S-1/A

As filed with the Securities and Exchange Commission on April 30, 2009

Registration No. 333-156936

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

Amendment No. 1 to

FORM S-1

REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933

PENN MILLERS HOLDING CORPORATION

(Exact name of registrant as specified in its charter)

Pennsylvania
(State or other jurisdiction of
incorporation or organization) 6331
(Primary Standard Industrial
Classification Code Number) 23-2994859
(I.R.S. Employer Identification
Number)

72 North Franklin Street
P.O. Box P
Wilkes-Barre, PA 18773-0016
(800) 822-8111

(Address, including zip code, and telephone number, including area code, of registrant’s principal executive offices)

Douglas A. Gaudet
President and Chief Executive Officer
Penn Millers Holding Corporation
72 North Franklin Street
P.O. Box P
Wilkes-Barre, PA 18773-0016
(800) 822-8111

(Name, address, including zip code, and telephone number, including area code, of agent for service)

Copies to:

David L. Harbaugh, Esquire	Wesley R. Kelso, Esquire
Morgan, Lewis & Bockius LLP	John D. Talbot, Esquire
1701 Market Street	Stevens & Lee, P.C.
Philadelphia, PA 19103	620 Freedom Business Center,
(215) 963-5751	Suite 200
	King of Prussia, PA 19406
	(610) 205-6028

     Approximate date of commencement of proposed sale to the public: As soon as practicable after this Registration Statement becomes effective.

     If any of the securities being registered on this form are to be offered on a delayed or continuous basis pursuant to Rule 415 of the Securities Act of 1933, check the following box: þ

     If this Form is filed to register additional securities for an offering pursuant to Rule 462(b) under the Securities Act of 1933, please check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. o

     If this Form is a post-effective amendment filed pursuant to Rule 462(c) under the Securities Act of 1933, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. o

     If this Form is a post-effective amendment filed pursuant to Rule 462(d) under the Securities Act of 1933, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. o

     Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):

Large accelerated filer o Accelerated filer o  Non-accelerated filer þ
(Do not check if a smaller reporting company) Smaller reporting company o

CALCULATION OF REGISTRATION FEE

Title of Each Class		Proposed Maximum	Proposed Maximum	Amount of
of Securities to be	Amount to be	Offering Price	Aggregate Offering	Registration
Registered	Registered	Per Share	Price(1)	Fee(2)
Common Stock, $0.01 par value per share	6,772,222 shares	$10.00	$67,722,220	$3,779

(1)	Estimated solely for the purpose of calculating the registration fee.
(2)	Calculated in accordance with Rule 457(a) and includes $1,152 that was previously paid on January 23, 2009.

     The registrant hereby amends this registration statement on such date or dates as may be necessary to delay its effective date until the registrant shall file a further amendment which specifically states that this registration statement shall thereafter become effective in accordance with Section 8(a) of the Securities Act of 1933 or until the registration statement shall become effective on such date as the Commission, acting pursuant to said Section 8(a), may determine.

The information in this prospectus is not complete and may be changed. We may not sell these securities until the registration statement filed with the Securities and Exchange Commission is effective. This prospectus is not an offer to sell these securities and it is not soliciting an offer to buy these securities in any state where the offer or sale is not permitted.

PROSPECTUS

PENN MILLERS HOLDING CORPORATION

     We are offering up to 6,772,222 shares of our common stock for sale in connection with the conversion of Penn Millers Mutual Holding Company, or Penn Millers Mutual, from the mutual to stock form of organization. Immediately following the conversion, we will acquire all of the newly issued shares of Penn Millers Mutual common stock.

     We are offering shares of our common stock in a subscription offering in the following order of priority:

• eligible members of Penn Millers Mutual, who were the policyholders of Penn Millers Insurance Company, as of April 22, 2009.

• our employee stock ownership plan, which we refer to as our ESOP; and

• officers, directors and employees of Penn Millers Mutual and its subsidiaries.

     The subscription offering will end at noon, Eastern Time, on ______, 2009. Any shares of our common stock not sold in the subscription offering may be sold to the general public in a community offering, which will commence simultaneously with and end concurrently with the subscription offering unless extended by us. We may also sell shares of our common stock to offerees in a syndicated community offering that may be conducted concurrently with or subsequent to the subscription offering and the community offering.

      A minimum of 4,505,000 shares of common stock must be sold to complete the offering. Our ESOP has the right to purchase that number of shares which is equal to 10% of the total number of shares sold in the offering. Therefore, the maximum number of shares sold may be increased to 6,772,222 shares solely to accommodate the 10% interest being purchased by our ESOP. Shares issued to the ESOP will be counted toward satisfaction of the minimum amount. If more orders are received than shares offered, shares will be allocated in the manner and priority described in this prospectus.

     The minimum number of shares that a person may subscribe to purchase is 25 shares. Except for our ESOP, the maximum number of shares that a person may purchase is 5% of the total number of shares sold in the offering.

     Griffin Financial Group, LLC, which we refer to as Griffin Financial, will act as our underwriter and will use its best efforts to assist us in selling our common stock in the offering, but is not obligated to purchase any shares of common stock that are being offered for sale. Purchasers will not pay any commission to purchase shares of common stock in the offering.

     There is currently no public market for our common stock. We have applied for the quotation of our common stock on the Nasdaq Global Market under the symbol “PMIC.”

     This investment involves risk. For a discussion of the material risks that you should consider, see “Risk Factors” beginning on page 13 of this prospectus.

OFFERING SUMMARY
Price: $10.00 per share

							Adjusted
	Minimum		Midpoint		Maximum		Maximum
Number of shares offered		4,505,000		5,300,000		6,095,000		6,772,222
Gross offering proceeds	$	45,050,000	$	53,000,000	$	60,950,000	$	67,722,220
Less: Proceeds from ESOP shares (1)	$	4,505,000	$	5,300,000	$	6,095,000	$	6,772,222
Offering expenses	$	2,570,000	$	2,570,000	$	2,570,000	$	2,570,000
Commissions (2)(3)	$	675,750	$	795,000	$	914,250	$	1,015,833
Net proceeds	$	37,299,250	$	44,335,000	$	51,370,750	$	57,364,165
Net proceeds per share	$	8.28	$	8.37	$	8.43	$	8.47

(1)	The calculation of net proceeds from this offering does not include the shares being purchased by our ESOP because we will loan a portion of the proceeds to the ESOP to fund the purchase of such shares. The ESOP is purchasing such number of shares as will equal 10% of the total number of shares sold in the offering.
(2)	Represents the amount to be paid to Griffin Financial, which is equal to 1.5% of the shares sold in the subscription offering and the community offering. See “The Conversion and Offering — Marketing and Underwriting Arrangements.”
(3)	Assumes that no shares are sold in a syndicated community offering. See “The Conversion and Offering — Marketing and Underwriting Arrangements” for commissions to be paid in the event of a syndicated community offering.

     Neither the Securities and Exchange Commission, the Pennsylvania Insurance Department nor any state securities commission has approved or disapproved of these securities or determined if this prospectus is accurate or complete. Any representation to the contrary is a criminal offense.

     For assistance, please call the Stock Information Center at 1-800-___-___.

Griffin Financial Group, LLC

The date of this Prospectus is __________, 2009

TABLE OF CONTENTS

	Page
CERTAIN IMPORTANT INFORMATION		1
PROSPECTUS SUMMARY		2
RISK FACTORS		13
FORWARD-LOOKING INFORMATION		28
SELECTED FINANCIAL AND OTHER DATA		30
USE OF PROCEEDS		32
MARKET FOR THE COMMON STOCK		33
DIVIDEND POLICY		34
CAPITALIZATION		35
UNAUDITED PRO FORMA FINANCIAL INFORMATION		36
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS		44
BUSINESS		81
THE CONVERSION AND OFFERING		108
FEDERAL INCOME TAX CONSIDERATIONS		127
MANAGEMENT		132
RESTRICTIONS ON ACQUISITION OF PENN MILLERS HOLDING CORPORATION		156
DESCRIPTION OF THE CAPITAL STOCK		160
TRANSFER AGENT AND REGISTRAR		161
LEGAL MATTERS		161
EXPERTS		161
ADDITIONAL INFORMATION		161
INDEX TO FINANCIAL STATEMENTS		F-1

(i)

CERTAIN IMPORTANT INFORMATION

     You should rely only on the information contained in this prospectus. We have not, and Griffin Financial has not, authorized any other person to provide information that is different from that contained in this prospectus. If anyone provides you with different or inconsistent information, you should not rely on it. We and Griffin Financial are offering to sell and seeking offers to buy our common stock only in jurisdictions where such offers and sales are permitted. You should assume that the information contained in this prospectus is accurate only as of the date of this prospectus, regardless of the time of delivery of this prospectus or of any sale of our common stock. Our business, financial condition, results of operations and prospects may have changed since that date. Information contained on our web site is not part of this prospectus.

     Unless the context otherwise requires, as used in this prospectus:

• “Penn Millers,” “the Company,” “we,” “us” and “our” refer to the registrant, Penn Millers Holding Corporation, as well as Penn Millers Mutual Holding Company, which we refer to as Penn Millers Mutual, PMHC Corp., Penn Millers Insurance Company and any of its subsidiaries;

• the “conversion” refers to a series of transactions by which Penn Millers Mutual will convert from a mutual holding company to a stock holding company and become a subsidiary of Penn Millers Holding Corporation;

• the “offering” and the “conversion offering” refer to the offering of up to 6,772,222 shares of our common stock under the plan of conversion to eligible subscribers in a subscription offering and to the general public in a community offering and syndicated community offering. We expect to conduct the subscription offering and the community offering at the same time. The syndicated community offering may be conducted concurrently with or subsequent to the subscription offering and the community offering; and

• “members” refers to members of Penn Millers Mutual, who are also (i) the named insureds under an individual insurance policy issued by Penn Millers Insurance Company or (ii) the named insureds under a group insurance policy issued by Penn Millers Insurance Company.

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PROSPECTUS SUMMARY

     This summary highlights selected information from this prospectus and may not contain all of the information that is important to you. To understand the offering fully, you should read this entire prospectus carefully, including our financial statements and the notes to the financial statements included in this prospectus.

Overview

     We provide a variety of property and casualty insurance products designed to meet the insurance needs of certain segments of the agricultural industry and the needs of small commercial businesses. We are licensed in 39 states, but we currently limit our sales of our agricultural insurance products to 33 states and our commercial insurance products to 8 states. We discontinued writing personal insurance products in 2003 and now offer only commercial products. We report our operating results in three operating segments: agribusiness insurance, commercial business insurance, and our “other” segment. However, assets are not allocated to segments and are reviewed in the aggregate for decision-making purposes.

     Our agribusiness insurance segment product includes fire and allied lines, inland marine, general liability, commercial automobile, workers’ compensation, and umbrella liability insurance. We specialize in writing coverage for manufacturers, processors, and distributors of products for the agricultural industry. We do not write property or liability insurance for farms or farming operations unless written in conjunction with an eligible agribusiness operation, and we do not write any crop insurance or weather insurance. Our commercial business segment insurance product consists of a business owner’s policy that combines property, liability, business interruption, and crime coverage for small businesses; workers’ compensation; commercial automobile; and umbrella liability coverage. The types of businesses we target include retail, service, hospitality, wholesalers, light manufacturers, and printers. Our third business segment, which we refer to as our “other” segment, includes the runoff of discontinued lines of insurance business and the results of mandatory assigned risk reinsurance programs that we must participate in as a condition of doing business in the states in which we operate.

     We primarily market our products through a network of over 450 independent producers in 33 states. Penn Millers has been assigned a “A-” (Excellent) rating by A.M. Best Company, Inc. The latest rating evaluation by A.M. Best Company, Inc. occurred on June 2, 2008.

Our Companies

     Penn Millers Holding Corporation is a newly created Pennsylvania corporation organized to be the stock holding company for Penn Millers Mutual following the mutual-to-stock conversion of Penn Millers Mutual. Penn Millers Holding Corporation is not an operating company and has not engaged in any business to date. Our executive offices are located at 72 North Franklin Street, Wilkes-Barre, Pennsylvania 18773-0016, and our toll-free number is 800-233-8347. Our web site address is www.pennmillers.com. Information contained on our website is not incorporated by reference into this prospectus, and such information should not be considered to be part of this prospectus.

     Penn Millers currently consists of two holding companies, Penn Millers Mutual Holding Company and PMHC Corp. (PMHC), and two operating insurance companies, Penn Millers Insurance Company and American Millers Insurance Company. We also own an insurance agency, Penn Millers Agency, Inc., which is currently inactive. In February 2009 we finalized the sale of substantially all the assets of another insurance agency, Eastern Insurance Group. In July 2008 we completed the sale of the assets of Penn Software and Technology Services, Inc., (Penn Software) an affiliated software company.

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     Our lead insurance company is Penn Millers Insurance Company, which is a Pennsylvania stock insurance company originally incorporated as a mutual insurance company in 1887. In 1999, Penn Millers Insurance Company converted from a mutual to a stock insurance company within a mutual holding company structure. This conversion created Penn Millers Mutual, a Pennsylvania mutual holding company, and established a “mid-tier” stock holding company, PMHC, to hold all of the outstanding shares of Penn Millers Insurance Company. Neither Penn Millers Mutual nor PMHC engages in any significant operations. The outstanding capital stock of Penn Millers Insurance Company is the primary asset of PMHC. American Millers Insurance Company is a wholly owned subsidiary of Penn Millers Insurance Company that provides Penn Millers Insurance Company with excess of loss reinsurance.

      Immediately following the conversion of Penn Millers Mutual, PMHC will merge into Penn Millers Mutual, terminating its existence, and Penn Millers Mutual will be renamed PMMHC Corp. and will become the stock holding company for Penn Millers Insurance Company and a wholly owned subsidiary of Penn Millers Holding Corporation.

     Penn Millers Insurance Company, American Millers Insurance Company, PMHC, and Penn Millers Mutual are subject to examination and comprehensive regulation by the Pennsylvania Insurance Department. See “Business — Regulation.”

Our Business Strategies and Offering Rationale

     Market Overview

     Our principal business strategy in both our agribusiness and commercial segments is to identify discrete underwriting risks where competition is limited and we can add value through personal service to our producers and insureds.

     Like most insurers, our premium growth and underwriting results have been, and continue to be, influenced by market conditions. Pricing in the property and casualty insurance industry historically has been cyclical. During a so-called soft market cycle, excess underwriting capacity leads to intense price competition and a market characterized by declining premium volume and relaxed underwriting terms. In a so-called hard market cycle, price competition is less severe. Therefore, during a hard market cycle insurers typically are able to increase premiums, maintain underwriting discipline and increase profit margins.

     Since 2005, the property and casualty insurance industry has experienced a soft market cycle. Although changes in the market cycle are impossible to predict, indicators of a return to a hard market typically include declining returns on equity, combined ratios at or in excess of 100% and reduced investment income due to low interest rates or investment losses. Because of recent turmoil in the capital markets, investment losses in the third and fourth quarters of 2008 have been particularly severe. Each of these market indicators are now present to some degree, which suggests that soft market conditions may be coming to an end in the near future.

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     Our current capital position is sufficient to support our existing premium volume and allow for modest growth. However, historically our growth during hard market cycles has exceeded industry norms. In the last hard market cycle that we believe began in 2000 and ended in 2004, our commercial lines direct premiums written in our core business segments increased by 248% (a compound annual growth rate of 25%), which exceeded the commercial lines industry growth of 163% (a compound annual growth rate of 13%) during that period. The primary purpose of this offering is to increase our capital to permit us to take advantage of growth opportunities when and if a hard market cycle returns.

     Competitive Strategy

     Our insurance policies are primarily sold through select independent insurance producers. We view these producers as our customers, because we believe that they significantly influence the insured’s decision to choose our insurance products over those of a competitor. We strive to win our producers’ support for our insurance products by differentiating ourselves from our competitors through positive relationships with our producers and by responding to their needs. The key to building and maintaining these positive relationships is communication between our producers and one of our underwriter and marketing representative teams, supported by loss control representatives, claims adjusters, and management. This approach provides the producers with responsive, consistent and predictable communications, service and decisions from us.

     Growth Strategies

     Our long-term growth plans involve enhancing our existing products and adding new products to increase our market share with our existing producers and continuing to add selected producers. Competitive pressures in the marketplace are exerting downward pressure on our prices, which is currently affecting our writing of new and renewal business. Our focus on underwriting discipline and rate adequacy in the midst of this soft market has resulted in our premium revenue growth being relatively modest and somewhat volatile. We believe that over the next twelve to twenty-four months the property and casualty insurance industry’s profits will decline to the point where pricing will start to increase and the underwriting cycle will move into a hard market phase. Although we do not have any current plans or intent to expand or grow our business by acquisition, we will consider any opportunities that are presented to us.

     We believe we are positioning the Company to take advantage of profitable growth opportunities that we anticipate will occur when prices increase during the expected hard market in the following ways:

• First, in 2009 we introduced an insurance product called PennEdge that will enable us to write customized coverages on mid-size commercial accounts. PennEdge will provide property and liability coverage to accounts that currently do not meet the eligibility requirements for our traditional business owners or agribusiness products. PennEdge is specifically tailored to unique business and industry segments, including wholesalers, light manufacturing, hospitality, commercial laundries and dry cleaners, and printers. These segments were chosen based on the experience of our underwriting staff and the market opportunities available to our existing producers.

• Second, we have differentiated our products by entering into strategic alliances to offer equipment breakdown, employment practices liability, and miscellaneous professional liability coverage, and we are exploring a strategic alliance to offer environmental impairment liability coverage. Under such strategic alliances, we typically reinsure all of the risk of loss to the strategic partner and earn a ceding commission.

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• Third, we are currently represented by a small number of producers in a large geographic area. New producers are an important part of our growth strategy, and we intend to continue to add them in areas where we want to increase our market presence.

     The completion of this offering will supply additional capital needed to support substantially increased premium volume, which we expect to result from the implementation of these growth strategies.

     Our ability to implement these strategies could be adversely affected by the highly competitive nature of the property and casualty insurance market. Many of our competitors have substantially greater financial, technical, and operating resources than we have. Furthermore, our ability to successfully develop and market new products, like PennEdge, or those developed through strategic alliances may depend on a number of factors including, but not limited to, our producers acceptance, attaining the necessary regulatory approvals, and the prices and products available from our competitors. Our competitors may price their products more aggressively or offer our producers higher commission rates, which may adversely affect our ability to grow and compete. For more information about risks facing our business see — “Risk Factors.”

The Conversion of Penn Millers Mutual from Mutual to Stock Form

     Penn Millers Mutual is a mutual holding company. As a mutual holding company, it has no shareholders, but it does have members. The members of Penn Millers Mutual are the policyholders of Penn Millers Insurance Company. The members have certain rights with respect to Penn Millers Mutual such as voting rights with respect to the election of directors and certain fundamental transactions, including the conversion of Penn Millers Mutual from mutual to stock form.

     Penn Millers Mutual adopted a plan of conversion on April 22, 2009 by which Penn Millers Mutual will convert from a mutual holding company to a stock holding company. Following the conversion, Penn Millers Mutual will become the wholly owned subsidiary of Penn Millers Holding Corporation.

     As part of the conversion, we are offering between 4,505,000 shares and 6,772,222 shares of our common stock for sale at a purchase price of $10.00 per share on a priority basis to eligible members of Penn Millers Mutual, who were the policyholders of Penn Millers Insurance Company at April 22, 2009, our employee stock ownership plan, the directors, officers, and employees of Penn Millers, and the general public. All purchasers of our common stock in the offering will pay the same cash price per share.

The Subscription and Community Offerings

     In the subscription offering, shares of common stock are being offered to eligible subscribers in the following order of priority:

• first, to the eligible members of Penn Millers Mutual, who were the policyholders of Penn Millers Insurance Company at April 22, 2009;

• second, to our employee stock ownership plan, or ESOP; and

• third, to the directors, officers and employees of Penn Millers.

     The eligible members and the directors, officers and employees of Penn Millers have the right to purchase shares of common stock in the offering subject to these priorities. Our ESOP also has the right to purchase shares in this offering in an amount equal to 10% of the shares sold in the offering. We call the offering of the common stock to these constituents the “subscription offering.”

     In the community offering, shares of common stock are being offered to members of the general public with preference given to:

• licensed insurance agencies and/or brokers that have been appointed by or otherwise are under contract with Penn Millers Insurance Company to market and distribute our insurance products;

• policyholders under policies of insurance issued by Penn Millers Insurance Company after April 22, 2009 (who are also members of Penn Millers Mutual); and

• natural persons and trusts for natural persons who are residents of Lackawanna or Luzerne Counties in Pennsylvania.

     We refer to the offering of the common stock to the general public as the “community offering.” Unlike the subscription offering, purchasers in the community offering do not have any right to purchase shares in the offering, and their orders are subordinate to the rights of the eligible subscribers in the subscription offering.

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     Any of the 6,095,000 offered shares of common stock not subscribed for in the subscription offering may be sold in the community offering. However, we reserve the absolute right to accept or reject any orders in the community offering, in whole or in part. We are planning to hold the community offering concurrently with the subscription offering.

The Syndicated Community Offering

     If participants in the subscription and community offerings, including the ESOP, purchase fewer than 4,505,000 shares, we, in our sole discretion, may sell additional shares on a best efforts basis using a syndicate of registered broker-dealers managed by Griffin Financial. This syndicated community offering may be conducted concurrently with or after the subscription offering and the community offering.

     The following table shows those persons that are eligible to purchase shares in the various phases of the offering and the shares available for purchase in each phase of the offering. The table does not include the shares that will be issued to the ESOP in the subscription offering, because the number of shares that can be issued in the offering can be increased to 6,772,222 solely to accommodate the purchase of such shares by the ESOP. We expect to conduct the subscription offering and the community offering simultaneously, and the syndicated community offering may be conducted concurrently with or after the subscription offering and community offering.

		Shares Available
Offering	Eligible Purchasers	for Purchase
Subscription Offering	Eligible members of Penn Millers Mutual, who were the policyholders of Penn Millers Insurance Company at April 22, 2009; and	6,095,000 shares
	Penn Millers’ officers, directors and employees (who may not, as a group, purchase more than 35% of the shares offered).
Community Offering	All members of the general public, with preference given to:	6,095,000 shares, less shares subscribed for in the subscription offering
	•   licensed insurance agencies and brokers appointed by or under contract with Penn Millers Insurance Company;
	•   policyholders of Penn Millers Insurance Company issued policies after April 22, 2009, who are also members of Penn Millers Mutual; and
	•   residents of Lackawanna or Luzerne Counties in Pennsylvania.
Syndicated Community Offering	All members of the general public	6,095,000 shares, less shares subscribed for in the subscription offering and the community offering

Our Structure Prior to the Conversion

     Since Penn Millers Insurance Company converted from mutual to stock form in 1999, we have operated under a mutual holding company structure. Our current corporate structure is shown in the following chart below.

Our Structure Following the Conversion

     After the completion of the conversion offering, we will merge our current mid-tier stock holding company, PMHC, into the converted Penn Millers Mutual, terminating the existence of PMHC. In addition, we intend to begin the process to dissolve Eastern Insurance Group and Penn Software in 2009. The following chart shows our corporate structure following completion of these transactions.

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Use of Proceeds

     We expect the net proceeds of the offering to be between $42.5 million and $65.1 million, after the payment of $2.57 million in estimated offering expenses. We intend to use the net proceeds from the offering as follows:

			Amount
	Amount		at the adjusted
	at the minimum		maximum
Use of Net Proceeds
Loan to ESOP	$	4,505,000	$	6,772,222
Commissions	$	675,750	$	1,015,833
General corporate purposes	$	37,299,250	$	57,364,165
Total	$	42,480,000	$	65,152,220

     After paying our offering expenses and commissions, we will use a portion of the net proceeds received from the sale of common stock in the offering to make a loan to our ESOP in an amount sufficient to permit the ESOP to buy up to 10% of the shares sold in the offering.

     After using a portion of the net proceeds to fund a loan to our ESOP, we expect to contribute most of the remaining net proceeds from the offering to Penn Millers Insurance Company. These net proceeds will supply additional capital that Penn Millers Insurance Company needs to support future premium growth. The net proceeds will also be used for general corporate purposes, including the expansion of our producer networks and the marketing of our new PennEdge product. On a short-term basis, the net proceeds will be invested primarily in U.S. government securities, other federal agency securities, and other securities consistent with our investment policy. On a short-term basis, any proceeds that we do not contribute to Penn Millers Insurance Company will be invested primarily in U.S. government securities, other federal agency securities, and other securities consistent with our investment policy.

     Assuming shareholder approval of our stock-based incentive plan at least six months after the offering, we may use a portion of the proceeds that are not contributed to Penn Millers Insurance Company to purchase in the open market shares of our common stock to be awarded under the stock-based incentive plan.

     Except for the foregoing, we currently have no specific plans, intentions, arrangements or understandings regarding the proceeds of the offering. See “Use of Proceeds.”

How Do I Buy Stock in the Offering?

     To buy common stock in the offering, sign and complete the stock order form that accompanies this prospectus and send it to us with your payment in the envelope provided so that it is received no later than noon, Eastern Time on                     , 2009. Payment may be made by check or money order payable to “BNY Mellon, escrow agent.” After you send in your payment, you have no right to modify your investment or withdraw your funds without our consent, unless we extend the offering to a date later than                     , 2009, or resolicit orders because of a change in the valuation of Penn Millers. See “The Conversion and Offering — If Subscriptions Received in all of the Offerings Combined Do Not Meet the Required Minimum” and “The Conversion and Offering — Resolicitation.” Our consent to any modification or withdrawal request may or may not be given in our sole discretion. We may reject a stock order form if it is incomplete or not timely received. We may also reject any order received in the community offering or the syndicated community offering, in whole or in part, for any reason.

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Limits on Your Purchase of Common Stock

     The minimum number of shares a person or entity may subscribe for in the offering is 25 shares ($250). Except for the ESOP, the maximum number of shares that a person or entity, together with any affiliate, associate or any person or entity with whom he or she is acting in concert, may purchase in the offering is 5% of the total shares sold in the offering. For this purpose, an associate of a person or entity includes:

• such person’s spouse;

• relatives of such person or such person’s spouse living in the same house;

• companies, trusts or other entities in which such person or entity holds 10% or more of the equity securities;

• a trust or estate in which such person or entity holds a substantial beneficial interest or serves in a fiduciary capacity; or

• any person acting in concert with any of the persons or entities listed above.

     We may decrease or increase the maximum purchase limitation. See “The Conversion and Offering — Limitations on Purchases of Common Stock.” In the event that we change the maximum purchase limitation, we will distribute a prospectus supplement or revised prospectus to each person who has placed an order to purchase the previous maximum number of shares such person could purchase in the offering.

     The ESOP has the right to purchase an amount equal to 10% of the shares of common stock to be issued in the offering, and its right to purchase this amount is not subject to any limitations or restrictions.

Oversubscription

     If you are an eligible member of Penn Millers Mutual or a director, officer or employee of Penn Millers, and we receive subscriptions in the subscription offering for more than 6,095,000 shares, which is the maximum number of shares being offered, your subscription may be reduced. In that event, no shares will be sold in the community offering or syndicated community offering, and the shares of common stock will be allocated first to eligible members and then to directors, officers and employees of Penn Millers. The maximum number of shares being offered will be increased to the extent necessary to allow the ESOP to purchase that number of shares equal to 10% of the shares issued in the offering.

     If eligible members subscribe for more than 6,095,000 shares, no shares of common stock will be sold to directors, officers and employees of Penn Millers (except in his or her capacity as an eligible policyholder). The shares of common stock will be allocated so as to permit each subscribing eligible member to purchase up to 1,000 shares (unless the magnitude of subscriptions does not permit such an allocation). Any remaining shares will be allocated among the eligible members who subscribe for more than 1,000 shares in proportion to the respective amounts of shares for which they subscribe. For a more complete description of the allocation procedures in the event of an oversubscription by eligible members, see “The Conversion and Offering — Subscription Offering and Subscription Rights.”

     If eligible members subscribe for less than 6,095,000 shares, but together with directors, officers and employees subscribe for more than 6,095,000 shares, each eligible member will be allowed to purchase the full amount of shares for which he or she subscribed, and the remaining shares of

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common stock will be allocated among the directors, officers and employees on a pro rata basis based on the amount that each director, officer and employee subscribed to purchase.

     If we receive in the subscription offering subscriptions for less than 6,095,000 shares of common stock, but in the subscription, community, and syndicated community offerings together we receive subscriptions and orders for more than 6,095,000 shares, we will sell to participants in the subscription offering the number of shares sufficient to satisfy their subscriptions in full, and then may accept orders in the community offering and the syndicated community offering, with preference given to orders received in the community offering, provided that the total number of shares sold in all three offerings does not exceed 6,095,000 shares (including the shares sold to the ESOP).

Undersubscription

     If the number of shares purchased in the subscription, community and syndicated community offerings are collectively less than 4,505,000, then we may choose to return all funds received in the offerings promptly to purchasers, without interest. Alternatively, we may cause a new valuation of the Company to be performed, and based on this valuation amend the registration statement of which this prospectus is a part and commence a new offering of the common stock. In that event, people who submitted subscriptions or orders will be permitted to cancel, modify, or confirm their orders. See “The Conversion and Offering — Resolicitation.”

Shares Outstanding Immediately After the Offering

     After the offering, there will be a minimum of 4,505,000 shares and a maximum of 6,772,222 shares of our common stock issued and outstanding.

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Management Purchases of Stock

     The directors and executive officers of Penn Millers, together with their affiliates and associates, propose to purchase approximately 133,000 shares of common stock in the offering. This amount does not include any of the shares of common stock to be purchased by the ESOP, but does include any shares that businesses owned or controlled by our directors may subscribe to purchase in their capacity as an eligible policyholder. Our directors and executive officers and their affiliates and associates are not obligated to purchase this number of shares, and in the aggregate they may purchase a greater or smaller number of shares. The total shares purchased by the management group and their affiliates and associates are not permitted to exceed 35% of the shares issued in the offering. See “The Conversion and Offering — Proposed Management Purchases.”

Benefits to Management

     Upon completion of the offering, the ESOP will own 10% of the total shares of common stock issued in the offering. These shares will be allocated under the ESOP over a 10-year period to our eligible employees, including our executive officers, as a retirement benefit.

     Our board of directors also intends to adopt a stock-based incentive plan for our directors, executive officers and other eligible employees. The stock-based incentive plan will be submitted to our shareholders for approval. However, under the provisions of the plan and Pennsylvania law, the plan cannot be proposed to shareholders until at least six months after the offering has been completed.

     Under the proposed stock-based incentive plan, we may award options to purchase common stock or award shares of restricted stock to directors, executive officers and other eligible employees. The exercise price of stock options is the fair market value of our common stock on the date of the option award. All awards under the stock-based incentive plan will be subject to such vesting, performance criteria, or other conditions as the compensation committee of our board of directors may establish. A number of shares equal to 10% of the shares issued in the offering (including shares issued to the ESOP) will be available for future issuance upon the exercise of stock options and a number of shares equal to 4% of the shares issued in the offering (including shares issued to the ESOP) will be available for future issuance upon the award of restricted stock. No decisions concerning the number of shares to be awarded or options to be granted to any director, officer or employee have been made at this time.

     The following table presents information regarding the participants in each benefit plan, and the total amount, the percentage, and the dollar value of the stock that we intend to set aside for our ESOP and stock-based incentive plan. No options or restricted shares will be issued under the stock-based incentive plan until the plan is approved by shareholders and the Pennsylvania Insurance Department. The table assumes the following:

• that 6,095,000 shares will be sold in the offering; and

• that the value of the stock in the table is $10.00 per share.

     Options are assigned no value because their exercise price will be equal to the fair market value of the stock on the day the options are awarded. As a result, anyone who receives an option will benefit from the option only if the price of the stock rises above the exercise price and the option is exercised.

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		Percent of					Value of Shares
	Individuals Eligible to	Shares issued			Number of		Based on $10.00
Plan	Receive Awards	in the Offering			Shares		Share Price
ESOP	All eligible full-time employees		10	%		609,500	$	6,095,000
Shares available under the stock-based incentive plan for restricted stock awards	Directors and selected officers and employees		4	%		243,800	$	2,438,000
Shares available under the stock-based incentive plan for stock options	Directors and selected officers and employees		10	%		609,500			(1)

(1) Stock options will be awarded with a per share exercise price at least equal to the market price of our common stock on the date of award. The value of a stock option will depend upon increases, if any, in the price of our common stock during the term of the stock option.

Deadlines for Purchasing Stock

     If you wish to purchase shares of our common stock, a properly completed and signed original stock order form, together with full payment for the shares, must be received (not postmarked) at the Stock Information Center no later than 12:00 noon, Eastern Time, on                     , 2009. You may submit your order form in one of three ways: by mail using the order reply envelope provided, by overnight courier to the address indicated on the stock order form, or by bringing the stock order form and payment to the Stock Information Center, which is located at the offices of Penn Millers Insurance Company at 72 North Franklin Street, Wilkes-Barre, Pennsylvania 18773. The Stock Information Center is open weekdays, except bank holidays, from 10:00 a.m. to 4:00 p.m., Eastern Time. Once submitted, your order is irrevocable unless the offering is terminated or extended. We may extend the                     , 2009 expiration date, without notice to you. If we extend the subscription offering to a date later than                     , 2009 we will resolicit subscriptions before proceeding with the offering. In such case, subscribers will have the right to confirm, modify or cancel their stock orders. If we do not receive a response from a subscriber to any resolicitation, the stock order will be canceled and all funds received will be returned promptly without interest. The subscription offering may not be extended to a date later than                     , 2009. The community offering and syndicated community offering, if conducted, may terminate at any time without notice, but no later than 45 days after the termination of the subscription offering.

Conditions That Must Be Satisfied Before We Can Complete the Offering and Issue the Stock

     Before we can complete the offering and issue our stock the Pennsylvania Insurance Commissioner must approve certain exemptions to provisions of the 1998 order approving Penn Millers Insurance Company’s conversion from mutual to stock form within a mutual holding company structure; the members of Penn Millers Mutual as of ______, 2009 must approve the plan of conversion; and we must sell at least the minimum number of shares offered.

Termination of the Offering

     We have the right to cancel the offering at any time. If we cancel the offering, your money will be promptly refunded, without interest.

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Dividend Policy

     We currently do not have any plans to pay dividends to our shareholders. In addition, as a holding company, our ability to pay dividends will be dependent upon Penn Millers Insurance Company declaring and paying a dividend to us. The payment of such dividends may require the prior approval of the Pennsylvania Insurance Department. For additional information regarding restrictions on our ability to pay dividends. See “Dividend Policy.”

Market for Common Stock

     We have applied for listing on the Nasdaq Global Market, but this does not mean that an active trading market for our stock will develop.

How You May Obtain Additional Information Regarding the Offering

     If you have any questions regarding the stock offering, please call the Stock Information Center at 1-800-            -             , Monday through Friday between 10:00 a.m. and 4:00 p.m., Eastern Time. The Stock Information Center will be closed on weekends and bank holidays. Our Stock Information Center is located at the offices of Penn Millers Insurance Company at 72 North Franklin Street, Wilkes-Barre, Pennsylvania 18773. Additional copies of the materials will be available at the Stock Information Center.

Risk Factors

     An investment in our common stock involves numerous risks. See “Risk Factors.”

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RISK FACTORS

     In addition to all other information contained in this prospectus, you should carefully consider the following risk factors in deciding whether to purchase our common stock.

Risks Related to Our Business

Catastrophic or other significant natural or man-made losses may negatively affect our financial and operating results.

     As a property and casualty insurer, we are subject to claims from catastrophes that may have a significant negative impact on operating and financial results. We have experienced catastrophe losses and can be expected to experience catastrophe losses in the future. Catastrophe losses can be caused by various events, including coastal storms, snow storms, ice storms, freezing temperatures, hurricanes, earthquakes, tornadoes, wind, hail, fires, and other natural or man-made disasters. The frequency, number and severity of these losses are unpredictable. The extent of losses from a catastrophe is a function of both the total amount of insured exposure in the area affected by the event and the severity of the event.

     We attempt to reduce our exposure to catastrophe losses through the underwriting process and by obtaining reinsurance coverage. However, in the event that we experience catastrophe losses, we cannot assure you that our unearned premiums, loss reserves and reinsurance will be adequate to cover these risks. In addition, because accounting rules do not permit insurers to reserve for catastrophic events until they occur, claims from catastrophic events could cause substantial volatility in our financial results for any fiscal quarter or year and could have a material adverse affect on our financial condition or results of operations. Our ability to write new business also could be adversely affected.

     We characterize as a “catastrophe” any event that is classified as such by the Property Claims Services (“PCS”) unit of Insurance Services Office, Inc. PCS defines industry catastrophes as events that cause $25 million or more in direct insured losses to property and that affect a significant number of policyholders and insurers. In 2006 and 2007, annual losses incurred by us from such events, net of reinsurance, were approximately $1.7 million and $2.0 million, respectively. In 2008, the industry experienced an unusually high level of catastrophe losses. According to the PCS, there were 37 catastrophic events in the United States in 2008, compared to an annual average of 24 events over the previous nine year period. The estimated $25.2 billion of industry losses in 2008, although not unusually high when compared to 2004 and 2005, did exceed the $15.9 billion of losses for the previous two years combined. For the twelve months ended December 31, 2008, we incurred approximately $4.9 million of catastrophe losses, net of reinsurance. With a broad geographic scope of business, we were impacted by 19 of the 37 designated catastrophic events, most of which included a high number of smaller losses that did not penetrate our catastrophe or per risk excess of loss reinsurance coverage.

     Our financial condition and results of operations also are affected periodically by losses caused by natural perils such as those described above that are not deemed a catastrophe. If a number of these events occur in a short time period, it may materially affect our financial condition and results of operations.

A reduction in our A.M. Best rating could affect our ability to write new business or renew our existing business.

     Ratings assigned by the A.M. Best Company, Inc. (A.M. Best) are an important factor influencing the competitive position of insurance companies. A.M. Best ratings, which are reviewed at least annually, represent independent opinions of financial strength and ability to meet obligations to policyholders and are not directed toward the protection of investors. Therefore, our A.M. Best rating should not be relied upon as a basis for an investment decision to purchase our common stock.

     Penn Millers Insurance Company holds a financial strength rating of “A-” (Excellent) by A.M. Best, the fourth highest rating out of 15 rating classifications. Penn Millers Insurance Company has held an A- rating for the past 14 years, and has been rated A- or higher every year since we were first rated in 1918. Our most recent evaluation by A.M. Best occurred on June 2, 2008. Financial strength ratings are used by producers and customers as a

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means of assessing the financial strength and quality of insurers. If our financial position deteriorates, we may not maintain our favorable financial strength rating from A.M. Best. A downgrade of our rating could severely limit or prevent us from writing desirable business or from renewing our existing business. In addition, a downgrade could negatively affect our ability to implement our strategy. See “Business — A.M. Best Rating.”

Turmoil in the capital markets and the severe economic downturn may impact our business activity level, results of operations, capital position and stock price.

     Our business prospects, results of operations and capital position are affected by financial market conditions and general economic conditions. As a public company, our stock price will also be affected by such conditions.

     Pressures on the global economy and financial markets commenced in the third quarter of 2007, accelerated significantly in the third quarter of 2008, and continued into the fourth quarter of 2008. Recently, there has been rising unemployment, decreasing real estate and commodity prices, decreasing consumer spending and business investment, unprecedented stock price volatility and a significant slowdown in the economy. It is not possible to predict whether conditions will deteriorate further or when the outlook will improve.

     As a result, the value of the securities we hold as investments may continue to decline, negatively affecting our earnings and capital level through realized and unrealized investment losses. If adverse economic conditions negatively affect companies who issue the securities we hold and reinsurers on whom we rely to help pay insurance claims, our liquidity level may suffer, we may experience insurance losses and it may be necessary to write-down securities we hold, due to issuer defaults or ratings downgrades. In December 2008, we sold all of our equity investments for a realized loss of $4.5 million, which was recognized in the fourth quarter of 2008. As of December 31, 2008, our investment portfolio, which consisted entirely of fixed maturity investments, had a net unrealized gain, before taxes, of approximately $1.4 million. Additionally, the market price of insurance company stocks has been volatile recently, and the common stock we issue to investors in this offering may be subject to price fluctuations unrelated to our operating performance or business prospects. In the event of a protracted recession, we may experience significant challenges. These may include an increase in lapsed premiums and policies and a reduction of new business, declining premium revenues from our workers’ compensation products due to our insureds’ declining payrolls, and declining premiums as a result of business failures. In addition, increases in both legitimate and fraudulent claims may result from a protracted and deep recession. An adverse economic environment could affect the recovery of deferred policy acquisition costs, and deferred tax assets may not be realizable. Finally, if adverse economic conditions affect the ability of our reinsurers to pay claims, we could experience significant losses that could impair our financial condition.

Our investment performance may suffer as a result of adverse capital market developments, which may affect our financial results and ability to conduct business.

     We invest the premiums we receive from policyholders until cash is needed to pay insured claims or other expenses. For the year ended December 31, 2008, we had $5.8 million in net realized investment losses as compared to $702,000 for the year ended December 31, 2007. Our investments will be subject to a variety of investment risks, including risks relating to general economic conditions, market volatility, interest rate fluctuations, liquidity risk and

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credit risk. An unexpected increase in the volume or severity of claims may force us to liquidate securities, which may cause us to incur capital losses. If we do not structure the duration of our investments to match our insurance and reinsurance liabilities, we may be forced to liquidate investments prior to maturity at a significant loss to cover such payments. Investment losses could significantly decrease our asset base and statutory surplus, thereby affecting our ability to conduct business.

     See “Management’s Discussion and Analysis of Financial Condition and Results of Operations — Quantitative and Qualitative Information About Market Risk.”

The geographic distribution of our business exposes us to significant natural disasters, which may negatively affect our financial and operating results.

     Approximately 35% of our business is concentrated in the southeastern United States, which is prone to tornadoes and hurricanes. Additionally, we plan to expand our business to the midwestern United States, which is prone to tornadoes and hail storms. Currently, approximately 26% of our direct premiums written originate from business written in Pennsylvania and New Jersey, and therefore, we have a greater exposure to catastrophic or other significant natural or man-made losses in that geographic region. The incidence and severity of such events are inherently unpredictable. In recent years, changing climate conditions have increased the unpredictability, severity and frequency of tornados, hurricanes, and other storms.

     States and regulators from time to time have taken action that has the effect of limiting the ability of insurers to manage these risks, such as prohibiting insurers from reducing exposures or withdrawing from catastrophe-prone areas, or mandating that insurers participate in residual markets. Our ability or willingness to manage our exposure to these risks may be limited due to considerations of public policy, the evolving political environment, or social responsibilities. We may choose to write business in catastrophe-prone geographic areas that we might not otherwise write for strategic purposes, such as improving our access to other underwriting opportunities.

     Our ability to properly estimate reserves related to hurricanes can be affected by the inability to access portions of the impacted areas, the complexity of factors contributing to the losses, the legal and regulatory uncertainties, and the nature of the information available to establish the reserves. These complex factors include, but are not limited to the following:

• determining whether damages were caused by flooding versus wind;

• evaluating general liability and pollution exposures;

• estimating additional living expenses;

• the impact of increased demand for products and services necessary to repair or rebuild damaged properties;

• infrastructure disruption;

• fraud;

• the effect of mold damage;

• business interruption costs; and

• reinsurance collectability.

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     The estimates related to catastrophes are adjusted as actual claims are filed and additional information becomes available. This adjustment could reduce income during the period in which the adjustment is made, which could have a material adverse impact on our financial condition and results of operations.

Losses resulting from political instability, acts of war or terrorism may negatively affect our financial and operating results.

     Numerous classes of business are exposed to terrorism related catastrophic risks. The frequency, number and severity of these losses are unpredictable. As a result, we have changed our underwriting protocols to address terrorism and the limited availability of terrorism reinsurance. However, given the uncertainty of the potential threats, we cannot be sure that we have addressed all the possibilities.

     The Terrorism Risk Insurance Act of 2002, as extended by the Terrorism Risk Insurance Program Reauthorization Act of 2007, is effective for the period from November 26, 2002 through December 31, 2014. Prior to the act, insurance coverage by private insurers for losses (other than workers’ compensation) arising out of acts of terrorism was severely limited. The act provides, among other things, that all licensed insurers must offer coverage on most commercial lines of business for acts of terrorism. Losses arising out of acts of terrorism that are certified as such by the Secretary of the Treasury of the United States and that exceed $100 million will be reimbursed by the federal government subject to a limit of $100 billion in any year and less a deductible calculated for each insurer. Each insurance company is responsible for a deductible based on a percentage of its direct earned premiums in the previous calendar year. For 2009, our deductible is approximately $15.4 million. For losses in excess of the deductible, the federal government will reimburse 85% of the insurer’s loss, up to the insurer’s proportionate share of the $100 billion.

     Notwithstanding the protection provided by reinsurance and the Terrorism Risk Insurance Act of 2002, the risk of severe losses to us from acts of terrorism has not been eliminated. Our reinsurance contracts include various limitations or exclusions limiting the reinsurers’ obligation to cover losses caused by acts of terrorism. Accordingly, events constituting acts of terrorism may not be covered by, or may exceed the capacity of, our reinsurance and could adversely affect our business and financial condition.

Our results may fluctuate as a result of many factors, including cyclical changes in the insurance industry, and we are currently in a “soft market” phase of the insurance industry cycle, which may lead to reduced premium volume.

     Results of companies in the insurance industry, and particularly the property and casualty insurance industry, historically have been subject to significant fluctuations and uncertainties. The industry’s profitability can be affected significantly by:

• rising levels of actual costs that are not known by companies at the time they price their products;

• volatile and unpredictable developments, including man-made and natural catastrophes;

• changes in reserves resulting from the general claims and legal environments as different types of claims arise and judicial interpretations relating to the scope of insurers’ liability develop; and

• fluctuations in interest rates, inflationary pressures and other changes in the investment environment, which affect returns on invested capital and may impact the ultimate payout of losses.

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     Historically, the financial performance of the insurance industry has fluctuated in cyclical periods of low premium rates and excess underwriting capacity resulting from increased competition (a so-called “soft market”), followed by periods of high premium rates and a shortage of underwriting capacity resulting from decreased competition (a so-called “hard market”). Fluctuations in underwriting capacity, demand and competition, and the impact on our business of the other factors identified above, could have a negative impact on our results of operations and financial condition. We believe that underwriting capacity and price competition in the current market are indicative of a “soft market” phase of the insurance industry cycle. This additional underwriting capacity has resulted in increased competition from other insurers seeking to expand the kinds or amounts of insurance coverage they offer and causes some insurers to seek to maintain market share at the expense of underwriting discipline. During the last three years, we have experienced increased price competition with regard to most of our product lines.

Because estimating future losses is difficult and uncertain, if our actual losses exceed our loss reserves our operating results may be adversely affected.

     We maintain reserves to cover amounts we estimate will be needed to pay for insured losses and for the expenses necessary to settle claims. Estimating loss and loss expense reserves is a difficult and complex process involving many variables and subjective judgments. We regularly review our reserve estimate protocols and our overall amount of reserves. We review historical data and consider the impact of various factors such as:

• trends in claim frequency and severity;

• information regarding each claim for losses;

• legislative enactments, judicial decisions and legal developments regarding damages; and

• trends in general economic conditions, including inflation.

     Our actual losses could exceed our reserves. If we determine that our loss reserves are inadequate, we will have to increase them. This adjustment would reduce income during the period in which the adjustment is made, which could have a material adverse impact on our financial condition and results of operations. Such adjustments to loss reserve estimates are referred to as “loss development.” If existing loss reserves exceed the revised estimate, it is referred to as positive loss development. Negative loss development occurs when the revised estimate of expected losses with respect to a calendar year exceed existing loss reserves. For example, our loss and loss expense reserve for the 2000 calendar year has experienced a cumulative negative loss development of $9.1 million (a 30.9% deficiency) as of December 31, 2008, while our loss and loss expense reserve for the 2005 calendar year experienced a cumulative positive loss development of $1.1 million (a 1.9% excess) as of December 31, 2008. For additional information, see “Business — Loss and LAE Reserves.”

If our reinsurers do not pay our claims in accordance with our reinsurance agreements, we may incur losses.

     We are subject to loss and credit risk with respect to the reinsurers with whom we deal because buying reinsurance does not relieve us of our liability to policyholders. If our reinsurers are not capable of fulfilling their financial obligations to us, our insurance losses would increase. For the year ended December 31, 2008, we ceded 19.7% of our gross written premiums to our reinsurers. We secure reinsurance coverage from a number of reinsurers. The lowest A.M. Best rating issued to any of our reinsurers is “A-” (Excellent), which is the fourth highest of fifteen ratings. See “Business — Reinsurance.”

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We may be unable to effectively develop and market new products, like PennEdge, which may negatively affect our operations.

     Our ability to expand our business and to compete depends on our ability to successfully develop and market new products, like PennEdge. The success of new products such as PennEdge depends on many factors, including our ability to anticipate and satisfy customer needs, develop our products cost-effectively, differentiate our products from our competitors, and, where applicable, obtain the necessary regulatory approvals on a timely basis.

     However, even if we successfully develop new products, the success of those products will be dependent upon market acceptance. Market acceptance could be affected by several factors, including, but not limited to:

• the availability of alternative products from our competitors;

• the price of our product relative to our competitors;

• the commissions paid to producers for the sale of our products relative to our competitors;

• the timing of our market entry; and

• our ability to market and distribute our products effectively.

     The successful development and marketing of PennEdge and other products will require a significant investment. Our failure to effectively develop and market PennEdge and other products may have an adverse effect on our business and operating results.

The property and casualty insurance market in which we operate is highly competitive, which impairs our ability to increase premiums for our products and recruit new producers.

     Competition in the property and casualty insurance business is based on many factors. These factors include the perceived financial strength of the insurer, premiums charged, policy terms and conditions, services provided, reputation, financial ratings assigned by independent rating agencies and the experience of the insurer in the line of insurance to be written. We compete with stock insurance companies, mutual companies, local cooperatives and other underwriting organizations. Many of these competitors have substantially greater financial, technical and operating resources than we have. Many of the lines of insurance we write are subject to significant price competition. If our competitors price their products aggressively, our ability to grow or renew our business may be adversely affected. We pay producers on a commission basis to produce business. Some of our competitors may offer higher commissions or insurance at lower premium rates through the use of salaried personnel or other distribution methods that do not rely on independent producers. Increased competition could adversely affect our ability to attract and retain business and thereby reduce our profits from operations.

Our results of operations may be adversely affected by any loss of business from key producers.

     Our products are primarily marketed by independent producers. Other insurance companies compete with us for the services and allegiance of these producers. These producers may choose to direct business to our competitors, or may direct less desirable risks to us. One producer, Arthur J. Gallagher Risk Management Services, which writes business for us through nine offices, accounted for $11.0 million or approximately 12% of our direct premiums written in 2008. Only one other producer accounted for more than 5% of our 2008 direct premiums written. If we experience a significant decrease in business from, or lose entirely, our largest producers it would have a material adverse effect on us.

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Assessments and premium surcharges for state guaranty funds, second injury funds and other mandatory pooling arrangements may reduce our profitability.

     Most states require insurance companies licensed to do business in their state to participate in guaranty funds, which require the insurance companies to bear a portion of the unfunded obligations of impaired, insolvent or failed insurance companies. These obligations are funded by assessments, which are expected to continue in the future. State guaranty associations levy assessments, up to prescribed limits, on all member insurance companies in the state based on their proportionate share of premiums written in the lines of business in which the impaired, insolvent or failed insurance companies are engaged. Accordingly, the assessments levied on us may increase as we increase our written premiums. Some states also have laws that establish second injury funds to reimburse insurers and employers for claims paid to injured employees for aggravation of prior conditions or injuries. These funds are supported by either assessments or premium surcharges based on incurred losses. See “Business — Regulation.”

     In addition, as a condition to conducting business in some states, insurance companies are required to participate in residual market programs to provide insurance to those who cannot procure coverage from an insurance carrier on a negotiated basis. Insurance companies generally can fulfill their residual market obligations by, among other things, participating in a reinsurance pool where the results of all policies provided through the pool are shared by the participating insurance companies. Although we price our insurance to account for our potential obligations under these pooling arrangements, we may not be able to accurately estimate our liability for these obligations. Accordingly, mandatory pooling arrangements may cause a decrease in our profits. At December 31, 2008, we participated in mandatory pooling arrangements in 32 states. As we write policies in new states that have mandatory pooling arrangements, we will be required to participate in additional pooling arrangements. Further, the impairment, insolvency or failure of other insurance companies in these pooling arrangements would likely increase the liability for other members in the pool. The effect of assessments and premium surcharges or increases in such assessments or surcharges could reduce our profitability in any given period or limit our ability to grow our business. See “Management’s Discussion and Analysis of Financial Condition and Results of Operations — Other Segment.”

Our revenues may fluctuate with our investment results and changes in interest rates.

     Our investment portfolio contains a significant amount of fixed maturity securities, including bonds, mortgage-backed securities (MBSs) and other securities. The fair values of these invested assets fluctuate depending upon economic conditions, particularly changes in interest rates.

     MBSs are subject to prepayment risks that vary with, among other things, interest rates. MBSs represented approximately $25.3 million or approximately 21% of our investments at December 31, 2008. During periods of declining interest rates, MBSs generally return principal faster than expected as the underlying mortgages are prepaid and/or refinanced by the borrowers in order to take advantage of the lower rates. MBSs with an amortized cost that is greater than par (i.e., purchased at a premium) may incur a reduction in yield or a loss as a result of prepayments. In addition, during such periods, we generally will be unable to reinvest the proceeds of any prepayment at comparable yields. Conversely, during periods of rising interest rates, the frequency of prepayments generally decreases. MBSs that have an amortized value that is less than par (i.e., purchased at a discount) may incur a decrease in yield or a loss as a result of slower prepayments.

     We may not be able to prevent or minimize the negative impact of interest rate changes. Additionally, unforeseen circumstances may force us to sell certain of our invested assets at a time when their fair values are less than their original cost, resulting in realized capital losses, which would reduce our net income. For example, the precipitous decline in stock market prices in the second half of 2008

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resulted in our decision to sell the balance of the equity securities in our investment portfolio in December 2008 for a pre-tax net realized loss of $4.5 million.

Volatility in commodity and other prices could impact our financial results.

     We provide insurance coverages to mills, silos, and other agribusinesses, which store large quantities of commodities such as corn, wheat and soybeans. Therefore, the amount of our losses is affected by the value of these commodities. Volatility in commodity prices may be a result of many factors, including, but not limited to, shortages or excess supply created by weather changes, catastrophes, changes in global or local demand, or the rise or fall of the U.S. dollar relative to other currencies. Unexpected increases in commodity prices could result in our losses exceeding our actual reserves for our agribusiness lines. Such volatility in commodity prices could cause substantial volatility in our financial results for any fiscal quarter or year and could have a material adverse affect on our financial condition or results of operations. Although we have experienced a period of rising commodity prices for the last several years, we believe that since the third quarter of 2008 we have entered a period of declining commodity prices.

     In addition, the cost of construction materials and prevailing labor costs in areas affected by widespread storm damage can significantly impact our casualty losses. Higher costs for construction materials and shortages of skilled contractors such as electricians, plumbers and carpenters can increase the cost to repair or replace an insured property.

Proposals to federally regulate the insurance business could affect our business.

     Currently, the U.S. federal government does not directly regulate the insurance business. However, federal legislation and administrative policies in several areas can significantly and adversely affect insurance companies. These areas include financial services regulation, securities regulation, pension regulation, privacy, tort reform legislation and taxation. In addition, various forms of direct federal regulation of insurance have been proposed. These proposals generally would maintain state-based regulation of insurance, but would affect state regulation of certain aspects of the insurance business, including rates, producer and company licensing, and market conduct examinations. We cannot predict whether any of these proposals will be adopted, or what impact, if any, such proposals or, if enacted, such laws may have on our business, financial condition or results of operations.

If we fail to comply with insurance industry regulations, or if those regulations become more burdensome, we may not be able to operate profitably.

     We are regulated by the Pennsylvania Insurance Department, as well as, to a more limited extent, the federal government and the insurance departments of other states in which we do business. Currently, approximately 26% of our direct premiums written originate from business written in Pennsylvania and New Jersey. Therefore, the cancellation or suspension of our license in these states, as a result of any failure to comply with the applicable insurance laws and regulations, may negatively impact our operating results.

     Most insurance regulations are designed to protect the interests of policyholders rather than shareholders and other investors. These regulations relate to, among other things:

• approval of policy forms and premium rates;

• standards of solvency, including establishing statutory and risk-based capital requirements for statutory surplus;

• classifying assets as admissible for purposes of determining statutory surplus;

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• licensing of insurers and their producers;

• advertising and marketing practices;

• restrictions on the nature, quality and concentration of investments;

• assessments by guaranty associations and mandatory pooling arrangements;

• restrictions on the ability to pay dividends;

• restrictions on transactions between affiliated companies;

• restrictions on the size of risks insurable under a single policy;

• requiring deposits for the benefit of policyholders;

• requiring certain methods of accounting;

• periodic examinations of our operations and finances;

• claims practices;

• prescribing the form and content of reports of financial condition required to be filed; and

• requiring reserves for unearned premiums, losses and other purposes.

     The Pennsylvania Insurance Department also conducts periodic examinations of the affairs of insurance companies and requires the filing of annual and other reports relating to financial condition, holding company issues and other matters. These regulatory requirements may adversely affect or inhibit our ability to achieve some or all of our business objectives. Our last examination was as of December 31, 2004.

     In addition, regulatory authorities have relatively broad discretion to deny or revoke licenses for various reasons, including the violation of regulations. Further, changes in the level of regulation of the insurance industry or changes in laws or regulations themselves or interpretations by regulatory authorities could adversely affect our ability to operate our business.

Our ability to manage our exposure to underwriting risks depends on the availability and cost of reinsurance coverage.

     Reinsurance is the practice of transferring part of an insurance company’s liability and premium under an insurance policy to another insurance company. We use reinsurance arrangements to limit and manage the amount of risk we retain, to stabilize our underwriting results and to increase our underwriting capacity. The availability and cost of reinsurance are subject to current market conditions and may vary significantly over time. Any decrease in the amount of our reinsurance will increase our risk of loss. We may be unable to maintain our desired reinsurance coverage or to obtain other reinsurance coverage in adequate amounts and at favorable rates. If we are unable to renew our expiring coverage or obtain new coverage, it will be difficult for us to manage our underwriting risks and operate our business profitably.

     It is also possible that the losses we experience on risks we have reinsured will exceed the coverage limits on the reinsurance. If the amount of our reinsurance coverage is insufficient, our insurance losses could increase substantially.

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We could be adversely affected by the loss of our existing management or key employees.

     The success of our business is dependent, to a large extent, on our ability to attract and retain key employees, in particular our senior officers. Our business may be adversely affected if labor market conditions make it difficult for us to replace our current key officers with individuals having equivalent qualifications and experience at compensation levels competitive for our industry. In particular, because of the shortage of experienced underwriters and claims personnel who have experience or training in the agribusiness sector of the insurance industry, replacing key employees in that line of our business could be challenging. Our key officers include: Douglas A. Gaudet, our President and Chief Executive Officer, Michael O. Banks, our Executive Vice President and Chief Financial Officer, Kevin D. Higgins, our Senior Vice President of Claims, Harold Roberts, our Senior Vice President and Chief Underwriting Officer, and Jonathan C. Couch, our Controller and Vice President. These key officers have an average of 23 years of experience in the property and casualty insurance industry.

     While we have employment agreements with a number of key officers, we do not have agreements not to compete or employment agreements with most of our employees. Our employment agreements with our key officers have change of control provisions that provide for certain payments and the continuation of certain benefits in the event they are terminated without cause or they voluntarily quit for good reason after a change in control. See “Management — Benefit Plans and Employment Agreements.”

We could be adversely affected by any interruption to our ability to conduct business at our current location.

     Our business operations are concentrated in one physical location in Wilkes-Barre, Pennsylvania, which is located on the Susquehanna River. Accordingly, our business operations could be substantially interrupted by flooding, snow, ice, and other weather-related incidents, or from fire, power loss, telecommunications failures, terrorism, or other such events. In such an event, we may not have sufficient redundant facilities to cover a loss or failure in all aspects of our business operations and to restart our business operations in a timely manner. Any damage caused by such a failure or loss may cause interruptions in our business operations that may adversely affect our service levels and business. See “Business — Technology.”

Risk Factors Relating to the Ownership of Our Common Stock

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Our ESOP and stock-based incentive plan will increase our costs, which will reduce our income.

     Our ESOP will purchase 10% of the shares of common stock sold in the offering with funds borrowed from us. The cost of acquiring the shares of common stock for the ESOP, and therefore the amount of the loan, will be between $4,505,000 at the minimum of the offering range and $6,772,222 at the adjusted maximum of the offering range. The loan will be repaid over a ten year period. We will record annual employee stock ownership plan expense in an amount equal to the fair value of the shares of common stock committed to be released to employees under the ESOP for each year. If shares of our common stock appreciate in value over time, compensation expense relating to the employee stock ownership plan will increase.

     We intend to adopt a stock-based incentive plan that will be submitted to our shareholders for approval six months after the offering. Under this plan participants would be awarded shares of our common stock (at no cost to them) or options to purchase shares of our common stock. The number of shares of common stock that may be issued pursuant to restricted stock awards or upon exercise of stock option awards under the stock-based incentive plan may not exceed 4% and 10%, respectively, of the total number of shares sold in the offering.

     The shares of restricted common stock awarded under the stock-based incentive plan will be expensed by us over their vesting period at the fair market value of the shares on the date they are awarded. If the restricted shares of common stock to be awarded under the plan are repurchased in the open market (rather than issued directly from our authorized but unissued shares of common stock) and cost the same as the purchase price in the offering, the reduction to shareholders’ equity due to the plan would be between $1,802,000 at the minimum of the offering range and $2,438,000 at the maximum of the offering range. To the extent we repurchase such shares in the open market and the price of such shares exceeds the offering price of $10.00 per share, the reduction to shareholders’ equity would exceed the range described above. Conversely, to the extent the price of such shares is below the offering price of $10.00 per share, the reduction to shareholders’ equity would be less than the range described above.

     Finally, accounting rules require companies to recognize as compensation expense the award-date fair value of stock options. When we record an expense for the award of options using the fair value method, we will incur significant compensation and benefits expense, which will reduce our net income.

The implementation of the stock-based incentive plan may dilute your percentage ownership interest and may also result in downward pressure on the price of our stock.

     The proposed stock-based incentive plan will be funded through either open market purchases or from the issuance of authorized but unissued shares. In the event that authorized but unissued shares are used to fund restricted stock awards and the exercise of stock option awards under the plan in an amount equal to 4% and 10%, respectively, of the shares issued in a midpoint offering, shareholders would experience a reduction in ownership interest of approximately 12.3%. In addition, the number of shares of common stock available for issuance pursuant to restricted stock awards and upon exercise of stock option awards following the adoption and approval of our stock-based incentive plan may be perceived by the market as having a dilutive effect, which could lead to a decrease in the price of our common stock.

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The valuation of our common stock in the offering is not necessarily indicative of the future price of our common stock, and the price of our common stock may decline after this offering.

     There can be no assurance that shares of our common stock will be able to be sold in the market at or above the $10.00 per share initial offering price in the future. The final aggregate purchase price of our common stock in the offering will be based upon an independent appraisal. The appraisal is not intended, and should not be construed, as a recommendation of any kind as to the advisability of purchasing shares of common stock. The valuation is based on estimates and projections of a number of matters, all of which are subject to change from time to time. See “The Conversion and Offering — The Valuation” for the factors considered by Curtis Financial in determining the appraisal.

     The price of shares of our common stock may decline for many reasons, some of which are beyond our control, including among others:

• quarterly variations in our results of operations;

• changes in expectations as to our future results of operations, including financial estimates by securities analysts and investors;

• announcements by third parties of claims against us;

• changes in law and regulation;

• results of operations that vary from those expected by investors; and

• future sales of shares of our common stock.

     In addition, the stock market in the last year has experienced substantial price and volume fluctuations that sometimes have been unrelated or disproportionate to the operating performance of companies. As a result, the trading price of shares of our common stock may be below the initial public offering price, and you may not be able to sell your shares at or above the price you pay to purchase them.

Statutory provisions and our articles and bylaws may discourage takeover attempts on Penn Millers that you may believe are in your best interests or that might result in a substantial profit to you.

     We are subject to provisions of Pennsylvania corporate and insurance law that hinder a change of control. Pennsylvania law requires the Pennsylvania Insurance Department’s prior approval of a change of control of an insurance holding company. Under Pennsylvania law, the acquisition of 10% or more of the outstanding capital stock of an insurer or its holding company is presumed to be a change in control. Approval by the Pennsylvania Insurance Department may be withheld even if the transaction would be in

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the shareholders’ best interest if the Pennsylvania Insurance Department determines that the transaction would be detrimental to policyholders.

     Our articles of incorporation and bylaws also contain provisions that may discourage a change in control. These provisions include:

• a prohibition on a person, including a group acting in concert, from acquiring voting control of more than 10% of our outstanding stock;

• a classified board of directors divided into three classes serving for successive terms of three years each;

• the prohibition of cumulative voting in the election of directors;

• the requirement that nominations for the election of directors made by shareholders and any shareholder proposals for inclusion on the agenda at any annual meeting must be made by notice (in writing) delivered or mailed to us not less than 90 days prior to the meeting;

• the prohibition of shareholders’ action without a meeting and of shareholders’ right to call a special meeting;

• unless otherwise waived by the board of directors, a person must be a shareholder of Penn Millers Holding Corporation for the lesser of one year or the time that has elapsed since the completion of the conversion;

• the requirement imposing a mandatory tender offering requirement on a shareholder that has a combined voting power of 25% or more of the votes that our shareholders are entitled to cast;

• the requirement that certain provisions of our articles of incorporation can only be amended by an affirmative vote of shareholders entitled to cast at least 80% of all votes that shareholders are entitled to cast, unless approved by an affirmative vote of at least 80% of the members of the board of directors; and

• the requirement that certain provisions of our bylaws can only be amended by an affirmative vote of shareholders entitled to cast at least 66 2/3%, or in certain cases 80%, of all votes that shareholders are entitled to cast.

     These provisions may serve to entrench management and may discourage a takeover attempt that you may consider to be in your best interest or in which you would receive a substantial premium over the current market price. These provisions may make it extremely difficult for any one person, entity or group of affiliated persons or entities to acquire voting control of Penn Millers, with the result that it may be extremely difficult to bring about a change in the board of directors or management. Some of these provisions also may perpetuate present management because of the additional time required to cause a change in the control of the board. Other provisions make it difficult for shareholders owning less than a majority of the voting stock to be able to elect even a single director. See “Management — Benefit Plans and Employment Agreements” and “Description of the Capital Stock.”

We will have broad discretion over the use of the net proceeds that we retain from the offering.

     Although we expect to use part of the net proceeds of the offering to fund a loan to our ESOP and to potentially make open market purchases of our shares for our stock incentive plan, our management will have broad discretion with respect to the use of the net proceeds that are contributed to Penn Millers Insurance Company. Except as specified above, we expect to use the net proceeds for general corporate purposes, which may include, among other things, purchasing investment securities and further expanding our insurance operations. See “Use of Proceeds.”

We believe that subscription rights have no value, but the Internal Revenue Service may disagree.

      We intend to take the position that, for U.S. federal income tax purposes, eligible members will be treated as transferring their membership interests in Penn Millers Mutual to Penn Millers Holding Corporation in exchange for subscription rights to purchase Penn Millers Holding Corporation common stock, and that any gain realized by an eligible member as a result of the receipt of a subscription right that is determined to have ascertainable fair market value on the date such right is received by the eligible member must be recognized, whether or not such right is exercised.

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      Curtis Financial has advised us that it believes the subscription rights will not have any fair market value. Curtis Financial has noted that the subscription rights will be granted at no cost to recipients, will be legally nontransferable and of short duration, and will provide the recipient with the right only to purchase shares of our common stock at the same price to be paid by members of the general public in the community offering. Curtis Financial cannot assure us, however, that the Internal Revenue Service will not challenge Curtis Financial’s determination or that such challenge, if made, would not be successful.

      For more information see “Federal Income Tax Considerations — Tax Consequences of Subscription Rights.”

If Penn Millers Insurance Company is not sufficiently profitable, our ability to pay dividends will be limited.

     Following the conversion offering, we will be a separate entity with no operations of our own other than holding the stock of Penn Millers Mutual. We will depend primarily on dividends paid by Penn Millers Insurance Company and any proceeds from the offering that are not contributed to Penn Millers Insurance Company to pay the debt service on our existing loans and to provide funds for the payment of dividends. We will receive dividends only after all of Penn Millers Insurance Company’s obligations and regulatory requirements with the Pennsylvania Insurance Department have been satisfied. During any twelve-month period, the amount of dividends paid by Penn Millers Insurance Company to us, without the prior approval of the Pennsylvania Insurance Department, may not exceed the greater of 10% of the company’s surplus as regards to policyholders as reported on its most recent annual statement filed with the Pennsylvania Insurance Department or the company’s statutory net income as reported on such statement. We presently do not intend to pay dividends to our shareholders. If the Penn Millers Insurance Company is not sufficiently profitable, our ability to pay dividends to you in the future will be limited.

Compliance with the requirements of the Securities Exchange Act and the Sarbanes-Oxley Act could result in higher operating costs and adversely affect our results of operations.

     When the offering is completed, we will be subject to the periodic reporting, proxy solicitation, insider trading and other obligations imposed under the Securities Exchange Act. In addition, the provisions of the Sarbanes-Oxley Act will immediately become applicable to us. Compliance with these

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requirements will increase our legal and accounting costs and the cost of directors and officers liability insurance, and will require management to devote substantial time and effort to ensure initial and ongoing compliance with these obligations. A key component of compliance under the Exchange Act is to produce quarterly and annual financial reports within prescribed time periods after the close of our fiscal year and each fiscal quarter. Historically, we have not been required to prepare such financial reports within these time periods. Failure to satisfy these reporting requirements may result in delisting of our common stock by the Nasdaq Global Market, and inquiries from or sanctions by the U.S. Securities and Exchange Commission (SEC). Moreover, the provision of the Sarbanes-Oxley Act that requires public companies to review and report on the adequacy of their internal controls over financial reporting will be applicable to us in 2010. We estimate that compliance with these requirements will require a substantial commitment of time and will result in an initial nonrecurring expense of approximately $300,000 to comply with the requirements of the Sarbanes-Oxley Act and an increase of approximately $700,000 in annual operating expenses to comply with the ongoing requirements of the Exchange Act and the Sarbanes-Oxley Act. These expenses as well as the additional management time and attention needed to comply with these requirements may have a material adverse effect on our financial condition and results of operations.

Our high price-to-earnings ratio may cause our stock to trade at less than $10 per share in the secondary market after completion of the offering.

Because of our relatively low returns on equity and assets in recent reporting periods and our negative profitability in the last twelve months, Curtis Financial did not rely on the pro forma price-to-earnings ratio in performing its valuation of us. Instead, Curtis Financial relied on the fully-converted pro forma price-to-book ratio as a valuation metric in determining the value of the Company. As a result, the price-to-earnings ratio of our shares may be substantially higher than our peers after completion of the offering. This may result in our shares trading in the secondary market after completion of the offering at less than the $10 per share offering price.

If we do not obtain approval to list on the Nasdaq Global Market, the price and liquidity of our stock may be adversely affected.

We have applied for listing on the Nasdaq Global Market. In order to list, we must meet certain minimum requirements for our stockholders’ equity, net income, the market value and number of publicly held shares, the number of shareholders, and the market price of our stock. In addition, to initially list, we must have at least three market makers agree to make a market in our stock. Even if we are approved, an active trading market may not develop and similar minimum criteria is required for continued listing on the Nasdaq Global Market, including having up to four market makers making a market in our stock under certain continued listing standards. The failure to receive approval to list or a subsequent delisting from the Nasdaq Global Market may adversely affect the market price for our stock and reduce the liquidity of our common stock, and therefore, make it more difficult for you to sell our stock.

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FORWARD-LOOKING INFORMATION

     This document contains forward-looking statements, which can be identified by the use of such words as “estimate,” “project,” “believe,” “intend,” “anticipate,” “plan,” “may,” “seek,” “expect” and similar expressions. These forward-looking statements include:

• statements of goals, intentions and expectations;

• statements regarding prospects and business strategy; and

• estimates of future costs, benefits and results.

     The forward-looking statements are subject to numerous assumptions, risks and uncertainties, including, among other things, the factors discussed under the heading “Risk Factors” that could affect the actual outcome of future events.

     All of these factors are difficult to predict and many are beyond our control. These important factors include those discussed under “Risk Factors” and those listed below:

• future economic conditions in the markets in which we compete that are less favorable than expected;

• the effects of weather-related and other catastrophic events;

• the effect of legislative, judicial, economic, demographic and regulatory events in the jurisdictions where we do business;

• our ability to enter new markets successfully and capitalize on growth opportunities either through acquisitions or the expansion of our producer network;

• our ability to introduce and successfully market our new PennEdge commercial multi-peril policy;

• our ability to expand our agribusiness lines into new geographic areas, including the midwestern United States;

• financial market conditions, including, but not limited to, changes in interest rates and the stock markets causing a reduction of investment income or investment gains and a reduction in the value of our investment portfolio;

• heightened competition, including specifically the intensification of price competition, the entry of new competitors and the development of new products by new or existing competitors, resulting in a reduction in the demand for our products;

• the impact of acts of terrorism and acts of war;

• the effects of terrorist related insurance legislation and laws;

• changes in general economic conditions, including inflation, unemployment, interest rates and other factors;

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• the cost, availability and collectability of reinsurance;

• estimates and adequacy of loss reserves and trends in loss and loss adjustment expenses;

• changes in the coverage terms selected by insurance customers, including higher deductibles and lower limits;

• our inability to obtain regulatory approval of, or to implement, premium rate increases;

• the potential impact on our reported net income that could result from the adoption of future accounting standards issued by the Public Company Accounting Oversight Board or the Financial Accounting Standards Board or other standard-setting bodies;

• inability to carry out marketing and sales plans, including, among others, development of new products or changes to existing products and acceptance of the new or revised products in the market;

• unanticipated changes in industry trends and ratings assigned by nationally recognized rating organizations;

• adverse litigation or arbitration results; and

• adverse changes in applicable laws, regulations or rules governing insurance holding companies and insurance companies, and environmental, tax or accounting matters including limitations on premium levels, increases in minimum capital and reserves, and other financial viability requirements, and changes that affect the cost of, or demand for our products.

     Because forward-looking information is subject to various risks and uncertainties, actual results may differ materially from that expressed or implied by the forward-looking information.

     ALL SUBSEQUENT WRITTEN AND ORAL FORWARD-LOOKING INFORMATION ATTRIBUTABLE TO PENN MILLERS OR ANY PERSON ACTING ON OUR BEHALF IS EXPRESSLY QUALIFIED IN ITS ENTIRETY BY THE CAUTIONARY STATEMENTS CONTAINED OR REFERRED TO IN THIS SECTION.

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SELECTED FINANCIAL AND OTHER DATA

     The following table sets forth selected financial data for Penn Millers prior to the offering. You should read this data in conjunction with our financial statements and accompanying notes, “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and other financial information included elsewhere in this prospectus. The balance sheet data as of December 31, 2008 and 2007, and the statement of operations data for each of the years in the three years ended December 31, 2008, 2007 and 2006 are derived from our audited financial statements beginning on page F-1.

     We evaluate our insurance operations by monitoring certain key measures of growth and profitability. In addition to GAAP measures, we utilize certain non-GAAP financial measures that we believe are valuable in managing our business and for providing comparisons to our peers. These non-GAAP measures are underwriting loss, combined ratios, written premiums, and net written premiums to statutory surplus ratio.

	At or for the years ended
	December 31,
	2008			2007			2006		2005(4)			2004
	(Dollars in thousands)
Statement of Operations Data:
Direct premiums written	$	94,985		$	94,073		$	84,544	$	84,084		$	89,041
Net premiums written	$	77,367		$	74,119		$	67,525	$	62,057		$	67,036
Net premiums earned	$	78,737		$	70,970		$	64,645	$	64,723		$	63,090
Net investment income		5,335			5,324			4,677		4,444			4,278
Net realized investment gains (losses)		(5,819	)		(702	)		349		424			936
Other revenue		411			508			345		277			301
Total revenue	$	78,664		$	76,100		$	70,016	$	69,868		$	68,605
Expenses
Loss and loss adjustment expense	$	57,390		$	49,783		$	43,766	$	40,242		$	42,910
Amortization of deferred acquisition costs		23,081			21,930			20,080		21,556			20,464
Underwriting and administrative expense		3,481			2,233			3,216		7,662			3,895
Interest expense		184			125			222		195			84
Other operating expenses		365			184			314		266			82
Total losses and expenses	$	84,501		$	74,255		$	67,598	$	69,921		$	67,435
Income (loss) from continuing operations, before income taxes	$	(5,837	)	$	1,845		$	2,418	$	(53	)	$	1,170
Income tax expense (benefit)		(1,378	)		396			506		(295	)		(21	)
Income (loss) from continuing operations	$	(4,459	)	$	1,449		$	1,912	$	242		$	1,191
Income (loss) on discontinued operations		(2,920	)		(363	)		168		47			199
Net income (loss)	$	(7,379	)	$	1,086		$	2,080	$	289		$	1,390
Balance Sheet Data (at period end):
Total investments, cash and cash equivalents	$	133,873		$	136,312		$	126,655	$	116,898		$	117,002
Total assets		220,524			219,613			207,768		197,897			192,020
Unpaid loss and loss adjustment expenses		108,065			95,956			89,405		83,849			73,287
Unearned premiums		45,322			46,595			43,294		39,984			42,798
Total liabilities		169,769			158,212			147,238		140,128			132,114
Equity		50,755			61,401			60,530		57,769			59,906

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	At or for the years ended
	December 31,
	2008			2007			2006			2005 (4)			2004
	(Dollars in thousands)
U.S. GAAP Ratios:
Loss and loss adjustment expense ratio (1)		72.9	%		70.1	%		67.7	%		62.2	%		68.0	%
Underwriting expense ratio (2)		32.8	%		33.3	%		35.1	%		39.2	%		38.0	%
Combined ratio (3)		105.7	%		103.4	%		102.8	%		101.4	%		106.0	%
Return on average equity, continuing operations		(8.0	%)		2.4	%		3.2	%		0.4	%		2.0	%
Return on average equity		(13.2	%)		1.8	%		3.5	%		0.5	%		2.3	%
Statutory Data:
Statutory net income (loss)	$	(4,718	)	$	878		$	1,374		$	3,171		$	634
Statutory surplus		42,569			50,795			50,524			47,216			45,445
Ratio of net premiums written to statutory surplus		181.7	%		145.9	%		133.6	%		131.4	%		147.5	%

(1)	Calculated by dividing loss and loss adjustment expenses by net premiums earned.
(2)	Calculated by dividing amortization of deferred policy acquisition costs and net underwriting and administrative expenses (attributable to insurance operations) by net premiums earned.
(3)	The sum of the loss and loss adjustment expense ratio and the underwriting expense ratio. A combined ratio of less than 100% means a company is making an underwriting profit.
(4)	In conjunction with the offering, 2005 has been adjusted, as of January 1, 2005, to reflect the adoption of Staff Accounting Bulletin (SAB) No. 108, Quantifying Financial Statement Misstatements.

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USE OF PROCEEDS

     Although the actual proceeds from the sale of our common stock cannot be determined until the offering is complete, we currently anticipate that the gross proceeds from the sale of our common stock will be between $45.1 million, at the minimum, and $67.7 million, at the adjusted maximum, of the offering range. We expect net proceeds from this offering to be between $42.5 million and $65.2 million, after payment of our offering expenses. See “Unaudited Pro Forma Financial Information — Additional Pro Forma Data” and “The Conversion and Offering — The Valuation” as to the assumptions used to arrive at such amounts. We expect to use the net proceeds from the offering as follows:

			Adjusted
	Minimum		Maximum
Net Proceeds
Gross proceeds	$	45,050,000	$	67,722,220
Offering expenses		2,570,000		2,570,000
Net proceeds before loan to ESOP	$	42,480,000	$	65,152,220
Use of Net Proceeds
Loan to ESOP	$	4,505,000	$	6,772,222
Commissions	$	675,750	$	1,015,833
General corporate purposes		37,299,250		57,364,165
Total	$	42,480,000	$	65,152,220

     After the payment of our offering expenses and commissions, we will use the net proceeds received from the sale of our shares of common stock in the offering to make a loan to our ESOP in an amount sufficient to permit the ESOP to buy an amount equal to 10% of the shares sold in the offering.

     After using net proceeds to fund a loan to our ESOP, we expect to contribute most of the net proceeds from the offering to Penn Millers Insurance Company. These net proceeds will supply additional capital that Penn Millers Insurance Company needs to support future growth in its net premiums written. The net proceeds contributed to the capital of Penn Millers Insurance Company will also be used for general corporate purposes, which may include reducing our reliance on reinsurance, furthering our geographic diversification through expansion of our producer network and marketing our PennEdge product. See “Business — Our Business Strategies and Offering Rationale.” On a short-term basis, the net proceeds contributed to Penn Millers Insurance Company will be invested primarily in U.S. government securities, other federal agency securities, and other securities consistent with our investment policy.

     Except for the loan to our ESOP, the contribution of capital to Penn Millers Insurance Company, the use of such proceeds for general corporate purposes, including the payment of debt service on our existing lines of credit, and the possible purchase of stock to fund restricted stock awards and stock option grants, we currently have no specific plans, arrangements or understandings regarding the use of the net proceeds from this offering.

     As of December 31, 2008, the Company had $950,000 outstanding under our existing lines of credit. These borrowings were used to pay for the initial expenses incurred for the offering and are part of the estimated $2.57 million of total offering expenses that will be paid from the gross proceeds. We anticipate that aside from these amounts, none of the proceeds will be used for debt service.

     The amount of proceeds from the sale of common stock in the offering will depend on the total number of shares actually sold. As a result, the net proceeds from the sale of common stock cannot be determined until the offering is completed.

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MARKET FOR THE COMMON STOCK

     We have applied for listing of our common stock on the Nasdaq Global Market under the symbol “PMIC,” subject to the completion of the offering.

     We have never issued any capital stock to the public. Consequently, there is no established market for our common stock. The development of a public market having the desirable characteristics of depth, liquidity and orderliness depends upon the presence in the marketplace of a sufficient number of willing buyers and sellers at any given time. Neither we nor any market maker has any control over the development of such a public market. Although we have applied to have our stock listed on the Nasdaq Global Market, an active trading market may not develop. This is, in part, because the size of the offering is small. Furthermore, a substantial portion of the stock will be held by our management and our ESOP.

      One of the requirements for initial listing of the common stock on the Nasdaq Global Market is that there are at least three market makers for the common stock. We cannot assure you that there will be three or more market makers for the common stock. Furthermore, we cannot assure you that you will be able to resell your shares of common stock for a price at or above $10.00 per share, or that approval for listing on the Nasdaq Global Market will be available, as contemplated.

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DIVIDEND POLICY

     Payment of dividends on our common stock is subject to determination and declaration by our board of directors. Our dividend policy will depend upon our financial condition, results of operations and future prospects.

     At present, we have no intention to pay dividends to our shareholders. We cannot assure you that dividends will be paid, or if and when paid, that they will continue to be paid in the future.

     We initially will have no significant source of cash flow other than dividends from Penn Millers Insurance Company, the repayment of our loan to the ESOP and the investment earnings on any net proceeds of the offering not contributed to Penn Millers Insurance Company. Therefore, the payment of dividends by us will depend significantly upon our receipt of dividends from Penn Millers Insurance Company.

     Pennsylvania law sets the maximum amount of dividends that may be paid by Penn Millers Insurance Company during any twelve-month period after notice to, but without prior approval of, the Pennsylvania Insurance Department. This amount cannot exceed the greater of 10% of the company’s surplus as regards to policyholders as reported on the most recent annual statement filed with the Pennsylvania Insurance Department, or the company’s statutory net income for the period covered by the annual statement as reported on such statement. As of December 31, 2008, the amount available for payment of dividends by Penn Millers Insurance Company to us in 2009 without the prior approval of the Pennsylvania Insurance Department is approximately $4.3 million. We cannot assure you that the Pennsylvania Insurance Department would approve the declaration or payment by Penn Millers Insurance Company of any dividends in excess of such amount to us. See “Business — Regulation.”

     Even if we receive any dividends from Penn Millers Insurance Company, we may not declare any dividends to our shareholders because of our working capital requirements. We are not subject to regulatory restrictions on the payment of dividends to shareholders, but we are subject to the requirements of the Pennsylvania Business Corporation Law of 1988. This law generally permits dividends or distributions to be paid as long as, after making the dividend or distribution, we will be able to pay our debts in the ordinary course of business and our total assets will exceed our total liabilities plus the amount that would be needed to satisfy the preferential rights upon dissolution of holders of stock with senior liquidation rights if we were to be dissolved at the time the dividend or distribution is paid.

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CAPITALIZATION

     The following table displays information regarding our historical and pro forma capitalization at December 31, 2008, on a consolidated basis. The pro forma information gives effect to the sale of common stock at the minimum, midpoint, and maximum of the range of our estimated consolidated pro forma market value, as determined by the independent valuation of Curtis Financial. The pro forma information also is displayed at the maximum of the estimated valuation range plus shares issuable to the ESOP, which we refer to as the “adjusted maximum.” The various capital positions are displayed based upon the assumptions set forth under “Use of Proceeds.” For additional financial information, see our financial statements and related notes beginning on page F-1 of this prospectus. The total number of shares to be issued in the offering will range from 4,505,000 shares to 6,772,222 shares. The exact number will depend on market and financial conditions. See “Use of Proceeds” and “The Conversion and Offering —Stock Pricing and Number of Shares to be Issued.”

Pro Forma Capitalization at December 31, 2008
(In thousands, except per share data)

	Penn Millers
	Historical
	Consolidated												Adjusted
	Capitalization			Minimum			Midpoint			Maximum			Maximum
Long term debt and lines of credit	$	2,382		$	1,432		$	1,432		$	1,432		$	1,432
Shareholders’ equity:
Common stock, $0.01 par value per share; authorized shares 10,000,000	$	—		$	45		$	53		$	61		$	68
Additional paid in capital		—			41,759			49,582			57,405			64,068
Retained earnings		51,914			51,914			51,914			51,914			51,914
Accumulated other comprehensive income (loss), net of tax		(1,159	)		(1,159	)		(1,159	)		(1,159	)		(1,159	)
Less: common stock to be acquired by ESOP(2)		—			(4,505	)		(5,300	)		(6,095	)		(6,772	)
Total shareholders’ equity	$	50,755		$	88,054		$	95,090		$	102,126		$	108,119

(1) No effect has been given to the issuance of additional shares of common stock pursuant to the proposed stock-based incentive plan. We intend to adopt a stock-based incentive plan and will submit such plan to shareholders for their approval at a meeting of shareholders to be held at least six months following completion of the offering. If the plan is approved by shareholders, an amount equal to 14% of the shares of common stock sold in the offering will be available for future issuance under such plan. Under such plan, 4% will be available for future restricted stock awards and 10% will be available for future stock option grants. Your ownership percentage would decrease by approximately 12.3% if shares were issued from our authorized but unissued shares upon the grant of all potential restricted stock awards and the exercise of all potential stock options, and if 5,300,000 shares were sold in the offering. No decrease in your ownership percentage will occur if the shares are purchased for the plan on the open market. See “Unaudited Pro Forma Financial Information — Additional Pro Forma Data” and “Management — Benefit Plans and Employment Agreements — Stock-Based Incentive Plan.”

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(2) Assumes that 10% of the common stock sold in the offering will be purchased by the ESOP. The common stock acquired by the ESOP is reflected as a reduction in shareholders’ equity. Assumes the funds used to acquire the ESOP shares will be borrowed from Penn Millers. See Note 1 to the table set forth under “Unaudited Pro Forma Financial Information — Additional Pro Forma Data” and “Management — Benefit Plans and Employment Agreements — Employee Stock Ownership Plan.”

UNAUDITED PRO FORMA FINANCIAL INFORMATION

     The following unaudited pro forma condensed balance sheet as of December 31, 2008, gives effect to the completion of the offering, including implementation of the ESOP, as if it had occurred as of December 31, 2008. The data is based on the assumption that 4,505,000 shares of common stock (the minimum number of shares required to be sold in the offering) are sold to eligible members of Penn Millers Mutual, our directors, officers, and employees, and the ESOP and other purchasers in the subscription offering and community offering, and that no shares are sold in the syndicated community offering.

     The following unaudited pro forma condensed statement of operations for the year ended December 31, 2008, presents our operating results as if the offering was completed and the implementation of the ESOP had occurred as of January 1, 2008.

     Completion of the offering is contingent on the sale of a minimum of 4,505,000 shares of common stock in the offering. If less than 4,505,000 shares of common stock are subscribed for in the subscription and community offerings, the remaining shares may be sold in the syndicated community offering.

     The unaudited pro forma information does not claim to represent what our financial position or results of operations would have been had the offering occurred on the dates indicated. This information is not intended to project our financial position or results of operations for any future date or period. The pro forma adjustments are based on available information and certain assumptions that we believe are factually supportable and reasonable under the circumstances. The unaudited pro forma financial information should be read in conjunction with our financial statements, the accompanying notes, and the other financial information included elsewhere in this prospectus.

     The pro forma adjustments and pro forma amounts are provided for informational purposes only. Our financial statements will reflect the effects of the offering only from the date it is completed.

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Unaudited Pro Forma Condensed Balance Sheet
As of December 31, 2008
(In thousands, except per share data)

	Penn Millers						Penn Millers
	Historical			Pro Forma			Pro Forma
	Consolidated			Adjustments			Consolidated
Assets
Cash and invested assets	$	133,873		$	36,349	(1)	$	170,222
Premiums receivable		31,080			—			31,080
Reinsurance receivables		20,637			—			20,637
Deferred acquisition costs		10,601			—			10,601
Prepaid reinsurance premiums		4,342			—			4,342
Accrued investment income		1,431			—			1,431
Property and equipment, net of accumulated depreciation		4,231			—			4,231
Income taxes receivable		1,508			—			1,508
Deferred income taxes		4,728			—			4,728
Other assets		3,864			—			3,864
Deferred offering costs		1,015			—			1,015
Assets held for sale		3,214			—			3,214
Total assets	$	220,524		$	36,349		$	256,873
Liabilities
Loss and loss adjustment expense reserves	$	108,065		$	—		$	108,065
Unearned premiums		45,322			—			45,322
Accounts payable and accrued expenses		13,353			—			13,353
Borrowings under line of credit		950			(950	)		—
Long-term debt		1,432			—			1,432
Liabilities held for sale		647			—			647
Total liabilities	$	169,769		$	(950	)	$	168,819
Shareholders’ equity
Common stock	$	—		$	45	(1)	$	45
Unearned compensation		—			(4,505	)(2)		(4,505	)
Additional paid in capital		—			41,759	(1)		41,759
Retained earnings		51,914			—			51,914
Accumulated other loss, net of deferred taxes		(1,159	)		—			(1,159	)
Total shareholders’ equity	$	50,755		$	37,299		$	88,054
Total liabilities and shareholders’ equity	$	220,524		$	36,349		$	256,873

(1)

The unaudited pro forma condensed balance sheet, as prepared, gives effect to the sale of common stock at the minimum of the estimated range of our consolidated pro forma market value, as determined by the independent valuation of Curtis Financial. The unaudited pro forma condensed balance sheet is based upon the assumptions set forth under “Use of Proceeds.”

(2)

Reflects the $4,505,000 loan from us to our ESOP, the proceeds of which will be used to purchase 10% of the common stock issued in the offering at a purchase price of $10.00 per share. The amount of this borrowing has been reflected as a reduction from net proceeds to determine the estimated funds available for investment. The amount of the ESOP loan will increase to $5,300,000, $6,095,000, and $6,772,222 if 5,300,000, 6,095,000, and 6,772,222 shares, respectively, are sold in the offering. The ESOP loan will bear interest at an annual rate equal to long-term Applicable Federal Rate with semi-annual compounding on the closing date of the offering.

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     For comparison with the above, the following table provides the net proceeds we will receive from the sale of common stock at the minimum, midpoint and maximum of the estimated valuation range and at the adjusted maximum, which includes the shares to be issued to the ESOP in the event we accept subscriptions to purchase the maximum number of shares from other purchasers in the offering.

										Adjusted
	Minimum			Midpoint			Maximum			Maximum
				(in thousands)
Gross proceeds from the offering	$	45,050		$	53,000		$	60,950		$	67,722
Less: common stock acquired by the ESOP		(4,505	)		(5,300	)		(6,095	)		(6,772	)
Less: offering expenses		(2,570	)		(2,570	)		(2,570	)		(2,570	)
Less: underwriting commissions		(676	)		(795	)		(914	)		(1,016	)
Net proceeds from the offering	$	37,299		$	44,335		$	51,371		$	57,364
Total shares issued by Penn Millers in the offering		4,505,000			5,300,000			6,095,000			6,772,222

The ESOP loan will require at least annual payments of principal and interest for a term of 10 years. Penn Millers Insurance Company intends to make contributions to the ESOP at least equal to the principal and interest requirement of the ESOP loan. As the ESOP loan is repaid, the shareholders’ equity of Penn Millers Holding Corporation will be increased. The ESOP expense reflects adoption of Statement of Position (SOP) 93-6, which requires recognition of expense based upon shares committed to be allocated under the ESOP, and the exclusion of unallocated shares from earnings per share computations. The valuation of shares committed to be allocated under the ESOP would be based upon the average market value of the shares during the year. For purposes of this calculation, the average market value was assumed to be equal to $10.00 per share. See “Management — Benefit Plans and Employment Agreements.”

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Unaudited Pro Forma Condensed Statement of Operations
Year Ended December 31, 2008
(in thousands, except per share data)

	Penn Millers						Penn Millers
	Historical			Pro Forma			Pro Forma
	Consolidated			Adjustments			Consolidated
Revenue:
Net premiums earned	$	78,737		$	—		$	78,737
Net investment income		5,335			1,037	(1)		6,372
Realized investment losses, net		(5,819	)		—			(5,819	)
Other income		411			—			411
Total revenue		78,664			1,037			79,701
Expenses:
Loss and loss adjustment expense	$	57,390		$	—		$	57,390
Amortization of deferred policy acquisition costs		23,081			—			23,081
Underwriting and administrative expenses		3,481			—			3,481
Interest expense		184			—			184
Other expenses, net		365			451	(2)		816
Total expenses		84,501			451			84,952
Loss from continuing operations before income taxes	$	(5,837	)	$	586		$	(5,251	)
Income tax (benefit) expense		(1,378	)		199	(3)		(1,179	)
Loss from continuing operations	$	(4,459	)	$	387		$	(4,072	)
Earnings per share data:
Basic and diluted loss per common share from continuing operations	$	—					$	(1.00	)
Weighted average basic and diluted common shares outstanding		—						4,077,025

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Notes to Unaudited Pro Forma Condensed Statement of Operations

(1)	Assumes that that the net proceeds from the offering were available for investment and received as of January 1, 2008, and that they were invested with an average annual pre-tax rate of return of 2.78%.
(2)	General operating expenses include a pro forma adjustment to recognize compensation expense under the ESOP for shares of common stock committed to be released to participants as the principal and interest of the $4,505,000 loan from us to the ESOP is repaid. The pro forma adjustment reflects the amounts repaid on the ESOP loan based on ten equal annual installments.
(3)	Adjustments to reflect the federal income tax effects of (1) — (2) above assuming an effective federal income tax rate of 34%.
(4)	It is assumed that 10% of the shares issuable in the offering will be purchased by our ESOP. For purposes of this table, the funds used to acquire such shares are assumed to have been borrowed by the ESOP from Penn

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Millers Holding Corporation. The amount to be borrowed is reflected as a reduction to shareholders’ equity. Penn Millers Insurance Company expects to make annual contributions to the ESOP in an amount at least equal to the principal and interest requirement of the debt. Annual payments of the ESOP debt is based upon ten equal annual installments of principal and interest. The pro forma net earnings assumes: (i) that the contribution to the ESOP is equivalent to the debt service requirement for the year ended December 31, 2008; (ii) that 45,050, 53,000, 60,950, and 67,722 shares at the minimum, midpoint, maximum and adjusted maximum of the offering range, respectively, were committed to be released at the end of the year ended December 31, 2008, at an average fair value of $10.00 per share, in accordance with SOP 93-6; and (iii) for purposes of calculating the net income per share, the weighted average of the ESOP shares which have not been committed for release, equal to 427,975, 503,500, 579,025 and 643,361 at the minimum, midpoint, maximum and adjusted maximum of the offering range during the year ended December 31, 2008, were subtracted from total shares outstanding of 4,505,000, 5,300,000, 6,095,000, and 6,772,222 at the minimum, midpoint, maximum and adjusted maximum of the offering range on such dates.

Additional Pro Forma Data

     The actual net proceeds from the sale of our common stock in the offering cannot be determined until the offering is completed. However, the offering net proceeds are currently estimated to be between $37.3 million and $57.4 million, based upon the following assumptions:

• Our ESOP will purchase an amount equal to 10% of the shares of common stock sold in the offering with a loan from us;

• Expenses of the offering will be $2.57 million; and

• Underwriting commissions will equal 1.5% of the gross proceeds of the offering and that no shares will be sold in the syndicated offering.

     We have prepared the following table, which sets forth our historical net income and retained earnings prior to the offering and our pro forma net income and shareholders’ equity following the offering. In preparing this table and in calculating pro forma data, the following assumptions have been made:

• Pro forma earnings have been calculated assuming the stock had been sold at the beginning of the period;

• Pro forma per share amounts have been calculated by dividing historical and pro forma amounts by the indicated number of shares of stock, as adjusted to give effect to the purchase of shares by our ESOP; and

• Pro forma shareholders’ equity amounts have been calculated as if our common stock had been sold in the offering on December 31, 2008, and, accordingly, no effect has been given to the assumed earnings effect of the net proceeds from the offering.

     The following pro forma information may not be representative of the financial effects of the offering at the date on which the offering actually occurs and should not be taken as indicative of future results of operations. The pro forma shareholders’ equity is not intended to represent the fair market value of the common stock and may be different than amounts that would be available for distribution to shareholders in the event of liquidation.

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     The following table summarizes historical data and our pro forma data at December 31, 2008, and for the year then ended based on the assumptions set forth above and in the table and should not be used as a basis for projection of the market value of the common stock following the completion of the offering.

	At or For the Year Ended December 31, 2008
	(In thousands, except for per share data)
										6,772,222 shares
	4,505,000 shares			5,300,000 shares			6,095,000 shares			sold at $10.00 per
	sold at $10.00 per			sold at $10.00 per			sold at $10.00 per			share (Adjusted
	share (Minimum			share (Midpoint			share (Maximum			Maximum
	of range)			of range)			of range)			of range)
Pro forma offering proceeds
Gross proceeds of public offering	$	45,050		$	53,000		$	60,950		$	67,722
Less offering expenses and commissions		(3,246	)		(3,365	)		(3,484	)		(3,586	)
Net proceeds		41,804			49,635			57,466			64,136
Less ESOP shares (1)		(4,505	)		(5,300	)		(6,095	)		(6,772	)
Net proceeds after ESOP shares	$	37,299		$	44,335		$	51,371		$	57,364
Pro forma shareholders’ equity
Historical equity of Penn Millers	$	50,755		$	50,755		$	50,755		$	50,755
Pro forma proceeds after ESOP shares		37,299			44,335			51,371			57,364
Pro forma shareholders’ equity (2)	$	88,054		$	95,090		$	102,126		$	108,119
Pro forma per share data
Total shares outstanding after the offering		4,505,000			5,300,000			6,095,000			6,772,222
Pro forma book value per share	$	19.55		$	17.94		$	16.76		$	15.97
Pro forma price-to-book value		51.16	%		55.74	%		59.67	%		62.62	%
Pro forma net income:
Historical loss from continuing operations	$	(4,459	)	$	(4,459	)	$	(4,459	)	$	(4,459	)
Loss on discontinued operations		(2,920	)		(2,920	)		(2,920	)		(2,920	)
Earnings on proceeds (3)		684			813			943			1,053
ESOP expense		(297	)		(350	)		(402	)		(447	)
Pro forma loss	$	(6,992	)	$	(6,916	)	$	(6,838	)	$	(6,773	)
Weighted average shares outstanding (4)		4,077,025			4,796,500			5,515,975			6,128,861
Pro forma loss per share	$	(1.71	)	$	(1.44	)	$	(1.24	)	$	(1.11	)

(1)

It is assumed that 10% of the aggregate shares sold in the offering will be purchased by the ESOP. The funds used to acquire such shares are assumed to have been borrowed by the ESOP from us. The amount to be borrowed is reflected as a reduction to shareholders’ equity. Annual contributions are expected to be made to the ESOP in an amount at least equal to the principal and interest requirement of the debt. The pro forma net income assumes: (i) that the contribution to the ESOP is equivalent to the debt service requirements for the year ended December 31, 2008; and (ii) only the ESOP shares committed to be released were considered outstanding for purposes of the net income per share calculations.

(2)

No effect has been given to the issuance of additional shares in connection with the grant of options or restricted stock awards under the stock-based incentive plan that we intend to adopt. Under the stock-based incentive plan, an amount equal to the aggregate of 10% of the common stock sold in the offering, or 450,500, 530,000, 609,500, and 677,222 shares at the minimum, midpoint, maximum, and adjusted maximum of the estimated offering range, respectively, will be available for future issuance upon the exercise of options to be granted under the stock-based incentive plan. Also under the stock-based incentive plan an amount equal to the aggregate of 4% of the shares of common stock sold in the offering, or 180,200, 212,000, 243,800 and 270,889 shares of common stock at the minimum, midpoint, maximum, and adjusted maximum of the estimated offering range, respectively, will be purchased either through open market purchases or issued by Penn Millers for the purposes of making restricted stock awards under the stock-based incentive plan. We expect to seek shareholder approval of the plan six months after completion of the offering. The issuance of authorized but unissued shares of our common stock for the purpose of making restricted stock awards under the stock-based incentive plan instead of open market purchases would dilute the voting interests of existing shareholders by

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	approximately 12.3% at the midpoint of the offering range.
(3)	Assumes an average after-tax rate of return of 1.835% per annum on the net proceeds of the offering.
(4)	It is assumed that 10% of the shares issuable in the offering will be purchased by our ESOP. For purposes of this table, the funds used to acquire such shares are assumed to have been borrowed by the ESOP from Penn Millers Holding Corporation. The amount to be borrowed is reflected as a reduction to shareholders’ equity of Penn Millers Holding Corporation. Annual contributions are expected to be made to the ESOP in an amount at least equal to the principal and interest requirement of the debt. The annual payment of the ESOP debt is based upon ten equal annual installments of principal and interest. The pro forma net earnings assumes: (i) that the contribution to the ESOP is equivalent to the debt service requirement for the year ended December 31, 2008; (ii) that 45,050, 53,000, 60,950, and 67,722 shares at the minimum, midpoint, maximum and adjusted maximum of the offering range, respectively, were committed to be released at the end of the year ended December 31, 2008, at an average fair value of $10.00 per share in accordance with SOP 93-6; and (iii) for purposes of calculating the net income per share, the weighted average of the ESOP shares which have not been committed for release, equal to 427,975, 503,500, 579,025, and 643,361 and at the minimum, midpoint, maximum and adjusted maximum of the offering range during the year ended December 31, 2008, were subtracted from total shares outstanding of 4,505,000, 5,300,000, 6,095,000, and 6,772,222 at the minimum, midpoint, maximum and adjusted maximum of the offering range on such dates.

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MANAGEMENT’S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS

     The following discussion and analysis of our financial condition and results of operations should be read in conjunction with the financial statements and accompanying notes included elsewhere in this prospectus. Some of the information contained in this discussion and analysis or set forth elsewhere in this prospectus constitutes forward-looking information that involves risks and uncertainties. Please see “Forward-Looking Information” and “Risk Factors” for more information. You should review “Risk Factors” for a discussion of important factors that could cause actual results to differ materially from the results described, or implied by, the forward-looking statements contained herein.

Overview

     Penn Millers Insurance Company is a property and casualty insurance company incorporated in Pennsylvania. Penn Millers Insurance Company is a wholly owned subsidiary of PMHC, which is a wholly owned subsidiary of Penn Millers Mutual Holding Company, or Penn Millers Mutual. American Millers Insurance Company is a property and casualty insurance company incorporated in Pennsylvania and is a wholly owned subsidiary of Penn Millers Insurance Company. On the effective date of the conversion, Penn Millers Mutual will become a wholly owned subsidiary of Penn Millers Holding Corporation. After the conversion, PMHC will merge with and into Penn Millers Mutual. The consolidated financial statements of Penn Millers Mutual prior to the conversion will become the consolidated financial statements of Penn Millers Holding Corporation upon completion of the conversion.

      On February 2, 2009, we completed the sale of substiantially all the assets of Eastern Insurance Group, which was a wholly owned subsidiary insurance agency of PMHC. In July 2008, we completed the sale of the assets of Penn Software and Technology Services, Inc. (Penn Software), a Pennsylvania corporation specializing in software development for the insurance industry. Penn Software was a wholly-owned subsidiary of PMHC. Both Eastern Insurance Group and Penn Software are accounted for as discontinued operations. We intend to begin the process to dissolve both Eastern Insurance Group and Penn Software in 2009.

     We offer insurance products designed to meet the needs of certain segments of the agricultural industry in 33 states. We also offer commercial insurance products designed to meet the needs of main street businesses in 8 states. We report our operating results in three operating segments: agribusiness insurance, commercial business insurance, and our “other” segment. Assets are not allocated to segments and are reviewed in the aggregate for decision-making purposes. Our agribusiness insurance segment product includes fire and allied lines, inland marine, general liability, commercial automobile, workers’ compensation, and umbrella liability insurance. We specialize in writing coverage for manufacturers, processors, and distributors of products for the agricultural industry. We market our agribusiness lines through independent producers and our employees. Our commercial business insurance segment product consists of a business owner’s policy that combines the following: property, liability, business interruption, and crime coverage for small businesses; workers’ compensation; commercial automobile; and umbrella liability coverage. The types of businesses we target include retail, service, hospitality, wholesalers, light manufacturers, and printers. We market our commercial lines through independent producers.

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     Our third business segment, which we refer to as our “other” segment, includes the runoff of lines of business that we no longer offer or assume and assigned risk reinsurance programs in which we are required to participate.

     Penn Millers Insurance Company is rated “A-” (Excellent) by A.M. Best Company, Inc., which is the fourth highest out of fifteen possible ratings. The latest rating evaluation by A.M. Best Company, Inc. occurred on June 2, 2008.

     For the year ended December 31, 2008, we had direct premiums written of $95.0 million, net premiums earned of $78.7 million, and a net loss from continuing operations of $4.5 million. For the year ended December 31, 2007, we had direct premiums written of $94.1 million, net premiums earned of $71.0 million, and net income from continuing operations of $1.4 million. At December 31, 2008, we had total assets of $220.5 million and equity of $50.8 million.

Marketplace Conditions and Trends

     The property and casualty insurance industry is affected by recurring industry cycles known as “hard” and “soft” markets. A soft cycle is characterized by intense competition resulting in lower pricing in order to compete for business. A hard market, generally considered a beneficial industry trend, is characterized by reduced competition that results in higher pricing. Since 2005, the property and casualty insurance industry has been characterized by a soft market and increased pricing competition.

Principal Revenue and Expense Items

     We derive our revenue primarily from premiums earned, net investment income and net realized gains (losses) from investments.

     Gross and net premiums written.

     Gross premiums written is equal to direct and assumed premiums before the effect of ceded reinsurance. Net premiums written is the difference between gross premiums written and premiums ceded or paid to reinsurers (ceded premiums written).

     Premiums earned.

     Premiums earned are the earned portion of our net premiums written. Gross premiums written include all premiums recorded by an insurance company during a specified policy period. Insurance premiums on property and casualty insurance contracts are recognized in porportion to the underlying risk insured and are earned ratably over the duration of the policies. At the end of each accounting period, the portion of the premiums that are not yet earned are included in unearned premiums and are realized as revenue in subsequent periods over the remaining term of the policy. Our policies typically have a term of twelve months. Thus, for example, for a policy that is written on July 1, 2008, one-half of the premiums would be earned in 2008 and the other half would be earned in 2009.

     Net investment income and net realized gains (losses) on investments

     We invest our surplus and the funds supporting our insurance liabilities (including unearned premiums and unpaid loss and loss adjustment expenses) in cash, cash equivalents, equities and fixed maturity securities. Investment income includes interest and dividends earned on invested assets. Net realized gains and losses on invested assets are reported separately from net investment income. We recognize realized gains when invested assets are sold for an amount greater than their cost or amortized cost (in the case of fixed maturity securities) and recognize realized losses when investment securities are written down as a result of an other than temporary impairment or sold for an amount less than their cost

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or amortized cost, as applicable. Our portfolio of investment securities is managed by an independent investment manager who has discretion to buy and sell securities in accordance with the investment policy approved by our board of directors. However, by agreement, our investment manager cannot sell any security without our consent if such sale will result in a net realized loss.

     Penn Millers’ expenses consist primarily of:

     Loss and loss adjustment expense

     Loss and loss adjustment expenses represent the largest expense item and include: (1) claim payments made, (2) estimates for future claim payments and changes in those estimates for prior periods, and (3) costs associated with investigating, defending and adjusting claims.

     Amortization of deferred policy acquisition costs and underwriting and administrative expenses

     Expenses incurred to underwrite risks are referred to as policy acquisition expenses and underwriting and administrative expenses. Policy acquisition costs consist of commission expenses, premium taxes and certain other underwriting expenses that vary with and are primarily related to the writing and acquisition of new and renewal business. These policy acquisition costs are deferred and amortized over the effective period of the related insurance policies. Underwriting and administrative expenses consist of salaries, rent, office supplies, depreciation and all other operating expenses not otherwise classified separately, and payments to bureaus and assessments of statistical agencies for policy service and administration items such as rating manuals, rating plans and experience data. Amortization of deferred policy acquisition costs, and underwriting and administrative expenses directly attributable to each segment are recorded in that segment directly. Underwriting and administrative overhead expense not specifically attributable to an individual segment is allocated to those segments based upon factors such as, employee head count, policy count, and premiums written.

     Income taxes

     We use the asset and liability method of accounting for income taxes. Deferred income taxes arise from the recognition of temporary differences between financial statement carrying amounts and the tax bases of our assets and liabilities. A valuation allowance is provided when it is more likely than not that some portion of the deferred tax asset will not be realized. The effect of a change in tax rates is recognized in the period of the enactment date.

Key Financial Measures

     We evaluate our insurance operations by monitoring certain key measures of growth and profitability. In addition to reviewing our financial performance based on results determined in accordance with generally accepted accounting principles in the United States (GAAP), we utilize certain non-GAAP financial measures that we believe are valuable in managing our business and for comparison to our peers. These non-GAAP measures are underwriting income, combined ratios, written premiums, and the ratio of net written premiums to statutory surplus.

     We measure growth by monitoring changes in gross premiums written and net premiums written. We measure underwriting profitability by examining loss and loss adjustment expense, underwriting expense and combined ratios. We also measure profitability by examining underwriting income (loss) and net income (loss).

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     Loss and loss adjustment expense ratio

     The loss and loss adjustment expense ratio is the ratio (expressed as a percentage) of loss and loss adjustment expenses incurred to premiums earned. We measure the loss ratio on an accident year and calendar year loss basis to measure underwriting profitability. An accident year loss ratio measures loss and loss adjustment expenses for insured events occurring in a particular year, regardless of when they are reported, as a percentage of premiums earned during that year. A calendar year loss ratio measures loss and loss adjustment expense for insured events occurring during a particular year and the change in loss reserves from prior accident years as a percentage of premiums earned during that year.

     Underwriting expense ratio

     The underwriting expense ratio is the ratio (expressed as a percentage) of amortization of deferred policy acquisition costs and net underwriting and administrative expenses (attributable to insurance operations) to premiums earned, and measures our operational efficiency in producing, underwriting and administering our insurance business.

     GAAP combined ratio

     Our GAAP combined ratio is the sum of the loss ratio and the expense ratio and measures our overall underwriting profit. If the GAAP combined ratio is below 100%, we are making an underwriting profit. If our combined ratio is at or above 100%, we are not profitable without investment income and may not be profitable if investment income is insufficient.

     Net premiums written to statutory surplus ratio

     The net premiums written to statutory surplus ratio represents the ratio of net premiums written, after reinsurance ceded, to statutory surplus. This ratio measures our exposure to pricing errors in our current book of business. The higher the ratio, the greater the impact on surplus should pricing prove inadequate.

     Underwriting income (loss)

     Underwriting income (loss) measures the pre-tax profitability of our insurance segments. It is derived by subtracting loss and loss adjustment expense, amortization of deferred policy acquisition costs, and underwriting and administrative expenses from earned premiums. Each of these items is presented as a caption in our statements of operations.

     Net income (loss) and return on average equity

     We use net income (loss) to measure our profit and return on average equity to measure our effectiveness in utilizing equity to generate net income. In determining return on average equity for a given year, net income (loss) is divided by the average of the beginning and ending equity for that year.

Critical Accounting Policies

     General

     The preparation of financial statements in accordance with GAAP requires both the use of estimates and judgment relative to the application of appropriate accounting policies. We are required to make estimates and assumptions in certain circumstances that affect amounts reported in our financial statements and related footnotes. We evaluate these estimates and assumptions on an on-going basis

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based on historical developments, market conditions, industry trends and other information that we believe to be reasonable under the circumstances. There can be no assurance that actual results will conform to our estimates and assumptions and that reported results of operations will not be materially adversely affected by the need to make accounting adjustments to reflect changes in these estimates and assumptions from time to time. We believe the following policies are the most sensitive to estimates and judgments.

     Loss and Loss Adjustment Expense Reserves

How reserves are established

     We maintain reserves for the payment of claims (incurred losses) and expenses related to adjusting those claims (loss adjustment expenses or LAE). Our loss reserves consist of case reserves, which are reserves for claims that have been reported to us, and reserves for claims that have been incurred but have not yet been reported (IBNR).

     When a claim is reported to us, our claims personnel establish a case reserve for the estimated amount of the ultimate payment. The amount of the loss reserve for the reported claim is based primarily upon a claim-by-claim evaluation of coverage, liability, injury severity or scope of property damage, and any other information considered pertinent to estimating the exposure presented by the claim. Each claim is settled individually based upon its merits, and some claims may take years to settle, especially if legal action is involved. Case reserves are reviewed on a regular basis and are updated as new data becomes available.

     In addition to case reserves, we maintain estimates of reserves for loss and loss adjustment expenses incurred but not reported. Some claims may not be reported for many years. As a result, the liability for unpaid loss and loss adjustment reserves includes significant estimates for IBNR.

     We utilize independent actuaries to assist with the estimation of our loss and LAE reserves each quarter. These actuaries prepare estimates of the ultimate liability for unpaid losses and LAE based on established actuarial methods described below. Our management reviews these estimates and supplements the actuarial analysis with information not fully incorporated into the actuarially based estimate, such as changes in the external business environment and changes in internal company processes and strategy. We may adjust the actuarial estimates based on this supplemental information in order to arrive at the amount recorded in the financial statements.

     We accrue liabilities for unpaid loss and loss adjustment expenses based upon estimates of the ultimate amount payable. We project our estimate of ultimate loss and loss adjustment expenses by line of business using the following actuarial methodologies:

Paid Loss Development Method — The Paid Loss Development Method utilizes historical loss payment patterns to estimate future losses. Estimates using this method are not affected by changes in case reserving practices that might have occurred during the review period, but may be understated as this method does not take into account large unpaid claims. This method is also susceptible to any changes in the rate of claim settlements or shifts in the size of claims settled.

The actuaries produce and review several indications of ultimate loss using this method based on various loss development factors (LDF) selections, such as

• 2, 3, 4, and 5-Year Averages (straight averages and loss-weighted averages)

• 5-Year Average Excluding Highest and Lowest LDFs

• All-Year average (straight average and loss-weighted average)

• Selected LDF Pattern (LDFs are selected for each evaluation based on the actuaries’ review of the historical development)

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Incurred Loss Development Method — The Incurred Loss Development Method utilizes historical incurred loss (the sum of cumulative historical loss payments plus outstanding case reserves) patterns to estimate future losses. This method is often preferred over the paid method as it includes the additional information provided by the aggregation of individual case reserves. The resulting LDFs tend to be lower and more stable than those of the paid development method. However, the incurred development method may be affected by changes in case reserving practices and any unusually large individual claims. As with the Paid Loss Development Method, the actuaries produce and review several indications of ultimate loss using this method based on various LDF selections.

Bornhuetter-Ferguson Method (Paid and Incurred) — The Bornhuetter-Ferguson Method is a blended method that explicitly takes into account both actual loss development to date and expected future loss emergence. This method is applied on both a paid loss basis and an incurred loss basis. This method uses the selected loss development patterns from the Loss Development Methods to calculate the expected percentage of loss unpaid (or unreported). The expected future loss component of the method is calculated by multiplying earned premium for the given exposure period by a selected a priori (i.e. deductive) loss ratio. The resulting dollars are then multiplied by the expected percentage of unpaid (or unreported) loss described above. This provides an estimate of future paid (or reported) losses that is then added to actual paid (or incurred) loss data to produce estimated ultimate loss.

Frequency/Severity Method — The Frequency/Severity Method combines estimates of ultimate claim counts and estimates of per claim ultimate loss severities to yield estimates of ultimate losses. Both the ultimate claim counts and ultimate severity are estimated using a loss development factor approach similar to the Incurred Loss Development Method. For this reason, the same considerations discussed in the Incurred Loss Development Method apply to this method as well. Ultimate claim counts and ultimate severities are multiplied together to produce an estimate of ultimate losses. This method is useful in more recent accident years where the data is not mature and is especially useful when loss development patterns are volatile or not well established.

     We estimate IBNR reserves by first deriving an actuarially based estimate of the ultimate cost of total loss and loss adjustment expenses incurred by line of business as of the financial statement date. We then reduce the estimated ultimate loss and loss adjustment expenses by loss and loss adjustment expense payments and case reserves carried as of the financial statement date. The actuarially determined estimate is based upon indications from one of the above actuarial methodologies or uses a weighted average of these results. The specific method used to estimate the ultimate losses for individual lines of business, or individual accident years within a line of business, will vary depending on the judgment of the actuary as to what is the most appropriate method for a line of business’ unique characteristics. Finally, we consider other factors that impact reserves that are not fully incorporated in the actuarially based estimate, such as changes in the external business environment and changes in internal company processes and strategy.

     The process of estimating loss reserves involves a high degree of judgment and is subject to a number of variables. These variables can be affected by both internal and external events, such as changes in claims handling procedures, economic inflation, legal trends, and legislative changes, among others. The impact of many of these items on ultimate costs for claims and claim adjustment expenses is difficult to estimate. Loss reserve estimation difficulties also differ significantly by line of business due to differences in claim complexity, the volume of claims, the potential severity of individual claims, the determination of occurrence date for a claim, and reporting lags (the time between the occurrence of the policyholder event and when it is actually reported to the insurer). Informed judgment is applied throughout the process, including the application of various individual experiences and expertise to multiple sets of data and analyses. We continually refine our loss reserve estimates in a regular ongoing process as historical loss experience develops and additional claims are reported and settled. We consider all significant facts and

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circumstances known at the time loss reserves are established.

     Due to the inherent uncertainty underlying loss reserve estimates, final resolution of the estimated liability for loss and loss adjustment expenses may be higher or lower than the related loss reserves at the reporting date. Therefore, actual paid losses, as claims are settled in the future, may be materially higher or lower in amount than current loss reserves. We reflect adjustments to loss reserves in the results of operations in the period the estimates are changed.

     Our reserves for unpaid loss and LAE (in thousands) are summarized below:

	As of		As of
	December 31,		December 31,
	2008		2007
Case reserves	$	57,976	$	48,957
IBNR reserves		27,464		28,272
Net unpaid loss and LAE		85,440		77,229
Reinsurance recoverables on unpaid loss and LAE		22,625		18,727
Reserves for unpaid loss and LAE	$	108,065	$	95,956

     At December 31, 2008, the amount recorded as compared to the actuarially-determined reserve range, net of reinsurance was as follows:

Reserve Range for Unpaid Loss and LAE
(in thousands)
Low End	Recorded	High End
$79,421	$85,440	$90,158

     The width of the range in reserves arises primarily from those lines of business for which specific losses may not be known and reported for some period and for losses that may take longer to emerge. These long-tail lines consist mostly of casualty lines including general liability, products liability, umbrella, workers’ compensation, and commercial auto liability exposures. The ultimate frequency or severity of these claims can be very different than the assumptions we used in our estimation of ultimate reserves for these exposures. The high end of the reserve range is limited by our 2008 aggregate stop loss reinsurance contract that provides reinsurance coverage for the 2008 accident year for loss and allocated loss adjustment expense from all lines of business in excess of a 72% loss and allocated loss adjustment expense ratio up to a 92% loss and allocated loss adjustment expense ratio.

     Specifically, the following factors could impact the frequency and severity of claims, and therefore, the ultimate amount of loss and LAE paid:

• The rate of increase in labor costs, medical costs, material costs, and commodity prices that underlie insured risks;

• Development of risk associated with our expanding producer relationships, new classes of business, and our growth in states where we currently have small market share;

• Impact of unemployment rates on behavior of injured insured workers;

• Impact of changes in laws or regulations;

• Adequacy of current pricing in relatively soft insurance markets; and

• Variability related to asbestos and environmental claims due to issues as to whether coverage exists, the definition of occurrence, the determination of ultimate damages, and the allocation of such damages to responsible parties.

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     The estimation process for determining the liability for unpaid loss and LAE inherently results in adjustments each year for claims incurred (but not paid) in preceding years. Negative amounts reported for claims incurred related to prior years are a result of claims being settled for amounts less than originally estimated (favorable development). Positive amounts reported for claims incurred related to prior years are a result of claims being settled for amounts greater than originally estimated (unfavorable development). For the years ended December 31, 2008 and 2007, we experienced favorable development of $5.2 million and $4.6 million, respectively.

     Potential for variability in our reserves is evidenced by this development. As further illustration of reserve variability, we initially estimated our reserve for unpaid loss and LAE net of reinsurance at the end of 2000 at $29.5 million. As of December 31, 2008, that reserve was re-estimated at $38.6 million, which is $9.1 million, or 30.9%, higher than the initial estimate.

Lines of Business and Actuarial Ranges

     The selection of the ultimate loss is based on information unique to each line of business and accident year and the judgment and expertise of the actuaries and management. Although we raised the net retention of our per risk excess of loss reinsurance covering many of these lines of business in 2008, our aggregate stop loss reinsurance contract limits the potential for further development across all lines for the reserves associated with that accident year. As of December 31, 2008, we had ceded reinsurance loss recoverable under this stop loss contract of $4.3 million, which is included in the net liabilities reported below. While individual lines may experience adverse development for the 2008 accident year in the future, the total net reserves for that accident year are protected against another $12.1 million of adverse development up to a 92% loss ratio.

     The following table provides case and IBNR reserves for losses and loss expenses by major lines of business as of December 31, 2008 and 2007. Prior to 2008, we did not produce an actuarial range of estimates. A discussion of each major line of business will follow.

As of December 31, 2008

							Actuarially Determined Range of Estimates
					Total
($ in thousands)	Case Reserves		IBNR Reserves		Reserves		Low		High
Commercial auto liability	$	7,698	$	4,214	$	11,912	$	11,116	$	12,404
Workers’ compensation		11,108		4,489		15,597		14,870		16,395
Commercial multi-peril		16,696		6,381		23,077		22,420		24,062
Liability		9,840		7,689		17,529		15,447		18,235
Fire & allied		5,857		26		5,883		5,837		5,883
Assumed		5,027		4,517		9,544		8,207		10,810
Other		1,750		148		1,898		1,524		2,369
Total net reserves		57,976		27,464		85,440	$	79,421	$	90,158
Reinsurance recoverables		11,634		10,991		22,625
Gross reserves	$	69,610	$	38,455	$	108,065

As of December 31, 2007

					Total
($ in thousands)	Case Reserves		IBNR Reserves		Reserves
Commercial auto liability	$	6,340	$	5,592	$	11,932
Workers’ compensation		9,449		6,027		15,476
Commercial multi-peril		14,581		5,608		20,189
Liability		6,721		5,282		12,003
Fire & allied		4,507		823		5,330
Assumed		5,198		4,573		9,771
Other		2,161		367		2,528
Total net reserves		48,957		28,272		77,229
Reinsurance recoverables		13,159		5,568		18,727
Gross reserves	$	62,116	$	33,840	$	95,956

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     As discussed earlier, the estimation of our reserves is based on several actuarial methods, each of which incorporates many quantitative assumptions. The judgment of the actuary plays an important role in selecting among various loss development factors and selecting the appropriate method, or combination of methods, to use for a given line of business and accident year. The ranges presented above represent the expected variability around the actuarially determined central estimate. The width of the range is primarily determined by the specific line of business. For example, long tail casualty lines typically involve greater uncertainty and, therefore, have a wider range of expected outcomes. The magnitude of the line of business (i.e. volume of insured exposures) can also factor into the range such that more significantly sized lines of business provide more statistically significant data to rely upon. The total range around our actuarially determined estimate varies from - -5% to +8%, with the ranges around each of our core lines of business (excluding Assumed and Other lines) ranging from the widest being -7% to +9% (Liability) to the narrowest being -1% to 0% (Fire & Allied lines). As shown in the table below, since 2002, the variance in our originally estimated loss reserves has ranged from 7% deficient to 8% redundant.

Recent Variabilities of the Liability for Unpaid Loss and LAE, Net of Reinsurance Recoverables

	2002			2003			2004			2005			2006			2007
As originally estimated	$	42,731		$	48,072		$	55,804		$	61,032		$	69,316		$	77,229
As estimated at December 31, 2008		45,744			49,284			54,411			59,884			63,847			72,004
Net cumulative redundancy (deficiency)	$	(3,013	)	$	(1,212	)	$	1,393		$	1,148		$	5,469		$	5,225
% redundancy (deficiency)		(7.1	)%		(2.5	)%		2.5	%		1.9	%		7.9	%		6.8	%

     The table below summarizes the impact on equity from changes in estimates of unpaid loss and LAE reserves as of December 31, 2008 (dollars in thousands):

Reserve Range for Unpaid	Aggregate Loss and		Percentage Change (1)
Loss and LAE	LAE Reserve		in Equity
Low End	$	79,421		7.8	%
Recorded	$	85,440		—
High End	$	90,158		(6.1	)%

(1) Net of tax

     If the loss and LAE reserves were recorded at the high end of the actuarially-determined range, the loss and LAE reserves would increase by $4.7 million. This increase in reserves would have the effect of decreasing net income and equity as of December 31, 2008 by $3.1 million. If the loss and LAE reserves were recorded at the low end of the actuarially-determined range, the loss and LAE reserves at December 31, 2008 would be reduced by $6.0 million with corresponding increases in net income and equity of $4.0 million.

     If the loss and LAE reserves were to adversely develop to the high end of the range, approximately $4.7 million of anticipated future payments for the loss and LAE expenses would be required to be paid, thereby affecting cash flows in future periods as the payments for losses are made.

Specific considerations for major lines of business

Commercial Multi-Peril

     At December 31, 2008, the commercial multi-peril line of business had recorded reserves, net of reinsurance, of $23.1 million, which represented 27% of our total net reserves. This line of business includes both property and liability coverage provided under a business owner’s policy. This line of business can be prone to adverse development arising from delayed reporting of claims and adverse settlement trends related to the liability portion of the line. No adjustment has been made to the actuarially selected estimate for this line. While management has not identified any specific trends relating to additional reserve uncertainty on prior accident years, a declining economic climate and unfavorable changes to the legal environment could lead to the filing of more claims for previously unreported losses.

Liability

     At December 31, 2008, our liability line of business had recorded reserves, net of reinsurance of $17.5 million, which represented 21% of our total net reserves. This line of business includes general liability, products liability, and umbrella liability coverages. This reserve is $0.8 million, or 5.2%, above the actuarially selected estimate. This line can be prone to volatility and adverse development. In particular, many claims in these coverages often involve a complex set of facts and high claim amounts, and litigation often takes place in challenging court environments.

Workers’ Compensation

     At December 31, 2008, our workers’ compensation line of business recorded reserves, net of reinsurance,

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of $15.6 million, or 18% of our total net reserves. This reserve is $0.5 million, or 3.0%, above the actuarially selected estimate. In addition to the uncertainties associated with the actuarial assumptions and methodologies described above, the workers’ compensation line of business can be impacted by a variety of issues such as unexpected changes in medical cost inflation, medical treatment options and duration, changes in overall economic conditions, and company specific initiatives. Initiatives to limit the long term costs of workers’ compensation claims costs, such as return to work programs, can be adversely impacted by poor economic conditions when there are fewer jobs available for injured workers.

Commercial Automobile Liability

     At December 31, 2008, our commercial automobile liability line of business had recorded reserves, net of reinsurance, of $11.9 million, which represented 14% of our total net reserves. This reserve is $0.4 million, or 3.5%, above the actuarially selected estimate. This line of business is similar to workers’ compensation in that the reporting of claims is generally timely but understanding the true extent of the liability can be difficult to estimate, both at the claim level and in aggregate. The gathering of important information can be delayed due to a slow legal discovery process. Also, uncertainty about the true severity of injuries and unpredictability of medical cost inflation can make reserving for specific claims a challenge. Medical cost inflation and evolving legal environments can also invoke uncertainty into the process of estimating IBNR.

Fire and Allied

     At December 31, 2008, our fire and allied lines of business had recorded reserves, net of reinsurance, of $5.9 million, which represented 7% of our total net reserves. These lines of business comprise a substiantial amount of the property exposures that we insure. Our allied lines of business covers losses primarily from wind, hail, and snow. No adjustment has been made to the actuarially selected estimate for this line. Favorable or unfavorable development can occur on specific claims based on changes in the cost of building materials, refinement of damage assessments, and resolution of coverage issues, and as opportunities for salvage and subrogation are investigated.

Assumed

     At December 31, 2008, our assumed lines of business had recorded reserves, net of reinsurance, of $9.5 million, which represented 11% of our total net reserves. This reserve is $0.3 million, or 3.2%, above the actuarially selected estimate. These lines comprise the majority of our Other segment, with the reserves mostly attributable to a Munich Re America reinsurance pool, in which we terminated our participation in 1986, and the mandatory assumed risk pools in which we are required to participate in the states we do business. The case reserves for these pools are established based on amounts reported to us by the ceding parties. The IBNR is estimated based on observed development trends using the various methodologies described earlier. The exposures within these pools include long tail lines such as workers’ compensation, auto liability, general liability, and products liability, which includes asbestos exposures. Development can occur in these reserves due to such factors as the changing legal environment, the economic climate, and medical cost inflation. In addition, we are dependent on information from third parties which can make it difficult to estimate the IBNR for this business.

     Investments

     Our fixed maturity and equity securities investments are classified as available-for-sale and carried at estimated fair value as determined by management based upon quoted market prices or a recognized pricing service at the reporting date for those or similar investments. Changes in unrealized investment gains or losses on our investments, net of applicable income taxes, are reflected directly in equity as a component of comprehensive income (loss) and, accordingly, have no effect on net income (loss). Investment income is recognized when earned, and capital gains and losses are recognized when investments are sold, or other-than-temporarily impaired.

     The fair value and unrealized losses for our securities that were temporarily impaired as of December 31, 2008 and 2007 are as follows:

	Less than 12 months				12 months or longer				Total
	(in thousands)				(in thousands)				(in thousands)
	Fair		Unrealized		Fair		Unrealized		Fair		Unrealized
Description of securities	value		losses		value		losses		value		losses
December 31, 2008:
State and political subdivisions	$	2,934	$	56	$	515	$	54	$	3,449	$	110
Mortgage-backed securities		2,203		297		1,645		373		3,848		670
Corporate securities		10,732		1,008		9,907		1,083		20,639		2,091
Total fixed maturities		15,869		1,361		12,067		1,510		27,936		2,871
Total temporarily impaired securities	$	15,869	$	1,361	$	12,067	$	1,510	$	27,936	$	2,871

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	Less than 12 months				12 months or longer				Total
	(in thousands)				(in thousands)				(in thousands)
	Fair		Unrealized		Fair		Unrealized		Fair		Unrealized
Description of securities	value		losses		value		losses		value		losses
December 31, 2007:
Agencies not backed by the full faith and credit of the U.S. government	$	—	$	—	$	4,199	$	7	$	4,199	$	7
State and political subdivisions		516		1		3,669		13		4,185		14
Mortgage-backed securities		497		—		9,150		119		9,647		119
Corporate securities		2,665		44		8,662		188		11,327		232
Total fixed maturities		3,678		45		25,680		327		29,358		372
Equity securities		760		43		326		1		1,086		44
Total temporarily impaired securities	$	4,438	$	88	$	26,006	$	328	$	30,444	$	416

     We invest in high credit quality bonds and have the ability and intent to hold them until maturity to realize all the future cash flows but classify them as available for sale. Fair values of interest rate sensitive instruments may be affected by increases and decreases in prevailing interest rates which generally translate, respectively, into decreases and increases in fair values of fixed maturity investments. The fair values of interest rate sensitive instruments also may be affected by the credit worthiness of the issuer, prepayment options, relative values of other investments, the liquidity of the instrument, and other general market conditions. For the year ended December 31, 2008, our fixed maturity portfolio lost $420,000 due to declines in fair values. Most of the decline in our fixed maturity portfolio has been in corporate bonds issued by financial institutions, whose prices have been depressed as a result of the recent turmoil in the credit markets. We have evaluated each security and taken into account the severity and duration of the impairment, the current rating on the bond, and the outlook for the issuer according to independent analysts. We have found that the declines in fair value are most likely attributable to the current market dislocation, and there is no evidence that the likelihood of not receiving all of the contractual cash flows is probable. We have the ability and intent to hold these securities until recovery, which may be maturity. Our fixed maturity portfolio is managed by an independent investment manager who has discretion to buy and sell securities, however, by agreement, the investment manager cannot sell any security without our consent if such sale will result in a net realized loss.

     We monitor our investment portfolio and review securities that have experienced a decline in fair value below cost to evaluate whether the decline is other than temporary. These evaluations involve judgment and consider the magnitude and reasons for a decline and the prospects for the fair value to recover in the near term. When we determine that an investment is other-than-temporarily impaired, the invested asset is written down to fair value, and the amount of the impairment is included in operations as a realized investment loss in the period it is determined. Other-than-temporary impairment losses result in a permanent reduction of the cost basis of the underlying security. For the years ended December 31, 2008, 2007 and 2006, we recorded pre-tax charges to income of $2,922,000, $620,000 and $0, respectively, for securities that we determined were other than temporarily impaired. Adverse investment market conditions, or poor operating results of underlying investments, could result in impairment charges in the future.

      We use quoted values and other data provided by a nationally recognized independent pricing service in our process for determining fair values of our investments. Its evaluations represent an exit price and a good faith opinion as to what a buyer in the marketplace would pay for a security in a current sale. As of December 31, 2008, all of our fixed maturity investments were priced using this one primary service. For fixed maturity securities that have quoted prices in active markets, market quotations are provided. For fixed maturity securities that do not trade on a daily basis, the independent pricing service prepares estimates of fair value using a wide array of observable inputs including relevant market information, benchmark curves, benchmarking of like securities, sector groupings, and matrix pricing. The observable market inputs that our independent pricing service utilizes may include (listed in order of priority for use) benchmark yields, reported trades, broker-dealer quotes, issuer spreads, two-sided markets, benchmark securities, market bids/offers, and other reference data on markets, industry, and the economy. Additionally, the independent pricing service uses an Option Adjusted Spread model to develop prepayment and interest rate scenarios. The pricing service did not use broker quotes in determining fair values of our investments.

      The independent pricing service provided a fair value estimate for all of our investments at December 31, 2008, which we utilized, among other resources, in reaching a conclusion as to the fair value of our investments. Management reviews the reasonableness of the pricing provided by the independent pricing service by employing various analytical procedures. We review all securities to identify recent downgrades, significant changes in pricing, and pricing anomalies on individual securities relative to other similar securities. This will include looking for relative consistency across securities in common sectors, durations, and credit ratings. This review will also include all fixed maturity securities rated lower than “A” by Moody’s or S&P. If, after this review, management does not believe the pricing for any security is a reasonable estimate of fair value, then it will seek to resolve the discrepancy through discussions with the pricing service. In our review we did not identify any such discrepancies for the years 2008 and 2007, and no adjustments were made to the estimates provided by the pricing service for the years 2008 and 2007. The classification within the fair value hierarchy of Statement of Financial Accounting Standards (SFAS) No. 157, Fair Value Measurements, is then confirmed based on the final conclusions from the pricing review.

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     Goodwill and intangible assets

     The costs associated with a group of assets acquired in a transaction are allocated to the individual assets, including identifiable intangible assets, based on their fair values. Identifiable intangible assets with a finite useful life are amortized over the period that the asset is expected to contribute directly or indirectly to our future cash flows.

     The excess of the price paid over the value assigned to identifiable intangible and tangible net assets is recorded as goodwill. The goodwill carried in our financial statements is related to our investments in Eastern Insurance Group and Penn Software. The identifiable intangible assets recorded in our financial statements are related to acquisitions within Eastern Insurance Group and primarily include customer related intangibles (i.e. insurance renewals). All goodwill and intangible assets are recorded in assets held for sale.

     Goodwill is tested annually for impairment, and is tested for impairment more frequently if events and circumstances indicate that the asset might be impaired. An impairment loss is recognized to the extent that the carrying amount exceeds the asset’s fair value. This determination is made at the reporting unit level and consists of two steps. First, we determine the fair value of a reporting unit and compare it to its carrying amount. Second, if the carrying amount of a reporting unit exceeds its fair value, an impairment loss is recognized for any excess of the carrying amount of the reporting unit’s goodwill over the implied fair value of that goodwill. The implied fair value of goodwill is determined by allocating the fair value of the reporting unit in a manner similar to a purchase price allocation, in accordance with SFAS No. 141, Business Combinations. The residual fair value after this allocation is the implied fair value of the reporting unit goodwill.

      We performed the impairment tests as of September 30, 2008, for Eastern Insurance Group and December 31, 2007 and 2006 for Penn Software and Eastern Insurance Group. Goodwill in Penn Software was impaired by $160,000 as of December 31, 2007. Penn Software was sold in July 2008, resulting in all remaining Penn Software goodwill being written off and a pre-tax loss on the sale of $117,000 being recognized.

      In 2008, our board of directors approved a plan to explore the sale of Eastern Insurance Group. The decision resulted from continued evaluation of our long term strategic plans and the role that the insurance brokerage segment played in that strategy. In the third quarter of 2008, the board fully committed to the sale of Eastern Insurance Group in order to concentrate solely on insurance underwriting as a long term core competency.

      At September 30, 2008, we tested the goodwill carrying value of Eastern Insurance Group for impairment. The possibility of impairment was evident based on information obtained in the selling process and the deterioration of local and national economic conditions. As a result of the impairment test, we recognized an impairment to goodwill of approximately $2.4 million within discontinued operations at September 30, 2008, which represented our best estimate of goodwill impairment loss, as further discussed in note 2 to our Consolidated Financial Statements. We completed the sale of Eastern Insurance Group on February 2, 2009. Pursuant to the asset purchase agreement, we sold substantially all of Eastern Insurance Group’s assets and liabilities for proceeds of $3.1 million less estimated costs of the sale of $231,000. Based on the fair value determined by the final terms of the sale and finalization of step two of the goodwill impairment test, we recorded an additional write down of goodwill at December 31, 2008 of $165,000. Subsequently, in the first quarter of 2009, we recorded a pre-tax loss of $6,000 on the sale of Eastern Insurance Group.

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     As of December 31, 2008, intangible assets with a carrying amount of $464,000 are included in assets held for sale. We ceased amortizing these intangible assets effective September 30, 2008, upon classifying Eastern Insurance Group as held for sale. Amortization expense related to these intangibles was $49,000, $62,000, and $51,000, for the years ended 2008, 2007, and 2006, respectively.

     As these intangible assets are classified as held for sale, we are measuring them, as part of the disposal group, at the lower of their carrying amount or fair value less cost to sell. We estimated the fair value less cost to sell at $599,000, which exceeds the carrying amount by $135,000. As such, the intangible assets are being carried at $464,000, at December 31, 2008.

     Deferred Policy Acquisition Costs

     Certain direct acquisition costs consisting of commissions, premium taxes and certain other direct underwriting expenses that vary with and are primarily related to the production of business are deferred and amortized over the effective period of the related insurance policies as the underlying policy premiums are earned. At December 31, 2008, 2007 and 2006, deferred acquisition costs and the related unearned premium reserves were as follows (in thousands):

	December 31,
	2008		2007		2006
Agribusiness segment
Deferred acquisition costs	$	5,981	$	6,429	$	6,252
Unearned premium reserves	$	27,352	$	27,552	$	26,686
Commercial business segment
Deferred acquisition costs	$	4,616	$	4,579	$	4,120
Unearned premium reserves	$	17,957	$	19,021	$	16,573
Other
Deferred acquisition costs	$	4	$	6	$	9
Unearned premium reserves	$	13	$	22	$	35
Total
Deferred acquisition costs	$	10,601	$	11,014	$	10,381
Unearned premium reserves	$	45,322	$	46,595	$	43,294

     The method followed in computing deferred acquisition costs limits the amount of deferred costs to their estimated realizable value, which gives effect to the premium to be earned, related investment income, loss and loss adjustment expenses, and certain other costs expected to be incurred as the premium is earned. Future changes in estimates, the most significant of which is expected loss and loss adjustment expenses, may require adjustments to deferred policy acquisition costs. If the estimation of net realizable value indicates that the deferred acquisition costs are not recoverable, they would be written off.

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     Income Taxes

     We use the asset and liability method of accounting for income taxes. Deferred income taxes arise from the recognition of temporary differences between financial statement carrying amounts and the tax bases of our assets and liabilities. A valuation allowance is provided when it is more likely than not that some portion of the deferred tax asset will not be realized. The effect of a change in tax rates is recognized in the period of the enactment date.

     We had gross deferred tax assets of $10.5 million at December 31, 2008. A valuation allowance is required to be established for any portion of the deferred tax asset for which we believe it is more likely than not that it will not be realized. We believe it is more likely than not that a portion of the deferred tax assets associated with our 2008 realized capital losses will not be realized. As such, at December 31, 2008, we recorded a valuation allowance associated with these items on our deferred income taxes of $1.0 million.

     We exercise significant judgment in evaluating the amount and timing of recognition of the resulting tax liabilities and assets. These judgments require us to make projections of future taxable income. The judgments and estimates we make in determining our deferred tax assets, which are inherently subjective, are reviewed on a continual basis as regulatory and business factors change. Any reduction in estimated future taxable income may require us to record an additional valuation allowance against our deferred tax assets.

     Effective January 1, 2008, we adopted Interpretation No. 48 (FIN 48), Accounting for Uncertainty in Income Taxes, an interpretation of Statement of Financial Accounting Standards No. 109. As of January 1, 2008 and December 31, 2008, we had no material unrecognized tax benefits or accrued interest and penalties. Federal tax years 2005 through 2008 were open for examination as of December 31, 2008.

     Pension Benefit Obligation

     We sponsor a noncontributory defined benefit pension plan covering substantially all employees. The accounting results for pension benefit costs and obligations are dependent upon various actuarial assumptions applied in the determination of such amounts. These actuarial assumptions include the following: discount rates, expected long-term rate of return on plan assets, future compensation increases, employee turnover, expected retirement age, optional form of benefit and mortality. We review these assumptions for changes annually with our independent actuary. We consider our discount rate assumptions and expected long-term rate of return on plan assets to be our most critical assumptions.

     The discount rate is used to value, on a present basis, our pension benefit obligation as of the balance sheet date. The same discount rate is also used in the interest cost component of the pension benefit cost determination for the following year. The measurement date used in the selection of our discount rate is the balance sheet date. Our discount rate assumptions are determined annually with assistance from our actuary based on the pattern of expected future benefit payments and the prevailing rates available on long-term, high quality corporate bonds (rated Aa or higher by an accepted rating agency) with terms similar to our estimated future pension distributions. This discount rate can change from year-to-year based on market conditions that impact corporate bond yields, and is reasonably likely to change in the future. Our discount rate decreased from 6.40% at December 31, 2007 to 6.16% at December 31, 2008.

     The expected long-term rate of return on plan assets is applied in the determination of periodic pension benefit cost as a reduction in the computation of the expense. In developing the expected long-term rate of return assumption, we considered published surveys of expected market returns, actual returns of various major indices, and our own historical investment returns. If any of these variables materially change in the future, our assumption is reasonably likely to change. The expected long-term rate of return on plan assets is based on an asset allocation assumption of 60% in equity securities and 40% in long duration fixed maturity securities. We review our asset allocation at least annually and make changes when considered appropriate. In 2008, we did not change our expected long-term rate of return from the 7.5% used in 2007. Our pension plan assets are valued at actual market value as of the measurement date.

     Pension expense for 2008 would have increased approximately $31,000 if our expected return on plan assets were one half of one percent lower. The 2008 pension expense would have increased approximately $68,000 if our assumed discount rate were one half of one percent lower, and would have decreased approximately $51,000 if our assumed discount rate were one half of one percent higher. The benefit obligation at December 31, 2008 would have increased by approximately $568,000 if our assumed discount rate were one half of one percent lower.

     Further information on our pension and other employee benefit obligations is included in note 9 of the Notes to our Consolidated Financial Statements.

Results of Operations

     Our results of operations are influenced by factors affecting the property and casualty insurance industry in general. The operating results of the United States property and casualty insurance industry are subject to significant variations due to competition, weather, catastrophic events, regulation, general economic conditions, judicial trends, fluctuations in interest rates and other changes in the investment environment.

     Our premium growth and underwriting results have been, and continue to be, influenced by market conditions. Pricing in the property and casualty insurance industry historically has been cyclical. During a soft market cycle, price competition is more significant than during a hard market cycle and makes it difficult to attract and retain properly priced agribusiness and commercial business. The insurance industry is currently experiencing a soft market cycle. Therefore, insurers may be unable to increase premiums and increase profit margins. A hard market typically has a positive effect on premium growth.

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      The major components of operating revenues and net (loss) income  are as follows (in thousands):

	Years Ended
	December 31,
	2008			2007			2006
Revenues:
Premiums earned:
Agribusiness	$	45,298		$	40,245		$	35,889
Commercial Business		31,805			29,260			26,761
Other		1,634			1,465			1,995
Total premiums earned		78,737			70,970			64,645
Investment income, net of investment expense		5,335			5,324			4,677
Realized investment (losses) gains, net		(5,819	)		(702	)		349
Other income		411			508			345
Total revenues	$	78,664		$	76,100		$	70,016
Components of net (loss) income:
Underwriting (loss) income:
Agribusiness	$	313		$	441		$	2
Commercial Business		(5,046	)		(1,913	)		(678	)
Other		288			(998	)		(1,106	)
Total underwriting losses		(4,445	)		(2,470	)		(1,782	)
Investment income, net of investment expense		5,335			5,324			4,677
Realized investment (losses) gains, net		(5,819	)		(702	)		349
Other income		411			508			345
Corporate expense		(770	)		(506	)		(635	)
Interest expense		(184	)		(125	)		(222	)
Other expense, net		(365	)		(184	)		(314	)
(Loss) income  from continuing operations, before income taxes		(5,837	)		1,845			2,418
Income tax (benefit) expense		(1,378	)		396			506
(Loss) income from continuing operations		(4,459	)		1,449			1,912
Discontinued Operations:
(Loss) income from discontinued operations, before income taxes		(3,090	)		(489	)		292
Income tax (benefit) expense		(170	)		(126	)		124
(Loss) income on discontinued operations		(2,920	)		(363	)		168
Net (loss)` income	$	(7,379	)	$	1,086		$	2,080

     Premiums Written and Premiums Earned

     Premiums earned increased 10.9% for the year ended December 31, 2008 compared to the year ended December 31, 2007 primarily due to growth in direct premiums written during 2007 and 2008, combined with a decrease in ceded premiums written of approximately $2.2 million in 2008. The decrease in ceded premiums was primarily due to a change in our reinsurance program for 2008 whereby we retained more of our losses above $500,000 and reduced our ceded premiums.

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     Premiums earned in 2007 increased 9.8% over 2006 due to a $9.5 million increase in direct premiums written for 2007 partially reduced by a $2.4 million increase in ceded premiums written related to the growth in direct premiums written.

     Net Investment Income

     The following table sets forth our average invested assets and investment income for the reported periods (in thousands):

	Year Ended
	December 31,
	2008			2007			2006
Average cash and invested assets	$	135,093		$	131,484		$	121,777
Net investment income		5,335			5,324			4,677
Return on average cash and invested assets		3.9	%		4.0	%		3.8	%

      Net investment income increased $11,000 for the year ended December 31, 2008 compared to 2007. The increase is attributable to an increase in the average invested assets of $3.6 million, which was mostly offset by the impact of declining interest rates.

     Net investment income increased 13.8% for the year ended December 31, 2007 compared to 2006 primarily due an increase in the average invested assets from $121.8 million in 2006 to $131.5 million in 2007, resulting primarily from investment of cash flows from operating activities, and a slightly higher average yield on our fixed income investments.

     Realized Investment (Losses) Gains

      We had realized investment losses of $5.8 million for the year ended December 31, 2008, compared to $702,000 for the year ended December 31, 2007. Approximately $5.7 million of the realized investment losses were attributable to other than temporary impairments ($2.9 million) and sales of equity investments ($2.8 million).

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In December 2008, we decided to liquidate our investments in equity securities in order to protect our capital position from the risk of further declines in the fair value of equity securities.

     We invest in high credit quality bonds and have the ability and intent to hold those with carrying value in excess of fair value until the earlier of the recovery of their fair value or maturity to realize all the future cash flows. However, our fixed income investments are classified as available for sale because we will, from time to time, make sales of securities that are not impaired, consistent with our investment goals and policies. For the year ended December 31, 2008, our fixed income portfolio had unrealized losses of $420,000 due to declines in fair values. Most of the decline is in our corporate bonds issued by financial institutions, whose prices have been depressed as a result of the turmoil that has struck credit markets. We have evaluated each security and taken into account the severity and duration of the impairment, the current rating on the bond, and the outlook for the issuer according to independent analysts. We believe that the declines in fair value are most likely attributable to the current market dislocation and there is no evidence that the likelihood of not receiving all of the contractual cash flows is probable. Because we have the ability and intent to hold these securities until we receive all contractual cash flows, we have recorded no other than temporary impairments on our fixed income investments.

     Our net realized investment losses of $702,000 in 2007 included pre-tax impairment charges of $620,000 recognized as a result of other-than-temporary declines in fair values. Our net realized investment gains in 2006 of $349,000 resulted from normal turnover within our investment portfolio, principally from the sale of equity securities.

     Other Income

     Other income in all periods presented primarily consists of premium installment charges and interest income on company owned life insurance (COLI) policies. The decline in other income for 2008 compared to 2007 is due to a lower rate of return on the COLI policies. The growth in other income from 2006 to 2007 is attributable to increases in the volume of premium billing installments, due to the growth in the number of in-force policies, and increasing investments in COLI.

     Underwriting (loss) income

     As discussed above, we evaluate our insurance operations by monitoring certain key measures of growth and profitability. In addition to using GAAP based performance measurements, we also utilize certain non-GAAP financial measures that we believe are valuable in managing our business and for comparison to our peers. These non-GAAP measures are underwriting income (loss), combined ratios, written premiums, and net written premiums to statutory surplus ratio.

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      Underwriting (loss) income  measures the pretax profitability of our insurance segments. It is derived by subtracting loss and loss adjustment expenses, amortization of deferred policy acquisition costs, and underwriting and administrative expenses from earned premiums. Each of these captions is presented in our statements of operations but not subtotaled. The sections below provide more insight into the variances in the categories of loss and loss adjustment expenses and amortization of deferred policy acquisition costs and underwriting and administrative expense, which impact underwriting profitability.

     Loss and Loss Adjustment Expenses

     Our loss and loss adjustment expenses (LAE) ratio increased to 72.9% in 2008, compared to 70.1% for the same period in 2007, primarily due to loss and loss adjustment expenses increasing $7.6 million in 2008, or 15.3% higher than in 2007. A $7.8 million or 10.9%, increase in net premiums earned offset, in part, the impact of the increased loss and LAE on the loss and LAE ratio. The increase in loss and loss adjustment expenses is primarily due to higher catastrophe losses of $4.9 million for 2008, compared to $2.0 million for 2007, increases in other non-catastrophe property losses; and increased automobile and liability losses. This increase was also driven by our higher reinsurance retention, which led to more retained losses. The increase in loss and loss adjustment expenses was partly offset by net favorable prior year loss development of approximately $5.2 million in 2008, compared to approximately $4.6 million in 2007.

      The development in 2008 is primarily attributable to favorable loss development in the fire and allied (approximately $2.2 million), workers’ compensation (approximately $1.6 million), and commercial auto liability (approximately $1.1 million) lines of business. The fire and allied lines development was the result of prior years’ claims settling for less than originally estimated. Many of our policies have high property exposures for which reported claims often require an extended amount of time to evaluate the claim due to the complexity in determining the value of the building and contents loss. The favorable loss development in the workers’ compensation and commercial auto lines was due to the general observation of declines in claims severity on prior accident years. As discussed in “Critical Accounting Policies”, these lines of business are prone to greater variability in the loss reserving process due to the inherent uncertainty as to claim reporting and settlement trends. Frequency and severity trends tend to emerge over more extended periods of time and adjustments to our estimates based on these changing trends are not made until the period in which there is reasonable evidence that an adjustment to the reserve is appropriate.

     The loss and LAE ratio increased to 70.1% in for the year ended December 31, 2007, compared to 67.7% for the same period in 2006. Loss and loss adjustment expenses increased $6.0 million in 2007, or 13.7% higher than the experience in 2006. This increase was driven primarily by our growth in premiums and an increase in large non-catastrophe property losses. Catastrophe losses increased 15.3% to $2.0 million in 2007 from $1.7 million in 2006, primarily due to several large losses attributable to winter storms and tornadoes. These increases in loss and loss adjustment expenses were partly offset by net favorable prior year loss and loss expense development of approximately $4.6 million in 2007, compared to approximately $19,000 for 2006.

     The development in 2007 is primarily attributable to workers’ compensation (approximately $2.8 million), commercial auto liability (approximately $2.5 million), and fire and allied lines (approximately $1.0 million). We broadly observed some decreasing frequency and severity in the commercial auto liability line and decreasing severity in the workers’ compensation line. The fire and allied lines development was attributable to claims settling for less than originally reserved. This development for 2007 was partly offset by approximately $1.5 million of unfavorable development in the commercial multi peril line and reserve strengthening of approximately $0.4 million related to asbestos claims assumed from a terminated reinsurance pool. The commercial multi peril line experienced an increase in newly reported claims for the 2005 accident year.

     Amortization of Deferred Policy Acquisition Costs and Underwriting and Administrative Expenses

     Our underwriting expense ratio represents the ratio of underwriting expenses (amortization of deferred policy acquisition costs and underwriting and administrative expenses directly attributable to our insurance operations) divided by net premiums earned. As one component of the combined ratio, along with the loss and LAE ratio, the underwriting expense ratio is a key measure of profitability. The underwriting expense ratio can exhibit volatility from year to year from such factors as changes in premium volume, one-time or infrequent expenses for strategic initiatives, or profitability based bonuses to employees and producers. Throughout the periods presented, the underwriting expense ratio has declined as our strategy has been to grow our net premium volume while controlling overhead costs. Total underwriting and administrative expenses, including amortization of deferred policy acquisition costs, increased $2.4 million in 2008, or 9.9% higher than in 2007. This increase is the result of a $1.2 million increase in amortization of deferred policy acquisition costs resulting from a 6.0% increase in direct premiums earned and an increase in underwriting and administrative expense of $1.2 million from product development costs incurred in 2008 associated with the roll-out of our PennEdge product in early 2009.

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The increase in underwriting expenses relative to the larger increase in net premiums earned resulted in the underwriting expense ratio declining from 33.3%, for the year ended December 31, 2007, to 32.8% for the year ended December 31, 2008.

      Total underwriting and administrative expenses, including amortization of deferred policy acquisition costs, increased $867,000 in 2007, or 3.7% higher than 2006. Amortization of deferred policy acquisition costs increased approximately $1.9 million, or 9.2%, due to an 11.8% increase in direct premiums earned in 2007. This increase in deferred policy acquisition costs was partly offset by a decrease of $983,000 in underwriting and administrative expense primarily attributable to decreases in employee bonuses and in the use of outside consultants. The small increase in underwriting expenses relative to the larger increase in net premiums earned resulted in the underwriting expense ratio declining from 35.1% in 2006 to 33.3% in 2007.

     Interest Expense

     Interest expense for the year ended 2008 was $184,000 compared to $125,000 for the year ended 2007. The increase was primarily due to accrued interest on our aggregate stop loss reinsurance contract, which we entered into effective January 1, 2008. The impact of this increase in 2008 was partly offset by a reduction in interest expense due to a lower average outstanding debt balance. In 2006, we repaid the balance of the mortgage loan for our home office building, which resulted in the significant decline in interest expense in 2007 from the $222,000 in interest expense incurred in 2006.

     Other Expense

     Other expense is comprised primarily of estimated reserves and specific write-offs of uncollectible premiums. The expense related to uncollectible premiums increased in 2006 due to an increase in aging of premiums receivable at the time. The expense levels returned to more normalized levels in 2007 and have increased in 2008, primarily due to increased write-offs and aging of receivables.

     (Loss) income  from continuing operations, before income taxes

     For the year ended December 31, 2008, we had a pre-tax loss from continuing operations of $5.8 million compared to pre-tax income of $1.8 million for the year ended December 31, 2007. This decrease was largely attributable to the significant increase in catastrophe and non-catastrophe related weather losses in 2008 and realized losses from other than temporary impairments and the sale of equity securities in 2008.

     For the year ended December 31, 2007, we had pre-tax income from continuing operations of $1.8 million compared to $2.4 million for the year ended December 31, 2006. This decrease was due to the impact of net realized losses of $702,000 in 2007 compared to net realized gains of $349,000 in 2006, partly offset by growth in investment income.

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     Income tax (benefit) expense

     The provision for income taxes for continuing operations was a benefit of $1.4 million for the year ended December 31, 2008, or an effective rate of 23.6%, compared to $396,000 of income tax expense, or an effective rate of 21.5%, for the year ended December 31, 2007. The 2008 provision for income taxes includes expense associated with a valuation reserve of $1.0 million for our 2008 realized capital losses for which it is more likely than not that we will not realize a tax benefit.

     For the year ended December 31, 2007, the provision for income taxes for continuing operations was an expense of $396,000, or an effective rate of 21.5%, compared to $506,000 of income tax expense, or an effective rate of 20.9%, for the year ended December 31, 2006.

     Net (loss) income from discontinued operations

     Discontinued operations include the results related to our agency operations at Eastern Insurance Group and our technology consulting firm, Penn Software. The sale of the assets of Penn Software was finalized in July 2008, and the sale of Eastern Insurance Group was finalized in February 2009. See “—Subsequent Events.” For the year ended December 31, 2008, the net loss from discontinued operations of $2.9 million includes an after tax goodwill impairment of $2.6 million for Eastern Insurance Group. For the year ended December 31, 2007, the net loss from discontinued operations of $363,000 included an after tax charge of $438,000 for executive severance related to the agency operations and an after tax goodwill impairment of $106,000 for Penn Software.

     Net (loss) Income

     For the year ended December 31, 2008, we had a net loss of $7.4 million compared to net income of $1.1 million for 2007. This decline in net income is primarily attributable to the change in net realized investment gains (losses), an increase in our loss and loss adjustment expense ratio, and the loss from discontinued operations, all of which are discussed in more detail above. Net income in 2007 declined to $1.1 million from $2.1 million in 2006 due primarily to the decline in net realized investment gains from 2006 to 2007 and the loss recognized from the impairment of Penn Software’s goodwill.

Results of Operations by Segment

     Our operations are organized into three business segments: agribusiness, commercial business, and our other segment. These segments reflect the manner in which we are currently managed based on type of customer, how the business is marketed, and the manner in which risks are underwritten. Within each segment we underwrite and market our insurance products through packaged offerings of coverages sold to generally consistent types of customers.

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     For purposes of segment reporting, the other segment includes the runoff of discontinued lines of insurance business and the results of mandatory assigned risk reinsurance programs that we must participate in as a cost of doing business in the states in which we operate. The discontinued lines of insurance business include personal lines, which we began exiting in 2001, and assumed reinsurance contracts in which we previously participated on a voluntary basis. Participation in these assumed reinsurance contracts ceased in the 1980s and early 1990s.

     Agribusiness

     The results of our agribusiness segment were as follows (amounts in thousands):

	Years Ended December 31,
	2008			2007			2006
Direct premiums written	$	57,281		$	55,965		$	51,874
Net premiums written		45,110			41,402			38,350
Revenues:
Net premiums earned	$	45,298		$	40,245		$	35,889
Other income		182			245			115
Total revenues(1)	$	45,480			40,490			36,004
Operating income (loss):
Underwriting (loss) income	$	313		$	441		$	2
Other income		182			245			115
Interest & other expenses		(202	)		(77	)		(150	)
Total operating income (loss)	$	293		$	609		$	(33	)
Loss and loss expense ratio		68.7	%		67.9	%		66.3	%
Underwriting expense ratio		30.6	%		31.0	%		33.7	%
GAAP combined ratio		99.3	%		98.9	%		100.0	%

(1) Revenues exclude net realized investment gains (losses) and net investment income. Operating income equals pre-tax net income from continuing operations excluding the impact of net realized investment gains (losses) and net investment income.

     Premiums Written and Earned Premiums

     The agribusiness marketplace has been very competitive during the last three years, putting pressure on pricing. These competitive pressures are affecting our writing of new and renewal business and putting downward pressure on our existing rates. Our focus on underwriting discipline and rate adequacy in the midst of this soft market has resulted in our premium revenue growth being relatively modest at times. Due to marketplace competition, direct premiums written increased only 2.4% for the year ended December 31, 2008 compared to 2007. Direct premiums written increased 7.9% in 2007 over 2006. The 2007 growth was attributable to aggressive marketing efforts to generate a higher level of new submissions from our brokers and to retain more of our existing accounts.

     Effective January 1, 2008, we modified our reinsurance program by retaining more of our losses above $500,000, which resulted in a decrease in ceded premiums written. The 2.4% increase in gross premiums written for 2008, combined with the reduction in ceded premiums,

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resulted in net premiums written increasing by 9.0% for the year ended December 31, 2008 compared to 2007. As a result, growth in net premiums written in 2007 and 2008 continued to drive the growth in net premiums earned in 2008, in which net premiums earned increased by 12.6% compared to 2007.

     Effective January 1, 2006, we modified our reinsurance program by increasing our per loss retention from $300,000 to $500,000. The reinsurance program was not materially changed in 2007, so the increase in net premiums written in 2007 of 8.0% over 2006 results from the growth in gross premiums written attributable to the marketing efforts to increase premium volumes. The growth in net premiums written in 2006 and 2007 resulted in a 12.1% increase in 2007 net premiums earned over the prior year.

     Other Income

     Other income primarily consists of premium installment charges and interest income on COLI policies. The decline in other income for 2008 as compared to 2007 is due to a lower rate of return on the COLI policies. The growth from 2006 to 2007 is attributable to increases in the volume of billing installments, due to the growth in the number of in-force policies, and increasing investments in company owned life insurance.

     Underwriting (loss) income

     As discussed above, we evaluate our insurance operations by monitoring certain key measures of growth and profitability. In addition to GAAP based measurements, we also utilize certain non-GAAP financial measures that we believe are valuable in managing our business and for comparison to our peers. These non-GAAP measures are underwriting income, combined ratios, written premiums, and net written premiums to statutory surplus ratio.

     Underwriting income (loss) measures the pretax profitability of our insurance segments. It is derived by subtracting loss and loss adjustment expenses, amortization of deferred policy acquisition costs, and underwriting and administrative expenses from earned premiums. Each of these captions is presented in our statements of operations but not subtotaled. The discussion below provides more insight into the variances in the categories of loss and LAE and underwriting and administrative expense, which impact underwriting profitability.

     Loss and Loss Adjustment Expenses

     Loss and loss adjustment expenses increased $3.8 million for the year ended December 31, 2008, 14.0% higher than in 2007. The increase in loss and loss adjustment expenses has primarily been driven by growth in insured exposures, weather related losses, and the increase in the reinsurance retention for 2008. Catastrophe losses were $4.5 million in 2008, compared to $1.6 million in 2007. In addition, increases in other non-catastrophe, weather-related property losses and increased automobile and liability losses have also contributed to the increase in loss and loss adjustment expense. The increase in loss and loss adjustment expenses has been offset by favorable prior year loss and loss expense development of approximately $4.8 million in 2008, compared to $4.3 million during 2007. The combination of increasing loss costs and competitive pricing has resulted in the loss and loss adjustment expense ratio increasing from 67.9% for 2007 to 68.7% for 2008.

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     Loss and loss adjustment expenses increased $3.5 million in 2007, 14.8% higher than the experience in 2006. This increase was driven primarily by the growth in insured exposures and an increase in large weather related property losses. The increase in loss and loss adjustment expenses was partly offset by favorable prior year loss and loss expense development of $4.3 million in 2007, compared to $196,000 in 2006. The increase in loss and loss adjustment expenses relative to the increase in net premiums earned resulted in the loss and loss adjustment expense ratio increasing from 66.3% in 2006 to 67.9% in 2007.

     Amortization of Deferred Policy Acquisition Costs and Underwriting and Administrative Expenses

     Underwriting expenses increased by $1.4 million in 2008, 10.9% higher than in 2007. The increase is due to increased amortization of deferred policy acquisition costs associated with the growth in premiums earned in 2008. This increase in underwriting expenses relative to the larger increase in net premiums earned resulted in the underwriting expense ratio declining from 31.0% for 2007 to 30.6% for 2008. This decline in the underwriting expense ratio was insufficient to offset the increase in loss and loss adjustment expense during 2008 primarily caused by the $2.9 million increase in catastrophe losses. As a result, our combined ratio rose from 98.9% for 2007 to 99.3% for the same period in 2008.

     Underwriting expenses increased $399,000 in 2007, 3.3% higher than 2006 due to an increase in acquisition expenses associated with the growth in premiums in 2007. This small increase in underwriting expenses relative to the larger increase in net premiums earned resulted in the underwriting expense ratio declining from 33.7% in 2006 to 31.0% in 2007. As a result of this decline in underwriting expenses our combined ratio declined from 100.0% in 2006 to 98.9% in 2007

     Interest and Other Expense

     Interest and other expense for 2008 was $202,000 compared to $77,000 for 2007. The increase was primarily due to interest on our aggregate stop loss reinsurance contract, which we entered into effective January 1, 2008. In 2006, we repaid the balance of

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the mortgage loan for our home office building, which resulted in the significant decline in interest and other expense in 2007 from the $150,000 in interest and other expense incurred in 2006.

     Commercial Business

     The results of our commercial business segment were as follows:

	Years Ended
	December 31,
Amounts in thousands	2008			2007			2006
Direct premiums written	$	37,458		$	37,860		$	32,365
Net premiums written		30,632			31,266			27,144
Revenues:
Net premiums earned	$	31,805		$	29,260		$	26,761
Other income		229			263			230
Total revenues (1)	$	32,034		$	29,523		$	26,991
Operating (loss) income:
Underwriting (loss) income	$	(5,046	)	$	(1,913	)	$	(678	)
Other income		229			263			230
Interest & other expenses		(247	)		(113	)		(257	)
Operating (loss) income	$	(5,064	)	$	(1,763	)	$	(705	)
Loss and loss expense ratio		80.1	%		70.3	%		65.5	%
Underwriting expense ratio		35.8	%		36.2	%		37.0	%
GAAP Combined ratio		115.9	%		106.5	%		102.5	%

(1) Revenues exclude net realized investment gains (losses) and net investment income. Operating income equals pre-tax net income from continuing operations excluding the impact of net realized investment gains (losses) and net investment income.

     Premiums Written and Premiums Earned

     The commercial insurance marketplace has been very competitive during the last three years, putting pressure on pricing. Our focus on underwriting discipline and rate adequacy in the midst of this soft market has made growth challenging at times. Direct premiums written decreased slightly by $402,000 or 1.1% in the year ended 2008 compared to the same period in 2007. Direct premiums written grew 17.0% in 2007 over 2006.

     Effective January 1, 2008, we modified our reinsurance program further by retaining more of our losses above $500,000, which resulted in a decrease in ceded premiums written. This reduction in ceded premiums has been mostly offset by the reinsurance of a new coverage we offered in 2008 and additional ceded premium incurred under our aggregate stop loss reinsurance treaty. We started offering employment practices liability insurance coverage in 2008 and have ceded all of the business to a reinsurer. The decrease in direct premiums written for 2008, combined with the described changes to ceded premiums, has resulted in net premiums written decreasing by 2.0% in the year ended 2008 compared to the same period last year. The growth in net premiums written in 2007 continued to drive the growth in net premiums earned in 2008, which increased 8.7% to $31.8 million.

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     The reinsurance program was not materially changed in 2007, so the increase in net premiums written in 2007 of 15.2% over 2006 resulted from 17.0% growth in direct premiums written for 2007 compared to 2006. The growth in net premiums written in 2007 of 15.2% resulted in net premiums earned in 2007 increasing 9.3% over 2007.

     Other Income

     Other income primarily consists of premium installment charges and interest income on COLI policies. The decline in other income for the year ended December 31, 2008 compared to 2007 is due to a lower rate of return on COLI policies. The growth in other income from 2006 to 2007 is attributable to increases in the volume of premium billing installments, due to the growth in the number of in force policies, and increasing investments in company owned life insurance.

     Underwriting (loss) Income

     As discussed above, we evaluate our insurance operations by monitoring certain key measures of growth and profitability. In addition to certain GAAP measures, we provide certain non-GAAP financial measures that we believe are valuable in managing our business and for comparison to our peers. These non-GAAP measures are underwriting income, combined ratios, written premiums, and net written premiums to statutory surplus ratio.

     Underwriting income (loss) measures the pre-tax profitability of our insurance segments. It is derived by subtracting loss and loss adjustment expenses, amortization of deferred policy acquisition costs, and underwriting and administrative expenses from earned premiums. Each of these captions is presented in our statements of operations but not subtotaled. The sections below provide more insight into the variances in the categories of loss and LAE and underwriting and administrative expense, which impact our underwriting profitability.

     Loss and Loss Adjustment Expenses

     Loss and loss adjustment expenses increased $4.9 million in the year ended December 31, 2008, 23.9% higher than in 2007. The increase in loss and loss adjustment expenses is due to increases in non-catastrophe property losses, increased automobile and workers compensation losses, and the increase in the reinsurance retention for 2008. The increase in loss and loss adjustment expenses was also affected by favorable prior year loss and loss expense development of approximately $117,000 in 2008, compared to approximately $800,000 of favorable development in 2007. This increase in loss and loss adjustment expenses relative to the smaller increase in net premiums earned resulted in the loss and loss adjustment expense ratio increasing from 70.3% for 2007 to 80.1% for 2008.

     Loss and loss adjustment expenses increased $3.0 million in 2007, 17.3% higher than the experience in 2006 due primarily to a significant increase in property losses. A lower level of workers compensation losses partly offset the growth in property losses. The increases in property losses were driven by higher non-catastrophe losses for 2007 compared to 2006. Catastrophe losses totaled $377,000 in 2007 compared to $276,000 in 2006. The increase in loss and loss adjustment expenses was also

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affected by favorable prior year loss and loss expense development of approximately $800,000 in 2007, compared to approximately $700,000 of favorable development in 2006. This increase in loss and loss adjustment expenses relative to the increase in net premiums earned resulted in the loss and loss adjustment expense ratio increasing from 65.5% in 2006 to 70.3% in 2007.

     Amortization of Deferred Policy Acquisition Costs and Underwriting Expenses and Administrative Expenses

     Underwriting expenses increased $768,000 in the year ended 2008, 7.2% higher than 2007 due primarily to an increase in acquisition expenses associated with the growth in premium revenues in 2008. This increase in underwriting expenses relative to the larger increase in net premiums earned resulted in the underwriting expense ratio declining from 36.2% for 2007 to 35.8% for 2008. This 40 basis point decrease in the underwriting expense ratio only partially offset the significant rise in our loss and loss adjustment expense ratio. As a result, our combined ratio increased from 106.5% for 2007 to 115.9% for 2008.

     Underwriting expenses increased $695,000 in 2007, 7.0% higher than in 2006 due to an increase in acquisition expenses associated with the growth in premium revenues in 2007. This increase in underwriting expenses relative to the larger increase in net premiums earned resulted in the underwriting expense ratio declining from 37.0% in 2006 to 36.2% in 2007. For the same comparable periods, however, loss and loss adjustment expense rose 480 basis points, resulting in an increase in our combined ratio from 102.5% in 2006 to 106.5% in 2007.

     Interest and Other Expenses

     Interest and other expense for 2008 increased to $247,000 compared to $113,000 for 2007 primarily due to accrued interest on our aggregate stop loss reinsurance contract, which was effective beginning on January 1, 2008. In 2006, we repaid the balance of the mortgage loan for our home office building, which resulted in a $144,000 decline in interest and other expense for the year ended 2007 compared to the same period in 2006.

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Other Segment

     The results of our other segment were as follows:

	Years Ended December 31,
Amounts in thousands	2008			2007			2006
Assumed premiums written	$	1,625		$	1,451		$	2,031
Net premiums written		1,625			1,451			2,031
Revenues:
Net premiums earned	$	1,634		$	1,465		$	1,995
Total revenues	$	1,634		$	1,465		$	1,995
Underwriting income/(loss)	$	288		$	(998	)	$	(1,106	)
Operating income/(loss)	$	288		$	(998	)	$	(1,106	)
Loss and loss expense ratio		47.3	%		129.7	%		122.3	%
Underwriting expense ratio		35.1	%		38.4	%		33.1	%
GAAP Combined ratio		82.4	%		168.1	%		155.4	%

      The other segment is comprised of business that we assume from assigned risk reinsurance programs in which states require admitted insurers to participate, the runoff of our personal lines business, which we began exiting in 2001, and the runoff of assumed reinsurance contracts in which we previously voluntarily participated as an assuming reinsurer.

      Both revenues and expenses in our other segment have experienced volatility over the last three years due to fluctuating rates of participation in our mandatory pools. This is reflected in net premiums earned of $2.0 million in 2006, $1.5 million in 2007, and $1.6 million in 2008. Our total claims and expenses have declined to $3.1 million in 2006, $2.5 million in 2007, and $1.3 million in 2008.

      Because of favorable claims development in the runoff of our personal lines and an increase in our net premiums earned in 2008 compared to 2007, our operating loss in our other segment decreased from a loss of $998,000 in 2007 to operating income of $288,000 for 2008. This continues our experience of decreasing losses from operations in this segment from a loss of $1.1 million in 2006.

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     Below is an overview of the significant mandatory and voluntary assumed risk pools:

     Mandatory Assumed Reinsurance:

     Fair Access to Insurance Requirements (FAIR) Plans, Beachfront Plans and Windstorm Plans. FAIR plans are state-run programs that provide basic property insurance coverage on buildings, dwellings, and their contents for property owners who are unable to obtain coverage in the standard insurance market. Beachfront and windstorm plans are similar in that they are state-regulated insurance pools that provide property insurance, both personal and commercial, in coastal areas exposed to the risk of heavy windstorm losses. The premiums, losses, and expenses of all three plans are allocated to participating insurers in proportion to their property (including wind) insurance premiums in the state.

     Commercial Automobile Insurance Plan and Joint Underwriting Association. Both are automobile residual markets that provide insurance to consumers who are unable to purchase automobile insurance through the voluntary market due to a variety of factors, such as their driving history or status as first-time drivers. Companies must participate in these plans and assume their proportionate share of the plan’s premiums and losses based on their voluntary premiums in that state.

     National Workers Compensation Reinsurance Pool, Massachusetts Workers Compensation Pool, Pennsylvania Workers Compensation Pool, Mississippi Workers Compensation Assigned Risk Pool. These are organizations in which hazardous workers’ compensation risks are assigned to insurers under various insurance plans and are reinsured into a pool. All companies must participate in these pools and assume their proportionate share of the plan’s premiums and losses based on their voluntary workers compensation premiums in the state so that undue loss to any one company can be avoided.

     Voluntary Assumed Reinsurance:

      The majority of our voluntary assumed business is due to three sources (in thousands):

	Total Reserves
	Including IBNR
	As of December 31,
	2008
Munich Re America Brokers, Inc (formerly American Re)	$	5,012
Mutual Reinsurance Bureau		363
Association of Mill & Elevator Companies		288
Total	$	5,663

     Munich Re America

     Munich Re America (formerly American Re) and Penn Millers Insurance Company entered into a reinsurance agreement beginning January 1, 1969 covering various property and liability lines of business. Penn Millers Insurance Company’s participation percentage ranged from 0.625% to 0.75%. We cancelled the contract effective December 31, 1986. In 1988 we were notified of numerous new bodily injury and property damage asbestos claims in accident years 1969, 1972, 1973, 1974, 1975, 1976, 1977, and 1979. We have experienced adverse development and periodic reserve strengthening over the years, but we believe that Munich Re America has established adequate case and IBNR reserves at this time.

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     Mutual Reinsurance Bureau

     The Mutual Reinsurance Bureau and Penn Millers Insurance Company agreement ran from 1966 to 1986. Mutual Reinsurance Bureau reinsured mainly casualty lines, including exposures to asbestos, environmental and lead liability.

     Association of Mill & Elevator Companies

     The Association of Mill & Elevator Companies, also called the Mill Mutuals, was a pooling arrangement established by a group of regional agribusiness underwriters whereby each company would cede a portion of their direct business into the pool and the results of the pool would be distributed to each member according to their contractual participation percentage. The pool was established prior to 1965 and was disbanded in 1993.

     Given the insignificant amount of premium earned in the other segment, we evaluate this segment’s underwriting performance in terms of dollars of underwriting loss instead of its combined ratio. For the year ended December 31, 2008, the other segment produced operating income of $288,000 compared to operating losses of $998,000 in 2007 and $1.1 million in 2006.

      The chart below shows the amount of operating income (loss) arising from each of the sources listed above in thousands:

	Years Ended
	December 31,
Amounts in thousands	2008			2007			2006
Mandatory Assumed Reinsurance	$	239		$	95		$	(332	)
Personal Lines — runoff		335			(94	)		(98	)
Voluntary Assumed Reinsurance — runoff		(286	)		(999	)		(676	)
Operating income (loss)	$	288		$	(998	)	$	(1,106	)

Financial Position

     At December 31, 2008, we had total assets of $220.5 million, compared to total assets of $219.6 million at December 31, 2007. Invested assets have declined in 2008 due to the weakening investment markets. This decline was more than offset primarily by an increase in reinsurance receivables, which is attributable mainly to the timing of payments from our reinsurers and reinsurance recoveries recorded related to the stop-loss reinsurance contract.

     At December 31, 2008, total liabilities were $169.8 million, compared to $158.2 million at December 31, 2007. The $11.6 million increase was primarily due to the increase in loss and LAE reserves. The reserve for unpaid loss and LAE was $108.1 million at December 31, 2008, compared to $96.0 million at December 31, 2007. This increase was due primarily to the growth in premiums written and the timing of claims payments.

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     Total equity decreased to $50.8 million at December 31, 2008, from $61.4 million as of December 31, 2007, a decrease of approximately $10.6 million, or 17.3%. The decrease in equity primarily reflects net unrealized investment losses of $2.2 million and a net loss of $7.4 million (primarily due to realized investment losses and the impairment of goodwill on discontinued operations) for the year ended December 31, 2008.

     At December 31, 2007, total assets were $219.6 million compared to $207.8 million at December 31, 2006. The $11.8 million increase was primarily due to a $9.7 million increase in cash and invested assets resulting from revenue growth in our insurance operations.

     At December 31, 2007, total liabilities were $158.2 million, compared to $147.2 million at December 31, 2006. The $11.0 million increase was primarily due to the increase in loss and LAE reserves and unearned premium reserves. The reserve for unpaid loss and LAE was $96.0 million at December 31, 2007, compared to $89.4 million at December 31, 2006. The unearned premium reserve was $46.6 million at December 31, 2007, compared to $43.3 million at December 31, 2006. These increases were due primarily to the growth in premiums written and the timing of payments on reported claims.

      Total equity increased to $61.4 million at December 31, 2007, from $60.5 million as of December 31, 2006, an increase of $871,000, or 1.4%. The increase in equity primarily reflected net income of $1.1 million for the year ended December 31, 2007.

Subsequent Events

     On February 2, 2009, we sold substantially all of the assets of Eastern Insurance Group for proceeds of approximately $3.1 million, less the estimated costs to sell of $231,000. In the first quarter of 2009, we recorded a pre-tax loss on the sale of $6,000. See note 20 of the Notes to Consolidated Financial Statements for additional information.

Effect of Offering on Our Future Financial Condition and Results of Operations

      Our future financial condition and results of operations will be affected by the offering. Upon completion of the offering, our pro forma shareholders’ equity will be between $88.1 million and $108.1 million, an increase of approximately 73.5% to 113.0% over our equity at December 31, 2008. See “Use of Proceeds,” “Capitalization” and “Unaudited Pro Forma Financial Information.” This increased capitalization should permit us to (i) increase direct premium volume to the

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extent competitive conditions permit, (ii) increase net premium volume by decreasing our reliance on reinsurance, and (iii) enhance investment income by increasing our investment portfolio.

ESOP

     In connection with the offering, the ESOP intends to finance the purchase of 10% of the common stock issued in the offering with the proceeds of a loan from Penn Millers Holding Corporation, and Penn Millers Insurance Company will make annual contributions to the ESOP sufficient to repay that loan, which we estimate will total, on a pre-tax basis, between approximately $450,000 and $680,000. See “Management — Benefit Plans and Employment Agreements — Employee Stock Ownership Plan.”

Stock-based Incentive Plan

     Under the stock-based incentive plan that we intend to adopt we may issue a total number of shares equal to 14% of the shares of common stock that are issued in the offering. Of this amount, an amount equal to 4% of the shares of common stock issued in the offering may be used to make restricted stock awards and 10% of the shares of common stock issued in the offering may be used to award stock options under the stock-based incentive plan. The fair value of any common stock used for restricted stock awards will represent unearned compensation. As we accrue compensation expense to reflect the vesting of such shares, unearned compensation will be reduced accordingly. We will also compute compensation expense at the time stock options are awarded based on the fair value of such options on the date they are granted. This compensation expense will be recognized over the appropriate service period. Implementation of the stock-based incentive plan is subject to shareholder approval. See “Management — Benefit Plans and Employment Agreements.”

Liquidity and Capital Resources

     We generate sufficient funds from our operations and maintain a high degree of liquidity in our investment portfolio to meet the demands of claim settlements and operating expenses. The primary source of funds are premium collections, investment earnings and maturing investments.

     We maintain investment and reinsurance programs that are intended to provide sufficient funds to meet our obligations without forced sales of investments. We maintain a portion of our investment portfolio in relatively short-term and highly liquid assets to ensure the availability of funds.

     As of December 31, 2008, we had a loan outstanding with a commercial bank in the amount of $1.4 million, which matures in July 2010. The interest rate on the loan is based on the one month London Interbank Offered Rate plus 105 basis points. We entered into an interest rate swap that fixes the interest rate at 5.55%. This loan was used for the acquisition of insurance agencies.

     We maintain two unsecured lines of credit with a commercial bank in the amount of $500,000 and $2 million, which allows us to meet our short term cash needs as they may arise. As of December 31, 2008, we currently have $500,000 outstanding under the $500,000 line of credit and $450,000 outstanding under the $2.0 million line of credit. We pay interest on the $500,000 line of credit, which expires on June 30, 2010, at a rate equal to the London Interbank Offered Rate (LIBOR) plus 105 basis points. The $2.0 million line of credit carries an interest rate of LIBOR plus 211 basis points and it expires on July 31, 2009.

     Our credit agreements for these unsecured lines of credit are subject to certain covenants and restrictions, including limitations on additional borrowing arrangements, encumbrances, and sales of assets. The covenants of these agreements include the maintenance of various amounts and ratios,

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including debt to capital, risk based capital, combined, debt service, and net premiums written to statutory capital and surplus ratios. We were in compliance with these covenants at December 31, 2008.

     Upon completion of the offering, we will immediately become subject to the proxy solicitation, periodic reporting, insider trading and other requirements of the Exchange Act and to most of the provisions of the Sarbanes-Oxley Act of 2002. We estimate that the cost of initial compliance with the requirements of the Sarbanes-Oxley Act will be approximately $300,000 and that compliance with the ongoing requirements of the Exchange Act and the Sarbanes-Oxley Act will result in an increase of approximately $700,000 in our annual operating expenses.

     Cash flows from continuing operations for the years ended December 31, 2008, 2007, and 2006 were as follows (in thousands):

	Year Ended
	December 31,
	2008			2007			2006
Cash flows provided by operating activities	$	7,383		$	11,017		$	11,711
Cash flows used in investing activities		(5,702	)		(13,373	)		(6,592	)
Cash flows provided by (used in) financing activities		144			(562	)		(2,087	)
Net increase (decrease) in cash and cash equivalents	$	1,825		$	(2,918	)	$	3,032

     For the year ended December 31, 2008, cash flows from operating activities totaled $7.4 million compared to $11.0 million for the year ended December 31, 2007. This decrease in cash flows from operating activities is primarily due to increased claim payments partially offset by lower reinsurance payments. Cash flows used in investing activities totaled $5.7 million for the year ended December 31, 2008, compared to $13.4 million in 2007, primarily reflecting an increase in fixed maturity investments purchased and partially offset by an increase in equity investments sold.

     For the year ended December 31, 2007, cash flows from operating activities totaled $11.0 million compared to $11.7 million for the year ended December 31, 2006. The decrease in cash flows from operating activities was primarily due to a decline in net income during 2007 compared to 2006. Cash flows used in investing activities totaled $13.4 million for the year ended December 31, 2007, compared to $6.6 million for the year ended December 31, 2006, primarily reflecting a year over year decrease in fixed income and equity investments sold of $7.1 million.

     Our principal source of liquidity will be dividend payments and other fees received from Penn Millers Insurance Company. Penn Millers Insurance Company is restricted by the insurance laws of Pennsylvania as to the amount of dividends or other distributions it may pay to us. Under Pennsylvania law, there is a maximum amount that may be paid by Penn Millers Insurance Company during any twelve-month period. Penn Millers Insurance Company may pay dividends to us after notice to, but without prior approval of the Pennsylvania Insurance Department in an amount “not to exceed” the greater of

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10% of the statutory surplus of Penn Millers Insurance Company as reported on its most recent annual statement filed with the Pennsylvania Insurance Department, or the statutory net income of Penn Millers Insurance Company for the period covered by such annual statement.

     As of December 31, 2008, the amount available for payment of dividends from Penn Millers Insurance Company in 2009 without the prior approval of the Pennsylvania Insurance Department is approximately $4.3 million. Prior to its payment of any dividend, Penn Millers Insurance Company is required to provide notice of the dividend to the Pennsylvania Insurance Department. The Pennsylvania Insurance Department has the power to limit or prohibit dividend payments if Penn Millers Insurance Company is in violation of any law or regulation. These restrictions or any subsequently imposed restrictions may affect our future liquidity.

     The following table summarizes, as of December 31, 2008, our future payments under contractual obligations and estimated claims and claims related payments for continuing operations.

	Payments due by period
	(in thousands)
Contractual			Less than						More than
Obligations	Total		1 year		1-3 years		3-5 years		5 years
Estimated gross loss & loss adjustment expense payments	$	108,065	$	36,743	$	38,903	$	17,290	$	15,129
Defined benefit plan obligations		9,773		295		697		1,445		7,336
Long-term debt obligations and lines of credit		2,667		1,047		1,320		200		100
Operating lease obligations		246		123		118		5		0
Accrued severance costs		831		471		251		30		79
Interest on long-term debt obligations and lines of credit		94		50		39		4		1
Total	$	121,676	$	38,729	$	41,328	$	18,974	$	22,645

     The timing of the amounts of the gross loss and loss adjustment expense payments is an estimate based on historical experience and the expectations of future payment patterns. However, the timing of these payments may vary from the amounts stated above. Defined benefit plan obligations are estimates based on various assumptions such as historical accruals, estimates of future employee service periods, future compensation increases, and mortality rates.

Off-Balance Sheet Arrangements

     We have no off-balance sheet arrangements that have or are reasonably likely to have a current or future effect on our financial condition, changes in financial condition, revenues or expenses, results of operations, liquidity, capital expenditures, or capital reserves.

Quantitative and Qualitative Information about Market Risk

     Market Risk

     Market risk is the risk that we will incur losses due to adverse changes in the fair value of financial instruments. We have exposure to three principal types of market risk through our investment activities: interest rate risk, credit risk and equity risk. Our primary market risk exposure is to changes in interest rates. We have not entered, and do not plan to enter, into any derivative financial instruments for trading or speculative purposes.

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     Interest Rate Risk

     Interest rate risk is the risk that we will incur economic losses due to adverse changes in interest rates. Our exposure to interest rate changes primarily results from our significant holdings of fixed rate investments. Fluctuations in interest rates have a direct impact on the fair value of these securities.

     The average maturity of the debt securities in our investment portfolio at December 31, 2008, was 4.8 years. Our debt securities investments include U.S. government bonds, securities issued by government agencies, obligations of state and local governments and governmental authorities, corporate bonds and mortgage-backed securities, most of which are exposed to changes in prevailing interest rates and which may experience moderate fluctuations in fair value resulting from changes in interest rates. We carry these investments as available for sale. This allows us to manage our exposure to risks associated with interest rate fluctuations through active review of our investment portfolio by our management and board of directors and consultation with our external investment manager.

     Fluctuations in near-term interest rates could have an impact on our results of operations and cash flows. Certain of these securities may have call features. In a declining interest rate environment these securities may be called by their issuer and replaced with securities bearing lower interest rates. If we are required to sell these securities in a rising interest rate environment we may recognize losses.

     As a general matter, we attempt to match the durations of our assets with the durations of our liabilities. Our investment objectives include maintaining adequate liquidity to meet our operational needs, optimizing our after-tax investment income, and our after-tax total return, all of which are subject to our tolerance for risk.

     The table below shows the interest rate sensitivity of our fixed income investments measured in terms of fair value (which is equal to the carrying value for all of our investment securities that are subject to interest rate changes) at December 31, 2008.

Hypothetical Change in	Estimated Change
Interest Rates	in Fair Value			Fair Value
	(dollars in thousands)
200 basis point increase	$	(8,962	)	$	112,952
100 basis point increase		(4,444	)		117,470
No change		—			121,914
100 basis point decrease		4,108			126,022
200 basis point decrease		6,699			128,613

     The interest rate risk for our variable rate debt not subject to the interest rate swap is not material at December 31, 2008.

     Credit Risk

     Credit risk is the potential economic loss principally arising from adverse changes in the financial condition of a specific debt issuer. We address this risk by investing primarily in fixed maturity securities that are rated investment grade with a minimum average portfolio quality of “Aa2” by Moody’s or an equivalent rating quality. We also independently, and through our outside investment manager, monitor the financial condition of all of the issuers of fixed maturity securities in the portfolio. To limit our exposure to risk, we employ diversification rules that limit the credit exposure to any single issuer or asset class.

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     Equity Risk

     Equity price risk is the risk that we will incur economic losses due to adverse changes in equity prices. In order to reduce our exposure to losses in our investment portfolio, during the fourth quarter of 2008 we sold all of our equity securities.

Impact of Inflation

     Inflation increases consumers’ needs for property and casualty insurance coverage due to the increase in the value of the property covered and any potential liability exposure. Inflation also increases claims incurred by property and casualty insurers as property repairs, replacements and medical expenses increase. These cost increases reduce profit margins to the extent that rate increases are not implemented on an adequate and timely basis. We establish property and casualty insurance premiums levels before the amount of loss and loss expenses, or the extent to which inflation may impact these expenses, are known. Therefore, we attempt to anticipate the potential impact of inflation when establishing rates. Because inflation has remained relatively low in recent years, financial results have not been significantly affected by it.

Recent Accounting Pronouncements

     In June 2006, the Financial Accounting Standards Board (FASB) issued Interpretation No. 48 (FIN 48), Accounting for Uncertainty in Income Taxes, which clarifies the accounting for income tax reserves and contingencies recognized in an enterprise’s financial statements in accordance with SFAS No. 109, Accounting for Income Taxes. FIN 48 also provides guidance on derecognition, classification, interest and penalties, accounting in interim periods, disclosure, and transition. On January 1, 2008, we adopted FIN 48. The adoption of FIN 48 did not result in any adjustments to beginning retained earnings, nor did it have a significant effect on our operations, financial condition, or liquidity. As of December 31, 2008, we had no material unrecognized tax benefits.

     In September 2006, the Securities and Exchange Commission (SEC) issued Staff Accounting Bulletin (SAB) No. 108, Quantifying Financial Statement Misstatements. SAB No. 108 provides guidance on how to evaluate prior period financial statement misstatements for purposes of assessing their materiality in the current period. SAB No. 108 was issued in order to eliminate the diversity of practice surrounding how public companies quantify financial statement misstatements. There are two widely recognized methods for quantifying the effects on the financial statements: the “rollover” or income statement method and the “iron curtain” or balance sheet method. Historically, we used the “rollover” method. Under this method, we quantified our financial statement misstatements based on the amount of errors originating in the current year income statement and as a result did not consider the effects of correcting the portion of the current year balance sheet misstatement that originated in prior years. SAB No. 108 now requires that we consider both the rollover and iron curtain methods (dual method) when quantifying misstatements in the financial statements. The iron curtain method quantifies a misstatement

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based on the effects of correcting the misstatement existing in the balance sheet at the end of the current year, irrespective of the timing of the misstatement’s origination.

     We previously identified that we had incorrectly accounted for contingent commissions in connection with the acquisition of Galland, Steinhauer & Repa, Inc.  in 2005. At the time, we allocated $187,000 received for contingent commissions subsequent to the acquisition, which were then passed through to the seller, pursuant to the contract, to the purchase price and also recognized revenue for that amount. This resulted in a $187,000 overstatement of goodwill and revenue for the twelve month period ending December 31, 2005. Prior to the adoption of SAB No. 108, we determined this misstatement was not material to the financial statements using the income statement approach. The error was considered material using the dual method approach.

      We have restated our 2005 financial statements to adopt the provisions of SAB No. 108. As a result, the balance in retained earnings at December 31, 2005 as presented in our Consolidated Statements of Equity was reduced by $187,000, and goodwill was reduced by the same amount.

     In September 2006, the FASB issued SFAS No. 158, Employers’ Accounting for Defined Benefit Pension and Other Postretirement Plans. SFAS No. 158 requires an employer to recognize the overfunded or underfunded status of a single employer defined benefit postretirement plan as an asset or liability in its statement of financial position and to recognize changes in that funded status through comprehensive income in the year in which the changes occur. SFAS No. 158 also requires fiscal year end measurement of defined benefit plan assets and benefit obligations. SFAS No. 158 amends SFAS Nos. 87, 88, 106, and 132(R). The requirement to recognize the funded status of a benefit plan and the disclosure requirements was effective for our fiscal year ended December 31, 2007. We recorded an adjustment of $994,000 net of $512,000 in related tax, to accumulated other comprehensive income (loss) upon adoption. The requirement to measure plan assets and benefit obligations as of the date of our fiscal year end balance sheet date was effective for our fiscal year ending December 31, 2008. This requirement had no effect on us.

     In September 2006, FASB issued SFAS No. 157, Fair Value Measurements. SFAS No. 157 defines fair value, establishes a framework for measuring fair value, and expands disclosure about fair value measurements. It applies to other pronouncements that require or permit fair value but does not require any new fair value measurements. The statement defines fair value as “the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date.” SFAS No. 157 establishes a fair value hierarchy to increase consistency and comparability in fair value measurements and disclosures. The hierarchy is based on the inputs used in valuation and gives the highest priority to quoted prices in active markets. The highest possible level should be used to measure fair value. We adopted SFAS No. 157 effective January 1, 2008. Our adoption of SFAS No. 157 did not have a material effect on our results of operations, financial position, or liquidity.

     In February 2007, the FASB issued SFAS No. 159, The Fair Value Option for Financial Assets and Financial Liabilities—Including an amendment of FASB Statement No. 115. SFAS No. 159 permits companies to choose to measure many financial instruments and certain other items at fair value at specified election dates. Upon adoption, an entity shall report unrealized gains and losses on items for which the fair value option has been elected in operations at each subsequent reporting date. Most of the provisions apply only to entities that elect the fair value option. However, the amendment to SFAS No. 115, Accounting for Certain Investments in Debt and Equity Securities, applies to all entities with available for sale and trading securities. SFAS No. 159 applied to us beginning on January 1, 2008. We did not elect to use the fair value option for any assets or liabilities.

     In February 2008, the FASB issued FASB Staff Position (FSP) FAS 157-2, Effective Date of FASB Statement No. 157, which delays the effective date of SFAS No. 157 for all nonfinancial assets and nonfinancial liabilities until January 1, 2009, except those that are recognized or disclosed at fair value in the financial statements on a recurring basis (at least annually). Accordingly, the provisions of SFAS No. 157 were not applied to goodwill and other intangible assets held by us and measured annually for impairment testing purposes only.

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     In March 2008, the FASB issued SFAS No. 161, Disclosures about Derivative Instruments and Hedging Activities—an amendment of FASB Statement No. 133 (SFAS 161). SFAS 161 changes the disclosure requirements for derivative instruments and hedging activities and specifically requires qualitative disclosures about objectives and strategies for using derivatives, quantitative disclosures about fair value amounts of, and gains and losses on, derivative instruments, and disclosures about credit risk related contingent features in derivative agreements. The provisions of SFAS 161 applied to us beginning January 1, 2009. The adoption of this standard will have no impact on our financial condition or results of operations, but may result in additional disclosures.

     In May 2008, the FASB issued SFAS No. 162, The Hierarchy of Generally Accepted Accounting Principles (SFAS 162), to identify the sources of accounting principles and provide a framework for selecting the principles to be used in the preparation of financial statements in accordance with U.S. generally accepted accounting principles. The hierarchy of authoritative accounting guidance is not expected to change current practice but is expected to facilitate the FASB’s plan to designate as authoritative its forthcoming codification of accounting standards. SFAS 162 is effective November 15, 2008. Our adoption did not result in any significant financial statement impact.

     In May 2008, the FASB issued SFAS No. 163, Accounting for Financial Guarantee Insurance Contracts (SFAS No. 163), requiring that an insurance enterprise recognize a claim liability prior to an event of default (insured event) when there is evidence that credit deterioration has occurred in an insured financial obligation. This statement also clarifies how SFAS No. 60, Accounting and Reporting by Insurance Enterprises, applies to financial guarantee insurance contracts, including the recognition and measurement to be used to account for premium revenue and claim liabilities. Those clarifications will increase comparability in financial reporting of financial guarantee insurance contracts by insurance enterprises. Expanded disclosures of financial guarantee insurance contracts are also required. SFAS No. 163 is effective for fiscal years beginning after December 15, 2008 and interim periods within those fiscal years, except for some disclosures about the insurance enterprise’s risk-management activities. Disclosures about the risk-management activities of the insurance enterprise are effective for the first period (including interim periods) beginning after issuance of this statement. Except for those disclosures, earlier application is not permitted. SFAS No. 163 applied to us as of January 1, 2009, except for disclosures about the insurance enterprise’s risk-management activities. The adoption of this standard will have no impact on our financial condition or results of operations.

     In October 2008, the FASB issued FSP FAS 157-3, Determining the Fair Value of a Financial Asset When the Market for That Asset Is Not Active (FSP FAS 157-3). FSP FAS 157-3 clarifies the application of SFAS No. 157 and provides an example to illustrate considerations in determining the fair value of a financial asset when the market for that financial asset is not active. FSP FAS 157-3 allows for the use of the reporting entity’s own assumptions about future cash flows and appropriately risk-adjusted discount rates when relevant observable inputs are not available to determine the fair value for a financial asset in a dislocated market. Our adoption of FSP FAS 157-3 had no impact on our financial condition or results of operations as of or for the year ended December 31, 2008.

      In December 2008, the FASB issued FSP FAS 132(R)-1, Employers’ Disclosures about Postretirement Benefit Plan Assets (FSP FAS 132R-1). FSP FAS 132R-1 was issued to provide guidance on an employer’s disclosures about plan assets of a defined benefit pension or other postretirement plan. FSP FAS 132R-1 requires an employer to disclose information about how investment allocation decisions are made, including factors that are pertinent to an understanding of investment policies and strategies. An employer will also need to disclose separately for pension plans and other postretirement benefit plans the fair value of each major category of plan assets based on the nature and risks of the assets as of each annual reporting date for which a statement of financial position is presented. FSP FAS 132R-1 also requires the disclosure of information that enables financial statement users to assess the inputs and valuation techniques used to develop fair value measurements of plan assets at the annual reporting date. For fair value measurements using significant unobservable inputs (Level 3), an employer will be required to disclose the effect of the measurements on changes in plan assets for the period. Furthermore, an employer is required to provide financial statement users with an understanding of significant concentrations of risk in plan assets. FSP FAS 132R-1 should be applied for fiscal years ending after December 15, 2009. Upon initial application, the provisions of FSP FAS 132R-1 are not required for earlier periods that are presented for comparative purposes. Earlier application is permitted. We are still evaluating the provisions of FSP FAS 132R-1 and intend to comply with its disclosure requirements.

     In January 2009, the FASB issued FSP Emerging Issues Task Force (EITF) Issue 99-20-1, Amendments to the Impairment Guidance of EITF Issue No. 99-20 (EITF 99-20-1). EITF 99-20-1 provides guidance on determining other-than-temporary impairments on securities subject to EITF Issue No. 99-20, Recognition of Interest Income and Impairment on Purchased Beneficial Interests and Beneficial Interests That Continue to Be Held by a Transferor in Securitized Financial Assets. The provisions of EITF 99-20-1 are required to be applied prospectively for interim periods and fiscal years ending after December 15, 2008. Our adoption of EITF 99-20-1 did not result in any significant financial statement impact.

      In April 2009, the FASB issued FSP FAS 157-4, Determining Fair Value When the Volume and Level of Activity for the Asset or Liability Have Significantly Decreased and Identifying Transactions That Are Not Orderly (FSP FAS 157-4). FSP FAS 157-4 provides guidelines for making fair value measurements more consistent with the principles presented in SFAS No. 157, Fair Value Measurements. FSP FAS 157-4 is effective for interim and annual periods ending after June 15, 2009, with early adoption permitted for interim and annual periods ending after March 15, 2009. We are currently evaluating the impact of adopting FSP FAS 157-4.

      In April 2009, the FASB issued FSP FAS 115-2 and FAS 124-2, Recognition and Presentation of Other-Than-Temporary Impairments. FSP FAS 115-2 and FAS 124-2 provides guidance designed to create greater clarity and consistency in accounting for and presenting impairment losses on debt and equity securities. FSP FAS 115-2 and FAS 124-2 is effective for interim and annual periods ending 15, 2009. We are currently evaluating the impact of adopting FSP FAS 115-2 and FAS 124-2.

      In April 2009, the FASB issued FSP FAS 107-1 and APB 28-1, Interim Disclosures about Fair Value of Financial Instruments. FSP FAS 107-1 and APB 28-1 will require a company to disclose in its interim financial statements the fair value of all financial instruments within the scope of FASB Statement No. 107, Disclosures about Fair Value of Financial Instruments, as well as the method(s) and significant assumptions used to estimate the fair value of those financial instruments. FSP FAS 107-1 and APB 28-1 is effective for interim and annual periods ending after June 15, 2009. Earlier application is permitted for periods ending after March 15, 2009, but only if we also adopt both FSP FAS 157-4 and FSP FAS 115-2 and FAS 124-2. We are currently evaluating the impact of adopting FSP FAS 107-1 and APB 28-1.

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BUSINESS

Overview

     We provide a variety of property and casualty insurance products designed to meet the insurance needs of certain segments of the agricultural industry and the needs of small commercial businesses. We are licensed in 39 states, but we currently limit our sales of our agricultural insurance products to 33 states and our commercial insurance products to 8 states. We discontinued writing personal lines insurance products in 2003 and now offer only commercial products. We report our operating results in three operating segments: agribusiness insurance, commercial business insurance, and our “other” segment. However, assets are not allocated to segments and are reviewed in the aggregate for decision-making purposes.

     Our agribusiness insurance product includes fire and allied lines, inland marine, general liability, commercial automobile, workers’ compensation, and umbrella liability insurance. We specialize in writing coverage for manufacturers, processors, and distributors of products for the agricultural industry. We do not write property or liability insurance for farms or farming operations unless written in conjunction with an eligible agribusiness operation, and we do not write any crop insurance. Our commercial business insurance product consists of a business owner’s policy that combines property, liability, business interruption, and crime coverage for small businesses; workers’ compensation; commercial automobile; and umbrella liability coverage. The types of businesses we target include retail, service, hospitality, wholesalers, light manufacturers, and printers. Our third business segment, which we refer to as our “other” segment, includes the runoff of lines of business that we no longer offer and assigned risk reinsurance programs in which we are required to participate.

     We primarily market our products through a network of over 450 independent producers in 33 states. Penn Millers Insurance Company has been assigned a “A-” (Excellent) rating by A. M. Best. The latest rating evaluation by A.M. Best occurred on June 2, 2008.

     We are managed by an experienced group of executives led by Douglas A. Gaudet, our President and Chief Executive Officer. Mr. Gaudet has served in his current position since December 2005, and has worked in the insurance industry for 30 years. Mr. Gaudet’s experience in prior positions with other insurance companies includes the development and introduction of new insurance products for such companies. Michael O. Banks, our Executive Vice President and Chief Financial Officer, has served with Penn Millers since 2002. Formerly a certified public accountant with KPMG, Mr. Banks worked with another insurance company for thirteen years prior to joining Penn Millers. Harold Roberts, our Senior Vice President and Chief Underwriting Officer, has been with Penn Millers for over 32 years. Kevin D. Higgins, our Senior Vice President of Claims, has served with Penn Millers since 2003. Mr. Higgins has over 27 years experience in the claims field. Jonathan Couch, our Controller and Vice President, joined Penn Millers in 2002 and has over 17 years of diversified financial management experience. As a group, our executive officers have on average more than 23 years of experience in the property and casualty insurance industry.

     We formed Penn Millers Holding Corporation so that it could acquire all of the capital stock of Penn Millers Mutual in the conversion. We plan to seek approval from the Pennsylvania Insurance Department to acquire control of Penn Millers Mutual. Prior to the conversion, we have not engaged and will not engage in any significant operations. After the conversion, our primary assets will be the outstanding capital stock of Penn Millers Mutual and a portion of the net proceeds of the conversion offering.

     Penn Millers currently consists of two holding companies, Penn Millers Mutual and PMHC, and three operating companies — Penn Millers Insurance Company, American Millers Insurance Company and Penn Millers Agency.

     The lead insurance company is Penn Millers Insurance Company, which is a Pennsylvania stock insurance company originally incorporated as a mutual insurance company in 1887. In 1999, Penn Millers Insurance Company converted from a mutual to a stock insurance company within a mutual holding company structure. This conversion created the Penn Millers Mutual Holding Company, a Pennsylvania mutual holding company, and established a “mid-tier” stock holding company, PMHC, also a Pennsylvania corporation, to hold all of the outstanding shares of

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Penn Millers Insurance Company. Neither Penn Millers Mutual nor PMHC engages in any significant operations. The outstanding capital stock of Penn Millers Insurance Company is the primary asset of PMHC. Immediately following the conversion of Penn Millers Mutual from mutual to stock form, PMHC will be merged out of existence into Penn Millers Mutual pursuant to a plan of liquidation.

     American Millers Insurance Company, a Pennsylvania stock insurance company, is a wholly-owned insurance subsidiary of Penn Millers Insurance Company. American Millers Insurance Company is currently used to reinsure Penn Millers Insurance Company by providing excess of loss reinsurance to Penn Millers for property losses above $450,000 up to $500,000. American Millers Insurance Company is licensed in Pennsylvania and Tennessee. Underwriting of the assumed risks is performed by Penn Millers Insurance Company. American Millers Insurance Company is rated “B++” (Good) by A.M. Best Company, which is the fifth highest out of fifteen possible ratings. The latest rating evaluation by A.M. Best occurred on June 2, 2008.

     Penn Millers Insurance Company, American Millers Insurance Company, PMHC, and Penn Millers Mutual Holding Company are subject to examination and comprehensive regulation by the Pennsylvania Insurance Department. See “— Regulation.”

     Penn Millers Agency, Inc., a Pennsylvania domiciled insurance agency, is a wholly-owned subsidiary of Penn Millers Insurance Company. This company does not conduct any significant business at this time.

     Eastern Insurance Group, an insurance agency located in Wilkes-Barre, Pennsylvania, was a wholly-owned subsidiary of PMHC. On February 2, 2009, we sold substantially all the assets of Eastern Insurance Group.

     In July 2008, we completed the sale of substantially all the assets of Penn Software, a Pennsylvania software development company.

     Our executive offices are located at 72 North Franklin Street, Wilkes-Barre, Pennsylvania 18773-0016, and our toll-free phone number is 800-233-8347. Our web site address is www.pennmillers.com. Information contained on our website is not incorporated by reference into this prospectus, and such information should not be considered to be part of this prospectus.

Our Business Strategies and Offering Rationale

     Market Overview

     Our principal business strategy in both our agricultural and commercial segments is to identify discrete underwriting risks where competition is limited and we can add value through personal service to our producers and insureds.

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     Like most insurers, our premium growth and underwriting results have been, and continue to be, influenced by market conditions. Pricing in the property and casualty insurance industry historically has been cyclical. During a so-called soft market cycle, excess underwriting capacity leads to intense price competition and a market characterized by declining premium volume and relaxed underwriting terms. In a so-called hard market cycle, price competition is less severe. Therefore, during a hard market cycle insurers are able to increase premiums, maintain underwriting discipline and earn a more acceptable profit margin.

     Since 2005, the property and casualty insurance industry has experienced a soft market cycle. Although changes in the market cycle are impossible to predict, indicators of a return to a hard market typically include declining returns on equity, combined ratios at or in excess of 100% and reduced investment income due to low interest rates or investment losses. Because of turmoil in the capital markets, investment losses in the third quarter of 2008 have been particularly severe. Each of these market indicators are now present to some degree, which suggests the current soft market may be coming to an end in the near future.

      Our current capital position is sufficient to support our existing premium volume and allow for modest growth. However, historically our growth during hard market cycles has exceeded industry norms. In the last hard market cycle that we believe began in 2000 and ended in 2004, our commercial lines direct premiums written in our core business segments increased by 248% (a compound annual growth rate of 25%), which exceeded the industry commercial lines average of 163% (a compound annual growth rate of 13%). The primary purpose of this offering is to increase our capital to permit us to take advantage of growth opportunities when and if a hard market cycle returns.

     Competitive Strategy

     Our insurance policies are sold through select independent insurance producers. We view these producers as our customers, because we believe that they significantly influence the insured’s decision to choose our insurance products over those of a competitor. We strive to win our producers’ loyal, profitable insureds by differentiating ourselves from our competitors through our relationships with our producers and our responsiveness to their needs. The key to our relationships is the communication between our producers and our underwriter and marketing representative teams, supported by loss control representatives, claims adjusters, and management. This approach provides the producers with very responsive, consistent and predictable communications, service and decisions from us.

     Growth Strategies

     Our long-term growth plans involve enhancing our existing products and adding new products to grow our market share with our existing producers and continuing to add select producers. Competitive pressures in the marketplace are currently affecting our writing of new and renewal business and exerting downward pressure on our prices. Our focus on underwriting discipline and rate adequacy in the midst of this soft market has resulted in our premium revenue growth being relatively modest and somewhat volatile. We believe that over the next 12 to 24 months the property and casualty insurance industry’s profits will decline to the point where pricing will start to increase and the underwriting cycle will move into a hard market phase. Although we do not have any current plans or intent to expand or grow our business by acquisition, we will consider any opportunities that are presented to us.

     We believe we are positioning the Company to take advantage of the profitable growth opportunities we anticipate will occur when prices increase during the hard market.

• First, in 2009 we introduced an insurance product called PennEdge that will enable us to write customized coverages on mid-size commercial accounts. PennEdge will provide

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	property and liability coverage to accounts that currently do not meet the eligibility requirements for our traditional business owners or agribusiness products. PennEdge is specifically tailored to unique business and industry segments, including wholesalers, light manufacturing, hospitality, commercial laundries and dry cleaners, and printers. These segments were chosen based on the experience of our underwriting staff and the market opportunities available to our existing producers.
•	Second, we have differentiated our product offerings by entering into strategic alliances to offer equipment breakdown, employment practices liability, and miscellaneous professional liability coverage, and we are exploring a strategic alliance to offer environmental impairment liability coverage. Under such strategic alliances, we typically reinsure all of the risk of loss to the strategic partner and earn a ceding commission.
•	Third, we are currently represented by a small number of producers in a large geographic area. New producers are an important part of our growth strategy, and we intend to continue to add them in areas where we want to increase our market presence.

     The completion of this offering will supply additional capital needed to support substantially increased premium volume that may result from the implementation of these strategies.

     Underwriting Strategies

     Our underwriting philosophy is aimed at consistently generating profits through sound risk selection and pricing discipline. We are pursuing premium rate adequacy to enhance our underwriting results. For both our agribusiness and commercial business segments, we continue to emphasize that we will not compromise profitability for top line growth. We use loss control representatives to examine most of our risks to determine the adequacy of insurance to property value, assess property conditions, and identify any liability exposures.

     We are a well established niche player in the agribusiness market with over 120 years in that specialty segment. Our PennEdge product will allow us to develop additional niche markets out of our existing commercial business target markets. We will focus our business on those industry segments we understand and in which we can differentiate ourselves from other insurance companies.

     Claims Strategy

     Our claims team supports our agency and broker relationship strategy by working to provide a consistent, good faith claims handling response to our policyholders. Claims excellence is achieved by timely investigation and handling of claims, settlement of meritorious claims for equitable amounts, maintenance of adequate case reserves, and control of claims loss adjustment expenses. We partner with industry experts and designated law firms to meet the specific service needs arising from the broad spectrum of claims unique to both the agribusiness and commercial business customer. Key strategic alliances ensure high quality field adjusting services, effective workers’ compensation case management, active pursuit of salvage and subrogation opportunities, and aggressive fraud prevention efforts, all of which yield results equally beneficial to our policyholders, producers, and Penn Millers.

Agribusiness Segment

     Penn Millers has been writing agribusiness policies for over 120 years. We believe we have an excellent industry reputation provided by experienced underwriting, marketing and loss control staff, supported by knowledgeable and easily accessible claims staff and senior management. Lines of business offered by our agribusiness segment include commercial property, inland marine, general liability, fidelity,

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surety, workers’ compensation, commercial automobile, and umbrella liability insurance. We market our insurance product to small to middle market agricultural businesses such as grain storage and elevators, flour mills, livestock feed manufacturers, fertilizer blending and application, cotton gins, livestock feed lots, mushroom growers, farm supply stores, produce packing, and seed merchants. The premium size of our agribusiness accounts range from approximately $100 to $1.5 million with an average premium of approximately $42,000. Our product is sold through approximately 200 specialty agribusiness producers and also on a direct basis. The primary competitors in our agribusiness marketplace are Nationwide Agribusiness, Michigan Millers Insurance Company, Continental Western Insurance Company, and Westfield Insurance Company. We seek to compete with other agribusiness insurance companies primarily on service rather than price.

     The following table sets forth the direct premiums written, net premiums earned, and net loss ratios for our agribusiness products for the periods indicated (dollars in thousands):

	For the Years Ended
	December 31,
	2008			2007			2006
Direct Premiums Written:
Property	$	20,831		$	20,263		$	18,961
Commercial Auto		12,919			14,055			13,334
Liability		9,615			8,635			8,029
Workers’ Compensation		8,064			7,394			6,610
Other		5,852			5,618			4,940
Total	$	57,281		$	55,965		$	51,874
Net Premiums Earned:
Property	$	16,412		$	13,772		$	12,620
Commercial Auto		12,119			11,859			11,189
Liability		8,795			7,540			6,768
Workers’ Compensation		7,310			6,394			5,166
Other		662			680			146
Total	$	45,298		$	40,245		$	35,889
Net Loss Ratios:
Property		86.1	%		84.9	%		60.4	%
Commercial Auto		41.9	%		48.5	%		62.7	%
Liability		90.1	%		102.6	%		46.4	%
Workers’ Compensation		51.4	%		54.2	%		113.8	%
Other		37.7	%		-196.2	%		92.0	%
Total		68.7	%		67.9	%		66.3	%

     Property

     Commercial property coverage protects businesses against the loss or loss of use, including its income-producing ability, of company property. As of December 31, 2008, our agribusiness segment had approximately 1,200 property insurance policies in force.

     Commercial Auto

     Commercial auto coverage protects businesses against liability to others for both bodily injury and property damage, medical payments to insureds and occupants of their vehicles, physical damage to an insured’s own vehicle from collision and various other perils, and damages caused by uninsured

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motorists. Commercial automobile policies are generally marketed only in conjunction with other supporting lines. As of December 31, 2008, our agribusiness segment had approximately 900 commercial automobile insurance policies in force.

     Liability

     Liability insurance includes commercial general liability, products liability, and professional liability covering our agribusiness insureds’ operations. As of December 31, 2008, our agribusiness segment had approximately 1,200 general liability insurance policies in force.

     Workers’ Compensation

     Workers’ compensation coverage protects employers against specified benefits payable under state law for workplace injuries to employees. We consider our workers’ compensation business to be a companion product; we rarely write stand-alone workers’ compensation policies. As of December 31, 2008, our agribusiness segment had approximately 400 workers’ compensation insurance policies in force.

     Other

     Other lines of business includes umbrella liability, system breakdown, employment practices liability, and surety insurance.

Commercial Lines Segment

     Our commercial business segment offers insurance coverage primarily to small commercial businesses. The premium size of our commercial business accounts range from approximately $200 to approximately $163,000 with an average premium of approximately $6,700. Our commercial lines business targets select low to medium hazard businesses such as retailers, including beverage stores, floor covering stores, florists, grocery stores, office equipment and supplies stores, and shopping centers; hospitality, such as restaurants and hotels; artisan contractor businesses, such as electrical, plumbing, and landscaping; professional services, such as accountants, insurance agencies, medical offices, and optometrists; office buildings; and select light manufacturing and wholesale businesses. The primary product is a business owner’s policy called “Solutions 2000” that covers major property and liability exposures, crime, and business interruption utilizing a simplified rating program. Other lines of business offered are workers’ compensation, commercial auto, and umbrella insurance. These lines are sold through approximately 250 independent agents in Pennsylvania, New Jersey, Connecticut, Massachusetts, Tennessee, Virginia, New York, and Maryland. A large number of regional and national insurance companies compete for our small business customers. We seek to compete with other commercial lines insurance companies primarily on service rather than price.

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     The following table sets forth the direct premiums written, net premiums earned, and net loss ratios of our commercial lines products for the periods indicated (dollars in thousands):

	For the Years Ended
	December 31,
	2008				2007			2006
Direct Premiums Written:
Property & Liability	$	21,056		$	22,474		$	20,567
Workers’ Compensation		8,031			7,716			5,825
Commercial Auto		5,068			4,914			3,983
Other		3,303			2,756			1,990
Total	$	37,458		$	37,860		$	32,365
Net Premiums Earned:
Property & Liability	$	19,428		$	18,301		$	18,076
Workers’ Compensation		7,451			6,524			5,077
Commercial Auto		4,659			4,194			3,564
Other		267			241			44
Total	$	31,805		$	29,260		$	26,761
Net Loss Ratios:
Property & Liability		99.0	%		87.0	%		59.9	%
Workers’ Compensation		54.5	%		37.1	%		74.0	%
Commercial Auto		45.9	%		54.9	%		78.2	%
Other		17.2	%		(35.3	%)		359.3	%
Total		80.1	%		70.3	%		65.5	%

     Property and Liability

     Our property and liability coverage includes commercial multi-peril, fire, allied, and general liability insurance. The majority of this business is rated and classified as commercial multi-peril. As of December 31, 2008, our commercial business segment had approximately 5,300 property and liability insurance policies in force.

     Workers’ Compensation

     Workers’ compensation coverage protects employers against specified benefits payable under state law for workplace injuries to employees. We generally write workers’ compensation policies in conjunction with our business owner’s policies. However, we do write stand-alone workers’ compensation policies. As of December 31, 2008, our commercial business segment had approximately 1,800 workers compensation insurance policies in force.

     Commercial Automobile

     Commercial auto coverage protects businesses against liability to others for both bodily injury and property damage, medical payments to insureds and occupants of their vehicles, physical damage to an insured’s own vehicle from collision and various other perils, and damages caused by uninsured motorists. Commercial automobile policies are only marketed in conjunction with our business owner’s policies. As of December 31, 2008, our commercial business segment had approximately 960 commercial automobile insurance policies in force.

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Marketing and Distribution

     We market our agricultural insurance product through approximately 200 producers in 33 states, and our commercial insurance product is sold through approximately 250 producers in 8 states and by several of our employees. We primarily market our products through this select group of independent producers. All of these producers represent multiple insurance companies and are established businesses in the communities in which they operate. They generally market the full range of our products. We view our independent insurance producers as our primary customers because they are in a position to recommend either our insurance products or those of a competitor to their customers. We consider our relationships with these producers to be good. We also have two employees that are engaged in the direct marketing of our insurance products, which accounted for approximately $3.7 million in direct premiums written for our agribusiness segment in 2008.

     We manage our producers through annual business reviews, with underwriter, marketing representative, and management participation, and through the establishment of benchmarks and goals for premium volume and profitability. In recent years we have eliminated a number of unprofitable producers. Our staff of three agribusiness marketing representatives report to Joseph J. Survilla, our Vice President of Agribusiness Marketing. Mr. Survilla has over 17 years of experience in the insurance industry and has been with Penn Millers since 1991. Our staff of six commercial lines marketing representatives report to William A. Dine, Sr., our Vice President of Commercial Business. Mr. Dine has over 15 years of experience in the insurance industry and has been with Penn Millers since 2000. Our sales and marketing staff work together with our underwriting staff as teams in connection with establishing the appropriate pricing for our products.

      One producer, Arthur J. Gallagher Risk Management Services, which writes business for us through nine offices, accounted for $11.0 million or approximately 12% of our direct premiums written in 2008. Only one other producer accounted for more than 5% of our 2008 direct premiums written.

      For the year ended December 31, 2008, our top 10 producers accounted for approximately 32% of direct premiums written.

     We emphasize personal contact between our producers and the policyholders. We believe that our producers’ responsive and efficient service and reputation, as well as our policyholders’ loyalty to and satisfaction with their agent or broker are the principal sources of new customer referrals, cross-selling of additional insurance products and policyholder retention for Penn Millers.

     We depend upon our independent producers to produce new business, assist in the underwriting process, and to provide front line customer service. Our network of independent producers also serves as an important source of information about the needs of the insureds we serve. We utilize this information to develop new products, such as PennEdge, and new product features, and to enter into strategic relationships to offer new products such as equipment breakdown, employment practices liability and environmental impairment coverages, which differentiates us from our competitors.

     Our producers are monitored and supported by our marketing representatives, who are employees of Penn Millers. These representatives also have principal responsibility for recruiting and training new producers. We periodically hold seminars for producers and conduct training programs that provide both technical training about our products and sales training about how to effectively market our products.

     Producers are compensated through a fixed base commission with an opportunity for profit sharing depending on the producer’s premiums written and profitability. Because we rely heavily on independent producers, we utilize a contingent compensation plan as an incentive for producers to place high-quality business with us and to support our loss control efforts. We believe that the contingent compensation paid to our producers is competitive with other insurance companies, subject to the producer directing high-quality, profitable business to us.

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     Our marketing efforts are further supported by our claims philosophy, which is designed to provide prompt and efficient service and claims processing, resulting in a positive experience for producers and policyholders. We believe that these positive experiences result in higher policyholder retention and new business opportunities when communicated by producers and policyholders to potential customers.

Underwriting, Risk Assessment and Pricing

     Our competitive strategy in underwriting is to provide very high-quality service to our producers and insureds by responding quickly and effectively to information requests and policy submissions. Our underwriting and marketing personnel work together in teams and are compensated based upon the profitability of the business that they sell and underwrite. Accordingly, they work together to originate and approve coverage for customers that will be priced appropriately for the underwriting risk assumed. We underwrite our agricultural and commercial lines accounts by evaluating each risk with consistently applied standards. We maintain information on all aspects of our business, which is regularly reviewed to determine product line profitability. Specific information regarding individual insureds is monitored to assist us in making decisions about policy renewals or modifications.

     Our underwriting staff of 25 employees has an average of 9 years of experience in property and casualty underwriting. Harold W. Roberts, our Senior Vice President and Chief Underwriting Officer, has been with Penn Millers for over 32 years.

     Our underwriting philosophy aims to consistently generate underwriting profits through sound risk selection and pricing discipline. One key element in sound risk selection is our use of loss control inspections. During the underwriting process, we rely to a significant extent on information provided by our staff of loss control representatives located throughout the continental United States. Our staff of nine loss control representatives is supported by a network of third party loss control providers to cover more remote areas. Our loss control representatives make a risk assessment by evaluating the insured’s hazards and related controls through interviews with the insured and inspections of their premises. If the business has risk management deficiencies, the inspector will offer recommendations for improvement. If significant deficiencies are not corrected, we will decline the business or move to cancel or non-renew policies already in force. Each new agribusiness customer is visited by a loss control representative, and most agribusiness customers are visited annually thereafter. Most of our commercial business customers are also inspected. Whether an inspection is required is based primarily on the type and amount of insurance coverage that is requested. These loss control inspections allow us to more effectively evaluate and mitigate risks, thereby improving our profitability.

     We strive to be disciplined in our pricing by pursuing rate increases to maintain or improve our underwriting profitability while still being able to attract and retain customers. We utilize pricing reviews that we believe will help us price risks more accurately, improve account retention, and support the production of profitable new business. Our pricing reviews involve evaluating our claims experience and loss trends on a periodic basis to identify changes in the frequency and severity of our claims. We then consider whether our premium rates are adequate relative to the level of underwriting risk as well as the sufficiency of our underwriting guidelines.

Claims Management

     Claims on insurance policies are received directly from the insured or through our independent producers. Our claims department supports our producer relationship strategy by working to provide a consistently responsive level of claim service to our policyholders. Our experienced, knowledgeable claims staff provides timely, good faith investigation and settlement of meritorious claims for appropriate

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amounts, maintenance of adequate case reserves for claims, and control of external claims adjustment expenses.

     Kevin D. Higgins, our Senior Vice President of Claims, supervises a staff of 14 employees with an average of 20 years of experience in processing property and casualty insurance claims. Mr. Higgins joined Penn Millers in 2003 and has over 27 years of experience in claims management.

Technology

     Our technology efforts are focused on supporting our competitive strategy of differentiating ourselves from our competitors through our relationships with our producers and our responsiveness to their needs and on making us as efficient and cost effective as possible.

     Our producers access our systems through a proprietary portal on our public website. Through this portal our producers can quote new business, submit applications and change requests, and access policyholder billing and claims information. The portal also provides information on our products and services and contains sales and marketing materials for the producers.

     We have been streamlining internal processes to achieve operational efficiencies through the implementation of a policy imaging and workflow system. This system provides online access to electronic copies of policy files, enabling our underwriters to respond to our producers’ inquiries more quickly and efficiently. The imaging system also automates internal workflows through electronic routing of underwriting and processing work tasks. This system allows our claims staff to access and process reported claims in an electronic claim file.

     As part of our disaster recovery program, we maintain backup computer servers at an off-site location that are updated on a real time basis. Accordingly, in the event that power or access to our headquarters is disrupted, we can continue to operate our business without significant interruption.

Reinsurance

     Reinsurance Ceded. In accordance with insurance industry practice, we reinsure a portion of our exposure and pay to the reinsurers a portion of the premiums received on all policies reinsured. Insurance policies written by us are reinsured with other insurance companies principally to:

• reduce net liability on individual risks;

• mitigate the effect of individual loss occurrences (including catastrophic losses);

• stabilize underwriting results;

• decrease leverage; and

• increase our underwriting capacity.

     Reinsurance can be facultative reinsurance or treaty reinsurance. Under facultative reinsurance, each policy or portion of a risk is reinsured individually. Under treaty reinsurance, an agreed-upon portion of a class of business is automatically reinsured. Reinsurance also can be classified as quota share reinsurance, pro rata reinsurance or excess of loss reinsurance. Under quota share reinsurance and pro rata reinsurance, the ceding company cedes a percentage of its insurance liability to the reinsurer in exchange for a like percentage of premiums less a ceding commission. The ceding company in turn recovers from the reinsurer the reinsurer’s share of all loss and loss adjustment expenses incurred on those risks. Under

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excess of loss reinsurance, an insurer limits its liability to all or a particular portion of the amount in excess of a predetermined deductible or retention. Regardless of type, reinsurance does not legally discharge the ceding insurer from primary liability for the full amount due under the reinsured policies. However, the assuming reinsurer is obligated to reimburse the ceding company to the extent of the coverage ceded.

     We determine the amount and scope of reinsurance coverage to purchase each year based on a number of factors. These factors include the evaluation of the risks accepted, consultations with reinsurance representatives and a review of market conditions, including the availability and pricing of reinsurance. A primary factor in the selection of reinsurers from whom we purchase reinsurance is their financial strength. Our reinsurance arrangements are generally renegotiated annually. For the year ended December 31, 2008, Penn Millers ceded to reinsurers $19.0 million of written premiums, compared to $21.2 million of written premiums for the year ended December 31, 2007.

     Individual property risks in excess of $500,000 are covered on an excess of loss basis pursuant to various reinsurance treaties up to $20 million. Any exposure over $20 million is covered by facultative reinsurance. All property lines of business, including commercial automobile physical damage, are reinsured under the same treaties.

     The chart below illustrates the reinsurance coverage under our 2009 excess of loss treaties for individual property risks:

				Ceded Under
				Reinsurance
Losses Incurred	Retained by Company			Treaties
Up to $500,000		100	%		0	%
$500,000 in excess of $500,000		52.5	%		47.5	%
$4 million in excess of $1 million		0	%		100	%
$15 million in excess of $5 million		0	%		100	%

     Individual casualty risks that are in excess of $500,000 are covered on an excess of loss basis up to $10 million per occurrence, pursuant to various reinsurance treaties. The chart below illustrates the reinsurance coverage under our 2009 excess of loss treaties for individual casualty risks:

				Ceded Under
				Reinsurance
Losses Incurred	Retained by Company			Treaties
Up to $500,000		100	%		0	%
$500,000 in excess of $500,000		52.5	%		47.5	%
$4 million in excess of $1 million		0	%		100	%
$5 million in excess of $5 million		0	%		100	%

     Casualty losses in excess of $500,0000 arising from workers’ compensation claims are reinsured up to $10 million on a per occurrence treaty basis under these same treaties, but are subject to maximum coverage of $7.5 million for any one life.

     Umbrella liability losses are reinsured on a 75% quota share basis up to $1 million and a 100% quota share basis in excess of $1 million up to $5 million. Any exposure over $5 million up to $10 million is covered by facultative reinsurance.

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     Catastrophic reinsurance protects the ceding insurer from significant aggregate loss exposure. Catastrophic events include windstorms, hail, tornadoes, hurricanes, earthquakes, riots, blizzards, terrorist activities and freezing temperatures. We purchase layers of excess treaty reinsurance for catastrophic property losses. We retain the first $2 million on any one occurrence and reinsure 95% of losses per occurrence in excess of $2 million, up to a maximum of $45 million total for one event.

     We also maintain a whole account, accident year aggregate excess of loss (aggregate stop loss) contract. This contract covers the 2008 and 2009 accident years and provides reinsurance coverage for loss and allocated loss adjustment expense (ALAE) from all lines of business, in excess of a 72% loss and ALAE ratio. The reinsurance coverage has a limit of 20% of subject net earned premiums.

     The insolvency or inability of any reinsurer to meet its obligations to us could have a material adverse effect on our results of operations or financial condition. Our reinsurance providers, the majority of whom are longstanding partners who understand our business, are all carefully selected with the help of our reinsurance broker, Towers Perrin. We monitor the solvency of reinsurers through regular review of their financial statements and, if available, their A.M. Best ratings. All of our reinsurance partners have at least an “A-” rating from A. M. Best. According to A.M. Best, companies with a rating of “A-” or better “have an excellent ability to meet their ongoing obligations to policyholders.” We have experienced no significant difficulties collecting amounts due from reinsurers.

     The following table sets forth the largest amounts of loss and loss expenses recoverable from reinsurers as of December 31, 2008 (in thousands):

	Loss & Loss
	Expense
	Recoverable		Percentage of
	On Unpaid		Total			A.M. Best
	Claims		Recoverable			Rating
Hannover Ruckericherungs	$	5,381		24	%		A
Swiss Reinsurance America Corp		4,311		19	%		A
XL Reinsurance America		2,575		11	%		A
Transatlantic Reinsurance Company		2,095		9	%		A
Partner Reinsurance Co. of the U.S.		1,948		9	%		A+
Hannover Reinsurance (Ireland)		1,717		8	%		A
Employers Mutual Casualty Co.		1,100		5	%		A-
Platinum Underwriters Reinsurance		848		4	%		A
Aspen Insurance UK		676		3	%		A
General Reinsurance		541		2	%		A++
All Other		1,433		6	%	A- or better
Total	$	22,625		100	%

     Reinsurance Assumed. We generally do not assume risks from other insurance companies. However, we are required by statute to participate in certain residual market pools. This participation requires us to assume business for workers’ compensation and for property exposures that are not insured in the voluntary marketplace. We participate in these residual markets pro rata on a market share basis, and as of December 31, 2008, our participation was not material. We previously participated in various voluntary insurance pools that are currently in runoff. We no longer participate in any voluntary assumed reinsurance contracts.

Loss and LAE Reserves

     We are required by applicable insurance laws and regulations to maintain reserves for payment of loss and loss adjustment expenses (LAE). These reserves are established for both reported claims and for

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claims incurred but not reported (IBNR), arising from the policies we have issued. The laws and regulations require that provision be made for the ultimate cost of those claims without regard to how long it takes to settle them or the time value of money. The determination of reserves involves actuarial and statistical projections of what we expect to be the cost of the ultimate settlement and administration of such claims. The reserves are set based on facts and circumstances then known, estimates of future trends in claims severity, and other variable factors such as inflation and changing judicial theories of liability.

     Estimating the ultimate liability for losses and LAE is an inherently uncertain process. Therefore, the reserve for losses and LAE does not represent an exact calculation of that liability. Our reserve policy recognizes this uncertainty by maintaining reserves at a level providing for the possibility of adverse development relative to the estimation process. We do not discount our reserves to recognize the time value of money.

     When a claim is reported to us, our claims personnel establish a “case reserve” for the estimated amount of the ultimate payment. This estimate reflects an informed judgment based upon general insurance reserving practices and on the experience and knowledge of our claims staff. In estimating the appropriate reserve, our claims staff considers the nature and value of the specific claim, the severity of injury or damage, and the policy provisions relating to the type of loss. Case reserves are adjusted by our claims staff as more information becomes available. It is our policy to settle each claim as expeditiously as possible.

     We maintain IBNR reserves to provide for already incurred claims that have not yet been reported and developments on reported claims. The IBNR reserve is determined by estimating our ultimate net liability for both reported and IBNR claims and then subtracting the case reserves and paid loss and LAE for reported claims.

     Each quarter, we compute our estimated ultimate liability using principles and procedures applicable to the lines of business written. However, because the establishment of loss reserves is an inherently uncertain process, we cannot assure you that ultimate losses will not exceed the established loss reserves. Adjustments in aggregate reserves, if any, are reflected in the operating results of the period during which such adjustments are made.

     Our estimated liability for asbestos and environmental claims is $2.5 million, $2.8 million and $2.6 million at December 31, 2008, 2007 and 2006, respectively, a substantial portion of which results from our participation in assumed reinsurance pools. The estimation of the ultimate liability for these claims is difficult due to outstanding issues such as whether coverage exists, the definition of an occurrence, the determination of ultimate damages, and the allocation of such damages to financially responsible parties. Therefore, any estimation of these liabilities is subject to significantly greater-than-normal variation and uncertainty.

     The following table provides a reconciliation of beginning and ending unpaid losses and LAE reserve balances of Penn Millers for the years ended December 31, 2008, 2007 and 2006, prepared in accordance with GAAP.

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	Years Ended
	December 31,
	2008			2007			2006
	(in thousands)
Balance at January 1	$	95,956		$	89,405		$	83,849
Reinsurance recoverable on unpaid loss and LAE		18,727			20,089			22,817
Net liability at January 1		77,229			69,316			61,032
Loss and LAE incurred, net:
Current year	$	62,612		$	54,421		$	43,785
Prior years		(5,222	)		(4,638	)		(19	)
Total incurred loss and LAE		57,390			49,783			43,766
Less loss and LAE paid, net:
Current year	$	26,578		$	22,191		$	14,222
Prior years		22,601			19,679			21,260
Total loss and LAE expenses paid		49,179			41,870			35,482
Net liability for unpaid loss and LAE, at December 31	$	85,440		$	77,229		$	69,316
Reinsurance recoverable on unpaid losses and LAE		22,625			18,727			20,089
Reserve for unpaid losses and LAE at December 31	$	108,065		$	95,956		$	89,405

     The estimation process for determining the liability for unpaid losses and LAE inherently results in adjustments each year for claims incurred (but not paid) in preceding years. Negative amounts reported for claims incurred related to prior years are a result of claims being settled for amounts less than originally estimated (favorable development). Positive amounts reported for claims incurred related to prior years are a result of claims being settled for amounts greater than originally estimated (unfavorable or adverse development).

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Reconciliation of Reserve for Loss and Loss Adjustment Expenses

     The following table shows the development of our reserves for unpaid loss and LAE from 1998 through 2008 on a GAAP basis. The top line of the table shows the liabilities at the balance sheet date, including losses incurred but not yet reported. The upper portion of the table shows the cumulative amounts subsequently paid as of successive years with respect to the liability. The lower portion of the table shows the reestimated amount of the previously recorded liability based on experience as of the end of each succeeding year. The estimates change as more information becomes known about the frequency and severity of claims for individual years. The redundancy (deficiency) exists when the reestimated liability for each reporting period is less (greater) than the prior liability estimate. The “cumulative redundancy (deficiency)” depicted in the table, for any particular calendar year, represents the aggregate change in the initial estimates over all subsequent calendar years.

     Gross deficiencies and redundancies may be significantly more or less than net deficiencies and redundancies due to the nature and extent of applicable reinsurance.

     The adverse development for the years 1999 through 2002 is primarily attributable to changes in estimates as we had better information about the frequency and severity of claims and the adequacy of premium pricing levels, particularly in the commercial multi-peril line of business. We have traditionally recorded reserves above the actuaries’ central estimate. However, the competitive insurance market of the late 1990’s resulted in inadequate pricing that was not immediately recognized in our estimates. Beginning in 2003, actuarial consultants were engaged to provide an additional reserve analysis three times per year. In addition, new policies and procedures were introduced to the claims function and more rigorous analysis of pricing data was undertaken. The resulting improvements to the claims reserving and underwriting and pricing processes has helped reduce the levels of reserve volatility in more recent years.

     The net cumulative deficiency for these years, while still high, is significantly lower than the gross deficiency, while in more recent years, the variance between gross and net is not as pronounced. This is primarily attributable to the fact that we purchased more reinsurance protection during these years. Our maximum retained loss for any one risk was $200,000 from 1999 to 2000. From 2001 to 2003, the maximum retention was $250,000. The maximum retention was $300,000 in 2004 and 2005 and $500,000 in 2006 and 2007. Effective January 1, 2008, we renewed our reinsurance coverage with a number of changes. We continue to retain $500,000 on any individual property and casualty risk. However, for 2008, we retained 75% of losses in excess of $500,000 to $1,000,000 and 25% of losses in excess of $1,000,000 to $5,000,000. As a complement to this increased retention, we entered into a whole account, accident year aggregate excess of loss contract that covers accident years 2008 and 2009. The reinsurance contract provides coverage in the event that the accident year loss ratio exceeds 72%.The favorable trend in redundant reserves since 2004 can be attributed primarily to the implementation of these improved claims management and reserving practices.

	Year Ended December 31,
	1998		1999		2000		2001		2002		2003		2004		2005		2006		2007		2008
	(in thousands)
Liability for unpaid loss and LAE, net of reinsurance recoverables	$	31,185	$	30,165	$	29,476	$	35,656	$	42,731	$	48,072	$	55,804	$	61,032	$	69,316	$	77,229	$	85,440
Cumulative amount of liability paid through
One year later		8,925		10,393		12,523		15,441		15,279		18,849		19,288		21,262		19,681		22,591		—
Two years later		13,312		15,977		20,032		23,640		25,731		27,719		28,977		32,372		31,974		—		—
Three years later		16,712		20,104		25,184		28,897		31,372		34,125		35,481		40,950		—		—		—
Four years later		19,542		23,386		28,118		32,311		35,104		37,135		41,365		—		—		—		—
Five years later		21,496		24,935		30,318		33,755		36,561		39,446		—		—		—		—		—
Six years later		22,790		26,699		31,333		34,786		37,978		—		—		—		—		—		—
Seven years later		24,430		27,451		32,039		35,847		—		—		—		—		—		—		—
Eight years later		25,117		28,000		33,002		—		—		—		—		—		—		—		—
Nine years later		25,641		28,755		—		—		—		—		—		—		—		—		—
Ten years later		26,387		—		—		—		—		—		—		—		—		—		—

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	Year Ended December 31,
	1998			1999			2000			2001			2002			2003			2004		2005			2006		2007		2008
	(in thousands)
Liability estimated as of
One year later		28,581			28,506			34,545			38,657			44,764			49,658			54,729		61,017			64,679		72,004		—
Two years later		25,883			31,763			34,864			40,138			44,591			48,718			54,948		61,081			63,847		—		—
Three years later		28,647			30,869			35,865			40,527			44,424			49,954			54,510		59,884			—		—		—
Four years later		27,906			30,885			36,594			40,416			45,405			49,617			54,411		—			—		—		—
Five years later		28,295			31,910			37,108			40,696			45,603			49,284			—		—			—		—		—
Six years later		29,438			32,448			37,402			41,157			45,744			—			—		—			—		—		—
Seven years later		30,168			33,127			38,193			41,513			—			—			—		—			—		—		—
Eight years later		30,811			33,820			38,590			—			—			—			—		—			—		—		—
Nine years later		31,425			34,273			—			—			—			—			—		—			—		—		—
Ten years later		31,942			—			—			—			—			—			—		—			—		—		—
Cumulative total redundancy (deficiency)	$	(757	)	$	(4,108	)	$	(9,114	)	$	(5,857	)	$	(3,013	)	$	(1,212	)	$	1,393	$	1,148		$	5,469	$	5,225		—
Gross liability — end of year	$	37,574		$	39,188		$	37,056		$	47,084		$	53,462		$	69,463		$	73,287	$	83,849		$	89,405	$	95,956	$	108,065
Reinsurance recoverables		6,389			9,023			7,580			11,428			10,731			21,391			17,483		22,817			20,089		18,727		22,625
Net liability — end of year	$	31,185		$	30,165		$	29,476		$	35,656		$	42,731		$	48,072		$	55,804	$	61,032		$	69,316	$	77,229	$	85,440
Gross reestimated liability — latest	$	47,068		$	55,110		$	58,413		$	62,206		$	65,091		$	67,034		$	71,114	$	84,443		$	80,647	$	91,772
Reestimated reinsurance recoverables — latest	$	15,126			20,837			19,823			20,693			19,347			17,750			16,703		24,559			16,800		19,768
Net reestimated liability — latest	$	31,942		$	34,273		$	38,590		$	41,513		$	45,744		$	49,284		$	54,411	$	59,884		$	63,847	$	72,004
Gross cumulative redundancy (deficiency)	$	(9,494	)	$	(15,922	)	$	(21,357	)	$	(15,122	)	$	(11,629	)	$	2,429		$	2,173	$	(594	)	$	8,758	$	4,184

Investments

     Our investments in debt and equity securities are classified as available for sale and are carried at fair value with unrealized gains and losses reflected as a component of equity net of taxes. The goal of our investment activities is to complement and support our overall mission. As such, the investment portfolio’s goal is to maximize after-tax investment income and price appreciation while maintaining the portfolios’ target risk profile.

     An important component of our operating results has been the return on invested assets. Our investment objectives are (i) accumulation and preservation of capital, (ii) optimization, within accepted risk levels, of after-tax returns, (iii) assuring proper levels of liquidity, (iv) providing for an acceptable and stable level of current income, (v) manage the maturities of our investment securities to reflect the maturities of our liabilities, and (vi) maintaining a quality portfolio which will help attain the highest possible rating from A.M. Best. See “Management’s Discussion and Analysis of Financial Condition and Results of Operations — Quantitative and Qualitative Information about Market Risk.”

     In addition to any investments prohibited by the insurance laws and regulations of Pennsylvania and any other applicable states, our investment policy prohibits the following investments and investing activities:

• Commodities and futures contracts

• Options (except covered call options)

• Non-investment grade debt obligations at time of purchase

• Preferred stocks (except “trust preferred” securities)

• Interest-only, principal-only, and residual tranche collateralized mortgage obligations

• Private placements

• International debt obligations

• Foreign currency trading

• Limited partnerships

• Convertible securities

• Venture-capital investments

• Real estate properties (except real estate investment trusts)

• Securities lending

• Portfolio leveraging, i.e., margin transactions

• Short selling

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     Our board of directors developed our investment policy in conjunction with our external investment manager and reviews the policy periodically.

      Our fixed maturity investment portfolio is professionally managed by a registered independent investment advisor specializing in the management of insurance company assets. In December 2008, we liquidated our entire portfolio of equity securities and invested the $11.4 million of net proceeds in fixed maturity securities. For more information regarding our investments that are other-than-temporarily impaired, see “Management’s Discussion and Analysis of Financial Condition and Results of Operations — Critical Accounting Policies — Investments.”

      The following table sets forth information concerning our investments (in thousands).

	At December 31,
	2008				2007
	Cost or Amortized		Estimated Fair		Cost or Amortized		Estimated Fair
	Cost		Value		Cost		Value
Agencies not backed by the full faith and credit of the U.S. government		$14,929		$16,089		$18,523		$18,888
U.S. treasury securities		8,530		9,310		7,837		8,096
States, Territories and possessions		15,753		16,475		15,310		15,771
Special Revenue		16,022		16,482		15,011		15,363
Public Utilities		5,419		5,396		2,516		2,580
Industrial and Miscellaneous		34,511		32,857		31,140		31,347
Mortgage-Backed Securities		25,374		25,305		20,636		20,724
Total Debt Securities		120,538		121,914		110,973		112,769
Equity Securities		—		—		10,525		13,409
Total		$120,538		$121,914		$121,498		$126,178

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     The following table summarizes the distribution of our portfolio of fixed income investments as a percentage of total estimated fair value based on credit ratings assigned by Standard & Poor’s Corporation (S&P) at December 31, 2008 (dollars in thousands).

	Estimated		Percent
Rating (1)	Fair Value		of Total (2)
Agencies not backed by the full faith and credit of the U.S. government	$	16,089		13.2	%
U.S. treasury securities		9,310		7.6	%
AAA		44,452		36.5	%
AA		17,866		14.7	%
A		29,409		24.1	%
BBB		4,788		3.9	%
Total	$	121,914		100.0	%

(1)	The ratings set forth in this table are based on the ratings assigned by S&P. If S&P’s ratings were unavailable, the equivalent ratings supplied by Moody’s Investor Service, Fitch Investors Service, Inc. or the NAIC were used where available.
(2)	Represents percent of fair value for classification as a percent of the total portfolio.

     The table below sets forth the maturity profile of our debt securities at December 31, 2008. Expected maturities could differ from contractual maturities because borrowers may have the right to call or prepay obligations, with or without call or prepayment penalties (in thousands).

	Amortized Cost		Estimated Fair Value (1)
Less than one year	$	8,321	$	8,439
One though five years		42,747		43,356
Five through ten years		39,299		39,824
Greater than ten years		4,797		4,990
Mortgaged-backed securities (2)		25,374		25,305
Total debt securities	$	120,538	$	121,914

(1)

Debt securities are carried at fair value in our financial statements beginning on page F-1.

(2)

Mortgage-backed securities consist of residential and commercial mortgage-backed securities and securities collateralized by home equity loans. These securities are presented separately in the maturity schedule due to the inherent risk associated with prepayment or early amortization. Prepayment rates are influenced by a number of factors that cannot be predicted with certainty, including: the relative sensitivity of the underlying mortgages or other collateral to changes in interest rates; a variety of economic, geographic and other factors; and the repayment priority of the securities in the overall securitization structures.

     At December 31, 2008, the average maturity of our mortgage-backed securities was 5.5 years and the average effective duration was 1.7 years. The average maturity of our fixed maturity investment portfolio, excluding mortgage-backed securities, was 4.7 years and the average duration was 3.6 years. As a result, the fair value of our investments may fluctuate significantly in response to changes in interest rates. In addition, we may experience investment losses to the extent our liquidity needs require the disposition of fixed maturity securities in unfavorable interest rate environments.

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     The following table sets forth the fair value and average credit rating of our portfolio of residential mortgage-backed securities (RMBS) at December 31, 2008 and December 31, 2007 (in thousands).

	December 31, 2008				December 31, 2007
			Average				Average
			Credit				Credit
	Fair Value		Rating		Fair Value		Rating
U.S. Agency guaranteed RMBS	$	21,373	AAA		$	15,688	AAA
Non-Agency guaranteed RMBS		—		—		—		—
Prime First Lien		—		—		—		—
Prime Second Lien		—		—		—		—
Alt-A Loans		—		—		—		—
Subprime Loans		—		—		—		—
Total	$	21,373		—	$	15,688		—

     At December 31, 2008, and at December 31, 2007, we owned no home equity loan backed securities.

     We use quoted values and other data provided by a nationally recognized independent pricing service as inputs in our process for determining fair values of our investments. The pricing service covers substantially all of the securities in our portfolio. The pricing service’s evaluations represent an exit price, a good faith opinion as to what a buyer in the marketplace would pay for a security in a current sale. The pricing is based on observable inputs either directly or indirectly, such as quoted prices in markets that are active, quoted prices for similar securities at the measurement date, or other inputs that are observable.

     Our fixed maturity investment manager provides us with pricing information that we utilize, together with information obtained from an independent pricing service, to determine the fair value of our fixed income securities. After performing a detailed review of the information obtained from the pricing service, no adjustment was made to the values provided.

     Approximately 19% of our investments in fixed maturity securities are guaranteed by third party monoline insurers. The following table sets forth information with respect to our fixed maturity securities that are guaranteed by third party insurers. We hold no securities issued by any third party insurer.

	(Dollars in Thousands)
	December 31, 2008				December 31, 2007
			Average				Average
			Credit				Credit
	Fair Value		Rating		Fair Value		Rating
Auto loan backed securities	$	—		—	$	—		—
Home equity loan backed securities		—		—		—		—
Municipal bonds	$	22,864	AA+		$	23,258	AAA

     The following table sets forth information with respect to the fair value at December 31, 2008, and December 31, 2007, of the fixed maturity securities that are guaranteed by each of the third party insurers (in thousands).

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	Fair Value at		Fair Value at
Insurer	December 31, 2008		December 31, 2007
AMBAC	$	3,259	$	3,274
FGIC		2,772		2,735
FSA		8,829		8,730
MBIA		8,004		8,519
Total	$	22,864	$	23,258

      The following table sets forth the ratings of the security, with and without consideration of guarantee, for the fixed maturity securities that are guaranteed by third party insurers at December 31, 2008 and December 31, 2007 (in thousands).

	At December 31, 2008				At December 2007
Rating	With Guarantee Fair Value		Without Guarantee Fair Value		With Guarantee Fair Value
AAA	$	8,832	$	1,654	$	23,258
AA		11,868		15,848		—
A		2,164		5,362		—
Total	$	22,864	$	22,864	$	23,258

     Our average cash and invested assets, net investment income and return on average cash and invested assets for the years ended December 31, 2008, 2007 and 2006 were as follows (in thousands):

	Year Ended
	December 31,
	2008			2007			2006
Average cash and invested assets	$	135,093		$	131,484		$	121,777
Net investment income		5,335			5,324			4,677
Return on average cash and invested assets		3.9	%		4.0	%		3.8	%

A.M. Best Rating

     A.M. Best Company, Inc. (“A.M. Best”) rates insurance companies based on factors of concern to policyholders. A.M. Best currently assigns an “A-” (Excellent) rating to Penn Millers Insurance Company. The latest rating evaluation by A.M. Best occurred on June 2, 2008. This rating is the fourth highest out of 15 rating classifications. According to the A.M. Best guidelines, A.M. Best assigns “A-” ratings to companies that have, on balance, very good balance sheet financial strength, operating performance and business profiles according to the standards established by A.M. Best. Companies rated “A-” are considered by A.M. Best to have “an excellent ability to meet their ongoing obligations to policyholders.” The rating evaluates the claims paying ability of a company, and is not a recommendation on the merits of an investment in our common stock.

     In evaluating a company’s financial and operating performance, A.M. Best reviews:

• the company’s profitability, leverage and liquidity;

• its book of business;

• the adequacy and soundness of its reinsurance;

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• the quality and estimated fair value of its assets;

• the adequacy of its reserves and surplus;

• its capital structure;

• the experience and competence of its management; and

• its marketing presence.

     In its ratings report on Penn Millers Insurance Company, A.M. Best states that we have solid capitalization and modest underwriting leverage. A.M. Best cites our strong agency relationships, significant presence in the agribusiness market, and strong loss control services within the agri-business market. The report states that these positive attributes are partially offset by historically low profitability that resulted from a high expense ratio in comparison to our peers, fluctuations in reserve development, and a history of large storm losses. A.M. Best noted that historically we have ceded a disproportionate portion of our premiums to reinsurers. The report acknowledged that we have made recent efforts to improve our operating results by restructuring our reinsurance program and purchasing a two-year aggregate stop-loss reinsurance program to restrict losses. A.M. Best states that our ratings outlook is stable.

Competition

     The property and casualty insurance market is highly competitive. We compete with stock insurance companies, mutual companies, local cooperatives and other underwriting organizations. Certain of these competitors have substantially greater financial, technical and operating resources than we do. Our ability to compete successfully in our principal markets is dependent upon a number of factors, many of which are outside our control. These factors include market and competitive conditions. Many of our lines of insurance are subject to significant price competition. Some companies may offer insurance at lower premium rates through the use of salaried personnel or other distribution methods, rather than through independent producers paid on a commission basis (as we do). In addition to price, competition in our lines of insurance is based on quality of the products, quality and speed of service, financial strength, ratings, distribution systems and technical expertise. The primary competitors in our agribusiness marketplace are Nationwide Agribusiness, Michigan Millers Insurance Company, Continental Western Insurance Company, and Westfield Insurance Company. A large number of regional and national insurance companies compete for small business customers.

Regulation

     General. Insurance companies are subject to supervision and regulation in the states in which they do business. State insurance authorities have broad administrative powers with respect to all aspects of the insurance business including:

• approval of policy forms and premium rates;

• standards of solvency, including establishing statutory and risk-based capital requirements for statutory surplus;

• classifying assets as admissible for purposes of determining statutory surplus;

• licensing of insurers and their producers;

• advertising and marketing practices;

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• restrictions on the nature, quality and concentration of investments;

• assessments by guaranty associations;

• restrictions on the ability of Penn Millers Insurance Company to pay dividends to us;

• restrictions on transactions between Penn Millers Insurance Company and its affiliates;

• restrictions on the size of risks insurable under a single policy;

• requiring deposits for the benefit of policyholders;

• requiring certain methods of accounting;

• periodic examinations of our operations and finances;

• claims practices;

• prescribing the form and content of reports of financial condition required to be filed; and

• requiring reserves for unearned premiums, losses and other purposes.

     State insurance laws and regulations require Penn Millers Insurance Company to file financial statements with state insurance departments everywhere it does business, and the operations of Penn Millers Insurance Company and its accounts are subject to examination by those departments at any time. Penn Millers prepares statutory financial statements in accordance with accounting practices and procedures prescribed or permitted by these departments.

     Examinations. Examinations are conducted by the Pennsylvania Insurance Department every three to five years. The Pennsylvania Insurance Department’s last examination of Penn Millers Insurance Company was as of December 31, 2004. The examination did not result in any adjustments to our financial position. In addition, there were no substantive qualitative matters indicated in the examination report that had a material adverse impact on our operations.

     NAIC Risk-Based Capital Requirements. In addition to state-imposed insurance laws and regulations, the NAIC has adopted risk-based capital requirements that require insurance companies to calculate and report information under a risk-based formula. These risk-based capital requirements attempt to measure statutory capital and surplus needs based on the risks in a company’s mix of products and investment portfolio. Under the formula, a company first determines its “authorized control level” risk-based capital. This authorized control level takes into account (i) the risk with respect to the insurer’s assets; (ii) the risk of adverse insurance experience with respect to the insurer’s liabilities and obligations, (iii) the interest rate risk with respect to the insurer’s business; and (iv) all other business risks and such other relevant risks as are set forth in the risk-based capital instructions. A company’s “total adjusted capital” is the sum of statutory capital and surplus and such other items as the risk-based capital instructions may provide. The formula is designed to allow state insurance regulators to identify weakly capitalized companies.

     The requirements provide for four different levels of regulatory attention. The “company action level” is triggered if a company’s total adjusted capital is less than 2.0 times its authorized control level but greater than or equal to 1.5 times its authorized control level. At the company action level, the company must submit a comprehensive plan to the regulatory authority that discusses proposed corrective actions to improve the capital position. The “regulatory action level” is triggered if a company’s total adjusted capital is less than 1.5 times but greater than or equal to 1.0 times its authorized control level. At the regulatory action level, the regulatory authority will perform a special examination of the company and issue an order specifying corrective actions that must be followed. The “authorized control level” is triggered if a company’s total adjusted capital is less than 1.0 times but greater than or equal to 0.7 times

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its authorized control level; at this level the regulatory authority may take action it deems necessary, including placing the company under regulatory control. The “mandatory control level” is triggered if a company’s total adjusted capital is less than 0.7 times its authorized control level; at this level the regulatory authority is mandated to place the company under its control. The capital levels of Penn Millers Insurance Company have never triggered any of these regulatory capital levels. We cannot assure you, however, that the capital requirements applicable to Penn Millers Insurance Company will not increase in the future.

     NAIC Ratios. The NAIC also has developed a set of 11 financial ratios referred to as the Insurance Regulatory Information System (IRIS). On the basis of statutory financial statements filed with state insurance regulators, the NAIC annually calculates these IRIS ratios to assist state insurance regulators in monitoring the financial condition of insurance companies. The NAIC has established an acceptable range for each of the IRIS financial ratios. If four or more of its IRIS ratios fall outside the range deemed acceptable by the NAIC, an insurance company may receive inquiries from individual state insurance departments. During each of the years ended December 31, 2008, 2007 and 2006, Penn Millers Insurance Company did not produce results outside the acceptable range for any of the IRIS tests.

     Market Conduct Regulation. State insurance laws and regulations include numerous provisions governing trade practices and the marketplace activities of insurers, including provisions governing the form and content of disclosure to consumers, illustrations, advertising, sales practices and complaint handling. State regulatory authorities generally enforce these provisions through periodic market conduct examinations.

     Property and Casualty Regulation. Our property and casualty operations are subject to rate and policy form approval, as well as laws and regulations covering a range of trade and claim settlement practices. State insurance regulatory authorities have broad discretion in approving an insurer’s proposed rates. The extent to which a state restricts underwriting and pricing of a line of business may adversely affect an insurer’s ability to operate that business profitably in that state on a consistent basis.

     State insurance laws and regulations require us to participate in mandatory property-liability “shared market,” “pooling” or similar arrangements that provide certain types of insurance coverage to individuals or others who otherwise are unable to purchase coverage voluntarily provided by private insurers. Shared market mechanisms include assigned risk plans and fair access to insurance requirement or “FAIR” plans. In addition, some states require insurers to participate in reinsurance pools for claims that exceed specified amounts. Our participation in these mandatory shared market or pooling mechanisms generally is related to the amount of our direct writings for the type of coverage written by the specific arrangement in the applicable state. We cannot predict the financial impact of our participation in these arrangements. See “Management’s Discussion and Analysis of Financial Condition and Results of Operations — Other Segment.”

     Guaranty Fund Laws. All states have guaranty fund laws under which insurers doing business in the state can be assessed to fund policyholder liabilities of insolvent insurance companies. Under these laws, an insurer is subject to assessment depending upon its market share in the state of a given line of business. For the years ended December 31, 2008, 2007 and 2006, we incurred approximately ($18,000), $156,000, and $299,000, respectively, in assessments pursuant to state insurance guaranty association laws. We establish reserves relating to insurance companies that are subject to insolvency proceedings when we are notified of assessments by the guaranty associations. We cannot predict the amount and timing of any future assessments on Penn Millers under these laws. See “Management’s Discussion and Analysis of Financial Condition and Results of Operations — Other Segment.”

     Sarbanes-Oxley Act of 2002. On July 30, 2002, President Bush signed into law the Sarbanes-Oxley Act of 2002, or the SOA. The stated goals of the SOA are to increase corporate responsibility, to

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provide for enhanced penalties for accounting and auditing improprieties at publicly traded companies and to protect investors by improving the accuracy and reliability of corporate disclosures pursuant to the securities laws. We will become subject to most of the provisions of the SOA immediately after completion of this offering.

     The SOA is the most far-reaching U.S. securities legislation enacted in some time. The SOA generally applies to all companies, both U.S. and non-U.S., that file or are required to file periodic reports with the Securities and Exchange Commission, or the SEC, under the Securities Exchange Act of 1934, or the Exchange Act. Given the extensive SEC role in implementing rules relating to many of the SOA’s new requirements, the final scope of these requirements remains to be determined.

     The SOA includes very specific additional disclosure requirements and new corporate governance rules, requires the SEC and securities exchanges to adopt extensive additional disclosure, corporate governance and other related rules and mandates further studies of specified issues by the SEC and the Comptroller General. The SOA represents significant federal involvement in matters traditionally left to state regulatory systems, such as the regulation of the accounting profession, and to state corporate law, such as the relationship between a board of directors and management and between a board of directors and its committees.

     The SOA addresses, among other matters:

• audit committees;

• certification of financial statements by the chief executive officer and the chief financial officer;

• the forfeiture of bonuses or other incentive-based compensation and profits from the sale of an issuer’s securities by directors and senior officers in the twelve month period following initial publication of any financial statements that later require restatement;

• a prohibition on insider trading during pension plan black out periods;

• disclosure of off-balance sheet transactions;

• a prohibition on personal loans to directors and officers;

• expedited filing requirements for Form 4 statement of changes of beneficial ownership of securities required to be filed by officers, directors and 10% shareholders;

• disclosure of whether or not a company has adopted a code of ethics;

• “real time” filing of periodic reports;

• auditor independence; and

• various increased criminal penalties for violations of securities laws.

     The SEC has been delegated the task of enacting rules to implement various provisions with respect to, among other matters, disclosure in periodic filings pursuant to the Exchange Act. To date, the SEC has implemented most of the provisions of the SOA. However, the SEC continues to issue final rules, reports, and press releases. As the SEC provides new requirements, we will review those rules and comply as required.

     Terrorism Risk Insurance Act of 2002. On November 26, 2002, President Bush signed the Terrorism Risk Insurance Act of 2002. Under this law, coverage provided by an insurer for losses caused by certified acts of terrorism is partially reimbursed by the United States under a formula under which the

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government pays 90% of covered terrorism losses, exceeding a prescribed deductible. Therefore, the act limits an insurer’s exposure to certified terrorist acts (as defined by the act) to the deductible formula. The deductible is based upon a percentage of direct earned premium for commercial property and casualty policies. Coverage under the act must be offered to all property, casualty and surety insureds.

     The immediate effect was to nullify terrorism exclusions previously permitted by state regulators to the extent they exclude losses that would otherwise be covered under the act. The act, as amended by the Risk Insurance Program Reauthorization Act of 2007, further states that until December 31, 2014, rates and forms for terrorism risk insurance covered by the act are not subject to prior approval or a waiting period under any applicable state law. Rates and forms of terrorism exclusions and endorsements are subject to subsequent review.

     Financial Services Modernized. The Gramm-Leach-Bliley Act was signed into law by President Clinton on November 12, 1999. The principal focus of the act is to facilitate affiliations among banks, securities firms and insurance companies. The ability of banks and securities firms to affiliate with insurers may increase the number, size and financial strength of our potential competitors. We have no affiliations with banks or securities firms and currently have no plans to enter into any such affiliation.

     Privacy. As mandated by the Gramm-Leach-Bliley Act, states continue to promulgate and refine laws and regulations that require financial institutions, including insurance companies, to take steps to protect the privacy of certain consumer and customer information relating to products or services primarily for personal, family or household purposes. A recent NAIC initiative that affected the insurance industry was the adoption in 2000 of the Privacy of Consumer Financial and Health Information Model Regulation, which assisted states in promulgating regulations to comply with the Gramm-Leach-Bliley Act. In 2002, to further facilitate the implementation of the Gramm-Leach-Bliley Act, the NAIC adopted the Standards for Safeguarding Customer Information Model Regulation. Several states have now adopted similar provisions regarding the safeguarding of customer information. Penn Millers has implemented procedures to comply with the Gramm-Leach-Bliley Act’s related privacy requirements.

     OFAC. The Treasury Department’s Office of Foreign Asset Control (OFAC) maintains a list of “Specifically Designated Nationals and Blocked Persons” (the SDN List). The SDN List identifies persons and entities that the government believes are associated with terrorists, rogue nations or drug traffickers. OFAC’s regulations prohibit insurers, among others, from doing business with persons or entities on the SDN List. If the insurer finds and confirms a match, the insurer must take steps to block or reject the transaction, notify the affected person and file a report with OFAC. The focus on insurers’ responsibilities with respect to the SDN List has increased significantly since September 11, 2001.

     New and Proposed Legislation and Regulations. The property and casualty insurance industry has recently received a considerable amount of publicity because of rising insurance costs and the unavailability of insurance. New regulations and legislation are being proposed to limit damage awards, to control plaintiffs’ counsel fees, to bring the industry under regulation by the federal government and to control premiums, policy terminations and other policy terms. We are unable to predict whether, in what form, or in what jurisdictions, any regulatory proposals might be adopted or their effect, if any, on us.

     Dividends. Pennsylvania law sets the maximum amount of dividends that may be paid by Penn Millers Insurance Company during any twelve-month period after notice to, but without prior approval of, the Pennsylvania Insurance Department. This amount cannot exceed the greater of 10% of the insurance company’s surplus as regards to policyholders as reported on the most recent annual statement filed with the Pennsylvania Insurance Department, or the insurance company’s statutory net income for the period covered by the annual statement as reported on such statement. As of December 31, 2008, the amount available for payment of dividends by Penn Millers Insurance Company in 2009

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without the prior approval of the Pennsylvania Insurance Department is approximately $4.3 million. “Extraordinary dividends” in excess of the foregoing limitations may only be paid with prior notice to, and approval of, the Pennsylvania Insurance Department. See “Dividend Policy.” In 2008, Penn Millers Insurance Company paid dividends to PMHC of $900,000 to pay operating expenses and debt service.

     Holding Company Laws. Most states have enacted legislation that regulates insurance holding company systems. Each insurance company in a holding company system is required to register with the insurance supervisory agency of its state of domicile and furnish certain information. This includes information concerning the operations of companies within the holding company group that may materially affect the operations, management or financial condition of the insurers within the group. Pursuant to these laws, the Pennsylvania Insurance Department may examine us and Penn Millers Insurance Company at any time, require disclosure of material transactions by us and Penn Millers Insurance Company and require prior notice of approval of certain transactions, such as “extraordinary dividends” distributed by Penn Millers Insurance Company.

     All transactions within our consolidated group affecting Penn Millers Insurance Company must be fair and equitable. Notice of certain material transactions between Penn Millers Insurance Company and any person or entity in our holding company system will be required to be given to the Pennsylvania Insurance Department. Certain transactions cannot be completed without the prior approval of the Pennsylvania Insurance Department.

     Approval of the state insurance commissioner is required prior to any transaction affecting the control of an insurer domiciled in that state. In Pennsylvania, the acquisition of 10% or more of the outstanding voting securities of an insurer or its holding company is presumed to be a change in control. Pennsylvania law also prohibits any person or entity from (i) making a tender offer for, or a request or invitation for tenders of, or seeking to acquire or acquiring any voting security of a Pennsylvania insurer if, after the acquisition, the person or entity would be in control of the insurer, or (ii) effecting or attempting to effect an acquisition of control of or merger with a Pennsylvania insurer, unless the offer, request, invitation, acquisition, effectuation or attempt has received the prior approval of the Pennsylvania Insurance Department.

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Legal Proceedings

     Penn Millers is a party to litigation in the normal course of business. Based upon information presently available to us, we do not consider any litigation to be material. However, given the uncertainties attendant to litigation, we cannot assure you that our results of operations and financial condition will not be materially adversely affected by any litigation.

Properties

     Our headquarters are located at 72 North Franklin Street, Wilkes-Barre, Pennsylvania. We own this 39,963 square foot facility. Eastern Insurance Group maintains two separate offices located at 613 Baltimore Drive, Wilkes-Barre, Pennsylvania and 138 Airport Road, Hazleton, Pennsylvania, which are 11,980 square feet and 1,700 square feet, respectively. Eastern Insurance Group leases both facilities. On February 2, 2009, when we completed the sale of substantially all of the assets of Eastern Insurance Group, these leases were assumed by the buyer.

Employees

     As of March 1, 2009, we had 114 full-time equivalent employees related to continuing operations. None of these employees are covered by a collective bargaining agreement, and we believe that our employee relations are good.

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THE CONVERSION AND OFFERING

     Penn Millers Mutual Holding Company was formed as a mutual holding company by Penn Millers in 1999 in connection with the conversion of Penn Millers Insurance Company (formerly known as Penn Millers Mutual Insurance Company) from a mutual to stock insurance company within a mutual holding company structure. The Pennsylvania Insurance Commissioner issued a 1998 Order approving the conversion of Penn Millers Insurance Company from mutual to stock form within a mutual holding company structure.

     As a mutual holding company, Penn Millers Mutual does not have shareholders. It has members. The members of Penn Millers Mutual are the policyholders of Penn Millers Insurance Company. According to the 1998 Order, except for those rights related to insurance coverages, the members of Penn Millers Mutual are entitled to the same rights as the members of a mutual insurance company, including the right to elect directors and to approve fundamental transactions such as this conversion. In an insurance company organized as a stock institution, policyholders have no governance rights, which reside with shareholders, and instead have only contractual rights under their insurance policies.

General

     On April 22, 2009, the board of directors of Penn Millers Mutual unanimously adopted the plan of conversion, subject to the approval of the Pennsylvania Insurance Commissioner and the members of Penn Millers Mutual. Pursuant to the 1998 Order, we are required to obtain the approval of the Pennsylvania Insurance Commissioner prior to effecting a conversion of Penn Millers Mutual. We are in the process of obtaining such approval. Approval by the Pennsylvania Insurance Commissioner is not a recommendation or endorsement of the offering. The plan of conversion is also subject to the approval of a majority of the members of Penn Millers Mutual as of                              , 2009, at a special meeting to be held on September ___, 2009.

     The plan of conversion provides that we will offer shares of our common stock for sale in a subscription offering to eligible members of Penn Millers Mutual, our employee stock ownership plan (ESOP), and the directors, officers and employees of Penn Millers. In addition, we may elect to offer the shares of common stock not subscribed for in the subscription offering, if any, for sale in a community offering commencing during or upon completion of the subscription offering and in a subsequent syndicated community offering. See “— Subscription Offering and Subscription Rights” and “— Community Offering.” We have the right to accept or reject, in whole or in part, any order to purchase shares of common stock received in the community offering or syndicated community offering.

     The conversion will be accomplished by the filing of amended and restated articles of incorporation for Penn Millers Mutual with the Pennsylvania Department of State. These amended and restated articles will, among other things, create and authorize the issuance of shares of capital stock of the converted company.

     After issuance of its shares of capital stock to Penn Millers Holding Corporation, Penn Millers Mutual will become a wholly owned stock subsidiary of Penn Millers Holding Corporation. The conversion will be effected only if subscriptions and orders are received for at least 4,505,000 shares of common stock and a majority of the members of Penn Millers Mutual as of ___, 2009 approve the plan. The conversion will be accounted for as a simultaneous reorganization, recapitalization and share offering that will not change the historical accounting basis of Penn Millers Mutual’s consolidated financial statements.

     A copy of the plan of conversion is available by contacting Penn Millers Holding Corporation’s principal executive offices located at 72 North Franklin Street, Wilkes-Barre, Pennsylvania 18773. A copy of the plan also was sent to each member of Penn Millers Mutual as of ___, 2009 along with the notice of the special meeting. The plan also is filed as an exhibit to the registration statement of which this prospectus is a part. Copies of the registration statement and attachments may be obtained from the SEC. See “Additional Information.”

Offering of Common Stock

     In connection with the conversion, we are offering shares of common stock to eligible members of Penn Millers Mutual, our ESOP, the directors, officers and employees and the general public. The offering to eligible members, the ESOP and Penn Millers’ directors, officers and employees is referred to as the subscription offering because each of those constituents will receive subscription rights to purchase common stock in the following order of priority:

• eligible members of Penn Millers Mutual, who are defined in the plan of conversion as the policyholders of Penn Millers Insurance Company under policies of insurance in place as of April 22, 2009;

• our ESOP; and

• the directors, officers and employees of Penn Millers who are not eligible policyholders under the category above.

     Our ESOP has the right to purchase shares in this offering in an amount equal to 10% of the shares sold in the offering. The subscription rights of Penn Millers’ directors, officers and employees are secondary to the subscription rights of the eligible members and our ESOP.

     We also plan to offer to sell shares of our common stock to members of the general public in a community offering with preference given to the following:

• licensed insurance agencies and brokers that have been appointed by or are under contract with Penn Millers Insurance Company to market and distribute policies of insurance;

• policyholders under policies of insurance issued by Penn Millers Insurance Company after April 22, 2009; and

• natural persons and trusts of natural persons (including individual retirement and Keogh retirement accounts and personal trusts in which such natural persons have substantial interests) who are residents of Lackawanna or Luzerne Counties in Pennsylvania.

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     If subscriptions and orders are not received for all of the shares available in the subscription and community offerings, we may offer the remaining available shares to the general public in a syndicated community offering managed by Griffin Financial on a best efforts basis. The syndicated community offering may be conducted concurrently with or subsequent to the subscription offering and community offering.

     The completion of this offering is subject to market conditions and other factors beyond our control. If the offering is not completed, our capital structure will remain unchanged. In that event, Penn Millers Mutual will continue to be a mutual holding company and sole shareholder of PMHC, and PMHC will continue to serve as the stock holding company for Penn Millers Insurance Company, and all funds received with order forms will be promptly returned to purchasers without interest.

Effect of Offering on Members of Penn Millers Mutual

     As set forth in the 1998 Order approving the conversion of Penn Millers Insurance Company within a mutual holding company structure, the members of Penn Millers Mutual are made up of the policyholders of Penn Millers Insurance Company. Accordingly, a policyholder of Penn Millers Insurance Company must have an effective policy of Penn Millers Insurance Company in order to be a member of Penn Millers Mutual. The 1998 Order further states that, except for those rights related to insurance coverages, the members of Penn Millers Mutual are entitled to the same rights as members of a mutual insurance company, including the right to vote for the election of directors and certain other corporate transactions. However, this membership interest has no market value because it cannot be separated from the underlying insurance policy and, in any event, is not transferable.

     Upon completion of the conversion, Penn Millers Mutual will be a stock holding company and all membership interests in Penn Millers Mutual held by the policyholders of Penn Millers Insurance Company will terminate. However, the conversion will have no effect on the contractual rights of the policyholders of Penn Millers Insurance Company.

     If the plan of conversion is not approved by a majority of the members of Penn Millers Mutual as of                    , 2009, or if the conversion fails to be completed for any other reason, Penn Millers Mutual will continue as a mutual holding company and Penn Millers’ corporate structure will be unchanged. In this case, the members of Penn Millers Mutual will retain the membership rights described above.

Continuity of Insurance Coverage and Business Operations

     This conversion will not change the insurance protection or premiums under individual insurance policies with Penn Millers Insurance Company. During and after the conversion, the normal business of issuing insurance policies will continue without change or interruption. After the conversion, we will continue to provide services to policyholders under current policies. Each member of the board of directors of Penn Millers Holding Corporation is also a member of the respective boards of directors of Penn Millers Mutual, PMHC and Penn Millers Insurance Company and will continue to serve on such boards of directors after the conversion. See “Management — Directors and Officers.” All of our officers at the time of the offering will retain their same positions after the conversion.

Voting Rights

     As described above, the policyholders of Penn Millers Insurance Company have certain voting rights in Penn Millers Mutual. After the conversion, all of the voting rights of the policyholders in Penn Millers Mutual will cease. Policyholders of Penn Millers Insurance Company will no longer be members of Penn Millers Mutual and will no longer have the right to elect the directors of Penn Millers Mutual or approve transactions involving Penn Millers Mutual. Instead, voting rights in Penn Millers Mutual will be held by Penn Millers Holding Corporation, which will own all of the capital stock of Penn Millers Mutual. Voting rights in Penn Millers Holding Corporation will be held by the shareholders of Penn Millers Holding Corporation, subject to the terms of the articles of incorporation and bylaws of Penn Millers Holding Corporation and to the provisions of Pennsylvania and federal law. See “Description of the Capital Stock — Common Stock” for a description of our common stock.

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Subscription Offering and Subscription Rights

     In accordance with the plan of conversion, rights to subscribe for the purchase of our common stock have been granted to the following persons, listed in order of priority:

• “eligible members” (as they are referred to in the plan of conversion), which means a person or entity who is the named insured under an insurance policy issued by Penn Millers Insurance Company that is issued and in force as of the close of business on April 22, 2009;

• our ESOP; and

• the directors, officers and employees of Penn Millers as of the closing date of the offering.

     At April 22, 2009, Penn Millers Mutual had approximately 6,344 eligible members, which equaled the number of policyholders of Penn Millers Insurance Company as of that date.

     All subscriptions received will be subject to the availability of common stock after satisfaction of all subscriptions of all persons having prior rights in the subscription offering and to the maximum and minimum purchase limitations set forth in the plan of conversion and as described below under “— Limitations on Purchases of Common Stock.”

     Priority 1: Eligible Members. Each eligible member will receive, without payment, nontransferable subscription rights to purchase shares, subject to the overall purchase limitations. See “— Limitations on Purchases of Common Stock.”

     If there are not sufficient shares available to satisfy all subscriptions by eligible members, shares will be allocated first among subscribing eligible members so as to permit each such eligible member, to the extent possible, to purchase the lesser of: (i) the number of shares for which he or she subscribed, or (ii) 1,000 shares. Any shares remaining after such allocation will be allocated among the subscribing eligible members whose subscriptions remain unfilled on a pro rata basis based on the amount that each eligible member subscribed to purchase, provided that no fractional shares will be issued.

     Priority 2: ESOP. The ESOP will receive, without payment, second priority, nontransferable subscription rights to purchase, in the aggregate, that number of shares equal to 10% of the common stock to be issued in the offering. The ESOP intends to purchase 10% of the shares of common stock, or between 450,500 shares and 677,222 shares, based on the minimum and adjusted maximum of the offering range, respectively. Subscriptions by the ESOP will not be aggregated with shares of common stock purchased directly by or which are otherwise attributable to any other participants in the offering, including subscriptions of any of Penn Millers’ directors, officers, or employees. Any oversubscription by the eligible members will not reduce the number of shares that the ESOP may purchase in the offering. In that event, the number of shares to be issued in the offering will be increased by such number of shares as is necessary to permit the ESOP to purchase 10% of the total number of shares issued in the offering. See “Management — Benefit Plans and Employment Agreements — Employee Stock Ownership Plan,” and “ — Limitations on Purchases of Common Stock.”

     Priority 3: Directors, Officers, and Employees. To the extent that there are sufficient shares remaining after satisfaction of all subscriptions by eligible members and the ESOP, then Penn Millers’ directors, officers, and employees will each receive, without payment, third priority, nontransferable subscription rights to purchase up to 5% of the total shares of common stock sold in the offering. The ability of the directors, officers, and employees to purchase common stock under this category is in addition to rights that are otherwise available to them under the plan of conversion if they fall within higher priority categories, provided that they do not exceed the              share limitation on purchases set forth in the preceding sentence. See “— Limitations on Purchases of Common Stock.” For information as to the number of shares proposed to be purchased by the directors and executive officers, see “— Proposed Management Purchases.”

     In the event of an oversubscription among the directors, officers, or employees, any available shares will be allocated on a pro rata basis based on the amount that each person subscribed to purchase.

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Community Offering

     To the extent that shares remain available for purchase after satisfaction of all subscriptions of eligible members, the ESOP, and the directors, officers and employees in the subscription offering described above, we may elect to accept offers received in the community offering to the extent of any remaining shares. The community offering, if any, will commence at the same time as, during, or promptly after the subscription offering and will end no later than 45 days after the end of the subscription offering.

     In the community offering, we, in our sole and absolute discretion, may give preference to orders received from the following categories of persons before proceeding to accept orders from the general public:

• licensed insurance agencies and brokers that have been appointed by or otherwise are under contract with Penn Millers Insurance Company to market and distribute policies of insurance;

• named insureds under policies of insurance issued by Penn Millers Insurance Company after April 22, 2009; and

• natural persons and trusts of natural persons (including individual retirement and Keogh retirement accounts and personal trusts in which such natural persons have substantial interests) who are residents of Lackawanna or Luzerne Counties, Pennsylvania.

     Subject to the preferences described above, the common stock offered in the community offering will be offered and sold in a manner designed to achieve a wide distribution of the common stock. In the event of oversubscription, subject to the preferences described above and our right to accept or reject, in our sole discretion, any order received in the community offering, any available shares will be allocated so as to permit each person whose order is accepted in the community offering to purchase, to the extent possible, the lesser of 1,000 shares and the number of shares subscribed for by such person. Thereafter, any available shares will be allocated among accepted orders that have not been filled on a pro rata basis based on the amount each person subscribed to purchase.

     The opportunity to submit an order for shares of common stock in the community offering category is subject to our right, in our sole discretion, to accept or reject any such orders in whole or in part either at the time of receipt of an order or as soon as practicable following the expiration of the community offering.

Syndicated Community Offering

     As a final step in the offering, if there are any shares of common stock not purchased in the subscription and community offerings, they may be offered for sale to the public in a syndicated

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community offering. This syndicated community offering would be commenced at our sole discretion. A syndicated community offering would be made through a group of registered broker-dealers to be formed and managed by Griffin Financial on our behalf. We would reserve the right to reject orders in whole or part in our sole discretion in a syndicated community offering. Neither Griffin Financial nor any registered broker-dealer will have any obligation to take or purchase any shares of the common stock in the syndicated community offering. However, Griffin Financial has agreed to use its best efforts in the sale of shares in the syndicated community offering.

     The price at which common stock would be sold in the syndicated community offering would be $10.00 per share. Shares of common stock purchased in the syndicated community offering would be combined with purchases in the subscription and community offerings for purposes of this offering’s maximum purchase limitation of 5% of the total shares sold in the offering.

     If a syndicated community offering is held, Griffin Financial will serve as sole book-running manager. In such capacity, Griffin Financial may form a syndicate of other broker-dealers who are Financial Industry Regulatory Authority (formerly NASD) member firms. Neither Griffin Financial nor any registered broker-dealer will have any obligation to take or purchase any shares of common stock in the syndicated community offering. The syndicated community offering will be conducted in accordance with certain Securities and Exchange Commission rules applicable to best efforts offerings. Generally, under those rules, Griffin Financial, in its capacity as a broker-dealer, will deposit funds it receives prior to closing from interested investors into a separate noninterest-bearing bank account. If and when all the conditions for the closing are met, funds for common stock sold in the syndicated community offering will be promptly delivered to us. If the offering is consummated, but some or all of an interested investor’s funds are not accepted by us, those funds will be returned to the interested investor promptly, without interest. If the offering is not consummated, funds in the account will be promptly returned, without interest, to the potential investor. Normal customer ticketing will be used for order placement. In the syndicated community offering, order forms will not be used.

     A syndicated community offering, if necessary, will terminate no more than 45 days after the end of subscription offering.

Stock Pricing and Number of Shares to be Issued

     The plan of conversion requires that the purchase price of the common stock be based on a valuation of our estimated consolidated pro forma market value. The valuation must be in the form of a range consisting of a midpoint valuation, a valuation fifteen percent (15%) above the midpoint valuation and a valuation fifteen percent (15%) below the midpoint valuation. Curtis Financial has determined that, as of April 1, 2009, our estimated consolidated pro forma market value is between $45.05 million and $60.95 million.

     Under the plan of conversion, the total purchase price of the common stock to be sold in the offering must be compatible with the pro forma market value of Penn Millers Mutual, on a consolidated basis.

     We determined to offer the common stock in the offering at the price of $10 per share to ensure a sufficient number of shares are available for purchase by policyholders. In addition, Griffin Financial advised us that the $10 per share offering price is commonly used in mutual-to-stock conversions of other insurance companies and savings banks and savings associations that use the subscription rights model. These were the only factors considered by our board of directors in determining to offer shares of common stock at $10 per

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share. The purchase price will be $10 per share regardless of any change in the consolidated pro forma market value of Penn Millers Mutual, as determined by Curtis Financial.

     We plan to issue between 4,505,000 and 6,095,000 shares (exclusive of the purchase by the ESOP) of our common stock in the offering. This range was determined by dividing the $10.00 price per share into the range of Curtis Financial’s valuation. Our ESOP will purchase between 450,500 and 677,222 shares of common stock in the offering.

     At the completion of the offering, but prior to our acceptance of any subscription orders in the offering, Curtis Financial will submit an updated valuation of the consolidated pro forma market value of Penn Millers Mutual as of the last day of the offering. Curtis Financial will take into account factors similar to those involved in its initial valuation. If the updated valuation does not fall within the estimated valuation range of the earlier valuation, we may cancel the offering, establish a new valuation range, extend, re-open or hold a new offering or take any other action we deem to be reasonably necessary. If we proceed with this offering using the updated valuation, people who submitted subscriptions or orders will be promptly notified by mail of the updated valuation and revised offering range. In that case, people will be given an opportunity to confirm, modify, or cancel their subscriptions and orders. See “— Resolicitation.” The funds of anyone who does not modify or confirm his subscription or order will be returned promptly without interest. Subscriptions and orders may not be withdrawn for any reason if the updated valuation is within the estimated valuation range of the earlier valuation.

     There is a difference of approximately $15.9 million between the low end and the high end of the estimated valuation range of Curtis Financial’s valuation. As a result, the percentage interest in Penn Millers that a subscriber for a fixed number of shares of common stock will have is approximately 26.1% greater if 4,505,000 shares are sold than if 6,095,000 shares are sold. In addition, assuming that the actual consolidated market value of Penn Millers Mutual will be within the broad estimated valuation range, this consolidated market value may be materially more or less than the total amount of subscriptions and orders received. Therefore, purchasers, in total and on a per share basis, may pay more for the common stock than the actual market value.

     We cannot assure you that the market price for the common stock immediately following the offering will equal or exceed $10 per share. Also, you should be aware that, prior to the completion of the offering, you will not have available to you information concerning the final updated valuation. The final updated valuation will be filed with the Securities and Exchange Commission as part of a post-effective amendment to the registration statement of which this prospectus forms a part. See “Additional Information.”

If Subscriptions Received in the Subscription Offering Meet or Exceed the Maximum Number of Shares Offered

     If, after the subscription offering, the number of shares subscribed for by eligible members, the ESOP, and the directors, officers and employees of Penn Millers in the subscription offering is equal to or greater than 6,095,000 shares, the offering will be promptly completed. We will, upon completion of the offering, issue shares of common stock to the subscribing participants, including to our ESOP. However, except for the shares purchased by the ESOP, the number of shares of common stock issued will not exceed 6,095,000 shares of common stock being offered. In the event of an oversubscription in the subscription offering, shares of common stock will be allocated among the subscribing participants in the priorities set forth in the plan of conversion. No fractional shares of common stock will be issued.

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If Subscriptions Received in the Subscription Offering Meet or Exceed the Required Minimum

     If the number of shares of common stock subscribed for by eligible members, the ESOP, and Penn Millers’ directors, officers and employees in the subscription offering is equal to or greater than 4,505,000 shares, but less than 6,095,000 shares, then we may choose to promptly complete the offering. However, prior to doing so, we will have the right in our absolute discretion to accept, in whole or in part, or reject orders received from any or all persons in the community offering. We also will have the right to offer shares of common stock to purchasers in a syndicated community offering. In any event, on the effective date we will issue to those persons purchasing in the subscription offering shares of common stock in an amount sufficient to satisfy the accepted subscriptions in full, including the subscription of the ESOP for 10% of the shares issued in the offering. No more than 6,772,222 shares of common stock will be issued in the conversion offering (including the shares issued to the ESOP). No fractional shares of common stock will be issued.

If Subscriptions Received in the Subscription Offering Do Not Meet or Exceed the Maximum

     If the number of shares of common stock subscribed for by eligible members, the ESOP, and Penn Millers’ directors, officers and employees in the subscription offering is less than 6,095,000 shares, we may, in our absolute discretion, accept other orders. We may accept orders received from purchasers in the community offering, and we may sell shares of common stock to purchasers in a syndicated community offering so that the aggregate number of shares of common stock sold in this offering is no greater than 6,772,222 shares. At that time, the offering will be promptly completed.

     Upon completion of the offerings, we will first issue to subscribing eligible members and directors, officers and employees of Penn Millers shares of common stock in an amount sufficient to satisfy their subscriptions in full. Next, we will issue to persons whose orders in the community offering (and if we conduct a syndicated community offering, to persons whose orders in the syndicated community offering) are accepted, sufficient additional shares of common stock so that the total number of shares of common stock to be issued in the offering, including the shares to be issued to the ESOP, will be equal to at least 4,505,000 shares. No fractional shares of common stock will be issued. In order to raise additional capital, we may in our absolute discretion elect to issue in excess of 4,505,000 shares of common stock by accepting orders of purchasers in the community offering and any syndicated offering. The number of shares of common stock issued in the offering cannot exceed 6,772,222 shares of common stock (including shares issued to the ESOP). See “— Community Offering” and “— Syndicated Community Offering” above.

If Subscriptions and Orders Received in All of the Offerings Combined Do Not Meet the Required Minimum

     If properly completed subscriptions and orders for less than 4,505,000 shares are received, then we may choose to cancel this offering and return all funds received in the offering, without interest, or we may cause a new valuation of the consolidated pro forma market value of Penn Millers Mutual to be performed, and based on this valuation commence a new offering of the common stock. If we elect to commence a new offering, each purchaser will be required to cancel, modify or confirm his or her order.

Resolicitation

     In the event that an updated valuation is provided by Curtis Financial that does not fall within the estimated valuation range, and we determine to proceed with the offering, we will resolicit those who have previously subscribed for shares in the subscription and community offerings and any syndicated community offering. In a resolicitation, subscribers will have the opportunity to confirm, modify, or cancel their stock orders within a specified period. If a purchaser in the subscription or community

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offerings and any syndicated community offering does not respond during the resolicitation period, the stock order will be cancelled and payment will be returned promptly without interest. We will also resolicit purchasers in the event that the offering is extended beyond                     , 2009.

The Valuation

     The plan of conversion requires that the aggregate purchase price of the common stock must be based on the appraised estimated consolidated pro forma market value of the common stock, as determined on the basis of an independent valuation. This pro forma market value may be that value that is estimated to be necessary to attract full subscription for the shares, as indicated by the valuation. It also may be stated as a range of pro forma market values.

     The plan of conversion requires that the valuation be made by an independent appraiser experienced in the valuation of insurance companies and that the purchase price of our common stock be based on the appraised estimated consolidated pro forma market value of Penn Millers Mutual, as determined on the basis of such independent valuation. On October 27, 2008, we retained Curtis Financial Group, LLC to prepare a valuation in connection with a plan of minority stock offering, which was subsequently terminated in favor of the current plan of conversion. On March 30, 2009, we retained Curtis Financial to prepare this valuation. Curtis Financial is engaged regularly in the valuation of insurance companies and other financial institutions. There is no pre-existing relationship between Curtis Financial and Penn Millers.

     Collectively, for those engagements. Curtis Financial will be paid a fixed fee of $186,000 plus out-of-pocket expenses. This fee is not contingent on the completion of the offering. We agreed, among other things, to indemnify Curtis Financial from and against any and all loss or expenses, including reasonable attorney’s fees, in connection with its appraisal and other services, except if such loss or expenses are the result of a lack of good faith or gross negligence on the part of Curtis Financial.

     Curtis Financial made its appraisal in reliance upon the information contained in this document and information provided by management of Penn Millers, including the financial statements. Curtis Financial also considered the following factors, among others:

• the present and projected operating results and financial condition of Penn Millers and current economic conditions;

• certain historical, financial and other information relating to Penn Millers;

• a comparative evaluation of the operating and financial statistics of Penn Millers with those of other similarly situated publicly traded insurance companies located in Pennsylvania and other regions of the United States;

• the aggregate size of the offering of the common stock of Penn Millers Holding Corporation as determined by Curtis Financial;

• the impact of the conversion offering on our net worth and earnings potential as determined by Curtis Financial;

• the trading market for securities of comparable institutions and general conditions in the market for such securities; and

• the value which Curtis Financial estimates to be necessary to attract a full subscription of our common stock.

     In conducting its analysis of Penn Millers, Curtis Financial placed emphasis on various financial and operating characteristics of Penn Millers, including our lines of business and competitive position in

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the industry, our relative size and premium volume, our operating results in recent years, and our ratio of equity capital to total assets. In addition to the factors listed above, in its review of the appraisal provided by Curtis Financial, our board of directors reviewed the methodologies and the appropriateness of the assumptions used by Curtis Financial and determined that such assumptions were reasonable.

     In preparing the appraisal, Curtis Financial visited our corporate headquarters and conducted discussions with our management concerning our business and future prospects. Curtis Financial reviewed and discussed with our management our audited GAAP and statutory financial statements for the years ended December 31, 2003 through December 31, 2008.

     In deriving its estimate of the estimated consolidated pro forma market value of Penn Millers, Curtis Financial utilized the comparative market valuation approach. The comparative market valuation approach estimates a value by reviewing the relevant market pricing characteristics of comparable companies that are publicly traded. Curtis Financial selected a group of publicly traded insurance companies based on criteria relating to asset size, profitability level, and market segment, among other factors. In determining the composition of the comparative group, Curtis Financial focused exclusively on publicly traded property and casualty insurance companies. Curtis Financial utilized the asset size and market capitalization selection criteria to encompass a meaningful number of companies for inclusion in the comparative group. The size and market capitalization criteria considered companies included in the lower quartile of all publicly traded property and casualty companies.

     Curtis Financial reviewed the trading market price ratios of the comparable companies for the purpose of developing valuation ratio benchmarks to reach an estimate of value for Penn Millers. The principal valuation measure considered by Curtis Financial was the price-to-book value ratio. Curtis Financial also considered the price-to-earnings and price-to-assets ratios. Based on the quantitative and qualitative comparisons of Penn Millers with the selected group of publicly traded companies, Curtis Financial applied adjusted market pricing ratios to our pro forma financial data to determine our estimated consolidated pro forma market value. The market pricing ratios determined by Curtis Financial took into account market value adjustments for our earnings prospects, our management, liquidity of our shares of common stock, subscription interest, stock market conditions, dividend outlook and the new issue discount warranted for an equity securities offering.

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     The following table sets forth the publicly traded insurance companies used by Curtis Financial in its comparative market valuation approach and certain financial data reviewed by Curtis Financial regarding these companies and Penn Millers as of or for the last twelve months (LTM) ended December 31, 2008.

					LTM(1)		Total
	Total		Total		Total		Equity/		LTM		LTM
	Assets		Equity		Revenue		Assets		ROAA(1)		ROAE(1)
	($000s)		($000s)		($000s)		(%)		(%)		(%)
Comparative Group
21st Century Holding Company		197,110		76,231		67,356		38.7		-1.2		-3.0
Baldwin & Lyons, Inc.		777,743		330,067		156,930		42.4		-0.9		-2.2
CRM Holdings, Ltd.		444,192		108,860		143,171		24.5		-0.4		-1.3
Donegal Group Inc.		880,109		363,584		372,312		41.3		2.9		7.2
Eastern Insurance Holdings, Inc.		377,311		138,137		131,204		36.6		-4.5		-10.8
EMC Insurance Group Inc.		1,108,099		282,916		413,892		25.5		-0.2		-0.5
First Mercury Financial Corporation		943,653		261,637		215,367		27.7		4.7		16.2
Hallmark Financial Services, Inc.		538,398		179,412		268,690		33.3		2.4		6.9
Mercer Insurance Group, Inc.		568,986		137,270		161,462		24.1		1.5		6.1
National Interstate Corporation		990,812		216,074		293,716		21.8		1.1		5.0
National Security Group, Inc.		124,890		34,648		61,233		27.7		-3.8		-12.3
NYMAGIC, INC.		946,476		164,073		56,181		17.3		-10.2		-46.5
SeaBright Insurance Holdings, Inc.		842,687		324,813		267,262		38.5		3.7		9.5
Unico American Corporation		184,603		76,958		46,770		41.7		2.8		7.3
Comparative Group Mean		637,505		192,477		189,682		31.5		-0.1		-1.3
Comparative Group Median		673,365		171,743		159,196		30.5		0.5		2.2
Penn Millers		220,524		50,755		78,664		23.0		-2.0		-8.0

(1) LTM corresponds to last twelve months ended December 31, 2008. Return on average assets (ROAA), which is the ratio of net income to total average assets, and the return on average equity (ROAE), which is the ratio of net income to total average equity, utilize net income for the LTM period and asset book values at December 31, 2008 and 2007 to derive such ratios.

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     The following table sets forth for the publicly traded insurance companies used by Curtis Financial certain market valuation data reviewed by Curtis Financial regarding these companies based on closing market prices as of April 1, 2009.

	Total		Price/		Price/		Price/		Price/		Price/
	Market		Book		Tang.		LTM		LTM		Total
	Value		Value		Book		EPS(1)		Rev.(1)		Assets
	($000s)		(%)		(%)		(x)		(x)		(%)
Comparative Group
21st Century Holding Company		26,446		34.7		34.7	Neg			0.39		13.4
Baldwin & Lyons, Inc.		291,789		88.4		89.3	Neg			1.86		37.5
CRM Holdings, Ltd.		10,389		9.5		9.8	Neg			0.07		2.3
Donegal Group Inc.		387,790		106.7		106.9		15.21		1.04		44.1
Eastern Insurance Holdings, Inc.		66,569		48.2		56.3	Neg			0.57		17.6
EMC Insurance Group Inc.		285,489		100.4		101.2	Neg			0.69		25.8
First Mercury Financial Corporation		267,649		102.3		136.0		6.66		1.24		28.4
Hallmark Financial Services, Inc.		137,587		76.7		125.8		10.66		0.51		25.6
Mercer Insurance Group, Inc.		89,465		65.2		68.0		11.08		0.55		15.7
National Interstate Corporation		327,084		151.4		151.4		30.69		1.11		33.0
National Security Group, Inc.		26,763		77.2		77.2	Neg			0.44		21.4
NYMAGIC, INC.		95,959		58.5		58.5	Neg			1.71		10.1
SeaBright Insurance Holdings, Inc.		227,340		70.0		71.0		7.71		0.85		27.0
Unico American Corporation		42,165		54.8		54.8		8.06		0.90		22.8
Comparative Group Mean		163,035		74.6		81.5		12.87		0.85		23.2
Comparative Group Median		116,773		73.3		74.1		10.66		0.77		24.2
Penn Millers (Fully Converted)
Pro Forma Minimum		45,050		51.2		52.7	Neg			0.57		17.5
Pro Forma Midpoint		53,000		55.7		57.3	Neg			0.66		20.0
Pro Forma Maximum		60,950		59.7		61.3	Neg			0.76		22.4

(1) LTM EPS corresponds to earnings per share for the last twelve months ended December 31, 2008. LTM revenue corresponds to total revenue for the last twelve months ended December 31, 2008.

     Curtis Financial determined that the price-to-earnings ratio was not applicable due to our relatively low average returns on equity and assets in recent reporting periods and our negative profitability in the LTM period. Thus, the price-to-book value ratio takes on additional meaning as a valuation metric. Curtis Financial also relied upon the price to asset ratio to confirm its valuation conclusion was reasonable. Based on its comparative analyses, Curtis Financial concluded that our estimated consolidated pro forma market value at the midpoint warranted a discount in the range of approximately 20% to 30% relative to the comparative group based on the price-to-book value ratio.

     Curtis Financial’s valuation appraisal of our estimated consolidated pro forma market value was prepared as of April 1, 2009. Curtis Financial has agreed to update its valuation at the conclusion of the offering, and otherwise as requested by us. These updates will consider developments in general stock market conditions, current stock market valuations for selected insurance companies, the results of the subscription offering, and the recent financial condition and operating performance of Penn Millers.

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     On the basis of the foregoing, Curtis Financial gave its opinion, dated April 1, 2009, that the estimated consolidated pro forma market value of our common stock ranged from a minimum of $45.05 million to a maximum of $60.95 million with a midpoint of $53.0 million. We determined that the common stock should be sold at $10.00 per share, resulting in a range of 4,505,000 to 6,095,000 shares of common stock being offered in the offering, which amount may be increased to 6,772,222 shares solely to accommodate the purchase by the ESOP of 10% of the shares sold in the subscription offering. The offering range may be amended if required or if necessitated by subsequent developments in our financial condition or market conditions generally. In the event the offering range is updated to amend the value of Penn Millers below $45.05 million or above $60.95 million, and we decide to proceed with the offering, the new appraisal will be filed with the SEC by post-effective amendment to the registration statement of which this prospectus is a part.

     No sale of shares of common stock in the offering may be consummated unless Curtis Financial first confirms that nothing of a material nature occurred that, taking into account all relevant factors, would cause it to conclude that the purchase price is materially incompatible with the estimate of the consolidated pro forma market value of our outstanding common stock upon completion of the offering. If this confirmation is not received, Penn Millers may cancel the offering, extend the offering period and establish a new estimated offering range and/or estimated price range, extend, reopen or hold a new offering or take any other action we deem necessary.

     Depending upon market or financial conditions, the total number of shares of common stock offered may be increased or decreased without a resolicitation of subscribers, provided that the aggregate gross proceeds are not below the minimum or more than the maximum of the offering range. In the event market or financial conditions change so as to cause the aggregate purchase price of the shares to be below the minimum of the offering range, purchasers will be resolicited and be permitted to continue their orders, in which case they will need to confirm their subscriptions prior to the expiration of the resolicitation offering or their subscription funds will be promptly refunded, or be permitted to modify or rescind their subscriptions. If the number of shares of common stock issued in the offering is increased due to an increase in the offering range to reflect changes in market or financial conditions, persons who subscribed for the maximum number of shares will be given the opportunity to subscribe for the adjusted maximum number of shares. See “— Limitations on Purchases of Common Stock.”

     An increase in the number of shares of common stock as a result of an increase in the estimated consolidated pro forma market value would decrease both a purchaser’s ownership interest and our pro forma shareholders’ equity on a per share basis while increasing pro forma shareholders’ equity on an aggregate basis. A decrease in the number of shares of common stock would increase both a purchaser’s ownership interest and our pro forma shareholders’ equity on a per share basis while decreasing pro forma shareholders’ equity on an aggregate basis. The effect on pro forma net income and pro forma net income per share of any increase or decrease in the number of shares issued will depend on the manner in which we use the proceeds from the offering. See “Unaudited Pro Forma Financial Information.”

     The appraisal report of Curtis Financial is an exhibit to the registration statement of which this prospectus is a part, and is available for inspection in the manner set forth under “Additional Information.”

     The Pennsylvania Insurance Department is not required to review or approve the valuation prepared by Curtis Financial in connection with this offering.

     The valuation is not intended, and must not be construed, as a recommendation of any kind as to the advisability of purchasing common stock. In preparing the valuation, Curtis Financial relied upon and assumed the accuracy and completeness of financial, statistical and other information provided to it by Penn Millers. Curtis Financial did not independently verify the financial statements

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and other information provided to it by Penn Millers, nor did Curtis Financial value independently our assets and liabilities. The valuation considers Penn Millers only as a going concern and should not be considered as an indication of our liquidation value. The valuation is necessarily based upon estimates and projections of a number of matters, all of which are subject to change from time to time. We cannot assure you that persons purchasing common stock will be able to sell such shares at or above the initial purchase price. Copies of the valuation report of Curtis Financial setting forth the method and assumptions for its valuation are on file and available for inspection at our principal executive offices. Any subsequent updated valuation report of Curtis Financial will be available for inspection.

Offering Deadline

     The stock offering will expire at noon, Eastern Time, on                     , 2009, unless on or prior to that date our board of directors extends the offering, which we may do without notice to you. Subscription rights not exercised prior to the termination date of this offering will be void. If this offering is extended more than 45 days after the original expiration date, we will resolicit subscribers offering them the opportunity to modify, cancel or confirm their orders. The method for modifying, cancelling, or confirming a subscription will be described in our notice of extension. If a subscriber does not modify or confirm his or her subscription by the extended termination date, the subscriber’s funds will be returned promptly without interest. We reserve the right in our sole discretion to terminate the offering at any time and for any reason, in which case we will cancel your order and return your payment without interest.

     Subscriptions and orders for common stock will not be accepted by us until we receive subscriptions and orders for at least 4,505,000 shares of common stock. If we have not received subscriptions and orders for at least 4,505,000 shares of common stock by the expiration date of this offering, all funds delivered to us for the purchase of stock in this offering will be promptly returned to purchasers without interest.

Use of Order Forms in This Offering

     Any person or entity who wants to subscribe for or order shares of common stock in this offering must sign and complete the stock order form and return it to us so that it is received (not postmarked) no later than noon, Eastern Time, on                     , 2009, together with full payment for all shares for which the order is made. The stock order form should be delivered in-person or mailed to the Stock Information Center located at the offices of Penn Millers Insurance Company at 72 North Franklin Street, Wilkes-Barre, Pennsylvania 18773. Payment by check or money order must accompany the stock order form. No cash, wire transfers, or third party checks will be accepted. All checks or money orders must be made payable to “BNY Mellon, escrow agent.” Unless the subscription offering is extended, all subscription rights under the offering will expire at noon, Eastern Time, on the termination date of this offering, whether or not we have been able to locate each person or entity entitled to subscription rights. Once tendered, orders to purchase common stock in the offering cannot be modified or revoked without our consent.

     No prospectus will be mailed any later than five days prior to the termination date of this offering, or hand delivered any later than two days prior to such date. This procedure is intended to ensure that each purchaser receives a prospectus at least 48 hours prior to the termination of the offering in accordance with Rule 15c2-8 under the Securities Exchange Act of 1934. Execution of the stock order form will confirm receipt or delivery in accordance with Rule 15c2-8. Stock order forms will be distributed only with or preceded by a prospectus. Photocopies and facsimile copies of stock order forms will not be accepted.

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     A subscription right may be exercised only by the eligible member, director, officer, or employee to whom it is issued and only for his or her own account. The subscription rights granted under our plan of conversion are nontransferable. Each eligible member, director, officer, or employee subscribing for shares of common stock is required to represent that he or she is purchasing the shares for his or her own account. Each eligible member, director, officer, or employee also must represent that he or she has no agreement or understanding with any other person or entity for the sale or transfer of the shares. We are not aware of any restrictions that would prohibit eligible members who purchase shares of common stock in the offering and who are not executive officers or directors of Penn Millers from freely transferring shares after the offering. See “— Limitations on Resales” herein.

     We shall have the absolute right, in our sole discretion, and without liability to any person, to reject any stock order form, including but not limited to a stock order form that is:

• not timely received;

• improperly completed or executed;

• is not accompanied by payment in full for the shares of common stock subscribed for in the form; or

• submitted by a person who we believe is making false representations or who we believe may be violating, evading or circumventing the terms and conditions of the plan of conversion.

     We may, but are not required to, waive any incomplete, inaccurate or unsigned stock order form. We also may require the submission of a corrected stock order form or the remittance of full payment for the shares of common stock subscribed for by any date that we specify. Our interpretations of the terms and conditions of the plan of conversion and determinations concerning the acceptability of the stock order forms will be final, conclusive and binding upon all persons. We (and our directors, officers, employees and agents) will not be liable to any person or entity in connection with any interpretation or determination.

Payment for Shares

     When you submit a completed stock order form to us, you must include payment in full for all shares of common stock covered by such order form. Payment may be made by check or money order in U.S. dollars and must be made payable to “BNY Mellon, escrow agent.” Payments will be placed in an escrow account at Bank of New York Mellon, who will serve as the escrow agent. The escrow account will be administered by the escrow agent. An executed stock order form, once received by us, may not be modified or rescinded without our consent. Funds accompanying stock order forms will not be released to us until the offering is completed.

     The ESOP will not be required to pay for shares at the time it subscribes, but will be required to pay for its shares at or before the completion of this offering.

Delivery of Certificates

     Certificates representing shares of the common stock will be mailed by our transfer agent to the persons entitled thereto at the addresses indicated on the order forms by such persons as soon as practical following completion of the offering. Until certificates are delivered to purchasers, you may not be able to sell the shares even though trading of the common stock will have begun.

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Stock Information Center

     If you have any questions regarding the offering, please call the Stock Information Center at 1-800-          -          , Monday through Friday from 10:00 a.m. to 4:00 p.m., Eastern Time. The Stock Information Center will be closed on weekends. Our Stock Information Center is located at the offices of Penn Millers Insurance Company at 72 North Franklin Street, Wilkes-Barre, Pennsylvania 18773. Additional copies of the materials will be available at the Stock Information Center.

Marketing and Underwriting Arrangements

     We have engaged Griffin Financial as a marketing agent in connection with the offering of the common stock in the offering. Griffin Financial has agreed to use its best efforts to assist us with the solicitation of subscriptions and purchase orders for shares of common stock in the offering.

     Stevens & Lee is acting as counsel to Griffin Financial in connection with the offering and, together with independent counsel retained by us, is also acting as our counsel in connection with the offering. Griffin Financial is an indirect, wholly owned subsidiary of Stevens & Lee. You should be aware that conflicts of interest may arise in connection with this transaction because Stevens & Lee is serving as an advisor to both us and the underwriter of the offering. The independent directors of the Company have retained independent counsel to help address these conflicts of interest, which potentially include differences between the Company’s interest in preceding with the offering and that of Griffin Financial.

     Pursuant to our engagement letter with Stevens & Lee, Stevens & Lee has agreed to perform its services for an aggregate fixed fee of $800,000 plus out-of-pocket expenses. Griffin Financial will receive an amount equal to 1.5% of the aggregate dollar amount of stock sold in the subscription and community offering, which shall be deemed a commission payable to Griffin for its services, less a $50,000 retainer fee and $50,000 paid to Griffin Financial upon the filing of this registration statement. Of Stevens & Lee’s $800,000 fee, an amount equal to $150,000 shall be deemed payable to Stevens & Lee for services as Griffin’s underwriters’ counsel.

     In the event the offering is abandoned for any reason, we will pay Stevens & Lee its accrued and unpaid legal fees, but in no event shall such fees (including fees previously paid) exceed $600,000.

     We will pay an additional fee to Griffin Financial if we conduct a syndicated offering and any shares are sold under a selected dealers’ agreement with one or more FINRA member firms. We will pay a sales commission to each selected dealer, any sponsoring dealer’s fees, and a management fee to Griffin Financial in the aggregate of 5.5% of the total purchase price of the shares sold in any syndicated offering.

     The following table sets forth commissions payable to Griffin Financial at the minimum and maximum number of shares sold in the offering, assuming that no shares are sold in a syndicated offering:

	Minimum		Maximum
	(4,505,000 shares)		(6,095,000 shares)
Commissions		$675,750(1)		$914,250(1)

(1) Includes the $100,000 in fees already paid to Griffin Financial, which will be credited against any commissions payable to Griffin Financial.

     Fees to Griffin Financial and to any other broker-dealer may be deemed to be underwriting fees. Griffin Financial and any other broker-dealers may be deemed to be underwriters. If the offering is not

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consummated or Griffin Financial ceases under certain circumstances to provide assistance to us, Griffin Financial will be reimbursed for its reasonable out-of-pocket expenses. Griffin Financial has no residual rights under the engagement letter to represent us or receive any payment from us in connection with any future financings, mergers, asset sales or any other transaction.

     The Griffin Financial engagement letter also contains customary indemnification provisions. We have agreed to indemnify Griffin Financial for its liabilities, costs and expenses, including legal fees, incurred in connection with certain claims or litigation arising out of or based upon untrue statements or omissions contained in this prospectus, including liabilities under the Securities Act of 1933.

      Bank of New York Mellon will perform records management services and escrow agent services for us in the offering. Bank of New York Mellon will receive a fee for this service, plus reimbursement of reasonable out-of-pocket expenses incurred in performing this service.

     Our directors and executive officers may participate in the solicitation of offers to purchase common stock in this offering. Questions from prospective purchasers will be directed to executive officers or registered representatives. Our employees have been instructed not to solicit offers to purchase common stock or provide advice regarding the purchase of common stock. We will rely on Rule 3a4-1 under the Exchange Act, and sales of common stock will be conducted within the requirements of Rule 3a4-1, so as to permit officers, directors and employees to participate in the sale of common stock. None of our officers, directors or employees will be compensated in connection with his or her participation in this offering.

Limitations on Purchases of Common Stock

     The plan of conversion provides for certain limitations on the purchase of shares in the offering:

• No person or entity may purchase fewer than 25 shares of common stock in the offering.

• No purchaser may purchase more than 5% of the total shares of common stock sold in the offering.

• No purchaser, together with such purchaser’s affiliates and associates or a group acting in concert, may purchase more than 5% of the total shares of common stock sold in the offering.

     Therefore, if any of the following persons purchase stock, their purchases when combined with your purchases cannot exceed 5% of the total shares of common stock sold in the offering:

• any corporation or organization (other than an affiliate of Penn Millers) of which you are an officer or partner or the beneficial owner of 10% or more of any class of equity securities;

• any trust or other estate in which you have a substantial beneficial interest or as to which you serve as trustee or in a similar fiduciary capacity;

• any of your relatives or your spouse, or any relative of your spouse, who lives at home with you;

• any person or entity who you control, who controls you, or who together with you is controlled by the same third party;

• any person or entity who is knowingly participating with you in a joint activity or interdependent conscious parallel action toward a common goal; or

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• any person or entity with whom you are combining or pooling voting or other interests in the securities of an issuer for a common purpose pursuant to any agreement or relationship.

     The above 5% share purchase limit does not apply to the ESOP, which intends to purchase 10% of the total number of shares of common stock issued in the offering.

     There are approximately 6,344 eligible members of Penn Millers Mutual, as determined by reference to the number of policyholders of Penn Millers Insurance Company as of April 22, 2009. If subscriptions by eligible members for common stock exceed the maximum of the estimated valuation range set forth in Curtis Financial’s valuation, we will be obligated to sell to eligible members the maximum number of shares offered. Except as set forth below under “— Proposed Management Purchases,” we are unable to predict the number of eligible members that may participate in the subscription offering or the extent of any participation.

     Shares of common stock to be purchased and held by the ESOP and allocated to a participant in the ESOP will not be aggregated with shares of common stock purchased by the participant or any other purchase of common stock in the offering for purposes of the purchase limitations discussed above.

     The officers and directors of Penn Millers, together with their affiliates and associates, may not purchase, in total, more than thirty-five percent (35%) of the shares of common stock issued in the offering. An associate is defined as:

• any corporation or organization (other than an affiliate of Penn Millers) of which the officer or director is an officer or partner or the beneficial owner of 10% or more of any class of equity securities;

• any trust or other estate in which the officer or director has a substantial beneficial interest or as to which he or she serves as trustee or in a similar fiduciary capacity; or

• any of the officer’s or director’s relatives or his or her spouse, or any relative of the spouse, who lives at home with the officer or director.

     Our directors will not be deemed to be associates of one another or a group acting in concert with other directors solely as a result of membership on our board of directors.

     Subject to any required regulatory approval and the requirements of applicable law, we may increase or decrease any of the purchase limitations at any time. If the individual purchase limitation is increased, we will permit any person or entity who subscribed for the maximum number of shares of common stock to purchase an additional number of shares up to the revised maximum. These additional shares will be subject to the rights and preferences of any person or entity who has priority subscription rights. If the individual purchase limitation or the number of shares of common stock to be sold is decreased, the order of any person or entity who subscribed for the maximum number of shares will be decreased to the new maximum. In the event that we change the maximum purchase limitation, we will distribute a prospectus supplement or revised prospectus to each person who placed an order for the previous maximum number of shares that an individual could purchase.

     Each person or entity purchasing common stock in the offering will be deemed to confirm that the purchase does not conflict with the purchase limitations under the plan of minority stock offering or otherwise imposed by law. If any person or entity violates the purchase limitations, we will have the right to purchase from that person or entity, at the purchase price of $10.00 per share, all shares acquired by the person or entity in excess of the purchase limitation. If the person or entity has sold these excess shares, we are entitled to receive the difference between the aggregate purchase price paid by the person or entity

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for the excess shares and the proceeds received by the person from the sale of the excess shares. This right of Penn Millers to purchase excess shares is assignable.

     We have the right in our absolute discretion and without liability to any purchaser, underwriter or any other person or entity to determine which orders, if any, to accept in the community offering or in the syndicated community offering. We have the right to accept or reject any order in whole or in part for any reason or for no reason. We also have the right to determine whether and to what extent shares of common stock are to be offered or sold in a syndicated community offering.

Proposed Management Purchases

     The following table lists the approximate number of shares of common stock that each of the directors and executive officers of Penn Millers Mutual and its subsidiaries and their affiliates and associates intend to purchase in the offering. These numbers include shares that each person and his associates intend to purchase. The directors and executive officers listed below do not have any agreements or obligation to purchase the amounts shown below. Each director or executive officer may elect to purchase an amount greater or less than those shown below, except that his or her purchase may not exceed 5% of the total shares sold in the offering. The table also shows the number of shares to be purchased by all directors and executive officers as a group, including the shares that all of their affiliates and associates intend to purchase, and other related information. For purposes of the following table, we have assumed that sufficient shares will be available to satisfy subscriptions in all categories.

Name	Amount ($)		Number of Shares(1)(2)		Percent (3)
Directors:
Heather M. Acker	$	50,000		5,000		*
F. Kenneth Ackerman, Jr.		100,000		10,000		*
Dorrance R. Belin		50,000		5,000		*
John L. Churnetski		75,000		7,500		*
John M. Coleman		200,000		20,000		*
Douglas A. Gaudet		300,000		30,000		*
Kim E. Michelstein		50,000		5,000		*
Robert A. Nearing, Jr.		75,000		7,500		*
James M. Revie		50,000		5,000		*
J. Harvey Sproul, Jr.		100,000		10,000		*
Executive Officers:
Michael O. Banks		100,000		10,000		*
Jonathan C. Couch		20,000		2,000		*
Harold Roberts		50,000		5,000		*
Kevin Higgins		50,000		5,000		*
Joseph Survilla		10,000		1,000		*
All Directors and Executive Officers as a Group (15 persons)	$	1,280,000		128,000		2.84	%

*	Less than one percent.
(1)	Does not include shares that will be allocated to employees under the ESOP. Under the ESOP, our employees will be allocated over time, in the aggregate, shares in an amount equal to 10% of the common stock issued in the offering (which equals between 450,500 shares if 4,505,000 shares are sold in the offering and 677,222 shares if 6,772,222 shares are sold in the offering).

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(2)

Does not include shares that would be issuable upon the exercise of options or the vesting of restricted stock awards granted under our proposed stock-based incentive plan. Under the stock-based incentive plan, we expect to grant to directors, executive officers and other employees options to purchase common stock and restricted stock awards in an aggregate amount equal to 14% of the shares issued in the offering (which equals between 630,700 shares if 4,505,000 shares are sold in the offering, and 948,111 shares if 6,772,222 shares are sold in the offering).

(3)

Assumes that 4,505,000 shares are issued in the offering, including the shares purchased by the ESOP.

Limitations on Resales

     The common stock issued in the offering will be freely transferable under the Securities Act of 1933. However, the transfer of shares issued to our directors and officers will be restricted for a period of six months from the effective date of the offering. The directors and officers of Penn Millers also are subject to additional resale restrictions under Rule 144 of the Securities Act of 1933. Shares of common stock issued to directors and officers will bear a legend giving appropriate notice of these restrictions. We will give instructions to the transfer agent for the common stock regarding these transfer restrictions. Any shares issued to the directors and officers of Penn Millers as a stock dividend, stock split or otherwise with respect to restricted stock will be subject to the same restrictions. Shares acquired by the directors and officers after the completion of the offering will be subject to the requirements of Rule 144. See “Management — Directors and Officers.”

Amendment or Termination of Plan of Conversion

     The plan of conversion may be amended or terminated at any time by our board of directors.

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FEDERAL INCOME TAX CONSIDERATIONS

General

     This is a general discussion of the material United States federal income tax considerations to:

• Penn Millers Mutual of the conversion of Penn Millers Mutual from a mutual holding company to a stock holding company;

• eligible members that are U.S. Persons that hold their membership interests in Penn Millers Mutual as a capital asset within the meaning of Section 1221 of the Internal Revenue Code of 1986, as amended (which we refer to as the Code), of the receipt, exercise and lapse of subscription rights to purchase shares of the common stock of Penn Millers Holding Corporation (which we refer to as our common stock) in the subscription offering;

• eligible members that are U.S. Persons that purchase shares of our common stock in the subscription offering upon the exercise of subscription rights and hold their shares of our common stock as a capital asset within the meaning of Section 1221 of the Code, of the acquisition, ownership and disposition of shares of our common stock purchased in the subscription offering; and

• other investors that are U.S. Persons that purchase shares of our common stock in the community offering and hold their shares of our common stock as a capital asset within the meaning of Section 1221 of the Code, of the acquisition, ownership and disposition of shares of our common stock purchased in the community offering.

     The following discussion is based, primarily, on private letter rulings that have been issued by the Internal Revenue Service to certain corporations unrelated to Penn Millers that have engaged in transactions that are analogous to the conversion. Under the Code, private letter rulings are directed only to the taxpayer that requested the rulings and they may not be used or cited as precedent by other taxpayers. In addition, some of the discussion below under “— Tax Consequences of Subscription Rights,” is outside the scope of the private letter rulings that have been issued by the Internal Revenue Service and is based on the Code, Treasury regulations promulgated under the Code, judicial authorities, published positions of the Internal Revenue Service and other applicable authorities, all as in effect on the date of this discussion and all of which are subject to change (possibly with retroactive effect) and to differing interpretations. No assurance can be given that the Internal Revenue Service would not assert, or that a court would not sustain, a position contrary to any part of the discussion under “— Tax Consequences of Subscription Rights,” below.

     The following discussion is directed solely to eligible members of Penn Millers Mutual that are U.S. Persons and hold membership interests in a qualifying policy as a capital asset within the meaning of Section 1221 of the Code, and it does not purport to address all of the United States federal income tax consequences that may be applicable to Penn Millers Mutual or to the individual circumstances of particular categories of eligible members of Penn Millers Mutual, in light of their specific circumstances. For example, if a partnership holds membership interests in a qualifying policy, the tax treatment of a partner will generally depend on the status of the partner and the activities of the partnership. If you are a partner of a partnership that holds membership interests in a qualifying policy, you should consult your tax advisor. In addition, the following discussion does not address aspects of United States federal income taxation that may be applicable to eligible members of Penn Millers Mutual subject to special treatment under the Code, such as financial institutions, insurance companies, pass-through entities, regulated investment companies, real estate investment trusts, financial asset securitization investment trusts, dealers or traders in securities or tax-exempt organizations, or any aspect of the U.S. alternative minimum tax or state, local or foreign tax consequences of the proposed transactions.

     For purposes of this discussion, the term “U.S. Person” means (a) a citizen or resident of the United States, (b) a corporation, or entity treated as corporation, created or organized in or under the laws of the United States or any political subdivision thereof, (c) an estate the income of which is subject to United States federal income taxation regardless of its source, (d) a trust if either (i) a court within the United States is able to exercise primary supervision over the administration of such trust and one or more U.S. Persons have the authority to control all substantial decisions of such trust or (ii) the trust has a valid election in effect to be treated as a U.S. Person for United States federal income tax purposes, or (e) any other person or entity that is treated for United States federal income tax purposes as if it were one of the foregoing.

     This discussion does not constitute tax advice and is not intended to be a substitute for careful tax planning. Each eligible member is urged to consult its own tax advisor with respect to the U.S. federal, state, local and non-U.S. income and other tax consequences of the receipt, exercise and lapse of subscription rights to purchase shares of our common stock in the subscription offering. Each prospective purchaser of shares of our common stock is urged to consult its own tax advisor with respect to the U.S. federal, state, local and non-U.S. income and other tax consequences of the acquisition, ownership and disposition of shares of our common stock purchased pursuant to this offering.

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The Conversion

     Based in substantial part on private letter rulings that have been issued by the Internal Revenue Service to certain corporations unrelated to Penn Millers that have engaged in transactions that are analogous to the conversion, we intend to take the position that, for federal income tax purposes:

• the conversion of Penn Millers Mutual from a mutual holding company to a stock holding company will be a reorganization within the meaning of Section 368(a)(1)(E) of the Code;

• Penn Millers Mutual in its post-conversion stock form will constitute one and the same taxable entity as Penn Millers Mutual in its pre-conversion mutual form;

• neither Penn Millers Mutual in its pre-conversion mutual form nor Penn Millers Mutual in its post-conversion stock form will recognize gain or loss as a result of the conversion; and

• the tax attributes of Penn Millers Mutual in its pre-conversion mutual form will remain unchanged as tax attributes of Penn Millers Mutual in its post-conversion stock form. Thus, Penn Millers Mutual’s basis in its assets, holding period for its assets, net operating loss carryovers, if any, capital loss carryovers, if any, earnings and profits and accounting methods will not be changed by reason of the conversion.

Tax Consequences of Subscription Rights

     Generally, the federal income tax consequences of the receipt, exercise and lapse of subscription rights are uncertain. They present novel issues of tax law that are not adequately addressed by any direct authorities. Nevertheless, based, primarily, on private letter rulings that have been issued by the Internal Revenue Service to certain corporations unrelated to Penn Millers that have engaged in transactions that are analogous to the conversion, we intend to take the position that, for U.S. federal income tax purposes:

• eligible members will be treated as transferring their membership interests in Penn Millers Mutual to Penn Millers Holding Corporation in exchange for subscription rights to purchase Penn Millers Holding Corporation common stock;

• any gain realized by an eligible member as a result of the receipt of a subscription right with a fair market value must be recognized, whether or not such right is exercised;

• the amount of gain that must be recognized by an eligible member as a result of the receipt of a subscription right will equal the fair market value of such subscription right;

• any gain recognized by an eligible member as a result of the receipt of a subscription right with a fair market value should constitute a capital gain, which will be long term capital gain if the eligible member has held its membership interests for more than one year; and

• if an eligible member is required to recognize gain on the receipt of a subscription right and does not exercise such subscription right, (i) the eligible member should recognize a corresponding loss upon the expiration or lapse of such member’s unexercised subscription right, (ii) the amount of that loss should equal the gain previously recognized upon receipt of the unexercised subscription right, and (iii) if the common stock that an eligible member would have received upon exercise of the lapsed subscription right would have constituted a capital asset in the hands of that eligible member, the resulting loss upon expiration of the subscription right should constitute a capital loss.

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   For purposes of determining gain, it is unclear how to determine the number of subscription rights that may be allocated to each eligible member during the subscription offering.

   Curtis Financial has advised us that it believes the subscription rights will not have any fair market value. Curtis Financial has noted that the subscription rights will be granted at no cost to recipients, will be legally nontransferable and of short duration, and will provide the recipient with the right only to purchase shares of our common stock at the same price to be paid by members of the general public in the community offering. Curtis Financial cannot assure us, however, that the Internal Revenue Service will not challenge Curtis Financial’s determination or that such challenge, if made, would not be successful. Nevertheless, eligible members are encouraged to consult with their tax advisors about the U.S. federal, state, local and non-U.S. income and other tax consequences of the receipt, exercise and lapse of subscription rights to purchase shares of our common stock in the subscription offering. See also “— Recent Developments” below.

Tax Consequences to Purchasers of Our Common Stock in the Offering

   Basis and Holding Period. The adjusted tax basis of a share of our common stock purchased by an eligible member pursuant to the exercise of a subscription right will equal the sum of the amount of cash paid for such share plus the basis, if any, of the subscription right that is exercised to purchase such share, taking into account the income and gain, if any, recognized by such eligible member on the receipt of such subscription right, less any prior return of capital distributions in respect of such stock. In all other cases, a holder’s adjusted tax basis in its shares of our common stock generally will equal the U.S. holder’s acquisition cost less any prior return of capital distributions in respect of such stock. The holding period of a share of our common stock purchased by an eligible member through the exercise of a subscription right will begin on the date on which the subscription right is exercised. In all other cases, the holding period of common stock purchased by an eligible member or other investor in the community offering will begin on the date following the date on which the stock is purchased.

   Dividends and Distributions. If we pay cash distributions to holders of shares of our common stock, such distributions generally will constitute dividends for U.S. federal income tax purposes to the extent paid from our current or accumulated earnings and profits, as determined under U.S. federal income tax principles. Distributions in excess of current and accumulated earnings and profits will constitute a return of capital that will be applied against and reduce (but not below zero) the holder’s adjusted tax basis in its shares of our common stock. Any remaining excess will be treated as gain realized on the sale or other disposition of its shares of our common stock and will be treated as described under “— Gain or Loss on Sale, Exchange or Other Taxable Disposition of Common Stock” below.

   Dividends we pay to a U.S. holder that is a taxable corporation generally will qualify for the dividends received deduction if the requisite holding period is satisfied. With certain exceptions (including, but not limited to, dividends treated as investment income for purposes of investment interest deduction limitations), and provided certain holding period requirements are met, dividends we pay to a non-corporate U.S. holder generally will constitute “qualified dividends” that will be subject to tax at the maximum tax rate accorded to capital gains for tax years beginning on or before December 31, 2010, after which the rate applicable to dividends is currently scheduled to return to the tax rate generally applicable to ordinary income.

   Gain or Loss on Sale, Exchange or Other Taxable Disposition of Common Stock. In general, a holder of shares of our common stock must treat any gain or loss recognized upon a sale, exchange or other taxable disposition of such shares (which would include a dissolution and liquidation) as capital gain or loss. Any such capital gain or loss will be long-term capital gain or loss if the holder’s holding period for its shares of our common stock so disposed of exceeds one year. In general, a holder will recognize gain or loss in an amount equal to the difference between (i) the sum of the amount of cash and the fair market value of any property received in such disposition and (ii) the holder’s adjusted tax basis in its shares of our common stock so disposed of. Long-term capital gain realized by a non-corporate holder generally will be subject to a maximum rate of 15 percent for tax years beginning on or before December 31, 2010, after which the maximum long-term capital gains rate is scheduled to increase to 20 percent. The deduction of capital losses is subject to limitations, as is the deduction for losses realized upon a taxable disposition by a holder of its shares of our common stock if, within a period beginning 30 days before the date of such disposition and ending 30 days after such date, such holder has acquired (by purchase or by an exchange on which the entire amount of gain or loss was recognized by law), or has entered into a contract or option so to acquire, substantially identical stock or securities.

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Recent Developments

   We call to your attention that, on August 6, 2008, the opinion of the United States Court of Federal Claims was filed in the case of Eugene A. Fisher, Trustee, Seymour P. Nagan Irrevocable Trust, Plaintiff, v. The United States, Defendant (No. 04-1726T), in which the court ruled that a policyholder of Sun Life Assurance Company that, in the course of the demutualization of Sun Life in a recapitalization that constituted a reorganization under the Code, (a) exchanged its voting and liquidation rights in Sun Life for shares of the common stock of a new holding company that would become the corporate parent of Sun Life (the “Exchange Shares”), and (b) sold the Exchange Shares on the open market, did not realize any income for federal income tax purposes on the sale of the Exchange Shares, because the amount realized by the policyholder on the sale of the Exchange Shares was less than the policyholder’s cost basis in its Sun Life insurance policy as a whole. The opinion of the court is contrary to the long-standing published position of the Internal Revenue Service that the basis of stock received by a policyholder in the course of a mutual insurance company’s demutualization in a series of transactions that constitute a reorganization within the meaning of Section 368(a) of the Code is zero. We understand that the government has appealed the court’s decision.

   The plan of conversion and the law considered by the court in Fisher were substantially different than Penn Millers Mutual’s plan of conversion and the corresponding law of Pennsylvania. Nevertheless, if the principles articulated by the court in Fisher were determined to be applicable to the subscription offering: (a) eligible members would not be required to recognize any income or gain upon the receipt of subscription rights with a fair market value if the fair market value of the subscription rights did not exceed the eligible policyholder’s cost basis in its Penn Millers insurance policy as a whole; and (b) the basis of the shares of our common stock purchased by an eligible member pursuant to the exercise of subscription rights would equal the sum of the purchase price of the stock plus the eligible member’s adjusted tax basis in the subscription rights that are exercised.

   You should consult your tax advisors with respect to the potential tax consequences to you of the receipt, exercise and lapse of subscription rights and the determination of your adjusted tax basis in your shares of our common stock, based on your particular circumstances.

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Information Reporting and Backup Withholding.

   We must report annually to the Internal Revenue Service and to each holder the amount of dividends or other distributions we pay to such holder on its shares of our common stock and the amount of tax withheld with respect to those distributions, regardless of whether withholding is required.

   The gross amount of dividends and proceeds from the disposition of shares of our common stock paid to a holder that fails to provide the appropriate certification in accordance with applicable U.S. Treasury regulations generally will be subject to backup withholding at the applicable rate (currently 28 percent).

   Backup withholding is not an additional tax. Any amounts we withhold under the backup withholding rules may be refunded or credited against the holder’s U.S federal income tax liability, if any, by the Internal Revenue Service if the required information is furnished to the Internal Revenue Service in a timely manner.

   DUE TO THE INDIVIDUAL NATURE OF TAX CONSEQUENCES, EACH ELIGIBLE MEMBER AND EACH OTHER PROSPECTIVE PURCHASER OF SHARES OF OUR COMMON STOCK IN THE OFFERING IS URGED TO CONSULT HIS OR HER TAX AND FINANCIAL ADVISOR.

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MANAGEMENT

Directors and Officers

     Our board of directors consists of Heather M. Acker, F. Kenneth Ackerman, Jr., Dorrance R. Belin, John L. Churnetski, John M. Coleman, Douglas A. Gaudet, Kim E. Michelstein, Robert A. Nearing, Jr., James M. Revie and J. Harvey Sproul, Jr., each of whom also presently serves as a director of Penn Millers Insurance Company, PMHC, and Penn Millers Mutual Holding Company. The board is divided into three classes with directors serving for three-year terms with approximately one-third of the directors being elected at each annual meeting of shareholders. Messrs. Churnetski, Coleman, and Nearing have terms of office expiring at the annual meeting to be held in 2010. Messrs. Belin and Revie and Mses. Acker and Michelstein have terms of office expiring at the annual meeting to be held in 2011. Messrs. Ackerman, Gaudet, and Sproul have terms of office expiring at the annual meeting to be held in 2012.

     Our executive officers are elected annually and, subject to the terms of their respective employment agreements, hold office until their respective successors have been elected and qualified or until death, resignation or removal by the board of directors. Annually, the director nominees are reviewed by the governance and bylaws committee and are selected by the Board.

     No person is eligible for election as a director after attaining the age of 75. Mr. Sproul will reach the age of 75 in August 2009. Although there are currently no specific succession plans in place regarding his position, the board of directors plans to identify his successor in 2009.

     The following table sets forth certain information regarding our current directors.

	Age at March 26,
	2009		Director Since(1)		Position with Penn Millers
Heather M. Acker		57		2004	Director
F. Kenneth Ackerman, Jr.		69		1979	Vice Chairman
Dorrance R. Belin		70		1998	Director
John L. Churnetski		68		1997	Director
John M. Coleman		59		2007	Director
Douglas A. Gaudet		54		2005	President and CEO
Kim E. Michelstein		56		1998	Director
Robert A. Nearing, Jr.		65		1997	Director
James M. Revie		72		1990	Director
J. Harvey Sproul, Jr.		74		1990	Chairman

(1) Indicates year first elected as a director of Penn Millers Insurance Company.

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     The business experience of each director for at least the past five years is set forth below.

     J. Harvey Sproul, Jr. is our Chairman of the Board and has served as such since April 17, 2002. Prior to his appointment as Chairman, Mr. Sproul had served as Vice Chairman of the Board since August 1997. He has served as a Director since 1990. He is President of H.B. Sproul Construction Company in Clarks Summit, Pennsylvania and has served as such since 1978. H.B. Sproul Construction Company provides consulting and services to Sproul Construction, Inc., a Pennsylvania corporation that performs site construction in the Scranton-Wilkes Barre area, including site excavation, compacted fill, storm and sanitary installation and bituminous paving. He received his bachelor of arts degree from Brown University and served as a Lieutenant, j.g., in the United States Navy.

     F. Kenneth Ackerman, Jr. is our Vice Chairman of the Board and has served as such since January 29, 2003, and has served as a Director since 1979. He has served as Chairman of Integrated Healthcare Strategies in Minneapolis, Minnesota since 2007. Integrated Healthcare Strategies is a consulting firm that assists healthcare organizations in workplace quality and organization. He previously served as President of Clark Consulting Healthcare Group from 2000 to 2007. Mr. Ackerman received his bachelors of science degree from Denison University and his masters of health administration from the University of Michigan.

     Heather M. Acker is Chief Operating Officer, Chief Financial Officer and Corporate Secretary for Gentex Corporation in Carbondale, Pennsylvania. Ms. Acker has held the position of Chief Financial Officer for over five years and has been Chief Operating Officer since 2007. Gentex Corporation designs and manufactures integrated life support systems for human protection in military, homeland defense and commercial markets. Ms. Acker received her undergraduate degree in mathematics from Bucknell University and received her M.B.A. from the Wharton School of Business of the University of Pennsylvania, with a concentration in finance. Ms. Acker has served as a Director since 2004.

     Dorrance R. Belin, Esq. is a Partner in the law firm of Oliver, Price & Rhodes in Clarks Summit, Pennsylvania, and concentrates his practice in estate planning and administration. Mr. Belin received his bachelor of arts degree in history from Yale University. In addition, he received his law degree from University of Pittsburgh and currently holds a license to practice law in Pennsylvania. Mr. Belin is also licensed in Pennsylvania as a title insurance agent. He has served as a Director since 1998.

     John L. Churnetski is retired from the architectural firm, Quad Three Group, Inc., a Wilkes-Barre engineering and architectural firm, where he served as Chairman until December 2005. He was employed by Quad Three Group for thirty-eight years. He has a bachelors of science degree in mechanical engineering from the University of Notre Dame. He has served as a Director since 1997.

     John M. Coleman is Chief Operating Officer of NCI Consulting LLC, and has served as such since 2006. NCI Consulting, LLC is a strategic management consulting firm serving the pharmaceutical industry and located in Moorestown, New Jersey. Mr. Coleman had previously worked as a private investor from 1999 until January 2006. His prior employment includes Senior Vice President and General Counsel of the Gillette Company and Senior Vice President — Law and Public Affairs of Campbell Soup Company. Mr. Coleman graduated magna cum laude with a bachelor of arts degree in political science from Haverford College. He received his law degree from University of Chicago and is licensed to practice law in Pennsylvania, New Jersey, and New York. He served as law clerk to the Honorable John D. Butzner, Jr. of the U.S. Court of Appeals and to Chief Justice Warren E. Burger of the U.S. Supreme Court. In addition, Mr. Coleman is a former Department Chair of the Philadelphia law firm, Dechert LLP and has been the Chief Legal Officer of two Fortune 500 companies. He has served as a Director since 2007.

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     Douglas A. Gaudet was appointed our President and Chief Executive Officer in 2005 after a nationwide search. He previously served as Vice President, Commercial Lines for Philadelphia Insurance Companies from 2004 to 2005. From November of 2000 until November of 2003, Mr. Gaudet served as Senior Executive Vice President of Operations of Harleysville Insurance Group, a public company with $1.2 billion in direct premiums written. Mr. Gaudet received his bachelors of arts degree from the State University of New York at Potsdam and his M.B.A. from Clarkson University. Mr. Gaudet is a Chartered Property Casualty Underwriter and holds an insurance producer license in Pennsylvania.

     Kim E. Michelstein served as Director of the Insite Division and a Senior Manager of Benco Dental Company from June 1999 until November 2003. Benco Dental Company is the largest independent dental supply company in the United States. She currently works as an independent consultant specializing in pro bono organizational work. Ms. Michelstein received her bachelor of arts degree in French and Spanish from Mount Holyoke College. In addition, Ms. Michelstein received her M.B.A from Wharton School of Business of the University of Pennsylvania, with a concentration in marketing. Ms. Michelstein served as a marketing executive for two Fortune 500 companies, General Foods Corporation and McNeil Consumer Products, a division of Johnson & Johnson. She has served as a Director since 1998.

     Robert A. Nearing, Jr. is Vice President, Secretary and Treasurer of Cochecton Mill in Cochecton, New York, which manufactures animal feed for the agricultural industry. Mr. Nearing graduated from Mohawk Valley College with a degree in mechanical technology. He has served as a Director since 1997.

     James M. Revie is Chairman and Business Manager of Strategic Litigation Research in Kingston, Pennsylvania and has served as such since 2003. Strategic Litigation Research is a nationwide consulting service that advises major corporations, insurance companies and law firms regarding the defense strategy in their litigation. Mr. Revie received his bachelor of arts degree in engineering from Harvard University. In addition, he received his M.B.A. from Harvard University in finance. Mr. Revie has served as a Director since 1990.

     In order to determine which of our directors are independent, we have elected to utilize the standards for independence established under the NASDAQ listing standards. Under this standard, an independent director is a person other than an executive officer or employee of Penn Millers or any other individual having a relationship which, in the opinion of the board of directors, would interfere with the exercise of independent judgment in carrying out the responsibilities of a director. The following persons will not be considered independent:

• a director who is, or at any time during the past three years was, employed by us;

• a director who accepted or who has a spouse, parent, child or sibling, whether by blood, marriage or adoption, or any other person who resides in his home, hereinafter referred to as a “Family Member”, who accepted any compensation from us in excess of $120,000 during any period of twelve consecutive months within the three years preceding the determination of independence (other than compensation for board or board committee service; compensation paid to a Family Member who is an employee (other than an executive officer) of Penn Millers; or benefits under a tax-qualified retirement plan, or non-discretionary compensation).

• a director who is a Family Member of an individual who is, or at any time during the past three years was, employed by us as an executive officer;

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• a director who is, or has a Family Member who is, a partner in, or a controlling shareholder or an executive officer of, any organization to which we made, or from which we received, payments for property or services in the current or any of the past three fiscal years that exceed 5% of the recipient’s consolidated gross revenues for that year, or $200,000, whichever is more (excluding payments arising solely from investments in our securities; or payments under non-discretionary charitable contribution matching programs).

• a director of Penn Millers who is, or has a Family Member who is, employed as an executive officer of another entity where at any time during the past three (3) years any of our executive officers served on the compensation committee of such other entity; or

• a director who is, or has a Family Member who is, a current partner of our outside auditor, or was a partner or employee of the company’s outside auditor who worked on our audit at any time during any of the past three (3) years.

     Under this criteria, directors Acker, Ackerman, Belin, Coleman, Churnetski, Michelstein, Nearing, Revie and Sproul are independent. Pennsylvania insurance law requires that one-third of the members of each committee of the board be independent, except for the audit, nominating, and compensation committees, which may only include independent directors.

Director Compensation

     In 2008, each of our non-employee directors received an annual retainer of $20,000, except for our Chairman and Vice Chairman of the Board, and a fee of $1,000 for each board meeting attended. Additionally, each of our non-employee directors received a fee of $500 for each committee meeting that he or she attends. The Chairman of each committee also received a $250 fee per meeting. The Audit Committee Chairman received an additional annual retainer of $3,000. Our Chairman of the Board, Mr. Sproul, received an annual retainer of $32,000, and our Vice Chairman of the Board, Mr. Ackerman, received an annual retainer of $22,000.

     For 2009, each of our non-employee directors will receive an annual retainer of $20,000, except for our Chairman, Vice Chairman and Audit Committee Chairman, and a fee of $1,000 for each board meeting attended. Additionally, each of our non-employee directors will receive a fee of $500 per committee meeting attended, except for the Chairperson of the respective committee, who will receive a fee of $750 per committee meeting. Our Chairman of the Board, Mr. Sproul, will receive an annual retainer of $32,000, and our Vice Chairman of the Board, Mr. Ackerman, will receive an annual retainer of $22,000. Our Audit Committee Chairman, Mr. Coleman, will receive an annual retainer of $30,000.

     The table below summarizes the total compensation paid to our non-employee directors for the fiscal year ended December 31, 2008.

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									Change in
									Pension
									Value and
									Nonqualified
	Fees Earned						Non-Equity		Deferred
	or Paid		Stock		Option		Incentive Plan		Compensation		All Other
	in Cash		Awards		Awards		Compensation		Earnings		Compensation		Total
	($)		($)		($)		($)		($)		($)		($)
J. Harvey Sproul, Jr.	$	47,500	$	0	$	0	$	0	$	0	$	0	$	47,500
F. Kenneth Ackerman, Jr.	$	39,193	$	0	$	0	$	0	$	0	$	906	$	40,099
Heather M. Acker	$	35,000	$	0	$	0	$	0	$	0	$	0	$	35,000
Dorrance R. Belin	$	36,000	$	0	$	0	$	0	$	0	$	0	$	36,000
John L. Churnetski	$	32,500	$	0	$	0	$	0	$	0	$	0	$	32,500
John M. Coleman	$	34,000	$	0	$	0	$	0	$	0	$	0	$	34,000
Kim E. Michelstein	$	36,750	$	0	$	0	$	0	$	0	$	0	$	36,750
Robert A. Nearing, Jr.	$	29,000	$	0	$	0	$	0	$	0	$	0	$	29,000
William A. Ray(1)	$	29,619	$	0	$	0	$	0	$	0	$	7,551	$	37,170
James M. Revie	$	33,000	$	0	$	0	$	0	$	0	$	0	$	33,000

(1) William A. Ray, age 65, had served as a Director since 2001 and resigned from the Board of Directors effective December 10, 2008. Mr. Ray retired from Towers Perrin Reinsurance in Philadelphia, Pennsylvania in 1999, where he was a Senior Vice President and Principal.

Committees of the Board of Directors

     Compensation Committee. Our compensation committee consists of Messrs. Churnetski (Committee Chairman), Ackerman, Belin, Nearing, Revie and Sproul, and Ms. Acker. All of the directors are independent under the criteria established under the NASDAQ listing standards. All of the directors are “non-employee directors,” as required under the Exchange Act. The compensation committee will:

• review, evaluate and approve the compensation and benefit plans and policies of Penn Millers employees, including its officers;

• review, evaluate and approve the compensation and benefit plans and policies for our officers and directors;

• grant stock options and restricted stock awards to employees, management and directors under our proposed stock-based incentive plan;

• be responsible for producing an annual report on executive compensation for inclusion in our proxy statement and for ensuring compliance of compensation and benefit programs with all other legal, tax and regulatory requirements; and

• make recommendations to our board of directors regarding these matters.

     Audit Committee. The Audit Committee consists of Messrs. Coleman (Committee Chairman), Ackerman, Belin, Churnetski, and Sproul, and Mses. Acker and Michelstein. In addition, our board of directors

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has determined that Ms. Acker is an audit committee financial expert within the meaning of SEC regulations. Under the independence criteria utilized by the NASDAQ listing rules, the Audit Committee members must meet additional criteria to be deemed independent. An Audit Committee member may not, other than in his or her capacity as a member of the Committee, the board of directors, or any other board of directors’ committee (i) accept directly or indirectly any consulting, advisory, or other compensatory fee from Penn Millers other than the receipt of fixed amounts of compensation under a retirement plan (including deferred compensation) for prior service with Penn Millers (provided such compensation is not contingent in any way on continued service); or (ii) be an affiliated person of Penn Millers as defined in Exchange Act Rule 10A-3(e)(1). All of the directors of the Audit Committee are independent under this criteria.

     The Audit Committee will:

• be responsible for the selection, retention, oversight and termination of our independent registered public accounting firm;

• approve the non-audit services provided by the independent registered public accounting firm;

• review the results and scope of the audit and other services provided by our independent registered public accounting firm;

• approve the estimated cost of the annual audit;

• establish procedures to facilitate the receipt, retention and treatment of complaints received from third parties regarding accounting, internal accounting controls, or auditing matters;

• establish procedures to facilitate the receipt, retention, and treatment of confidential, anonymous submissions of concerns regarding questionable accounting or auditing matters by Penn Millers employees;

• review and approve all related party transactions and transactions raising potential conflicts of interest;

• review the annual financial statements and the results of the audit with management and the independent registered public accounting firm;

• review with management and the independent registered public accounting firm the adequacy of our system of internal control over financial reporting, including their effectiveness at achieving compliance with any applicable laws or regulations;

• review with management and the independent registered public accounting firm the significant recommendations made by the independent registered public accounting firm with respect to changes in accounting procedures and internal control over financial reporting; and

• report to the board of directors on the results of its review and make such recommendations as it may deem appropriate.

     Governance and Bylaws Committee. The Governance and Bylaws Committee of the board of directors consists of Messrs. Ackerman (Committee Chairman), Belin, Coleman, Nearing, and Sproul and

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Mses. Acker and Michelstein. All of the directors are independent as defined under the NASDAQ listing standards. The Governance and Bylaws Committee will:

• make independent recommendations to the board of directors as to best practices for board governance and evaluation of board performance;

• produce a Code of Ethics and submit it for board approval, and periodically review the Code of Ethics for necessary revisions;

• identify suitable candidates for board membership, and in such capacity will consider any nominees recommended by shareholders;

• propose to the board a slate of directors for election by the shareholders at each annual meeting; and

• propose candidates to fill vacancies on the board based on qualifications it determines to be appropriate.

     Finance Committee. The Finance Committee consists of Mses. Michelstein (Committee Chairman) and Acker, and Messrs. Ackerman, Gaudet, Coleman, Revie and Sproul. The purpose of the Finance Committee is to review and make recommendations to the Board with respect to financial issues and policies of the company. In particular, the Finance Committee will:

• review investment policies, strategies, transactions and performance;

• review Penn Millers’ capital structure and provide recommendations regarding financial planning;

• conduct an annual financial review and assessment of proposed strategic plans and initiatives;

• conduct a financial review and assessment of proposed business transactions; and

• administer Penn Millers’ Pension Plan and 401(k) plans.

     Executive Committee. The Executive Committee consists of Messrs. Sproul (Committee Chairman), Ackerman, Belin, Coleman, Gaudet, Nearing and Revie, and Ms. Acker. The purpose and duties of the Executive Committee are to handle legal formalities and technicalities concerning administrative operations. The Executive Committee will:

• oversee budget review;

• provide capital spending approval;

• propose capital structure policy;

• oversee merger, acquisition and divestiture review;

• provide debt issuance approval; and

• review qualification of commercial and investment bankers.

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Compensation Committee Interlocks and Insider Participation

     The members of the compensation committee of our board of directors are currently Messrs. Churnetski (Committee Chairman), Ackerman, Belin, Nearing, Revie and Sproul.

     The compensation committee does not include any current or former officers or current employees of Penn Millers. None of our executive officers serves as a member of the board of directors or compensation committee of any entity that has one or more executive officers serving on our board of directors or compensation committee.

Officers

     Douglas A. Gaudet, age 54, was appointed our President and Chief Executive Officer in 2005 after a nationwide search. He previously served as Vice President, Commercial Lines for Philadelphia Insurance Companies from 2004 to 2005. From November of 2000 until November of 2003, Mr. Gaudet served as Senior Executive Vice President of Operations of Harleysville Insurance Group, a public company with $1.2 billion in direct premiums written. Mr. Gaudet received his bachelors of arts degree from the State University of New York at Potsdam and his M.B.A. from Clarkson University. Mr. Gaudet is a Chartered Property Casualty Underwriter and holds an insurance producer license in Pennsylvania.

     Michael O. Banks, age 49, is our Chief Financial Officer and Treasurer and has served as such since August 2002. His responsibilities are in the areas of administration, financial functions, human resources and the commercial business insurance unit. He has also currently serves as Secretary, which he was appointed to in September 2004. Mr. Banks has served as an Executive Vice President since March 2004. He previously served as a Senior Vice President from August 2002 until March 2004.

     Harold W. Roberts, age 54, is our Senior Vice President of Agribusiness Underwriting and has served as such since March 2006. Prior to his appointment as Senior Vice President of Agribusiness Underwriting he served as Senior Vice President of Underwriting from October 2004 until January 2006. Previously, he had served as Vice President of Underwriting. Mr. Roberts graduated from Wilkes University with a bachelor of science degrees in finance and accounting. Mr. Roberts is also a Chartered Property Casualty Underwriter and is currently a licensed insurance producer in Pennsylvania, New Jersey and Georgia.

     Kevin D. Higgins, age 52, is our Senior Vice President of Claims and has served as such since January 2007. He had previously served as Vice President of Claims from May 2003 until December 2006. Mr. Higgins is Certified Insurance Counselor and is a certified Associate in Claims and Casualty Claims Law Associate. Prior to his employment with Penn Millers, he served in progressive claims leadership roles with Royal & SunAlliance, including as President and Director of Operations of its wholly-owned subsidiary, Investigative Resources Global, Inc.

     Jonathan C. Couch, age 40, is our Vice President of Finance and Controller and has been with Penn Millers since November 2002. He is responsible for managing all of the financial functions of Penn Millers, including, financial reporting, accounting, benefit plans, loss reserves, investments, planning and budgeting. Prior to his employment with Penn Millers, he served in various financial roles at Pitney Bowes, Inc., Andersen Consulting, and Cap Gemini Ernst & Young LLP. Mr. Couch received his bachelor of arts degree in economics and business from Lafayette College and his M.B.A from the University of Connecticut.

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Compensation Discussion and Analysis

     The compensation committee of our board of directors is currently responsible for establishing and reviewing our compensation policies and approving the compensation of our employees, including our executive officers named in the Summary Compensation Table, referred to herein as our “named executive officers.” The compensation committee oversees our overall compensation structure, policies and programs, and assesses whether our compensation structure establishes appropriate incentives for management and employees.

     Compensation Philosophy and Objectives. The compensation committee has sought to design a compensation structure that attracts, motivates and retains qualified and experienced officers and, at the same time, is both reasonable for our organization and competitive position in the marketplace. The compensation structure is designed to support our business strategy and business plan by clearly communicating expectations for executives with respect to goals and rewarding achievement of these goals. Finally, our compensation structure is designed to align our named executive officers’ incentives with performance measures directly related to the Company’s financial goals and the creation of shareholder value.

     Our compensation has consisted primarily of cash compensation, salary and bonuses, and retirement benefits. In connection with the offering, we expect to offer our employees the opportunity to participate in an employee stock ownership plan. In addition, following the offering, we expect to adopt a stock-based incentive plan, subject to shareholder approval of the plan. The stock-based incentive plan will allow us to incorporate into our compensation structure stock options and restricted common stock awards to directors, officers and other employees. Because equity and performance-based compensation will correlate our employees’ compensation with the creation of shareholder value, we anticipate that our proposed stock-based benefit plans will play a significant role in our future compensation considerations, particularly for our named executive officers.

     Determination of Compensation Level. Because the compensation committee currently reviews the compensation for employees throughout our organization, our President and Chief Executive Officer, Mr. Gaudet, provides recommendations on matters of compensation philosophy, plan design and the general guidelines for employee compensation. These recommendations are then considered and evaluated by the compensation committee. Mr. Gaudet generally attends committee meetings in order to provide information on employee performance, but refrains from participating in discussions regarding his own compensation. The compensation committee, in an executive session, reviews and approves corporate goals and objectives for Mr. Gaudet, evaluates his performance, with the governance and bylaw committee, based upon these goals and objectives, and sets his compensation level on the basis of this evaluation.

     In order to establish the compensation structure for 2008 and 2009, the compensation committee employed Compensation Consulting Consortium (3C) to conduct a review of external competitiveness of our compensation structure based on publicly available salary surveys and through the publicly available compensation information of a peer group of publicly traded insurance companies of comparable asset size and with comparable revenues. The survey’s objectives were to determine the value and market competiveness of the total compensation packages for our executives. In its evaluation of market competiveness, the compensation committee focused primarily on the information provided from the peer group analysis, which consisted of the following nine insurance companies: 21^st Century Holding Company, Atlantic American Corporation, Bancinsurance Corporation, Eastern Insurance Holdings, Inc., Gainsco, Inc., Investors Title Insurance Company, Mercer Insurance Group, National Atlantic Holdings Corporation, and Unico American Corporation. The peer group of companies has a nationwide span. The committee does not benchmark salaries, bonuses, or retirement plans or benefits to any particular level or percentile target of the peer group range. An individual’s total compensation or individual

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compensation elements may be higher or lower than the peer group due to additional considerations such as tenure with Penn Millers or cost of living adjustments. However, the compensation committee utilizes these surveys to ensure that the compensation structure allows Penn Millers to maintain a competitive position in the marketplace for talent.

     Elements of Executive Compensation. The components of compensation we provide to our named executive officers primarily consist of the following:

• annual base salary;

• annual cash and deferred compensation bonuses which are discretionary;

• retirement benefits; and

• other perquisites and personal benefits.

     Base Salary. For fiscal year 2008, the compensation committee considered salary adjustments for Messrs. Gaudet, Banks, Joanlanne, Roberts, Higgins and Couch in January 2008. Mr. Gaudet, our only named executive officer who is also a member of the board of directors, did not participate in discussions regarding his own compensation.

     In determining base salaries for 2008, the compensation committee considered the overall financial performance of Penn Millers and the individual executive officer’s performance and compensation relative to the peer surveys, however, no particular weight was given to any single factor. The base salaries at December 31, 2008, for Messrs. Gaudet, Banks, Joanlanne, Roberts, Higgins and Couch were $342,476, $235,706, $198,633, $186,589, $162,983 and $133,524, respectively. The compensation committee believes that the base salaries paid to our named executive officers are commensurate with their duties, performance and range for the industry compared with insurance companies of similar size within our region, and therefore permit us to attract and retain qualified and talented employees.

     Employment Agreements. We enter into employment agreements with executive officers, including the named executive officers, when we determine that an employment agreement is warranted in order to ensure the executive’s continued employment in light of prevailing market competition for the particular position held by the executive officer, or where it is determined it is necessary in light of the prior experience of the executive or practices at Penn Millers with respect to other similarly situated employees. Based on the evaluation of these factors, we currently have employment agreements with Messrs. Gaudet, Banks, Roberts, Higgins and Couch.

     Cash Bonuses. In addition to base salary, we pay annual cash bonuses to our employees, including our named executive officers under our Success Sharing Bonus Plan. The amount of the cash bonus calculated is based on achieving certain operating income targets established on a segment and company-wide basis. In order to participate in the plan, an employee must have been employed with Penn Millers for at least four months prior to the end of the calendar year and satisfactory performed his or her job duties in the board’s discretion. For the fiscal year ended December 31, 2008, none of our named executive officers met the specified operating targets in order to earn a bonus. Our Chief Executive Officer may recommend and the board, in its discretion, may approve a bonus outside the criteria set forth in the plan in the event of extraordinary individual or business unit performance or events. No bonuses were awarded under the plan for the year ended December 31, 2008. We believe our operating income targets have a direct impact on our executives’ performance and the achievement of our strategic goals.

     Under the Success Sharing Bonus Plan, payouts of bonuses are conditioned on Penn Millers Insurance Company first meeting its operating income goals. Operating income goals are established for each level of our reporting segments. If a segment meets its operating income target, the executives in that segment are entitled to a bonus. For 2008, our operating income goals were as follows:

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Business Unit Level	Threshold ($)		Target ($)		Maximum ($)
Insurance Company	$	4,731,000	$	6,121,000	$	8,349,000
Commercial Business	$	1,812,000	$	2,344,000	$	3,198,000
Agribusiness	$	3,590,000	$	4,645,000	$	6,336,000
Holding Company(1)	$	4,313,000	$	5,580,000	$	7,611,000

(1) Excludes operating income (loss) from Eastern Insurance Group and Penn Software.

     For our named executive officers, the business unit thresholds applied to each particular officer is determined by the board of directors. For certain executive officers, the thresholds applied are broken down on a weighted basis across two business units. The thresholds applied to our executive officers on a business unit basis for 2008 were as follows:

					Penn
					Software and
	Insurance	Commercial		Holding	Technology
Name	Company	Business	Agribusiness	Company	Services
Douglas A. Gaudet	—	—	—	100%	—
Michael O. Banks	—	25%	—	75%	—
Frank Joanlanne	—	—	—	75%	25%
Harold W. Roberts	—	—	25%	75%	—
Kevin D. Higgins	100%	—	—	—	—
Jonathan C. Couch	—	—	—	100%	—

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     For 2008, none of the named executive officers reached the threshold required to receive a bonus under the plan. Typically, the executives receive a certain percentage of their base salary as a bonus under the plan based upon the executive’s position and for 2008 whether the executive reached the threshold, target or maximum operating income goal. The potential amount of each employee’s bonus was set forth in the plan by position as a percentage of his or her base salary for that year and is noted in the table below.

	% of Base Salary as	% of Base Salary as	% of Base Salary as
Employee Title or	Bonus Opportunity	Bonus Opportunity	Bonus Opportunity
Position	at Threshold	at Target	at Maximum
Chief Executive Officer and President	22.5%	45.0%	67.5%
Executive Vice President & Senior Vice President	20.0%	40.0%	60.0%
Vice President	17.5%	35.0%	52.5%
Assistant Vice President	10.0%	20.0%	30.0%
Managers, Assistant Managers, and Supervisors	6.0%	12.0%	18.0%
All Other Employees	2.5%	5.0%	7.5%

     For 2009, we plan to amend our Success Sharing Bonus Plan. We expect that under the plan the payment of the cash bonus wil be based upon on the company achieving established performance metrics related to return on equity (ROE), premium growth, and expense control. To be eligible to participate in the plan, an employee will have to be employed with Penn Millers for at least four months prior to the end of the calendar year and must have satisfactorily performed his or her job duties in the board’s discretion.

     Retirement and Other Personal Benefits. We also provide all of our employees, including our named executive officers, with tax-qualified retirement benefits through our 401(k) retirement plan. All employees who meet the age and service requirements are eligible to participate in the 401(k) plan on a non-discriminatory basis. We provide a 401(k) matching contribution to employee contributions, up to specified amounts. Participants become vested in the matching contributions in accordance with a five year ratable vesting schedule. Currently, Messrs. Banks, Roberts, Higgins and Couch are fully vested in our matching contributions. Mr. Gaudet is partially vested in our matching contributions.

     Our executives are also eligible to participate in our defined benefit pension plan, which is designed to provide financial security through retirement benefits for our employees. Under the plan, participants may elect a life annuity or other optional forms of payment. Benefits under the plan become fully vested and nonforfeitable after five years of service or on normal retirement date if still employed. Currently, Messrs. Banks, Roberts, Higgins and Couch are fully vested in their pension benefits.

     In addition, we currently sponsor a Nonqualified Deferred Compensation and Company Incentive Plan. The plan is designed to provide for certain highly compensated and management employees of Penn Millers an additional opportunity for retirement income, and deferral of receipt of all or a portion of the compensation the employees would otherwise receive. Employees are eligible to participate in the plan upon selection by the compensation committee. In addition, if the participant accomplishes certain performance levels, Penn Millers will make incentive contributions to the participant’s account. Incentive contributions vest pursuant to a five year ratable vesting schedule.

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     We also offer a Supplemental Executive Retirement Plan (SERP), through which we provide additional retirement income to a select group of executives. Under the SERP, a participant receives benefits to be distributed following retirement and vests in these benefits following ten years of tenure with Penn Millers. Currently, only Mr. Roberts is vested in his SERP benefits and only Messrs. Gaudet, Banks, Joanlanne, Roberts and Higgins participate in the SERP. By utilizing vesting schedules of substantial periods, we believe our 401(k), pension plan, SERP, and Nonqualified Deferred Compensation and Company Incentive Plan will help promote the long-term retention of talented executives.

     In addition, we offer various fringe benefits to all of our employees, including our named executive officers, which include group policies for medical insurance. For 2008, Mr. Gaudet was provided with an automobile and with insurance and maintenance expenses related thereto, life insurance, and country club and dinner club memberships. Messrs. Banks, Joanlanne, Roberts and Higgins received a perquisite allowance in lieu of an automobile and other benefits and reimbursements. The compensation committee believes that such benefits are appropriate for these named executive officers and are consistent with our goal of providing competitive compensation and personal benefits in comparison with our peers.

     Stock-Based Plans. In connection with the offering, we intend to adopt an ESOP, which will purchase 10% of the total stock outstanding following the offering. The ESOP will provide all of our employees who meet the age and service requirements with a stake in the future performance of our common stock. The ESOP will be an equity based plan available to all ranks of employees and will align our employees’ interests, including our named executive officers, with our shareholders.

     Our board of directors intends to adopt a stock-based incentive plan, which will permit us to make stock or stock-based awards in the form of incentive stock options and restricted common stock to directors and employees. The compensation committee expects that the stock-based incentive plan will assist us in attracting, motivating, and retaining persons who will be in a position to substantially contribute to our financial success. We anticipate that the stock-based incentive plan will have a term of ten years (unless our board of directors terminates the stock-based incentive plan earlier). The stock-based incentive plan will be administered by the compensation committee of the board of directors, who will determine the vesting period for the option and restricted stock awards under the plan. Our stock-based incentive plans will provide us with an additional opportunity to encourage the retention of our executives and to align our executives’ compensation to the achievement of financial and strategic goals and the creation of long-term shareholder value.

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Summary Compensation Table

     The following table sets forth information regarding the total annual compensation of our named executive officers for the fiscal year ended December 31, 2008.

							Non-Equity		Nonqualified Deferred		All Other
Name and							Incentive Plan		Compensation		Compensation
Principal Position	Year		Salary ($)		Bonus ($)		Compensation		Earnings ($)		($)(1)		Total
Douglas A. Gaudet
President and Chief Executive Officer		2008		342,476		—		—		—		23,207	$	365,683
Michael O. Banks,
Executive Vice President and Chief Financial Officer		2008		235,706		—		—		—		26,536	$	262,242
Frank Joanlanne,
Sr. Vice President (2)		2008		198,633		—		—		—		16,353	$	214,986
Harold W. Roberts,
Chief Underwriting Officer		2008		186,589		—		—		—		16,456	$	203,045
Kevin D. Higgins, Sr.
Vice President of Claims		2008		162,983		—		—		—		15,425	$	178,408
Jonathan C. Couch
Vice President of Finance and Controller		2008		133,524		—		—		—		4,162	$	137,686

(1)	Consists of matching contributions to 401(k) plan, life insurance premiums, country club and car allowances on behalf of Messrs. Gaudet, Banks, Joanlanne, Roberts, Higgins and Couch.
(2)	Mr. Joanlanne’s employment with Penn Millers was terminated on December 1, 2008.

Benefit Plans and Employment Agreements

     General. Douglas A. Gaudet, Michael O. Banks, Harold W. Roberts, Kevin D. Higgins, and Jonathan C. Couch are parties to employment agreements with Penn Millers. In connection with the offering, our board of directors has approved the employee stock ownership plan. Our board of directors also intends to adopt a stock-based incentive plan that will be submitted for shareholder approval at least six months after the offering. In addition, we have an existing defined-benefit pension plan and a 401(k) and profit sharing plan in which our executive officers are eligible to participate.

     Employee Stock Ownership Plan. In connection with the offering, we plan to adopt an employee stock ownership plan, or ESOP, for the exclusive benefit of participating employees, to be implemented upon the completion of the offering. Participating employees are all of our employees, who have attained the age of 21 and have completed at least one year of service with Penn Millers. As of December 31, 2008, there were 99 employees eligible to participate in the ESOP. We will submit to the IRS an application for a letter of determination as to the tax-qualified status of the ESOP. We expect that the ESOP will receive a favorable letter of determination from the IRS.

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     The ESOP intends to borrow funds from us in order to be able to purchase an amount of shares equal to 10% of the common stock issued in the offering. This loan will bear an interest rate equal to the long-term Applicable Federal Rate with semi-annual compounding on the closing date of the offering. Depending on the number of shares issued in the offering, the ESOP loan will require the ESOP to make annual payments of between approximately $450,000 and $680,000, for a term of ten years. The loan will be secured by our shares of common stock purchased by the ESOP. Shares purchased with the ESOP loan proceeds will be held in a suspense account for allocation among participants as the ESOP loan is repaid. We are required to contribute sufficient funds to the ESOP to enable the ESOP to meet its loan obligations.

     Contributions to the ESOP and shares released from the suspense account will be allocated among participants on the basis of their annual wages subject to federal income tax withholding and all other payments of compensation reported on Form W-2, plus any amounts withheld under a plan qualified under Sections 125, 401(k) or 132(f) of the Code and sponsored by Penn Millers Holding Corporation or an affiliate. Participants must be employed at least 1,000 hours in a calendar year and be employed on the last day of the calendar year in order to receive an allocation. A participant becomes 100% vested in his or her right to ESOP benefits only after completing 6 years of service (20% per year beginning with the participant’s second year of service). For vesting purposes, a year of service means any year in which an employee completes at least 1,000 hours of service. Vesting will be accelerated to 100% upon a participant’s attainment of normal retirement age (age 65 and five years of service), death, or disability. Forfeitures will be reallocated to participants on the same basis as other contributions, or, at our discretion, used to pay administrative expenses. Vested benefits are payable upon a participant’s retirement, death, disability, or separation from service, and will be paid in a lump sum as whole shares of common stock (with cash paid in lieu of fractional shares), unless the distributee elects cash. Any dividends paid on allocated shares are expected to be credited to participant accounts within the ESOP or paid to participants, and any dividends on unallocated shares are expected to be used to repay the principal of and interest on the ESOP loan.

     As sponsor of the ESOP, Penn Millers will administer the ESOP itself or engage a third party administrator to provide, among other services, participant recordkeeping and account maintenance services. An unaffiliated bank or trust company will be appointed as custodian and trustee of the ESOP. The ESOP trustee must vote all allocated shares held in the ESOP in accordance with the instructions of the participants. Unallocated shares and allocated shares for which no timely direction is received will be voted by the ESOP trustee in the same proportion as the participant-directed voting of allocated shares.

     Stock-Based Incentive Plan. Our board of directors intends to adopt a stock-based incentive plan. In order for the plan to be effective, it must be approved by our shareholders at least six months after the offering.

     The purpose of the stock-based incentive plan will be to assist us in attracting, motivating, and retaining persons who will be in a position to substantially contribute to our financial success. The stock-based incentive plan will assist us in this effort by providing a compensation vehicle directly tied to the performance of our common stock. We anticipate that the stock-based incentive plan will have a term of ten years (unless our board of directors terminates the stock-based incentive plan earlier).

     The stock-based incentive plan will permit us to make stock or stock-based awards in the form of incentive stock options, nonqualified stock options, and restricted common stock to directors and employees. Our non-employee directors will not be eligible to receive awards of incentive stock options, because, under the Internal Revenue Code, incentive stock options may only granted to employees. The stock-based incentive plan will be administered by the compensation committee of the board of directors.

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     The aggregate number of shares of common stock that can be awarded under the stock-based incentive plan will be limited to 14% of the number of shares issued in the offering. No more than 10% of the number of shares of common stock issued in the offering will be issuable under the stock-based incentive plan upon exercise of stock options, and no more than 4% of the number of shares of common stock issued in the offering will be issuable under the stock-based incentive plan as restricted common stock.

     We may purchase shares of our common stock in the open market to hold as treasury shares for use in issuing stock upon the exercise of stock options or making restricted stock awards, or we may issue new shares from our authorized but unissued common stock. If we purchase all of the common stock eligible to be issued under the stock-based incentive plan in the open market, the number of shares purchased will be between 630,700 shares and 948,111 shares, and if we purchase all of the shares at $10.00 per share, the cost would be between $6,307,000 and $9,481,111. By purchasing some or all of the shares to be issued under the stock-based incentive plan in the open market, Penn Millers can reduce the dilution to net income per share and the percentage of shares held by then existing shareholders as the result of the issuance of common stock upon exercise of stock options and vesting of restricted stock awards under the stock-based incentive plan.

     All awards granted under the stock-based incentive plan will be subject to vesting, performance criteria, or other conditions as the compensation committee may in its discretion set, subject to the terms of the stock-based incentive plan document. The failure to satisfy any vesting, performance criteria, or other conditions may result in the forfeiture, lapse, or other loss of the benefit of an award under the stock-based incentive plan. An award agreement between Penn Millers and the officer, director or employee will evidence the terms of each award, including these conditions.

     Each option issued under the stock-based incentive plan will entitle the option holder upon vesting, to purchase a number of shares of our common stock, at a price per share, specified in the agreement issued to him or her. Incentive stock options afford favorable tax treatment to recipients upon compliance with certain restrictions under Section 422 of the Code. Nonqualified stock options are options that do not qualify for the favorable tax treatment of Section 422 of the Code.

     Under the stock-based incentive plan, the exercise price of each stock option must be at least 100% of the fair market value of a share of common stock on the date of award, except that the exercise price of an incentive stock option awarded to an individual who beneficially owns more than 10% of the voting power from all classes of our stock must be at least 110% of the fair market value on the date of award. If our stock is traded on the Nasdaq Global Market, as we expect, the fair market value will be the average of the “bid” and “asked” prices on the day the option is awarded, and if no such prices are available for that day, the exercise price will be determined by reference to the bid and asked prices on the preceding day on which prices were quoted.

     No taxable income will be recognized by the option holder upon exercise of an incentive stock option, although it may increase the option holder’s alternative minimum tax liability, if applicable. Incentive stock options do not result in tax deductions to Penn Millers unless the option holder fails to comply with Section 422 of the Code, which requires the option holder to hold shares acquired through exercise of an incentive stock option for two years from the date on which the option is awarded and for

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more than one year from the date on which the shares are issued upon exercise of the option. If the option holder complies with these requirements, any gain or loss on the subsequent sale of such shares will be long-term capital gain or loss. Generally, if the option holder sells such shares before the expiration of either of these holding periods, then at the time of the sale, the option holder will realize taxable ordinary income equal to the lesser of: (i) the excess of the shares’ fair market value on the date of exercise over the exercise price, or (ii) the option holder’s actual gain, if any, on the purchase and sale. The option holder’s additional gain or any loss upon any such sale will be a capital gain or loss, which will be long-term or short-term, depending upon whether he held the shares for more or less than one year.

     Upon the exercise of a nonqualified stock option, the option holder will recognize ordinary income upon the exercise of the nonqualified option in an amount equal to the excess of the then fair market value of the stock acquired over the exercise price. Penn Millers will generally be entitled to a federal income tax deduction equal to the amount reportable as income by the option holder.

     Restricted stock is common stock that will typically be awarded under the stock-based incentive plan at no cost to the recipient. It will be nontransferable and forfeitable until the holder’s interest in the stock vests. Vesting will be tied to performance or the passage of time, as determined by the compensation committee. Restricted stock awards are subject to a minimum vesting period of the earlier of the date on which (i) the recipient completes three years of continuous employment with us following the date of the award (or a later date specified by the compensation committee), (ii) a Change in Control (as defined in the stock-based incentive plan), or (iii) in the case of a non-employee director, upon his or her death, permanent and total disability, or retirement (as defined in the stock-based incentive plan). In the event the recipient’s service with Penn Millers is terminated, the minimum vesting period may be waived by the compensation committee, subject to the approval of a majority of the disinterested members of our Board within 60 days of the recipient’s termination of service with Penn Millers. Upon vesting and release of the restricted stock, the holder will recognize ordinary income equal to the then fair market value of the stock (plus the amount of any retained dividends that are then paid over to him or her), unless a special election has been timely filed with the Internal Revenue Service to recognize as income the value of the restricted stock on the award date. When the holder sells the shares, capital gain and loss rates will apply. Penn Millers will be entitled to a federal income tax deduction equal to the amount reportable as income by the holder.

     Section 162(m) of the Code denies a deduction to any publicly held corporation for compensation paid to certain “covered employees” in a taxable year to the extent that compensation to such covered employee exceeds $1,000,000. Compensation attributable to awards made under the stock-based incentive plan, when combined with all other types of compensation received by a covered employee from Penn Millers, may cause this limitation to be exceeded in any particular year. Certain kinds of compensation, including qualified “performance-based compensation,” are disregarded for purposes of the deduction limitation. In accordance with treasury regulations promulgated under Section 162(m) of the Code, awards will qualify as performance-based compensation if the award is granted by the compensation committee comprised solely of “outside directors” and either (i) with respect to stock options, the plan contains a per-employee limitation on the number of shares for which such options may be granted during a specified period, the per-employee limitation is approved by the shareholders, and the exercise price of the option is no less than the fair market value of the shares on the date of award, or (ii) the award is subject to the achievement (as specified in writing by the compensation committee) of one or more objective performance goal or goals that the compensation committee establishes in writing while the outcome is substantially uncertain, and the shareholders approve the performance goal or goals. It is our intention to have awards under the stock-based incentive plan to executive officers constitute “performance-based compensation” in accordance with the provisions of Section 162(m) of the Code, but the compensation committee may approve awards that do not qualify for maximum deductibility when it deems it to be in the best interest of Penn Millers.

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     Our board of directors is currently considering the terms and conditions of the stock-based incentive plan. We expect that the initial grant of awards under the stock-based incentive plan will take place on the date of shareholder approval. We have not made any decisions concerning the number or type of awards that will be made to any director or officer at this time. We will not make any awards under the stock-based incentive plan before receiving shareholder approval.

     401(k) Retirement Plan. We currently sponsor a 401(k) plan. Employees, including our named executive officers, are eligible to participate in the plan immediately upon employment. As of December 31, 2008, 110 of our employees were eligible to participate in the plan. Under the plan, participants receive matching contributions from Penn Millers equal to fifty percent of the employee’s contribution up to three percent of their eligible compensation. Participants in the plan become vested in the matching contributions they receive from us in accordance with a five year ratable vesting schedule. Under the schedule, our matching contributions vest at a rate of 20% per year of service completed. An employee reaches a year of service when they have worked 1,000 hours in the applicable calendar year. Once amounts under the plan are distributed, the participant will have taxable income for the amounts distributed. Participants taking distributions when they are under the age of 59 1/2 could be subject to an additional 10% excise tax on the income distributed.

     As of December 31, 2008, Messrs. Banks, Roberts, Joanlanne, Higgins and Couch were each 100% vested in the 401(k) plan and Mr. Gaudet was 60% vested in the 401(k) plan. For the year ended December 31, 2008, Messrs Gaudet and Banks each received $6,900 in contributions to the plan by Penn Millers. Roberts, Joanlanne, Higgins, and Couch received $6,456, $6,353, $5,425, and $4,162, respectively, in contributions to the plan from Penn Millers.

     Supplemental Executive Retirement Plan. We currently sponsor a Supplemental Executive Retirement Plan (SERP). The SERP is designed to provide additional retirement income to a select group of management and highly compensated employees of Penn Millers. Employees are eligible to participate in the SERP upon selection by the compensation committee. Currently, only Messrs. Gaudet, Banks, Roberts and Higgins are eligible to participate in the SERP. Under the SERP, participants may receive either a series of annual installment payments for a maximum of ten years or an actuarially equivalent lump sum payment equal to a targeted percentage of their final average compensation. Participants in the SERP are vested in the benefits under the plan after ten (10) years of service with Penn Millers. After the employee has vested, he may not receive a benefit until he satisfies the conditions for normal or early retirement or he terminates enrollment by reason of death or disability. If a participant terminates before he is vested, he will not be entitled to any benefits under the plan. The benefits provided by the plan are in addition to benefits provided under our defined benefit pension plan or our 401(k) Plan. The SERP is solely funded by us. In 2008, we contributed $971,000 to the SERP.

     Pension Plan. We currently sponsor a defined benefit pension plan. The plan is designed to provide financial security through retirement benefits for our employees. Employees automatically begin participation in the plan as of January 1, provided they have completed six (6) months of service and have reached the age of 20 ¹/2. As of January 1, 2009, 108 of our employees were eligible to participate in the plan. Under the plan, participants may elect a life annuity paid as a series of equal monthly installment payments beginning on the date of retirement and continuing until death of the participant or other optional forms of payment. Benefits are determined based on the following factors: (i) average compensation, (ii) years of service, (iii) the form in which benefits are paid, (iv) the date of retirement, and (v) when payments begin. Accrued benefits under the plan become fully vested and nonforfeitable after five (5) years of service with Penn Millers or upon the date of normal retirement age, if the participant is still employed.

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     The following table sets forth information concerning plans that provide for payments or other benefits at, following, or in connection with, retirement for each named executive officer.

PENSION BENEFITS
AS OF AND FOR THE YEAR ENDED DECEMBER 31, 2008

		Number of
		Years of		Present Value of		Payments
		Credited		Accumulated		During Last
Name	Plan Name	Service (#)		Benefit($)(1)		Fiscal Year ($)
Douglas A. Gaudet	Defined Benefit Pension Plan		3	$	25,000	$	0
	Supplemental Executive Retirement Plan		3	$	185,000	$	0
Michael O. Banks	Defined Benefit Pension Plan		6	$	66,000	$	0
	Supplemental Executive Retirement Plan		6	$	26,000	$	0
Frank Joanlanne(2)	Defined Benefit Pension Plan		5	$	31,000	$	0
	Supplemental Executive Retirement Plan		5	$	0	$	0
Harold W. Roberts	Defined Benefit Pension Plan		33	$	409,000	$	0
	Supplemental Executive Retirement Plan		33	$	223,000	$	0
Kevin D. Higgins, Sr.	Defined Benefit Pension Plan		6	$	50,000	$	0
	Supplemental Executive Retirement Plan		6	$	25,000	$	0
Jonathan C. Couch	Defined Benefit Pension Plan		6	$	22,000	$	0

(1) The present value of accumulated benefits were calculated with the following assumptions:

• Retirement occurs at age 65;

• At retirement, the participants take a lump sum based on the accrued benefit as of December 31, 2008;

• The lump sum is calculated using an interest rate of 6.16% for the pension and 6.56% for the SERP

• The lump sum is discounted to December 31, 2008 at a rate of 6.16% and 6.56% per year, for the pension and SERP, respectively

(2) Although Mr. Joanlanne was eligible to participate in the SERP, his accumulated benefits were forfeited as a result of the termination of his employment.

     Nonqualified Deferred Compensation and Company Incentive Plan. We currently sponsor a Nonqualified Deferred Compensation and Company Incentive Plan. The plan is designed to provide for certain highly compensated and management employees of Penn Millers (i) an additional opportunity for retirement income, and (ii) deferral of receipt of all or a portion of the compensation the employees would otherwise receive. Employees are eligible to participate in the plan upon selection by the compensation committee. The plan enables participants to defer base compensation or bonuses which will result in the deferral of federal income taxation under Code Section 409A. Participants are eligible to defer up to 50% of their base compensation and 100% of their bonus. In addition, if the participant accomplishes certain

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performance levels, Penn Millers will make incentive contributions to the participant’s account. Incentive contributions will vest pursuant to a five year ratable vesting schedule. Distributions of payments under the plan will commence upon normal or early retirement, separation from service, and death or disability. The participant may elect to receive distributions either in a lump sum or in annual installments over a period not exceeding ten years. In 2008, Penn Millers did not make any contributions to the accounts of the named executive officers.

NON-QUALIFIED DEFERRED COMPENSATION
AS OF AND FOR THE YEAR ENDED DECEMBER 31, 2008

	Executive		Registrant		Aggregate					Aggregate
	Contributions		Contributions		Earnings			Aggregate		Balance at
	in Last		in Last		in Last			Withdrawals/		Last Fiscal
Name	Fiscal Year		Fiscal Year(1)		Fiscal Year(1)			Distributions		Year End
Douglas A. Gaudet	$	0	$	0	$	(8,437	)	$	0	$	15,066
Michael O. Banks	$	0	$	0	$	(5,483	)	$	0	$	8,966
Frank Joanlanne	$	0	$	0	$	(6,455	)	$	0	$	1,447
Harold W. Roberts	$	12,033	$	0	$	(11,370	)	$	0	$	23,645
Kevin D. Higgins, Sr.	$	0	$	0	$	(2,660	)	$	0	$	5,462
Jonathan C. Couch	$	0	$	0	$	0		$	0	$	0

(1) Contribution amounts were not reported as earnings in the Summary Compensation Table. The participants in the plan had aggregate losses as of December 31, 2008. These losses were not reported in the Summary Compensation Table.

     Executive Employment Agreements. Douglas A. Gaudet, Michael O. Banks, Harold W. Roberts, Kevin D. Higgins, and Jonathan C. Couch are each parties to employment agreements with Penn Millers. Mr. Gaudet’s employment agreement, dated November 21, 2005, has a four year term that expires on December 31, 2009. Mr. Banks’ employment agreement, dated January 1, 2006, has a four year term that expires on December 31, 2009. Mr. Roberts’ employment agreement, dated January 1, 2006, has a three year term that expired on December 31, 2008. Mr. Higgins’ employment agreement, dated January 1, 2007, has a three year term that expires on December 31, 2009. Mr. Couch’s employment agreement, dated January 1, 2007, has a two year term that expired on December 31, 2008. Unless either party has given the other party written notice that such party does not agree to renew the agreement, then the employment agreements are subject to the following automatic renewals:

• the agreements for Messrs. Gaudet and Banks automatically renew when there is 2 years remaining on the agreement;

• the agreements for Messrs. Roberts and Higgins automatically renew when there is 1 year remaining on the agreement; and

• the agreement for Mr. Couch renews annually.

     The compensation committee will enter into employment agreements with executive officers when it determines that such an agreement is desirable to obtain some measure of assurance as to the executive’s continued employment in light of prevailing market competition for the position held by the executive officer, or where the compensation committee determines that an employment agreement is

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necessary and appropriate in light of the executive’s prior experience or with our practices with respect to similar situated employees.

     Base Salary. Under their respective employment agreements, as currently in effect, Messrs. Gaudet, Banks, Roberts, Higgins and Couch are each entitled to receive an annual base salary of not less than $342,476, $235,706, $186,589, $162,983, and $133,524 in 2009. The base salary is reviewed periodically for merit or cost-of-living increases and may be increased pursuant to the policies then in effect related to executive compensation. The base compensation paid to the executive officer in any calendar year may not be less than the base compensation paid to the respective executive officer in the previous year, except for a reduction which is proportionate to a company-wide reduction in executive pay The base salary is intended to provide fixed compensation to the executive officer that reflects his job responsibilities, experience, value to Penn Millers, and demonstrated performance. The base salary for each executive in any future employment agreements or any amounts paid over the base salary amount under this current or any future employment agreements will be determined by the compensation committee based on its subjective evaluation of a variety of factors, including, but not limited to:

• the nature and responsibility of the position;

• the impact, contribution, expertise and experience of the executive;

• to the extent available and relevant, competitive market information; and

• the importance of retaining the executive along with the competitiveness of the market for the executive’s talent and services.

     Bonus. Our executive officers are entitled to participate in the Success Sharing Bonus Plan that we maintain and offer to our employees, and may receive an additional bonus or bonuses as the board of directors deems appropriate. The Success Sharing program is focused on delivering return on average equity, premium growth and controlling operating expenses. The potential for each employee’s bonus is set forth in the plan by position and base salary for that year.

     Benefits and Perquisites. Under their employment agreements, Messrs. Gaudet, Banks, Roberts, Higgins, and Couch are each entitled to participate in any other insurance, vacation, and other fringe benefits that Penn Millers maintains for its other employees. We provide three types of insurance to eligible employees: life, accident and health, and disability income. We provide these benefits to help alleviate the financial costs and loss of income arising from illness, disability or death, and to allow employees to take advantage of reduced insurance rates available for group policies.

     Penn Millers is required under Mr. Gaudet’s employment agreement to provide Mr. Gaudet with a leased automobile. Expenses, including insurance and operating expenses, are to be paid by Penn Millers, subject to such accounting by Mr. Gaudet of personal use of the automobile as may be requested by Penn Millers. In 2008, Penn Millers paid Mr. Gaudet $16,307 for insurance and operating expenses

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for his leased automobile. In lieu of reimbursement for country club fees, an automobile allowance, or other reimbursements or perquisites, Michael O. Banks, Harold W. Roberts, and Kevin D. Higgins receive an annual stipend that is paid quarterly in an amount determined by our Board of Directors. In 2008, a stipend of $18,195 was paid to Mr. Banks and Messrs. Joanlanne, Roberts and Higgins each received a stipend of $10,000.

     Benefits Provided in Connection with Termination or Change in Control. If Messrs. Gaudet or Banks are terminated without Cause or voluntarily terminate their employment for Good Reason (as such terms are defined in the employment agreements), they will be entitled to receive their accrued but unpaid base compensation and the continuation of their base compensation for the lesser of the remaining employment term or three years. If Messrs. Roberts or Higgins are terminated without Cause or voluntarily terminate their employment for Good Reason (as such terms are defined in the employment agreements), they will be entitled to receive their accrued but unpaid base compensation and the continuation of their base compensation for the lesser of the remaining employment term or two years. If Mr. Couch is terminated without Cause or voluntarily terminates his employment for Good Reason (as such terms are defined in the employment agreements), he will be entitled to receive his accrued but unpaid base compensation and the continuation of his base compensation for the lesser of the remaining employment term or one year.

     Following their termination of employment, Penn Millers will provide Messrs. Gaudet, Banks, Roberts, Higgins, and Couch with such amounts and benefits to which they may otherwise be entitled under the retirement, insurance, and similar programs of Penn Millers in which they participated immediately prior to their termination, but eligibility for these benefits may be limited if full payment would be deemed a “parachute payment” under Section 280G of the Code.

     If Messrs. Gaudet, Banks, Roberts, Higgins, or Couch terminate employment voluntarily without Good Reason or are terminated for Cause, they will be entitled to receive accrued but unpaid base salary until the date of termination and Penn Millers will also provide them with all amounts and benefits which they are entitled to under retirement, insurance, and similar programs of Penn Millers in which they participated immediately prior to termination.

     If Messrs. Gaudet or Banks die or become disabled (as such term is defined in the employment agreements) during the employment period, Penn Millers will provide them and their beneficiaries, as the case may be, with all amounts and benefits to which they are entitled under retirement, insurance and similar programs of Penn Millers in which they participated immediately prior to termination. In addition, if Messrs. Gaudet and Banks are terminated as a result of a disability or death, they will receive continuation of their base compensation for twelve months.

     If Messrs. Roberts, Higgins, or Couch die or become disabled (as such term is defined in the employment agreements) during the employment period, they are entitled to their accrued but unpaid base compensation and any accrued but unpaid or otherwise vested benefits under our benefit and incentive plans.

     Should Messrs. Gaudet, Banks, Roberts, Higgins, or Couch become subject to the excise tax provisions of Section 4999 of the Code as a result of any compensation and benefits received under their employment agreements, such compensation and benefits will be reduced by the minimum amount necessary to avoid the application of Section 280G of the Code.

     If any payment under Messrs. Gaudet, Banks, Roberts, Higgins, or Couch’s employment agreements is or becomes subject to Section 409A(a)(2)(B)(i) of the Code, such payments will be delayed, for a period of six months, accumulated with all other delayed payments, and paid on the day

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following such six-month period. All other remaining payments will be made as otherwise required by the employment agreements.

     Messrs. Gaudet and Banks’ employment agreements further provide that during the employment period, and in the event they are terminated for Cause or voluntarily quit without Good Reason for the greater of a (i) period of two years after the date of termination of employment or (ii) the period during which Gaudet or Banks is receiving continuation of his base compensation following a termination pursuant to the terms of the employment agreement (the “Restricted Period”), Messrs. Gaudet and Banks may not solicit, endeavor to entice away from Penn Millers or its subsidiaries or affiliates, or otherwise interfere with the relationship of Penn Millers or its subsidiaries or affiliates with any person who is employee or associate of Penn Millers or any of its subsidiaries or affiliates. Messrs. Roberts, Higgins and Couch’s employment agreements provide that during the employment period, and in the event they are terminated for Cause or voluntarily quit without Good Reason, for a period of two years (the “Restricted Period”), Messrs. Roberts, Higgins and Couch may not solicit, endeavor to entice away from Penn Millers or its subsidiaries or affiliates, or otherwise interfere with the relationship of Penn Millers or its subsidiaries or affiliates with any person who is employee or associate of Penn Millers or any of its subsidiaries or affiliates. During the Restricted Period, Messrs. Gaudet, Banks, Roberts, Higgins, or Couch may not solicit, induce or attempt to solicit or induce any customer, supplier or other entity doing business with Penn Millers to cease doing business with Penn Millers.

     If Messrs. Gaudet and Banks are terminated without Cause or voluntarily terminate their employment for Good Reason in the event of a Change in Control (as such terms are defined in the employment agreements), they will each be entitled to receive, for the lesser period of the term remaining under their employment agreement or three years following their respective termination date, the continuation of the base salary they received under the term of the change of control agreement. They would also be entitled to employer-provided health care benefits for 18 months following their termination date. Neither this offering nor a second-step demutualization will constitute a Change in Control.

     If Messrs. Roberts or Higgins are terminated without Cause or voluntarily terminate their employment for Good Reason in the event of a Change in Control (as such terms are defined in the employment agreements), they will each be entitled to receive their accrued but unpaid base compensation and the continuation of their base compensation for the lesser of the remaining employment term or two years following their respective termination date. They would also be entitled to employer-provided health care benefits for 12 months following their termination date. If Mr. Couch is terminated without Cause or voluntarily terminates his employment for Good Reason in the event of a Change in Control, he will be entitled to receive his accrued but unpaid base compensation and the continuation of his base compensation for the lesser of the remaining employment term or one year following his respective termination date. He would also be entitled to employer-provided health care benefits for 12 months following his termination date.

     We currently also have a severance obligation to Frank Joanlanne, pursuant to a Separation Agreement dated November 10, 2008. Mr. Joanlanne was formerly our Senior Vice President and his employment was terminated on December 1, 2008 in connection with our decision to sell Eastern Insurance Group. Pursuant to Mr. Joanlanne’s Separation Agreement, we shall pay him his $213,148 over a period of one year and ending on December 31, 2009. We will pay for outplacement assistance for Mr. Joanlanne in an amount not to exceed $3,000. In addition, we will continue Mr. Joanlanne’s health, dental and vision insurance coverage until December 31, 2009.

     In addition, we currently have a severance obligation to William J. Spencer, Jr., pursuant to a Separation Agreement dated January 4, 2008. Mr. Spencer was formerly our Executive Vice President of Marketing, and his employment was terminated on December 31, 2007. Pursuant to Mr. Spencer’s Separation Agreement, we will pay him $226,609 annually for a period of three years following his

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termination date. Under the Separation Agreement, he was also entitled to a one-time bonus of $50,000 pursuant to the terms of his 2005 senior executive retention agreement with Penn Millers and Eastern Insurance Group. In addition, we will continue Mr. Spencer’s health, dental and vision coverage until June 30, 2009.

Transactions with related persons, promoters and certain control persons

     Penn Millers Mutual and all of its wholly owned subsidiaries are parties to a federal income tax allocation agreement, Pursuant to the tax allocation agreement, Penn Millers Mutual determines the amount of federal income tax liability attributable to each company in accordance with the regulations promulgated by the Internal Revenue Service. Each company is required to pay to Penn Millers Insurance Company the amount of federal income tax liability that is attributable to such company, and Penn Millers Insurance Company is responsible for paying to the Internal Revenue Service the federal income tax liability of the consolidated group.

     Since January 1, 2008, we have not engaged in any transactions with, loaned money to or incurred any indebtedness to, or otherwise proposed to engage in transactions with, loaned money to or incur any indebtedness to, any related person, promoter or control person in an amount that in the aggregate exceeds $120,000, except as described above.

     We maintain a written policy which discourages our officers, directors, and employees from having a financial interest in any transaction between Penn Millers and a third party. When we engage in transactions involving our officers, directors or employees, their immediate family members, or affiliates of these parties, our officers, directors and employees are required to give notice to us of their interest in such a transaction and refrain from participating in material negotiations or decisions with respect to that transaction. Directors with an interest in such a transaction are expected to disqualify themselves from any vote by the board of directors regarding the transaction.

     When considering whether, we should engage in a transaction in which our officers, directors or employees, their immediate family members, or affiliates of these parties, may have a financial interest, our board of directors considers the following factors:

• whether the transaction is fair and reasonable to us;

• the business reasons for the transaction;

• whether the transaction would impair the independence of a director;

• whether the transaction presents a conflict of interest, taking into account the size of the transaction, the financial position of the director, officer or employee, the nature of their interest in the transaction and the ongoing nature of the transaction; and

• whether the transaction is material, taking into account the significance of the transaction in light of all the circumstances.

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RESTRICTIONS ON ACQUISITION OF PENN MILLERS HOLDING CORPORATION

     The articles of incorporation and bylaws we intend to adopt prior the offering contain provisions that are intended to encourage potential acquirers to negotiate directly with our board of directors, but which also may deter a non-negotiated tender or exchange offer for our stock or a proxy contest for control of Penn Millers Holding Corporation. Certain provisions of Pennsylvania law also may discourage non-negotiated takeover attempts or proxy contests. In addition, the terms of the employment agreements with our executive officers (see “Management — Benefit Plans and Employment Agreements”) may be viewed as having the effect of discouraging these efforts.

     All of these provisions may serve to entrench existing management. These provisions also may deter institutional interest in and ownership of our stock and, accordingly, may depress the market price for, and liquidity of, the common stock.

     Following is a description of these provisions and the purpose and possible effects of these provisions. We do not presently intend to propose additional anti-takeover provisions for our articles of incorporation or bylaws. Because of the possible adverse effect these provisions may have on shareholders, this discussion should be read carefully.

Antitakeover Provisions of Our Articles of Incorporation and Bylaws

     1. Prohibition of Ownership and Voting of Shares in Excess of 10%. Our articles of incorporation impose limitations upon the ability of certain shareholders and groups of shareholders to acquire or vote shares of our stock. The articles of incorporation prohibit any person (whether an individual, company or a group acting in concert, as defined) from acquiring voting control, as defined. Voting control is generally defined as the beneficial ownership at any time of shares with more than 10% of the total voting power of the outstanding stock of Penn Millers Holding Corporation. These provisions would not apply to the purchase of shares by underwriters in connection with a public offering. A group acting in concert includes persons seeking to combine or pool their voting power or other interests in common stock for a common purpose. Such a group does not include actions by the board of directors acting solely in their capacity as the Board.

     Under this provision, shares of common stock, if any, owned in excess of 10% will not be entitled to vote on any matter or take other shareholder action. For purposes of determining the voting rights of other shareholders, these excess shares are essentially treated as no longer outstanding. As a result, where excess shares are present, other shareholders will realize a proportionate increase in their voting power, but this 10% voting restriction will not be applicable to other shareholders if their voting power increases above 10% as a result of application of this rule to another shareholder.

     The potential effect of this voting rights limitation is significant. Any person or group acting in concert owning more than 10% of the outstanding common stock will generally be unable to exercise voting rights proportionate to their equity interest. When operating in conjunction with other provisions in our articles of incorporation described below, the practical effect of the limitation on voting rights may be to render it virtually impossible for any one shareholder or group acting in to determine the outcome of any shareholder vote.

     The 10% voting rights limitation may make it extremely difficult for any one person or group of affiliated persons to acquire voting control of Penn Millers Holding Corporation, with the result that it may be extremely difficult to bring about a change in the board of directors or management. This provision may have the effect of discouraging holders of large amounts of shares from purchasing additional shares, or would be holders who may desire to acquire enough shares to exercise control from purchasing any shares. As a result, this provision may have an adverse effect on the liquidity and market price of the shares.

     2. Classified Board of Directors. Our articles of incorporation provide for a classified board of directors of between 3 and 15 members, which number is fixed by the board of directors, divided into three classes serving for successive terms of three years each. This provision is designed to assure experience, continuity, and stability in the board’s leadership and policies. We believe that this can best be accomplished by electing each director to a three-year term and electing only approximately one-third of the directors each year.

     The election of directors for staggered terms significantly extends the time required to make any change in control of the board of directors and may tend to discourage any surprise or non-negotiated takeover bid for control of Penn Millers Holding Corporation. Under the articles of incorporation, it will take at least two annual meetings for holders of a majority of Penn Millers Holding Corporation’s voting securities to make a change in control of the board of directors because only a minority (approximately one-third) of the directors will be elected at each meeting. In addition, because certain actions require more than majority approval of the board of directors, as described herein, it may take as many as three annual meetings for a controlling block of shareholders to obtain complete control of the board and Penn Millers Holding Corporation’s management.

     This provision may tend to perpetuate present management because of the additional time required to change control of the board. Because the provision will increase the amount of time required for a takeover bidder to obtain control without the cooperation of the board even if the takeover bidder were to acquire a majority of the outstanding stock, it may tend to discourage certain tender offers, perhaps including some tender offers that the shareholders may believe would be in their best interests. The classified board provision will apply to all elections of directors and, accordingly, it will make it more difficult for shareholders to change the composition of the board if the shareholders believe such a change would be desirable, even in the absence of any third party’s acquisition of voting control. This is especially true in light of the denial of cumulative voting described below.

     3. No Cumulative Voting. Cumulative voting entitles a shareholder to multiply the number of votes to which the shareholder is entitled by the number of directors to be elected, with the shareholder being able to cast all votes for a single nominee or distribute them among the nominees as the shareholder

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sees fit. The Pennsylvania Business Corporation Law provides that shareholders are entitled to cumulate their votes for the election of directors, unless a corporation’s articles of incorporation provide otherwise.

     Cumulative voting is specifically prohibited in the articles of incorporation because we believe that each director should represent and act in the interest of all shareholders and not any special shareholder or group of shareholders. In light of current acquisition techniques and activity, minority representation could be disruptive and could impair the efficient management of Penn Millers Holding Corporation for the benefit of shareholders generally. In addition, the absence of cumulative voting also will tend to deter greenmail, in which a substantial minority shareholder uses his holdings as leverage to demand that a corporation purchase his shares at a significant premium over the market value of the stock to prevent the shareholder from obtaining or attempting to obtain a seat on the board of directors. In the absence of cumulative voting, a majority of the votes cast in any election of directors can elect all of the directors of the class in any given year. Because Penn Millers Mutual Holding Company will continue to own a majority of our outstanding shares of common stock after completion of the offering, it will be able to control the election of each of our directors.

     The absence of cumulative voting, coupled with a classified board of directors, will also deter a proxy contest designed to win representation on the board of directors or remove management because a group or entity owning less than a majority of the voting stock may be unable to elect a single director. Although this will make removal of incumbent management more difficult, we believe deterring proxy contests will avoid the significant cost, in terms of money and management’s time, in opposing such actions.

     4. Nominations for Directors and Shareholder Proposals. Our bylaws require that nominations for the election of directors made by shareholders (as opposed to those made by the board of directors) and any shareholder proposals for the agenda at any annual meeting generally must be made by notice (in writing) delivered or mailed to the Secretary not less than 90 days prior to the meeting of shareholders at which directors are to be elected.

     We believe that this procedure will assure that the board of directors and shareholders will have an adequate opportunity to consider the qualifications of all nominees for directors and all proposals, and will permit the shareholders’ meetings to be conducted in an orderly manner. It may have the effect, however, of deterring nominations and proposals other than those made by the board of directors.

     5. Mergers, Sale of Assets, Liquidation Approval. Our articles of incorporation provide that any merger, consolidation, sale of assets or similar transaction involving Penn Millers Holding Corporation requires the affirmative vote of shareholders entitled to cast at least 80% of the votes which all shareholders are entitled to cast, unless the transaction is approved in advance by two-thirds of the members of the board of directors. If the transaction is approved in advance by two-thirds of the members of the Board, approval by the affirmative vote of a majority of the votes cast by holders of outstanding voting stock at a meeting at which a quorum was present would be required.

     The articles of incorporation also provide that liquidation or dissolution of Penn Millers Holding Corporation requires the affirmative vote of shareholders entitled to cast at least 80% of the votes that all shareholders are entitled to cast, unless such transaction is approved by two-thirds of the members of the board of directors.

     We believe that in a merger or other business combination, the effects on our employees and our customers and the communities we serve might not be considered by a tender offeror when merging Penn Millers Holding Corporation into an entity controlled by an offeror as the second part of a two-step acquisition. By requiring approval of a merger or similar transaction by the affirmative vote of shareholders holding 80% or more of the combined voting power of outstanding stock of Penn Millers Holding Corporation, it will be extremely difficult for a group or person owning a substantial block of Penn Millers Holding Corporation stock, after a successful tender or exchange offer, to accomplish a merger or similar transaction without negotiating an agreement acceptable to the board of directors. Accordingly, the board of directors will be able to protect the interests of the remaining shareholders as well as our employees and the customers and communities that we serve. If Board approval is not obtained, the proposed transaction must be on terms sufficiently attractive to obtain approval by a vote of shareholders holding 80% or more of the combined voting power of outstanding Penn Millers Holding Corporation capital stock.

     The 80% approval requirement could result in the Board and management being able to exercise a stronger influence over any proposed takeover by refusing to approve the proposed business combination and obtaining sufficient votes, including votes controlled directly or indirectly by management, to preclude the 80% approval requirement.

     Because this provision will tend to discourage nonnegotiated takeover bids and will encourage other takeover bidders to negotiate with the Board, it also will tend to assist the Board and, therefore, management in retaining their present positions. In addition, if the Board does not grant its prior approval, a takeover bidder may still proceed with a tender offer or other purchases of Penn Millers Holding Corporation stock although any resulting acquisition of Penn Millers Holding Corporation may be more difficult and more expensive. Because of the increased expense and the tendency of this provision to discourage competitive bidders, the price offered to shareholders may be lower than if this provision were not present in the articles of incorporation.

     6. Qualifications for Directors. Our articles of incorporation provide that, unless waived by the board of directors, a person must be a shareholder of Penn Millers Holding Corporation for the lesser of one year or the time that has elapsed since the completion of the conversion, before he or she can be elected to the board of directors. This provision is designed to discourage non-shareholders who are interested in buying a controlling interest in Penn Millers Holding Corporation for the purpose of having themselves elected to the Board, by requiring them to wait for such period before being eligible for election.

     7. Mandatory Tender Offer by 25% Shareholder. Our articles of incorporation require any person or entity that acquires stock of Penn Millers Holding Corporation with a combined voting power of 25% or more of the total voting power of outstanding capital stock, to offer to purchase, for cash, all outstanding shares of Penn Millers Holding Corporation’s voting stock at a price equal to the highest price paid within the preceding twelve months by such person or entity for shares of the respective class or series of Penn Millers Holding Corporation stock. In the event this person or entity did not purchase any shares of a particular class or series of stock within the preceding twelve months, the price per share for such class or series of Penn Millers Holding Corporation stock would be the fair market value of such class or series of stock as of the date on which such person acquires 25% or more of the combined voting power of outstanding Penn Millers Holding Corporation stock.

     The Pennsylvania Business Corporation Law provides that, following any acquisition by a person or group of more than 20% of a publicly-held corporation’s voting stock, the remaining shareholders have the right to receive payment, in cash, for their shares from the acquiror of an amount equal to the fair value of their shares, including a proportionate amount for any control premium. Our articles of incorporation provide that if provisions of the respective articles and the Pennsylvania Business Corporation Law both apply in a given instance, the price per share to be paid will be the higher of the price per share determined under the provision in the articles or under the Pennsylvania Business Corporation Law.

     Our board of directors believes that any person or entity who acquires control of Penn Millers Holding Corporation in a nonnegotiated manner should be required to offer to purchase all shares of voting stock remaining outstanding after the assumption of control, at a price not less than the amount paid to acquire the control position.

     A number of companies have been the subject of tender offers for, or other acquisitions of, 20% or more of their outstanding shares of common stock. In many cases, such purchases have been followed by mergers in which the tender offeror or other purchaser has paid a lower price for the remaining outstanding shares than the price it paid in acquiring its original interest in the company and has paid in a potentially less desirable form in the merger (often securities of the purchaser that do not have an established trading market at the time of issuance). The statutory right of the remaining shareholders of a company to dissent in connection with certain mergers and receive the fair value of their shares in cash may involve significant expense and uncertainty to dissenting shareholders and may not be meaningful because the appraisal standard to be applied under Pennsylvania law does not take into account any appreciation in the stock price due to the merger. This provision in the articles of incorporation is intended to prevent these potential inequities.

     In many situations, the provision would require that a purchaser pay shareholders a higher price for their shares or structure the transaction differently than might be the case without the provision. Accordingly, we believe that, to the extent a merger were involved as part of a plan to acquire control of Penn Millers Holding Corporation, adoption of the provision would increase the likelihood that a purchaser would negotiate directly with our board of directors. We further believe that our Board is in a better position than our individual shareholders to negotiate effectively on behalf of all shareholders and that the Board is likely to be more knowledgeable than any individual shareholder in assessing the business and prospects of Penn Millers Holding Corporation. Accordingly, we are of the view that negotiations between the board of directors and a would-be purchaser will increase the likelihood that shareholders, as a whole, will receive a higher average price for their shares.

     The provision will tend to discourage any purchaser whose objective is to seek control of Penn Millers Holding Corporation at a relatively low price by offering a lesser value for shares in a subsequent merger than it paid for shares acquired in a tender or exchange offer. The provision also should discourage the accumulation of large blocks of shares of Penn Millers Holding Corporation voting stock, which the board of directors believes to be disruptive to the stability of our vitally important relationships with our employees and customers and the communities that we serve, and which could precipitate a change of control of Penn Millers Holding Corporation on terms unfavorable to the other shareholders.

     Tender offers or other private acquisitions of stock are usually made at prices above the prevailing market price of a company’s stock. In addition, acquisitions of stock by persons attempting to acquire control through market purchases may cause the market price of the stock to reach levels that are higher than otherwise would be the case. This provision may discourage any purchases of less than all of the outstanding shares of voting stock of Penn Millers Holding Corporation and may thereby deprive shareholders of an opportunity to sell their stock at a higher market price. Because of having to pay a higher price to other shareholders in a merger, it may become more costly for a purchaser to acquire control of Penn Millers Holding Corporation. Open market acquisitions of stock may be discouraged by the requirement that any premium price paid in connection with such acquisitions could increase the price that must be paid in a subsequent merger. The provision may therefore decrease the likelihood that a tender offer will be made for less than all of the outstanding voting stock of Penn Millers Holding Corporation and, as a result, may adversely affect those shareholders who would desire to participate in such a tender offer.

      8. Prohibition of Shareholders’ Action Without a Meeting and of Shareholders’ Right To Call a Special Meeting. Our articles of incorporation prohibit shareholder action without a meeting (i.e., the written consent procedure is prohibited) and prohibit shareholders from calling a special meeting. Therefore, in order for shareholders to take any action, it will require prior notice, a shareholders’ meeting and a vote of shareholders. Special meetings of shareholders can only be called by the Chief Executive Officer or the board of directors. Therefore, without the cooperation of the Chief Executive Officer or the board of directors, any shareholder will have to wait until the annual meeting of shareholders to have a proposal submitted to the shareholders for a vote.

     These provisions are intended to provide the board of directors and non-consenting shareholders with the opportunity to review any proposed action, express their views at the meeting and take any necessary action to protect the interests of our shareholders and Penn Millers Holding Corporation before the action is taken, and to avoid the costs of holding multiple shareholder meetings each year to consider proposals of shareholders. These provisions also will preclude a takeover bidder who acquires a majority of outstanding Penn Millers Holding Corporation stock from completing a merger or other business combination of Penn Millers Holding Corporation without granting the board of directors and the remaining shareholders an opportunity to make their views known and vote at an annual shareholders’ meeting. The delay caused by the necessity for an annual shareholders’ meeting may allow us to take preventive actions, even if you believe such actions are not in the best interests of the shareholders.

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     9. Amendment of Articles of Incorporation. The Pennsylvania Business Corporation Law provides that the articles of incorporation of a Pennsylvania business corporation (such as Penn Millers Holding Corporation) may be amended by the affirmative vote of a majority of the votes cast by all shareholders entitled to vote, except as otherwise provided by the corporation’s articles of incorporation. Our articles of incorporation provide that the following provisions of the articles can only be amended by an affirmative vote of shareholders entitled to cast at least 80% of all votes that shareholders are entitled to cast, or by an affirmative vote of 80% of the members of the board of directors and of shareholders entitled to cast at least a majority of all votes that shareholders are entitled to cast:

          (i) those establishing a classified board of directors;

          (ii) the prohibition on cumulative voting for directors;

          (iii) the prohibition on shareholders calling special meetings;

          (iv) the provision regarding the votes required to amend the articles of incorporation;

          (v) the provision that no shareholder shall have preemptive rights.

          (vi) the provisions that require 80% shareholder approval of certain actions;

          (vii) the prohibition on acquiring or voting more than 10% of the voting stock;

          (viii) the provision regarding the votes required to amend the bylaws; and

          (ix) the requirement of a 25% shareholder to purchase all remaining shareholders’ stock.

     On other matters, the articles of incorporation can be amended by an affirmative vote of a majority of the votes cast by all shareholders entitled to vote thereon at a meeting at which a quorum is present.

     10. Amendment of Bylaws. Generally, our articles of incorporation vest authority to make and amend the bylaws in the board of directors, acting by a vote of a majority of the entire board. In addition, except as described below, shareholders may amend the bylaws by an affirmative vote of the holders of 66-2/3% of the outstanding voting stock. However, the provision of the bylaws concerning directors’ liability and indemnification of directors, officers and others may not be amended to increase the exposure of directors to liability or decrease the degree of indemnification except by a two-thirds vote of the entire board of directors or 80% of all votes of shareholders entitled to be cast.

     This provision is intended to provide additional continuity and stability in our policies and governance so as to enable us to carry out our long range plans. The provision also is intended to discourage non-negotiated efforts to acquire Penn Millers Holding Corporation, since a greater percentage of outstanding voting stock will be needed before effective control over its affairs could be exercised. The board of directors will have relatively greater control over the bylaws than the shareholders because, except with respect to the director liability and indemnification provisions, the board could adopt, alter, amend or repeal the bylaws upon a majority vote by the directors.

Pennsylvania Fiduciary Duty Provisions

     The Pennsylvania Business Corporation Law provides that:

     (a) the board of directors, committees of the board, and directors individually, can consider, in determining whether a certain action is in the best interests of the corporation:

          (1) the effects of any action upon any or all groups affected by such action, including shareholders, employees, suppliers, customers and creditors of the corporation, and upon communities in which offices or other establishments of the corporation are located;

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          (2) the short-term and long-term interests of the corporation, including benefits that may accrue to the corporation from its long-term plans and the possibility that these interests may be best served by the continued independence of the corporation;

          (3) the resources, intent and conduct (past, stated and potential) of any person seeking to acquire control of the corporation; and

          (4) all other pertinent factors;

     (b) the board of directors need not consider the interests of any particular group as dominant or controlling;

     (c) directors, absent any breach of fiduciary duty, bad faith or self-dealing, are presumed to be acting in the best interests in the corporation, including with respect to actions relating to an acquisition or potential acquisition of control, and therefore they need not satisfy any greater obligation or higher burden of proof with respect to such actions;

     (d) actions relating to acquisitions of control that are approved by a majority of disinterested directors are presumed to satisfy the directors’ fiduciary obligations unless it is proven by clear and convincing evidence that the directors did not assent to such action in good faith after reasonable investigation; and

     (e) the fiduciary duty of directors is solely to the corporation and not its shareholders, and may be enforced by the corporation or by a shareholder in a derivative action, but not by a shareholder directly.

     One of the effects of these fiduciary duty provisions may be to make it more difficult for a shareholder to successfully challenge the actions of our board of directors in a potential change in control context. Pennsylvania case law appears to provide that the fiduciary duty standard under the Pennsylvania Business Corporation Law grants directors the almost unlimited statutory authority to reject or refuse to consider any potential or proposed acquisition of the corporation.

Other Provisions of Pennsylvania Law

     The Pennsylvania Business Corporation Law also contains provisions that have the effect of impeding a change in control. As permitted by the Pennsylvania Business Corporation Law, we have elected to provide in our articles of incorporation that these provisions will not apply to us.

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DESCRIPTION OF THE CAPITAL STOCK

General

      Our articles of incorporation authorize the issuance of 10,000,000 shares of common stock, $0.01 par value per share, and 1,000,000 shares of preferred stock, with a par value, if any, to be fixed by the board of directors. In the offering, we expect to issue between 4,505,000 and 6,772,222 shares of common stock. No shares of preferred stock will be issued in connection with the offering. The creation and issuance of preferred stock is subject to the prior approval from the Pennsylvania Insurance Department.

Common Stock

     Voting Rights. The holders of common stock will possess exclusive voting rights in Penn Millers Holding Corporation, except if and to the extent shares of preferred stock issued in the future have voting rights. Each holder of shares of common stock will be entitled to one vote for each share held of record on all matters submitted to a vote of holders of shares of common stock. See “Restrictions on Acquisition of Penn Millers Holding Corporation — Antitakeover Provisions of Our Articles of Incorporation and Bylaws.” Shareholders are not entitled to cumulate their votes for election of directors.

     Dividends. Under the Pennsylvania Business Corporation Law, we may only pay dividends if solvent and if payment of such dividend would not render us insolvent. Funds for the payment of dividends initially must come from either proceeds of this offering retained by us or dividends paid to us by Penn Millers Insurance Company. Therefore, the restrictions on Penn Millers Insurance Company’s ability to pay dividends affect our ability to pay dividends. See “Dividend Policy” and “Business — Regulation.”

     Transfer. Shares of common stock are freely transferable except for shares that are held by affiliates. Shares issued to our directors and officers in the offering will be restricted as to transfer for a period of six months from the effective date of the offering. Shares held by affiliates must be transferred in accordance with the requirements of Rule 144 of the Securities Act of 1933.

     Liquidation. In the event of any liquidation, dissolution or winding up of Penn Millers Insurance Company, Penn Millers Holding Corporation, as holder of all of the capital stock of Penn Millers Insurance Company, would be entitled to receive all assets of Penn Millers Insurance Company after payment of all debts and liabilities. In the event of a liquidation, dissolution or winding up of Penn Millers Holding Corporation, each holder of shares of common stock would be entitled to receive a portion of the Company’s assets, after payment of all of the Company’s debts and liabilities. If any preferred stock is issued, the holders thereof are likely to have a priority in liquidation or dissolution over the holders of the common stock.

     Other Characteristics. Holders of the common stock will not have preemptive rights with respect to any additional shares of common stock that may be issued. The common stock is not subject to call for redemption, and the outstanding shares of common stock, when issued and upon our receipt of their full purchase price, will be fully paid and nonassessable.

Preferred Stock

     None of the 1,000,000 shares of preferred stock that our board intends to authorize subject to the Pennsylvania Insurance Department’s approval, will be issued in the offering. When our

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articles of incorporation are filed, the board of directors will be authorized, without shareholder approval, to issue preferred stock or rights to acquire preferred stock, and to fix and state the par value, voting powers, number, designations, preferences or other special rights of such shares or rights, and the qualifications, limitations and restrictions applicable to any such series of preferred stock. The preferred stock may rank prior to the common stock as to dividend rights or liquidation preferences, or both, and may have full or limited voting rights. The board of directors has no present intention to issue any of the preferred stock.

TRANSFER AGENT AND REGISTRAR

     The transfer agent and registrar for the common stock is                                                              .

LEGAL MATTERS

     The legality of our common stock will be passed upon for us by Stevens & Lee, King of Prussia, Pennsylvania. Certain legal matters will be passed upon for Griffin Financial Group, LLC by Stevens & Lee, King of Prussia, Pennsylvania.

EXPERTS

     The consolidated financial statements and schedules of Penn Millers Mutual Holding Company and subsidiary as of December 31, 2008 and 2007, and for each of the years in the three year period ended December 31, 2008, have been included herein, in reliance upon the report of KPMG LLP, an independent registered public accounting firm, appearing elsewhere herein and upon the authority of said firm as experts in accounting and auditing.

     The report of the independent registered public accounting firm covering the December 31, 2008 financial statements refers to Penn Millers Mutual Holding Company and subsidiary’s adoption of the provisions of Statement of Financial Accounting Standards No. 158, Employers’ Accounting for Defined Benefit Pension and Other Postretirement Plans, as of December 31, 2007, and Securities and Exchange Commission Staff Accounting Bulletin No. 108, Quantifying Financial Statement Misstatements, in 2008.

     Curtis Financial has consented to the publication in this document of the summary of its report to us setting forth its opinion as to the estimated consolidated pro forma market value of our common stock to be outstanding upon completion of the offering and its opinion with respect to subscription rights.

ADDITIONAL INFORMATION

     We have filed with the SEC a Registration Statement on Form S-1 under the Securities Act of 1933 with respect to the shares of our common stock offered in this document. As permitted by the rules and regulations of the SEC, this prospectus does not contain all the information set forth in the Registration Statement. Such information can be examined without charge at the Public Reference Room of the SEC located at 100 F Street, N.E., Washington, D.C. 20549, and copies of such material can be obtained from the SEC at prescribed rates. The public may obtain more information on the operations of the Public Reference Room by calling the SEC at 1-800-732-0330. The registration statement also is available through the SEC’s world wide web site on the internet at http://www.sec.gov. The statements contained in this prospectus as to the contents of any contract or other document filed as an exhibit to the Registration Statement are, of necessity, brief descriptions thereof and are not necessarily complete.

     In connection with the offering, we will register our common stock with the SEC under Section 12(b) of the Securities Exchange Act of 1934, and, upon such registration, we and the holders of our stock will become subject to the proxy solicitation rules, reporting requirements and restrictions on stock purchases and sales by directors, officers and shareholders with 10% or more of the voting power, the annual and periodic reporting requirements and certain other requirements of the Securities Exchange Act of 1934.

161

PENN MILLERS HOLDING CORPORATION

UP TO 6,772,222 SHARES COMMON STOCK

------------------------ PROSPECTUS ------------------------

GRIFFIN FINANCIAL GROUP, LLC

                                        , 2009

Until                                         , 2009, all dealers effecting transactions in these securities, whether or not participating in this offering, may be required to deliver a prospectus. This is in addition to the obligation of dealers to deliver a prospectus when acting as underwriters.

INDEX TO FINANCIAL STATEMENTS

	Page
Report of Independent Registered Public Accounting Firm		F-2
Financial Statements
Consolidated Balance Sheets (As of December 31, 2008 and 2007)		F-3
Consolidated Statements of Operations (Years ended December 31, 2008, 2007 and 2006)		F-4
Consolidated Statements of Equity (Years ended December 31, 2008, 2007, and 2006)		F-5
Consolidated Statements of Cash Flows (Years ended December 31, 2008, 2007, and 2006)		F-6
Notes to Consolidated Financial Statements		F-7
Schedules to Consolidated Financial Statements		F-45

F-1

Report of Independent Registered Public Accounting Firm

The Board of Directors
Penn Millers Mutual Holding Company:

We have audited the accompanying consolidated balance sheets of Penn Millers Mutual Holding Company and subsidiary (the Company) as of December 31, 2008 and 2007, and the related consolidated statements of operations, equity, and cash flows for each of the years in the three-year period ended December 31, 2008. In connection with our audits of the consolidated financial statements, we also have audited the financial statement schedules II to VI. These consolidated financial statements and financial statement schedules are the responsibility of the Company’s management. Our responsibility is to express an opinion on these consolidated financial statements and financial statement schedules based on our audits.

We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.

In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Penn Millers Mutual Holding Company and subsidiary as of December 31, 2008 and 2007, and the results of their operations and their cash flows for each of the years in the three-year period ended December 31, 2008, in conformity with U.S. generally accepted accounting principles. Also, in our opinion, the related financial statement schedules, when considered in relation to the basic consolidated financial statements taken as a whole, present fairly, in all material respects, the information set forth therein.

As discussed in note 2 to the consolidated financial statements, the Company adopted the provisions of Statement of Financial Accounting Standards No. 158, Employers’ Accounting for Defined Benefit Pension and Other Postretirement Plans, as of December 31, 2007, and adopted the provisions of Securities and Exchange Commission Staff Accounting Bulletin No. 108, Quantifying Financial Statement Mis-statements, in 2008.

/s/ KPMG LLP  

Philadelphia, Pennsylvania
April 22, 2009

F-2

PENN MILLERS MUTUAL HOLDING COMPANY AND SUBSIDIARY
Consolidated Balance Sheets
December 31, 2008 and 2007
(Dollars in thousands)

	2008			2007
Assets
Investments:
Fixed maturities:
Available for sale, at fair value (amortized cost $120,538 in 2008 and $110,973 in 2007)	$	121,914			112,769
Equity securities, at fair value (cost $0 in 2008 and $10,525 in 2007)		—			13,409
Total investments		121,914			126,178
Cash and cash equivalents		11,959			10,134
Premiums and fees receivable		31,080			32,489
Reinsurance receivables and recoverables		20,637			15,640
Deferred policy acquisition costs		10,601			11,014
Prepaid reinsurance premiums		4,342			4,234
Accrued investment income		1,431			1,499
Property and equipment, net of accumulated depreciation		4,231			4,401
Income taxes receivable		1,508			1,056
Deferred income taxes		4,728			1,872
Other		3,864			3,972
Deferred offering costs		1,015			—
Assets held for sale		3,214			7,124
Total assets	$	220,524			219,613
Liabilities and Equity
Liabilities:
Losses and loss adjustment expense reserves	$	108,065			95,956
Unearned premiums		45,322			46,595
Accounts payable and accrued expenses		13,353			12,874
Borrowings under line of credit		950			—
Long-term debt		1,432			1,745
Liabilities held for sale		647			1,042
Total liabilities		169,769			158,212
Equity:
Retained earnings		51,914			59,293
Accumulated other comprehensive (loss) income		(1,159	)		2,108
Total equity		50,755			61,401
Total liabilities and equity	$	220,524			219,613

See accompanying notes to consolidated financial statements.

F-3

PENN MILLERS MUTUAL HOLDING COMPANY AND SUBSIDIARY
Consolidated Statements of Operations
Years ended December 31, 2008, 2007, and 2006
(Dollars in thousands)

	2008			2007			2006
Revenues:
Premiums earned	$	78,737			70,970			64,645
Investment income, net of investment expense		5,335			5,324			4,677
Realized investment (losses) gains, net		(5,819	)		(702	)		349
Other income		411			508			345
Total revenues		78,664			76,100			70,016
Losses and expenses:
Losses and loss adjustment expenses		57,390			49,783			43,766
Amortization of deferred policy acquisition costs		23,081			21,930			20,080
Underwriting and administrative expenses		3,481			2,233			3,216
Interest expense		184			125			222
Other expense, net		365			184			314
Total losses and expenses		84,501			74,255			67,598
(Loss) income from continuing operations, before income taxes		(5,837	)		1,845			2,418
Income tax (benefit) expense		(1,378	)		396			506
(Loss) income from continuing operations		(4,459	)		1,449			1,912
Discontinued operations:
(Loss) income on discontinued operations, before income taxes		(3,090	)		(489	)		292
Income tax (benefit) expense		(170	)		(126	)		124
(Loss) income on discontinued operations		(2,920	)		(363	)		168
Net (loss) income	$	(7,379	)		1,086			2,080

See accompanying notes to consolidated financial statements.

F-4

PENN MILLERS MUTUAL HOLDING COMPANY AND SUBSIDIARY
Consolidated Statements of Equity
Years ended December 31, 2008, 2007, and 2006
(Dollars in thousands)

				Accumulated
				other
	Retained			comprehensive
	earnings			income (loss)			Total
Balance at December 31, 2005, as restated for the adoption of SAB No. 108 (note 2 (s))	$	56,127			1,642			57,769
Net income		2,080			—			2,080
Other comprehensive income, net of taxes:
Unrealized investment holding gain arising during period, net of related income tax expense of $470		—			913			913
Reclassification adjustment for realized gains included in net income, net of related income tax expense of $119		—			(232	)		(232	)
Net unrealized investment gain								681
Comprehensive income								2,761
Balance at December 31, 2006		58,207			2,323			60,530
Net income		1,086			—			1,086
Other comprehensive income, net of taxes:
Unrealized investment holding gain arising during period, net of related income tax expense of $179		—			348			348
Reclassification adjustment for realized losses included in net income, net of related income tax benefit of $222		—			431			431
Net unrealized investment gain								779
Comprehensive income								1,865
Adjustment to initially adopt SFAS No. 158, net of related income taxes of $512		—			(994	)		(994	)
Balance at December 31, 2007		59,293			2,108			61,401
Net loss		(7,379	)		—			(7,379	)
Other comprehensive loss, net of taxes:
Unrealized investment holding loss arising during period, net of related income tax benefit of $3,097		—			(6,012	)		(6,012	)
Reclassification adjustment for realized losses included in net income, net of related income tax benefit of $1,965		—			3,813			3,813
Net unrealized investment loss								(2,199	)
Defined benefit pension plan, net of related income tax benefit of $551		—			(1,068	)		(1,068	)
Comprehensive loss								(10,646	)
Balance at December 31, 2008	$	51,914			(1,159	)		50,755

(Continued)

F-5

PENN MILLERS MUTUAL HOLDING COMPANY AND SUBSIDIARY
Consolidated Statements of Cash Flows
Years ended December 31, 2008, 2007, and 2006
(Dollars in thousands)

	2008			2007			2006
Cash flows from operating activities:
Net (loss) income	$	(7,379	)		1,086			2,080
Loss (income) on discontinued operations		2,920			363			(168	)
Adjustments to reconcile net (loss) income to net cash provided by operating activities:
Change in receivables, unearned premiums, and prepaid reinsurance		(4,787	)		4,470			3,318
Increase in loss and loss adjustment expense reserves		12,109			6,551			5,556
Change in accounts payable and accrued expenses		(1,737	)		56			598
Deferred income taxes		(1,068	)		(208	)		(512	)
Change in deferred acquisition costs		413			(633	)		(735	)
Amortization and depreciation		710			783			766
Realized investment losses (gains), net		5,819			702			(349	)
Other, net		383			(2,153	)		1,157
Cash provided by operating activities — continuing operations		7,383			11,017			11,711
Cash (used in) provided by operating activities — discontinued operations		(20	)		515			104
Net cash provided by operating activities		7,363			11,532			11,815
Cash flows from investing activities:
Available-for-sale investments:
Purchases		(50,075	)		(27,852	)		(27,777	)
Sales		32,927			7,048			14,125
Maturities		11,970			8,350			7,800
Purchases of property and equipment, net		(524	)		(919	)		(740	)
Cash used in investing activities — continuing operations		(5,702	)		(13,373	)		(6,592	)
Cash used in investing activities — discontinued operations		(48	)		(261	)		—
Net cash used in investing activities		(5,750	)		(13,634	)		(6,592	)
Cash flows from financing activities:
Initial public offering costs paid		(493	)		—			—
Net borrowings (repayments) on line of credit		950			(250	)		64
Repayment of long-term debt		(313	)		(312	)		(2,151	)
Net cash provided by (used in) financing activities — continuing operations		144			(562	)		(2,087	)
Net cash used in financing activities —discontinued operations	$	(260	)		(290	)		(221	)
Net cash used in financing activities		(116	)		(852	)		(2,308	)
Net increase (decrease) in cash		1,497			(2,954	)		2,915
Cash and cash equivalents at beginning of year		10,462			13,416			10,501
Cash and cash equivalents at end of year		11,959			10,462			13,416
Less cash of discontinued operations at end of year		—			328			364
Cash and cash equivalents of continuing operations at end of year	$	11,959			10,134			13,052

(Continued)

F-6

PENN MILLERS MUTUAL HOLDING COMPANY AND SUBSIDIARY

Notes to Consolidated Financial Statements

(Dollars in thousands, except share data)

(1)	Description of Business
	Penn Millers Mutual Holding Company and subsidiary (the Company) are engaged in the marketing and sale of commercial property and liability insurance in 33 states throughout the United States. Coverage is written directly by the Company’s employees and through independent producers.
	Penn Millers Holding Corporation (PMHC), which was renamed PMHC Corp. on April 22, 2009, is a wholly owned subsidiary of Penn Millers Mutual Holding Company (PMMHC). Penn Millers Insurance Company (PMIC) is a property and casualty insurance company incorporated in Pennsylvania. PMIC is a wholly owned subsidiary of PMHC, and the stock of PMIC is the most significant asset of PMHC. American Millers Insurance Company (AMIC) is a property and casualty insurance company incorporated in Pennsylvania and is a wholly owned subsidiary of PMIC. PMHC conducts no business other than acting as a holding company for PMIC.
	PMIC offers insurance products designed to meet the needs of certain segments of the agricultural industry in 33 states. PMIC also offers commercial insurance products designed to meet the needs of main street businesses in 8 states. The Company reports its operating results in three segments: agribusiness insurance, commercial business insurance, and a third segment, which is referred to as “other”. However, assets are not allocated to segments and are reviewed in the aggregate for decision-making purposes. The agribusiness insurance segment markets its products in a bundled offering that includes fire and allied lines, inland marine, general liability, commercial automobile, workers’ compensation, and umbrella liability insurance. This segment specializes in writing coverage for manufacturers, processors, and distributors of products for the agricultural industry. The commercial business insurance segment product consists of a business owner’s policy that combines property, liability, business interruption, and crime coverage for small businesses, workers’ compensation, commercial automobile and umbrella liability coverage. The types of businesses this segment targets include retail, service, hospitality, wholesalers, light manufacturers, and printers. Both the commercial and agribusiness lines are marketed through independent producers. The “other” segment includes the runoff of discontinued lines of insurance business and the results of mandatory assigned risk reinsurance programs that the Company must participate in as a condition of doing business in the states in which it operates.
	The Company owned Eastern Insurance Group (EIG), an insurance agency that placed business with both PMIC and unaffiliated insurance companies. On March 1, 2005, EIG acquired Galland Steinhauer & Repa, Inc. (GSR), an insurance agency that also placed business with PMIC and unaffiliated insurance companies. In 2008, the Company committed to a plan to sell EIG’s business and, therefore, the assets and liabilities have been classified as held-for-sale, with the results of operations reported as discontinued operations in the accompanying consolidated financial statements. The Company sold substantially all of the assets of EIG in February 2009 (see note 20).
	Penn Software & Technology Services Inc. (PSTS) was owned by the Company and provided both hardware and computer programming services to its clients. In 2007, management made a decision to sell PSTS, and as such, reported the assets and liabilities of PSTS as held for sale with the results of its operations as discontinued operations in the accompanying consolidated financial statements. The Company sold substantially all of the assets of PSTS in July 2008 (see note 20).
	On April 1, 1999, Pennsylvania Millers Mutual Insurance Company demutualized and became a stock insurance company, PMIC, within a mutual holding company structure, in accordance with a plan

(Continued)

F-7

PENN MILLERS MUTUAL HOLDING COMPANY AND SUBSIDIARY

Notes to Consolidated Financial Statements

(Dollars in thousands, except share data)

	approved by the Commonwealth of Pennsylvania and Pennsylvania Millers Mutual Insurance Company’s policyholders under the Insurance Company Mutual-to-Stock Conversion Act. As part of this demutualization, PMMHC was formed as the ultimate controlling entity of PMHC and PMIC. The transaction was consummated with the purchase of 5,000,000 shares (100% of issued) of $1 par stock at $2 per share of PMIC by PMHC. At the same time, PMIC paid a shareholders’ dividend of $10,100. Also, PMMHC purchased 1,000 shares (100% of issued) of $1 par stock at $1 per share of PMHC.
	PMHC owns all of the outstanding common stock of PMIC, which owns all of the outstanding common stock of Penn Millers Agency, Inc. and AMIC.
(2)	Summary of Significant Accounting Policies

(a)	Basis of Presentation
	The accompanying consolidated financial statements have been prepared in conformity with U.S. generally accepted accounting principles (GAAP) and include the accounts and operations of the Company and its subsidiary. All material intercompany balances and accounts have been eliminated in consolidation. Certain reclassifications have been made to the prior years’ consolidated financial statements in order to conform to the current year presentation. The consolidated financial statements, along with related notes, reflect the reclassification of EIG and PSTS as assets and liabilities held for sale and discontinued operations. See note 20 for additional disclosure related to discontinued operations.
(b)	Use of Estimates
	The preparation of consolidated financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, including loss reserves, contingent assets and liabilities, tax valuation allowances, valuation of defined benefit pension obligations, valuation of investments, including other-than-temporary impairment of investments and impairment of goodwill and the disclosure of contingent assets and liabilities at the date of consolidated the financial statements, and the reported amounts of revenues and expenses, during the reporting period. Actual results could differ from these estimates.
(c)	Discontinued Operations and Assets Held for Sale
	Discontinued operations represent components of the Company that have either been disposed of or are classified as held-for-sale if both the operations and cash flows of the components have been or will be eliminated from ongoing operations of the Company as a result of the disposal and when the criteria for discontinued operations have been met. The results of

(Continued)

F-8

PENN MILLERS MUTUAL HOLDING COMPANY AND SUBSIDIARY

Notes to Consolidated Financial Statements

(Dollars in thousands, except share data)

	operations of reporting units classified as discontinued operations are done so for all periods presented. The Company classifies assets and liabilities of reporting units as held-for-sale when the criteria for held-for-sale accounting are met. At the time a reporting unit qualifies for held-for-sale accounting, the reporting unit is evaluated to determine whether or not the carrying value exceeds its fair value less costs to sell. Any loss resulting from carrying value exceeding fair value less cost to sell is recorded in the period the reporting unit initially meets held-for-sale accounting. Management judgment is required to (1) assess the criteria required to meet held-for-sale accounting and (2) estimate fair value. Subsequent to initial classification as held for sale, the reporting unit is carried at the lower of its carrying amount or fair value less the cost to sell. Changes to the fair value could result in an increase or decrease to previously recognized losses. The assets and liabilities of a disposed group, classified as held for sale, are presented separately in the appropriate asset and liability sections of the consolidated balance sheets for all periods presented.
(d)	Concentration of Risk
	The Company’s business is subject to concentration of risk with respect to geographic concentration. Although PMHC’s operating subsidiaries are licensed collectively in 33 states, direct premiums written for two states, New Jersey and Pennsylvania, accounted for more than 25% of the Company’s direct premium writings for 2008. Consequently, changes in the New Jersey or Pennsylvania legal, regulatory, or economic environment could adversely affect the Company.
	Additionally, one producer, Arthur J. Gallagher Risk Management Services, which writes business for the Company through nine offices, accounted for 12% of the Company’s direct premiums written for 2008. Only one other producer accounted for more than 5% of the Company’s 2008 direct premium writings. No other brokers account for more than 5% of direct premium writings.
(e)	Investments
	The Company classifies all of its equity investments and fixed maturity securities as “available-for-sale,” requiring that these investments be carried at fair value, with unrealized gains and losses, less related deferred income taxes, excluded from operations, and reported in equity as accumulated other comprehensive income (loss). Short-term investments are recorded at cost, which approximates fair value. Management values the Company’s fixed maturities using quoted values and other data provided by a nationally recognized independent pricing service as inputs into its process for determining fair values of its investments. The pricing is based on observable inputs either directly or indirectly, such as quoted prices in markets that are active; quoted prices for similar securities at the measurement date; or other inputs that are observable. The fair value of equity securities is based on the quoted market prices from an active market at the balance sheet date.
	Premiums and discounts on fixed maturity securities are amortized or accreted using the interest method. Mortgage-backed securities are amortized over a period based on estimated future principal payments, including prepayments. Prepayment assumptions are reviewed periodically and adjusted

(Continued)

F-9

PENN MILLERS MUTUAL HOLDING COMPANY AND SUBSIDIARY

Notes to Consolidated Financial Statements

(Dollars in thousands, except share data)

as necessary to reflect actual prepayments and changes in expectations. Adjustments related to changes in prepayment assumptions are recognized on a retrospective basis. Dividends and interest on securities are recognized in operations when declared and earned, respectively. Accrual of income is suspended on fixed maturities or mortgage backed securities that are in default, or on which it is likely that future payments will not be made as scheduled. Interest income on investments in default is recognized after principal is paid and when payments are received. There are no investments included in the consolidated balance sheets that were not income-producing for the preceding 12 months.

Realized investment gains and losses on the sale of investments are recognized on the specific identification basis as of the trade date. Realized losses also include losses for fair value declines that are considered to be other than temporary. Changes in unrealized investment gains or losses on investments carried at fair value, net of applicable income taxes, are reflected directly in equity as a component of comprehensive income (loss) and, accordingly, have no effect on net income (loss).

The Company recognizes an impairment loss when an invested asset’s value declines below cost and the change is deemed to be other-than-temporary, or if it is determined that the Company will not be able to recover all amounts due pursuant to the issuer’s contractual obligations prior to sale or maturity. When the Company determines that an invested asset is other-than-temporarily impaired, the invested asset is written down to fair value, and the amount of the impairment is included in operations as a realized investment loss. The fair value then becomes the new cost basis of the investment, and any subsequent recoveries in fair value are recognized in operations at disposition.

Factors considered in determining whether a decline is other-than-temporary include the length of time and the extent to which fair value has been below cost, the financial condition and near-term prospects of the issuer, and the Company’s ability and intent to hold the investment for a period of time sufficient to allow for any anticipated recovery.

The Company’s process for reviewing invested assets for impairments during any quarter includes the following:

• identification and evaluation of investments that have possible indications of other-than-temporary impairment, which includes an analysis of investments with gross unrealized investment losses that have fair values less than 80% of cost for six consecutive months or more;

• review of portfolio manager recommendations for other-than-temporary impairments based on the investee’s current financial condition, liquidity, near-term recovery prospects and other factors;

• consideration of evidential matter, including an evaluation of factors or triggers that may cause individual investments to qualify as having other-than-temporary impairments, regardless of the duration in unrealized loss position; and

• determination of the status of each analyzed investment as other-than-temporarily impaired or not, with documentation of the rationale for the decision.

(Continued)

F-10

PENN MILLERS MUTUAL HOLDING COMPANY AND SUBSIDIARY

Notes to Consolidated Financial Statements

(Dollars in thousands, except share data)

	A fixed maturity security is other-than-temporarily impaired if it is probable that the Company will not be able to collect all amounts due under the security’s contractual terms or where the Company does not have the intent to hold the security to recovery, which may be maturity. Equity securities are other-than-temporarily impaired when it becomes apparent that the Company will not recover its cost over a reasonable period of time.
	The Company evaluates its mortgage backed securities for such characteristics as delinquency and foreclosure levels, credit enhancement, projected losses and coverage, and an analysis of the cash flows. It is possible that the underlying collateral of these securities will perform worse than current expectations, which may lead to adverse changes in cash flows on these securities and potential future other-than-temporary impairment losses. Events that may trigger material declines in fair values for these securities in the future would include but are not limited to deterioration of credit metrics, significantly higher levels of default and severity of loss on the underlying collateral, deteriorating credit enhancement and loss coverage ratios, or further illiquidity.
	The Company may, from time to time, sell invested assets subsequent to the balance sheet date that were considered temporarily impaired at the balance sheet date. Such sales are generally due to events occurring subsequent to the balance sheet date that result in a change in the Company’s intent or ability to hold an invested asset. The types of events that may result in a sale include significant changes in the economic facts and circumstances related to the invested asset, significant unforeseen changes in the Company’s liquidity needs, or changes in tax laws or the regulatory environment.
	The fair value of investments is reported in note 3. The fair value of other financial instruments, principally receivables, accounts payable and accrued expenses, and long-term debt approximates their December 31, 2008 and 2007 carrying values.
	The severe downturn in the public debt and equity markets, reflecting uncertainties associated with the mortgage crisis, worsening economic conditions, widening of credit spreads, bankruptcies and government intervention in large financial institutions, has resulted in significant realized and unrealized losses in the Company’s investment portfolio. Depending on market conditions going forward, the Company could incur additional realized and unrealized losses in future periods.
(f)	Derivative Instruments
	The Company has entered into an interest rate swap agreement in an effort to manage interest rate risk associated with its variable rate debt. The Company’s derivative instrument is executed with a financial institution (counterparty) and is subject to counterparty credit risk. Counterparty credit risk is the risk that the counterparty is unable to perform under the terms of the derivative instrument upon settlement of the derivative instrument.
	The derivative is recorded in accounts payable and accrued expenses in the consolidated balance sheets at fair value with the associated gain/loss included in the consolidated statements of operations.
(g)	Premium Revenue
	Insurance premiums on property and casualty insurance contracts are recognized in proportion to the underlying risk insured and are earned ratably over the duration of the policies. The reserve for unearned premiums on these contracts represents the portion of premiums written relating to the unexpired terms of coverage. The Company estimates earned but unbilled (EBUB) audit premiums and records them as an adjustment to earned premiums. The estimation of EBUB is based on a quantitative analysis of the Company’s historical audit experience.
(h)	Fee Income
	PSTS fee income is derived from hardware and computer programming services performed on a per diem basis. Revenues from projects are recognized as the services are rendered. Fee income is being reported through discontinued operations.
(i)	Commission Income
	EIG commission income is generally recognized as of the effective date of the insurance policy except for commissions billed on an installment basis, which are recognized as billed. Contingent commissions are recognized in amounts and in the period when management believes

(Continued)

F-11

PENN MILLERS MUTUAL HOLDING COMPANY AND SUBSIDIARY

Notes to Consolidated Financial Statements

(Dollars in thousands, except share data)

	receipt is probable and can be reasonably estimated. Commission income is being reported through discontinued operations.
(j)	Policy Acquisition Costs
	Policy acquisition costs, such as commissions, premium taxes, and certain other underwriting expenses that vary with and are primarily related to the production of new and renewal business, have been deferred and are amortized over the effective period of the related insurance policies. The method followed in computing deferred policy acquisitions costs limits the amount of such deferred costs to their estimated realizable value, which gives effect to the premium to be earned, related investment income, losses and loss adjustment expenses, and certain other costs expected to be incurred as the premium is earned. Future changes in estimates, the most significant of which is expected loss and loss adjustment expenses, may require adjustments to deferred policy acquisition costs. If the estimation of net realizable value indicates that the deferred acquisition costs are not recoverable, they would be written off.
(k)	Losses and Loss Adjustment Expenses
	The liability for unpaid losses and loss adjustment expenses represents the estimated liability for claims reported to the Company plus claims incurred but not yet reported and the related estimated adjustment expenses. The liability for losses and related loss adjustment expenses is determined using case basis evaluations and statistical analyses. Although considerable variability is inherent in such estimates, management believes that the liabilities for unpaid losses and loss adjustment expenses are reasonable. These estimates are periodically reviewed and adjusted as necessary and such adjustments are reflected in current operations.
	The Company’s estimated liability for asbestos and environmental claims is $2,502 and $2,764 at December 31, 2008 and 2007, respectively, a substantial portion of which results from the Company’s participation in assumed reinsurance pools. The Company estimates this liability based on its pro rata share of asbestos and environmental case reserves reported by the pools and an additional estimate of incurred but not reported losses and loss adjustment expenses based on actuarial analysis of the historical development patterns. The estimation of the ultimate liability for these claims is difficult due to outstanding issues such as whether coverage exists, the definition of an occurrence, the determination of ultimate damages, and the allocation of such damages to financially responsible parties. Therefore, any estimation of these liabilities is subject to significantly greater than normal variation and uncertainty.
(l)	Property and Equipment
	The costs of property and equipment are depreciated using the straight-line method over the estimated useful lives of the assets. Maintenance, repairs, and minor renewals are charged to expense as incurred, while expenditures that substantially increase the useful life of the assets are capitalized. Fixed assets are depreciated over three to seven years. Property is depreciated over useful lives generally ranging from five to forty years. The Company continually monitors the reasonableness of the estimated useful lives and adjusts them as necessary.
	The Company follows the provisions of the American Institute of Certified Public Accountants (AICPA) Statement of Position (SOP) No. 98-1, Accounting for the Costs of Computer Software

(Continued)

F-12

PENN MILLERS MUTUAL HOLDING COMPANY AND SUBSIDIARY

Notes to Consolidated Financial Statements

(Dollars in thousands, except share data)

	Developed or Obtained for Internal Use (SOP 98-1). SOP 98-1 provides guidance for determining when computer software developed or obtained for internal use should be capitalized and what costs should be capitalized. It also provides guidance on the amortization of capitalized costs and the recognition of impairment. The Company capitalized costs of $0 in 2008 and 2007. Capitalized software costs are depreciated over periods ranging from three to five years.
	As required by Statement of Financial Accounting Standards (SFAS) No. 144, Accounting for the Impairment or Disposal of Long-Lived Assets, the Company tests for impairment of property, plant, and equipment whenever events or changes in circumstances indicate that the carrying amount of the assets may not be recoverable. As of December 31, 2008, an impairment under SFAS No. 144 is not considered necessary.
(m)	Income Taxes
	The Company and its subsidiary file a consolidated federal income tax return. Deferred tax assets and liabilities are determined based on differences between financial reporting and tax bases of assets and liabilities and are measured using tax rates and laws that are expected to be in effect when the differences reverse. A valuation allowance is provided when it is more likely than not that some portion of the deferred tax asset will not be realized.
(n)	Reinsurance Accounting and Reporting
	The Company relies upon reinsurance agreements to limit its maximum net loss from large single risks or risks in concentrated areas, and to increase its capacity to write insurance. Reinsurance does not relieve the primary insurer from liability to its policyholders. To the extent that a reinsurer may be unable to pay losses for which it is liable under the terms of a reinsurance agreement, the Company is exposed to the risk of continued liability for such losses. Estimated amounts of reinsurance receivables and recoverables, net of amounts payable that have the right of offset, are reported as assets in the accompanying consolidated balance sheets. Prepaid reinsurance premiums represent the unexpired portion of premiums ceded to reinsurers. The Company considers numerous factors in choosing reinsurers, the most important of which are the financial stability and creditworthiness of the reinsurer.
(o)	Goodwill
	Goodwill is tested annually for impairment, and is tested for impairment more frequently if events and circumstances indicate that the asset might be impaired. An impairment loss is recognized to the extent that the carrying amount exceeds the asset’s fair value. This determination is made at the reporting unit level and consists of two steps. First, the Company determines the fair value of a reporting unit and compares it to its carrying amount. Second, if the carrying amount of a reporting unit exceeds its fair value, an impairment loss is recognized for any excess of the carrying amount of the reporting unit’s goodwill over the implied fair value of that goodwill. The implied fair value of goodwill is determined by allocating the fair value of the reporting unit in a manner similar to a purchase price allocation, in accordance with SFAS No. 141, Business Combinations. The residual fair value after this allocation is the implied fair value of the reporting unit goodwill. PSTS and EIG

(Continued)

F-13

PENN MILLERS MUTUAL HOLDING COMPANY AND SUBSIDIARY

Notes to Consolidated Financial Statements

(Dollars in thousands, except share data)

	have goodwill, which is classified as assets held for sale. The Company performed the impairment tests as of December 31, 2008, 2007, and 2006 for PSTS and EIG. Goodwill of EIG was also tested as of September 30, 2008 after information obtained during the selling process and the further deterioration of economic conditions indicated that it was more likely than not that the fair value of the EIG reporting unit was below its carrying amount. Goodwill in PSTS was impaired by $160 as of December 31, 2007. PSTS was sold in July 2008, resulting in a pretax loss on sale of $117.
	As of September 30, 2008, the Company determined that the carrying amount of the EIG reporting unit exceeded its fair value. The Company had not completed the second step of the goodwill impairment test, as of September 30, 2008. However, as a goodwill impairment loss was probable and could be reasonably estimated, the Company recognized its best estimate of that loss as of September 30, 2008. The Company estimated that EIG goodwill of $4,747 was impaired by $2,435 (unaudited). Management estimated the fair value of the reporting unit at September 30, 2008 based on various offers obtained during their process of selling EIG. The estimate was consistent with offers received subsequent to the end of the third quarter 2008.
	The Company completed step two of the goodwill impairment test in the fourth quarter 2008 and recorded an additional adjustment of $165 to the goodwill impairment write-down that was recorded at September 30, 2008. The fair value of the reporting unit was based on the actual selling price of EIG as executed on February 2, 2009. The adjusted carrying amount of goodwill of $2,147 is in assets held for sale at December 31, 2008.
	The Company completed the sale of substantially all of EIG’s assets and liabilities on February 2, 2009 and received proceeds of $3,109 less the estimated costs to sell of $231. In the first quarter of 2009, the Company recorded a pretax loss on sale of $6. The Company expects to incur approximately $908 of income tax expense on the sale in the first quarter of 2009. Much of the tax expense is expected to be available to offset capital losses incurred in 2008.
(p)	Cash and Cash Equivalents
	Cash and cash equivalents consist of cash, bank drafts, balances on deposit with banks, and investments with maturity at date of purchase of three months or less in qualified banks and trust companies.
(q)	Employee Benefit Plans
	The Company records annual amounts relating to its defined benefit pension plan and nonqualified Supplemental Executive Retirement Plan (SERP) based on calculations that include various actuarial assumptions, such as discount rates, mortality, rates of return and compensation increases. These estimates are highly susceptible to change from period to period based on the performance of plan assets, demographic changes and market conditions. The Company reviews its actuarial assumptions on an annual basis and makes modifications to the assumptions based on current rates and trends. The Company believes that the assumptions used in recording its defined benefit pension plan and SERP obligations are reasonable based on its experience, market conditions and input from its actuaries and investment advisors.
	The Company utilizes the corridor method of amortizing actuarial gains and losses. The amortization of experience gains and losses is recognized only to the extent that the cumulative unamortized net actuarial gain or loss exceeds 10% of the greater of the projected benefit obligation and the fair value of plan assets at the beginning of the year. When required, the excess of the cumulative gain or loss balance is amortized over the expected average remaining service life of the employees covered by the plan. On December 31, 2007, the Company adopted the provisions SFAS No. 158, Employers’ Accounting for Defined Benefit Pension and Other Postretirement Plans—an amendment of FASB statements No. 87, 88, 106 and 132(R). This statement requires recognition of the deferrals on the balance sheet with a corresponding charge to accumulated other comprehensive income (loss).
(r)	Deferred Offering Costs
	In accordance with the Securities and Exchange Commission (SEC) Staff Accounting Bulletin (SAB) Topic 5A, Expenses of Offering, the Company has deferred offering costs consisting principally of legal, underwriting and audit fees incurred through the balance sheet date that are related to the proposed offering and that will be charged to equity upon the completion of the proposed offering or charged to expense if the proposed offering is not completed.
	Deferred offering costs of $1,015 are reported separately on the consolidated balance sheets at December 31, 2008.

(Continued)

F-14

PENN MILLERS MUTUAL HOLDING COMPANY AND SUBSIDIARY

Notes to Consolidated Financial Statements

(Dollars in thousands, except share data)

(s)	Recent Accounting Pronouncements
	In June 2006, the Financial Accounting Standards Board (FASB) issued Interpretation No. 48 (FIN 48), Accounting for Uncertainty in Income Taxes— an interpretation of FSAB statement No. 109, which clarifies the accounting for income tax reserves and contingencies recognized in an enterprise’s financial statements in accordance with SFAS No. 109, Accounting for Income Taxes. FIN 48 also provides guidance on derecognition, classification, interest and penalties, accounting in interim periods, disclosure, and transition. On January 1, 2008, the Company adopted FIN 48. The adoption of FIN 48 did not result in any adjustments to beginning retained earnings, nor did it have a significant effect on operations, financial condition, or liquidity. As of December 31, 2008, the Company has no material unrecognized tax benefits.
	In September 2006, the SEC issued SAB No. 108, Quantifying Financial Statement Misstatements. SAB No. 108 provides guidance on how to evaluate prior period financial statement misstatements for purposes of assessing their materiality in the current period. SAB No. 108 was issued in order to eliminate the diversity of practice surrounding how public companies quantify financial statement misstatements. There are two widely recognized methods for quantifying the effects on the financial statements: the “rollover” or income statement method and the “iron curtain” or balance sheet method. Historically, the Company used the “rollover” method. Under this method, the Company quantified its financial statement misstatements based on the amount of errors originating in the current year income statement and as a result did not consider the effects of correcting the portion of the current year balance sheet misstatement that originated in prior years. SAB No. 108 now requires that the Company must consider both the rollover and iron curtain methods (dual method) when quantifying misstatements in the financial statements. The iron curtain method quantifies a misstatement based on the effects of correcting the misstatement existing in the balance sheet at the end of the current year, irrespective of the timing of the misstatement’s origination.
	The Company had previously identified that it had incorrectly accounted for contingent commissions in connection with the acquisition of GSR in 2005. At the time, the Company allocated $187 received for contingent commissions subsequent to the acquisition, which were then passed through to the seller, pursuant to the contract, to the purchase price, and also recognized revenue for that amount. This resulted in a $187 overstatement of goodwill and revenue for the twelve month period ending December 31, 2005. Prior to the adoption of SAB No. 108, the Company determined this misstatement was not material to the financial statements using the income statement approach. The error was considered material using the dual method approach.
	The Company restated their 2005 financial statements to adopt the provisions of SAB No. 108. As a result, the balance of retained earnings at December 31, 2005, as presented in the consolidated statements of equity presented herein, was reduced by $187 and goodwill was reduced by the same amount.
	In September 2006, the FASB issued SFAS No. 158. SFAS No. 158 requires an employer to recognize the overfunded or underfunded status of a single employer defined benefit postretirement plan as an asset or liability in its statement of financial position and to recognize changes in that funded status through comprehensive income (loss) in the year in which the changes occur. SFAS No. 158 also requires fiscal year-end measurement of defined benefit plan assets and benefit obligations. SFAS No. 158 amends SFAS Nos. 87, 88, 106, and 132(R). The requirement to recognize the funded status of a benefit plan and the disclosure requirements was effective for the Company’s fiscal year ended December 31, 2007. The Company recorded an adjustment of $994, net of $512 in related tax, to accumulated other comprehensive income (loss) upon adoption. The requirement to measure plan assets and benefit obligations as of the date of Company’s fiscal year-end balance sheet date was effective for the Company’s fiscal year ending December 31, 2008. This requirement had no effect on the Company.
	In September 2006, FASB issued SFAS No. 157, Fair Value Measurements. SFAS No. 157 defines fair value, establishes a framework for measuring fair value, and expands disclosure about fair value measurements. It applies to other pronouncements that require or permit fair value but does not

(Continued)

F-15

PENN MILLERS MUTUAL HOLDING COMPANY AND SUBSIDIARY

Notes to Consolidated Financial Statements

(Dollars in thousands, except share data)

require any new fair value measurements. The statement defines fair value as “the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date.” SFAS No. 157 establishes a fair value hierarchy to increase consistency and comparability in fair value measurements and disclosures. The hierarchy is based on the inputs used in valuation and gives the highest priority to quoted prices in active markets. The highest possible level should be used to measure fair value. The Company adopted SFAS No. 157 effective January 1, 2008. The Company’s adoption of SFAS No. 157 did not have a material effect on its results of operations, financial position, or liquidity.

In February 2007, the FASB issued SFAS No. 159, The Fair Value Option for Financial Assets and Financial Liabilities—Including an amendment of FASB Statement No. 115. SFAS No. 159 permits companies to choose to measure many financial instruments and certain other items at fair value at specified election dates. Upon adoption, an entity shall report unrealized gains and losses on items for which the fair value option has been elected in operations at each subsequent reporting date. Most of the provisions apply only to entities that elect the fair value option. However, the amendment to SFAS No. 115, Accounting for Certain Investments in Debt and Equity Securities, applies to all entities with available-for-sale and trading securities. SFAS No. 159 is effective on January 1, 2008 for the Company. The Company did not elect to use the fair value option for any assets or liabilities.

In February 2008, the FASB issued FASB Staff Position (FSP) FAS 157-2, Effective Date of FASB Statement No. 157, which delays the effective date of SFAS No. 157 for all nonfinancial assets and nonfinancial liabilities until January 1, 2009, except those that are recognized or disclosed at fair value in the financial statements on a recurring basis (at least annually). Accordingly, the provisions of SFAS No. 157 were not applied to goodwill and other intangible assets held by the Company and measured annually for impairment testing purposes only.

In March 2008, the FASB issued SFAS No. 161, Disclosures about Derivative Instruments and Hedging Activities—an amendment of FASB Statement No. 133. SFAS No. 161 changes the disclosure requirements for derivative instruments and hedging activities and specifically requires qualitative disclosures about objectives and strategies for using derivatives, quantitative disclosures about fair value amounts of, and gains and losses on, derivative instruments, and disclosures about credit-risk-related contingent features in derivative agreements. The provisions of SFAS No. 161 are effective for the Company beginning January 1, 2009. The adoption of this standard will have no impact on the Company’s financial condition or results of operations, but may result in additional disclosures.

In May 2008, the FASB issued SFAS No. 162, The Hierarchy of Generally Accepted Accounting Principles, to identify the sources of accounting principles and provide a framework for selecting the principles to be used in the preparation of financial statements in accordance with GAAP. The hierarchy of authoritative accounting guidance is not expected to change current practice but is expected to facilitate the FASB’s plan to designate as authoritative its forthcoming codification of accounting standards. SFAS No. 162 is effective

(Continued)

F-16

PENN MILLERS MUTUAL HOLDING COMPANY AND SUBSIDIARY

Notes to Consolidated Financial Statements

(Dollars in thousands, except share data)

November 15, 2008. The Company’s adoption did not result in any financial statement impact.

In May 2008, the FASB issued SFAS No. 163, Accounting for Financial Guarantee Insurance Contracts—an intrepretation of FASB Statement No. 60, requiring that an insurance enterprise recognize a claim liability prior to an event of default (insured event) when there is evidence that credit deterioration has occurred in an insured financial obligation. This statement also clarifies how SFAS No. 60, Accounting and Reporting by Insurance Enterprises, applies to financial guarantee insurance contracts, including the recognition and measurement to be used to account for premium revenue and claim liabilities. Those clarifications will increase comparability in financial reporting of financial guarantee insurance contracts by insurance enterprises. Expanded disclosures of financial guarantee insurance contracts are also required. SFAS No. 163 is effective for fiscal years beginning after December 15, 2008 and interim periods within those fiscal years, except for some disclosures about the insurance enterprise’s risk-management activities. Disclosures about the risk-management activities of the insurance enterprise are effective for the first period (including interim periods) beginning after issuance of this statement. Except for those disclosures, earlier application is not permitted. SFAS No. 163 will be effective for the Company as of January 1, 2009, except for disclosures about the insurance enterprise’s risk-management activities. The adoption of this standard will have no impact on the Company’s financial condition or results of operations.

In October 2008, the FASB issued FSP FAS 157-3, Determining the Fair Value of a Financial Asset When the Market for That Asset Is Not Active. FSP FAS 157-3 clarifies the application of SFAS No. 157 and provides an example to illustrate considerations in determining the fair value of a financial asset when the market for that financial asset is not active. FSP FAS 157-3 allows for the use of the reporting entity’s own assumptions about future cash flows and appropriately risk-adjusted discount rates when relevant observable inputs are not available to determine the fair value for a financial asset in a dislocated market. The Company’s adoption of FSP FAS 157-3 had no impact on the financial condition or results of operations as of or for the year ended December 31, 2008.

In December 2008, the FASB issued FSP FAS 132(R)-1, Employers’ Disclosures about Postretirement Benefit Plan Assets. FSP FAS 132R-1 was issued to provide guidance on an employer’s disclosures about plan assets of a defined benefit pension or other postretirement plan. FSP FAS 132R-1 requires an employer to disclose information about how investment allocation decisions are made, including factors that are pertinent to an understanding of investment policies and strategies. An employer will also need to disclose separately for pension plans and other postretirement benefit plans the fair value of each major category of plan assets based on the nature and risks of the assets as of each annual reporting date for which a statement of financial position is presented. FSP FAS 132R-1 also requires the disclosure of information that enables financial statement users to assess the inputs and valuation techniques used to develop fair value measurements of plan assets at the annual reporting date. For fair value measurements using significant unobservable inputs (Level 3), an employer will be required to disclose the effect of the measurements on changes in plan assets for the period. Furthermore, an employer is required to provide financial statement users with an understanding of significant concentrations of risk in plan assets. FSP FAS 132R-1 should be applied for fiscal years ending after December 15, 2009. Upon initial application, the provisions of FSP FAS 132R-1 are not required for earlier periods that are presented for comparative purposes. Earlier application is permitted. The Company is still evaluating the provisions of FSP FAS 132R-1 and intends to comply with its disclosure requirements.

In January 2009, the FASB issued FSP Emerging Issues Task Force (EITF) Issue 99-20-1, Amendments to the Impairment Guidance of EITF Issue No. 99-20. EITF 99-20-1 provides guidance on determining other-than-temporary impairments on securities subject to EITF Issue No. 99-20, Recognition of Interest Income and Impairment on Purchased Beneficial Interests and Beneficial Interests That Continue to Be Held by a Transferor in Securitized Financial Assets. The provisions of EITF 99-20-1 are required to be applied prospectively for interim periods and fiscal years ending after December 15, 2008. The Company’s adoption of EITF 99-20-1 did not result in any significant financial statement impact.

In April 2009, the FASB issued FSP FAS 157-4, Determining Fair Value When the Volume and Level of Activity for the Asset or Liability Have Significantly Decreased and Identifying Transactions That Are Not Orderly (FSP FAS 157-4). FSP FAS 157-4 provides guidelines for making fair value measurements more consistent with the principles presented in SFAS No. 157, Fair Value Measurements. FSP FAS 157-4 is effective for interim and annual periods ending after June 15, 2009, with early adoption permitted for interim and annual periods ending after March 15, 2009. The Company currently is evaluating the impact of adopting FSP FAS 157-4.

In April 2009, the FASB issued FSP FAS 115-2 and FAS 124-2, Recognition and Presentation of Other-Than-Temporary Impairments. FSP FAS 115-2 and FAS 124-2 provide guidance designed to create greater clarity and consistency in accounting for and presenting impairment losses on debt and equity securities. FSP FAS 115-2 and FAS 124-2 is effective for interim and annual periods ending after June 15, 2009, with early adoption permitted for interim and annual periods ending after March 15, 2009. The Company currently is evaluating the impact of adopting FSP FAS 115-2 and FAS 124-2.

In April 2009, the FASB issued FSP FAS 107-1 and APB 28-1, Interim Disclosures about Fair Value of Financial Instruments. FSP FAS 107-1 and APB 28-1 will require a company to disclose in its interim financial statements the fair value of all financial instruments within the scope of FASB Statement No. 107, Disclosures about Fair Value of Financial Instruments, as well as the method(s) and significant assumptions used to estimate the fair value of those financial instruments. FSP FAS 107-1 and APB 28-1 is effective for interim and annual periods ending after June 15, 2009. Earlier application is permitted for periods ending after March 15, 2009, but only if the Company also adopts both FSP FAS 157-4 and FSP FAS 115-2 and FAS 124-2. The Company currently is evaluating the impact of adopting FSP FAS 107-1.

(Continued)

F-17

PENN MILLERS MUTUAL HOLDING COMPANY AND SUBSIDIARY

Notes to Consolidated Financial Statements

(Dollars in thousands, except share data)

(3)	Fair Value Measurements
	Effective January 1, 2008, upon adoption of SFAS No. 159, the Company did not elect the fair value option for any assets or liabilities that were not otherwise already carried at fair value in accordance with other accounting pronouncements.
	In accordance with SFAS No. 157, the Company’s financial assets and financial liabilities measured at fair value are categorized into three levels, based on the markets in which the assets and liabilities are traded and the reliability of the assumptions used to determine fair value. These levels are:
	Level 1 — Unadjusted quoted market prices for identical assets or liabilities in active markets that the Company has the ability to access. The Company classifies U.S. Treasury debt securities as Level 1.
	Level 2 — Valuations based on observable inputs, other than quoted prices included in Level 1, for assets and liabilities traded in less active dealer or broker markets. Valuations are based on identical or comparable assets and liabilities. The Company classifies all securities, other than U.S. Treasury debt securities, as Level 2.
	Level 3 — Valuations for assets and liabilities that are derived from other valuation methodologies, including option pricing models, discounted cash flow models, and similar techniques, and not based on market exchange, dealer, or broker traded transactions. Level 3 valuations incorporate certain assumptions and projections that are often unobservable in determining the fair value assigned to such assets or liabilities.
	The table below presents the balances of assets and liabilities measured at fair value on a recurring basis.

	December 31, 2008
	Level 1		Level 2		Level 3		Total
Fixed maturities, available for sale	$	9,310		112,604		—		121,914
Equity securities		—		—		—		—
Total assets	$	9,310		112,604		—		121,914
Accounts payable and accrued expenses	$	—		66		—		66
Total liabilities	$	—		66		—		66

The Company uses quoted values and other data provided by a nationally recognized independent pricing service in its process for determining fair values of its investments. Its evaluations represent an exit price and a good faith opinion as to what a buyer in the marketplace would pay for a security in a current sale.

As of December 31, 2008, all of the Company’s fixed maturity investments were priced using this one primary service. For fixed maturity securities that have quoted prices in active markets, market quotations are provided. For fixed maturity securities that do not trade on a daily basis, the independent pricing service prepares estimates of fair value using a wide array of observable inputs including relevant market information, benchmark curves, benchmarking of like securities, sector groupings, and matrix pricing. The observable market inputs that the Company’s independent pricing service utilizes may include (listed in order of priority for use) benchmark yields, reported trades, broker/dealer quotes, issuer spreads, two-sided markets, benchmark securities, market bids/offers, and other reference data on markets, industry, and the economy. Additionally, the independent pricing service uses an Option Adjusted Spread model to develop prepayment and interest rate scenarios.

The independent pricing service provided a fair value estimate for all of the Company’s investments at December 31, 2008, which is utilized, among other resources, in reaching a conclusion as to the fair value of investments. Management reviews the reasonableness of the pricing provided by the independent pricing service by employing various analytical procedures. The Company reviews all securities to identify recent downgrades, significant changes in pricing, and pricing anomalies on individual securities relative to other similar securities. This will include looking for relative consistency across securities in various common blocks or sectors, durations, and credit ratings. This review will also include all fixed maturity securities rated lower than “A” by Moody’s or S&P. If, after this review, management does not believe that the pricing for any security is a reasonable estimate of fair value, then it will seek to resolve the discrepancy through discussions with the pricing service. The classification within the fair value hierarchy of SFAS No. 157 is then confirmed based on the final conclusions from the pricing review. The Company did not have any such discrepancies at December 31, 2008.

Included in accounts payable and accrued expenses is an interest rate swap agreement (see note 14). Management estimates the fair value of the interest rate swap based on information obtained from a third-party financial institution counterparty. Management also considers the prevailing interest rate environment as a key input into the valuation of the swap.

(Continued)

F-18

PENN MILLERS MUTUAL HOLDING COMPANY AND SUBSIDIARY

Notes to Consolidated Financial Statements

(Dollars in thousands, except share data)

(4)      Investments

The amortized cost and fair value of investments in fixed maturity and equity securities, which are all available for sale, at December 31, 2008 and 2007, are as follows:

			Gross		Gross
	Amortized		unrealized		unrealized		Estimated
	cost		gains		losses		fair value
December 31, 2008:
U.S. treasuries	$	8,530		780		—		9,310
Agencies not backed by the full faith and credit of the U.S. government		14,929		1,160		—		16,089
State and political subdivisions		31,775		1,292		110		32,957
Mortgage-backed securities		25,374		601		670		25,305
Corporate securities		39,930		414		2,091		38,253
Total fixed maturities	$	120,538		4,247		2,871		121,914
Total equity securities	$	—		—		—		—
December 31, 2007:
U.S. treasuries	$	7,837		259		—		8,096
Agencies not backed by the full faith and credit of the U.S. government		18,523		372		7		18,888
State and political subdivisions		30,321		827		14		31,134
Mortgage-backed securities		20,636		207		119		20,724
Corporate securities		33,656		503		232		33,927
Total fixed maturities	$	110,973		2,168		372		112,769
Total equity securities	$	10,525		2,928		44		13,409

(Continued)

F-19

PENN MILLERS MUTUAL HOLDING COMPANY AND SUBSIDIARY

Notes to Consolidated Financial Statements

(Dollars in thousands, except share data)

The amortized cost and estimated fair value of fixed maturity securities at December 31, 2008, by contractual maturity, are shown below:

	Amortized		Estimated
	cost		fair value
Due in 1 year or less	$	8,321		8,439
Due after 1 year through 5 years		42,747		43,356
Due after 5 years through 10 years		39,299		39,824
Due after 10 years		4,797		4,990
		95,164		96,609
Mortgage-backed securities		25,374		25,305
	$	120,538		121,914

The expected maturities may differ from contractual maturities in the foregoing table because borrowers may have the right to call or prepay obligations with or without call or prepayment penalties.

At December 31, 2008 and 2007, investments with a fair value of $4,543 and $5,744, respectively, were on deposit with regulatory authorities, as required by law.

Major categories of net investment income are as follows:

	2008			2007			2006
Interest on fixed maturities	$	5,425			5,157			4,519
Dividends on equity securities		215			251			247
Interest on cash and cash equivalents		209			456			413
Total investments income		5,849			5,864			5,179
Investment expense		(514	)		(540	)		(502	)
Investment income, net of investment expense	$	5,335			5,324			4,677

(Continued)

F-20

PENN MILLERS MUTUAL HOLDING COMPANY AND SUBSIDIARY

Notes to Consolidated Financial Statements

(Dollars in thousands, except share data)

Realized gross (losses) gains from investments and the change in difference between fair value and cost of investments, before applicable income taxes, are as follows:

	2008			2007			2006
Fixed maturity securities:
Available for sale:
Gross gains	$	80			—			2
Gross losses		(109	)		(77	)		(16	)
Equity securities:
Gross gains		2,211			524			453
Gross losses		7,960	)		(1,100	)		(87	)
Realized investment (losses) gains, net		(5,778	)		(653	)		352
Change in value of interest rate swap		(41	)		(49	)		(3	)
Realized investment (losses) gains after change in value of interest rate swap, net	$	(5,819	)		(702	)		349
Change in difference between fair value and cost of investments:
Fixed maturity securities for continuing operations	$	(420	)		1,519			(392	)
Equity securities for continuing operations		(2,884	)		(337	)		1,403
Total for continuing operations	$	(3,304	)		1,182			1,011
Equity securities for discontinued operations		(28	)		(2	)		20
Total including discontinued operations	$	(3,332	)		1,180			1,031

Income tax (benefit) expense on net realized investment (losses) gains was $(1,965), $(222) and $119 for the years ended December 31, 2008, 2007 and 2006, respectively. Deferred income tax expense applicable to net unrealized investment gains included in equity was $468 and $1,592 at December 31, 2008 and 2007, respectively.

For the nine months ended September 30, 2008, the Company recorded impairment charges of $2,922 on all of its equity investments. In the fourth quarter of 2008, the Company sold all of its equity portfolio and recognized an additional $4,522 realized loss on the sale related to fourth quarter declines in fair value. Impairment charges of $620 and $0 for the years ended December 31, 2007 and 2006, respectively, were recorded within realized net investment (losses) gains on the accompanying consolidated statements of operations. See the Company’s policy for recording an impairment loss in note 2.

The Company entered into an interest rate swap agreement in 2005 to manage interest rate risk associated with its variable rate debt. The fixed interest rate as a result of the agreement is 5.55% for the full five year term of the debt. The notional amount of the swap is $1,432 and $1,745 at December 31, 2008 and 2007, respectively. Investment losses of $41, $49 and $3 were recorded within net realized investment (losses) gains on the consolidated statements of operations in 2008, 2007 and 2006, respectively.

(Continued)

F-21

PENN MILLERS MUTUAL HOLDING COMPANY AND SUBSIDIARY

Notes to Consolidated Financial Statements

(Dollars in thousands, except share data)

The fair value and unrealized losses for securities temporarily impaired as of December 31, 2008 and 2007 are as follows:

	Less than 12 months				12 months or longer				Total
	Fair		Unrealized		Fair		Unrealized		Fair		Unrealized
Description of securities	value		losses		value		losses		value		losses
2008:
State and political subdivisions	$	2,934		56		515		54		3,449		110
Mortgage-backed securities		2,203		297		1,645		373		3,848		670
Corporate securities		10,732		1,008		9,907		1,083		20,639		2,091
Total fixed maturities		15,869		1,361		12,067		1,510		27,936		2,871
Total temporarily impaired securities	$	15,869		1,361		12,067		1,510		27,936		2,871
2007:
Agencies not backed by the full faith and credit of the U.S. government	$	—		—		4,199		7		4,199		7
State and political subdivisions		516		1		3,669		13		4,185		14
Mortgage-backed securities		497		—		9,150		119		9,647		119
Corporate securities		2,665		44		8,662		188		11,327		232
Total fixed maturities		3,678		45		25,680		327		29,358		372
Equity securities		760		43		326		1		1,086		44
Total temporarily impaired securities	$	4,438		88		26,006		328		30,444		416

The Company invests in high credit quality bonds and has the ability and intent to hold them until maturity to realize all the future cash flows but classifies them as available for sale. Fair values of interest rate sensitive instruments may be affected by increases and decreases in prevailing interest rates which generally translate, respectively, into decreases and increases in fair values of fixed maturity investments. The fair values of interest rate sensitive instruments also may be affected by the credit worthiness of the issuer, prepayment options, relative values of other investments, the liquidity of the instrument, and other general market conditions. Most of the decline in our fixed maturity portfolio has been in corporate bonds issued by financial institutions, whose prices have been depressed as a result of the recent turmoil in the credit markets. The Company has evaluated each security and taken into account the severity and duration of the impairment, the current rating on the bond, and the outlook for the issuer according to independent analysts. The Company has found that the declines in fair value are most likely attributable to the current market dislocation, and there is no evidence that the likelihood of not receiving all of the contractual cash flows is probable. There are $12,067 in fixed maturity securities, at fair value, that at December 31, 2008, had been below cost for over 12 months. The $1,510 of unrealized losses on such securities relates to securities which carry an investment grade debt rating and have declined in fair value roughly in line with overall market conditions. The Company currently has the ability and intent to hold these securities until recovery, which may be maturity. However, depending on developments involving both the issuers and worsening economic conditions, these investments may be written down in the income statement in the future.

(Continued)

F-22

PENN MILLERS MUTUAL HOLDING COMPANY AND SUBSIDIARY

Notes to Consolidated Financial Statements
(Dollars in thousands, except share data)

	The Company does not engage in subprime residential mortgage lending. The only securitized financial assets that the Company owns are residential and commercial mortgage backed securities of high credit quality. The Company’s exposure to subprime lending is limited to investments in corporate bonds of banks, which may contain some subprime loans on their balance sheets. These bonds are reported at fair value. As of December 31, 2008, fixed maturity securities issued by banks accounted for 7.8% of the bond portfolio’s book value. None of the Company’s fixed maturity securities have defaulted or required an impairment charge due to the subprime credit crisis.
(5)	Comprehensive Income (Loss)
	Comprehensive (loss) income for the years ended December 31, 2008, 2007, and 2006 consisted of the following:

	2008			2007		2006
Net (loss) income	$	(7,379	)		1,086		2,080
Other comprehensive (loss) income:
Unrealized (losses) gains on securities:
Unrealized investment holding (losses) gains arising during period		(6,012	)		348		913
Less:
Reclassification adjustment for losses (gains) included in net income (loss)		3,813			431		(232	)
Net unrealized investment (losses) gains		(2,199	)		779		681
Defined benefit pension plans:
Recognized net actuarial loss		(1,068	)		—		—
Other comprehensive (loss) income		(3,267	)		779		681
Comprehensive (loss) income	$	(10,646	)		1,865		2,761

(Continued)

F-23

PENN MILLERS MUTUAL HOLDING COMPANY AND SUBSIDIARY

Notes to Consolidated Financial Statements

(Dollars in thousands, except share data)

Accumulated other comprehensive (loss) income at December 31, 2008 and 2007 consisted of the following amounts:

	2008			2007
Unrealized investment  gains for continuing operations, net of tax	$	908			3,088
Unrealized investment (losses) gains for discontinued operations, net of tax		(5	)		14
Defined benefit pension plan — net actuarial loss, net of tax		(2,062	)		(994	)
Accumulated other comprehensive (loss) income	$	(1,159	)		2,108

(6)	Deferred Policy Acquisition Costs
	Changes in deferred policy acquisition costs for the years ended December 31, 2008, 2007, and 2006 are as follows:

	2008			2007			2006
Balance, January 1	$	11,014			10,381			9,646
Acquisition costs deferred		22,668			22,563			20,815
Amortization charged to operations		(23,081	)		(21,930	)		(20,080	)
Balance, December 31	$	10,601			11,014			10,381

(7)	Property and Equipment
	Property and equipment consisted of land and buildings with a cost of $5,677 and $5,592 and equipment, capitalized software costs, and other items with a cost of $9,064 and $8,625 at December 31, 2008 and 2007, respectively. Accumulated depreciation related to such assets was $10,510, $9,816 and $9,070 at December 31, 2008, 2007 and 2006, respectively.
	Rental expense under leases for continuing operations amounted to $140, $245, and $206 for 2008, 2007, and 2006, respectively.

(Continued)

F-24

PENN MILLERS MUTUAL HOLDING COMPANY AND SUBSIDIARY

Notes to Consolidated Financial Statements

(Dollars in thousands, except share data)

At December 31, 2008, the minimum aggregate rental and lease commitments for continuing operations are as follows:

2009	$	123
2010		81
2011		37
2012		5
Total	$	246

(8)	Long-Term Debt
	Long-term debt related to continuing operations at December 31, 2008 and 2007 consisted of the following:

	2008		2007
Term loan agreement — due 2010	$	1,432		1,745
Long-term debt	$	1,432		1,745

The Company has a term loan agreement due in 2010. The term loan requires monthly principal payments of $26, plus interest, based on a five-year amortization schedule. Interest is based on the London Interbank Offered Rate (0.45% at December 31, 2008) plus a spread of 105 basis points through its maturity in July 2010. The term loan agreement subjects the Company to certain covenants and restrictions, including limitations on additional borrowing arrangements, encumbrances, and sales of assets. Covenants also include maintenance of various financial ratios and amounts. The Company was in compliance with these covenants at December 31, 2008 and 2007.

The following is a schedule of maturities of the long-term debt from continuing operations as of December 31, 2008:

2009	$	312
2010		1,120
Total	$	1,432

Interest paid was $90, $108, and $218 as of December 31, 2008, 2007, and 2006, respectively.

Long-term debt, recorded within liabilities held for sale, at December 31, 2008 and 2007 consisted of the following:

	2008		2007
Acquisition payables	$	285		545
Long-term debt	$	285		545

As further discussed in note 17, installment payments relating to the acquisition of GSR are due in four installments over a four-year term under the purchase agreement. At December 31, 2008, one payment totaling $285, net of imputed interest computed at a 5.5% interest rate, remains and was paid in March 2009.

F-25

PENN MILLERS MUTUAL HOLDING COMPANY AND SUBSIDIARY

Notes to Consolidated Financial Statements
(Dollars in thousands, except share data)

(9)	Employee Benefit Plans
	The Company has a noncontributory defined benefit pension plan covering substantially all employees. Retirement benefits are a function of both the years of service and level of compensation. It is the Company’s policy to fund the plan in amounts equal to the amount deductible for federal income tax purposes. The Company also sponsors a SERP. The SERP, which is unfunded, provides defined pension benefits outside of the qualified defined benefit pension plan to eligible executives based on average earnings, years of service, and age at retirement.
	As a result of the classification of EIG as held for sale, the Company has recognized a curtailment of its defined benefit pension plan in accordance with SFAS No. 88, Employers’ Accounting for Settlements and Curtailments of Defined Benefit Pension Plans and for Termination Benefits. According to SFAS No. 88, a curtailment loss should be recognized when the curtailment is probable and the loss can be reasonably estimated. The EIG employees, who are part of the sale and represent a significant number of participants within the plan, stopped accruing benefits as of their termination on February 2, 2009, the date of the sale. The Company recognized a curtailment loss in the fourth quarter 2008 when it became probable, as the Company executed a letter of intent to sell EIG on January 7, 2009. The recognized curtailment loss represents the balance of unrecognized prior service cost associated with the EIG employees, in the amount of $222. A reduction in projected benefit obligation of $123 was recognized at the same time.

(a) Obligations and Funded Status at December 31

	2008			2007
Change in benefit obligation:
Benefit obligation at beginning of year	$	9,768			9,552
Service cost		664			656
Interest cost		573			582
Benefit payments		(1,408	)		(699	)
Administrative expenses		(41	)		(26	)
Actuarial loss (gain)		340			(297	)
Curtailment		(123	)		—
Benefit obligation at end of year	$	9,773			9,768
Change in plan assets:
Fair value of plan assets at beginning of year	$	6,239			6,476
Employer contributions		1,402			455
Benefit payments		(1,408	)		(699	)
Administrative expenses		(41	)		(26	)
Actual return on plan assets		(1,251	)		33
Fair value of plan assets at end of year	$	4,941			6,239
Funded status (net liability recognized)	$	(4,832	)		(3,529	)

(Continued)

F-26

PENN MILLERS MUTUAL HOLDING COMPANY AND SUBSIDIARY

Notes to Consolidated Financial Statements

(Dollars in thousands, except share data)

     Amounts recognized in accumulated other comprehensive income (loss):

	2008			2007
Unrecognized prior service cost	$	(527	)		(811	)
Unrecognized net loss		(2,598	)		(695	)
Accumulated other comprehensive loss	$	(3,125	)		(1,506	)

The accumulated benefit obligation for the qualified defined benefit pension plan was $6,894 and $6,126 at December 31, 2008 and 2007, respectively.

The accumulated benefit obligation and projected benefit obligation of the SERP were $1,024 and $1,353, respectively, at December 31, 2008 and $1,870 and $2,193, respectively, at December 31, 2007.

(b) Components of Net Periodic Benefit Cost

	2008			2007			2006
Service cost	$	664			656			618
Interest cost		573			582			512
Expected return on plan assets		(462	)		(489	)		(440	)
Amortization of prior service costs		62			62			62
Amortization of net loss		27			7			36
Net periodic pension expense		864			818			788
Curtailment loss		222			—			—
Net periodic pension expense and additional amounts recognized	$	1,086			818			788

(Continued)

F-27

PENN MILLERS MUTUAL HOLDING COMPANY AND SUBSIDIARY

Notes to Consolidated Financial Statements
(Dollars in thousands, except share data)

(c)	Assumptions
	Weighted average assumptions used to determine benefit obligations at December 31, 2008 and 2007 are as follows:

	Pension Plan						SERP
	2008			2007			2008			2007
Discount rate		6.16	%		6.40	%		6.56	%		6.40	%
Rate of compensation increase		4.00			4.00			5.00			5.00

Weighted average assumptions used to determine net periodic benefit cost for the years ended December 31, 2008 and 2007 are as follows:

	Pension Plan						SERP
	2008			2007			2008			2007
Discount rate		6.40	%		6.00	%		6.40	%		6.00	%
Expected long-term return on plan assets		7.50			7.50			N/A			N/A
Rate of compensation increase		4.00			4.00			5.00			5.00

Discount rates are selected considering yields available on high quality debt instruments at durations that approximate the timing of the benefit payments for the pension liabilities at the measurement date. The expected rate of return reflects the Company’s long term expectation of earnings on the assets held in the plan trust, taking into account asset allocations, investment strategy, the views of the asset managers, and the historical performance.

(d) Plan Assets

The pension plan’s asset allocation at December 31, 2008 and 2007, by asset category, is as follows:

	Percentage of Plan Assets
	2008			2007
Asset:
Equity securities		52.8	%		57.3	%
Fixed maturity securities		47.0			41.0
Cash and cash equivalents		0.2			1.7
Total		100.0	%		100.0	%

The Company maintains an investment policy for the pension plan. The overall investment strategy is to maintain appropriate liquidity to meet the cash requirements of the short-term plan obligations and to maximize the plan’s return while adhering to the policy’s objectives and risk guidelines, as well as the regulations set forth by various government entities. The policy sets forth asset allocation guidelines that emphasize U.S. investments with strong credit quality and restrict traditionally risky

(Continued)

F-28

PENN MILLERS MUTUAL HOLDING COMPANY AND SUBSIDIARY

Notes to Consolidated Financial Statements

(Dollars in thousands, except share data)

investments. Currently, the targeted allocation is 60% U.S. common stocks, 33% corporate bonds (A rated or better), 5% U.S. government and agency securities, and 2% cash.

To develop the expected long-term rate of return on assets assumption, the Company considered the historical returns and the future expectations for returns for each asset class, as well as the target asset allocation of the pension plan portfolio. This resulted in the selection of the 7.5% long-term rate of return on assets assumption.

(e) Cash Flows

Estimated Future Benefit Payments

The following benefit payments, which reflect expected future service, as appropriate, are expected to be paid:

2009	$	295
2010		233
2011		464
2012		1,048
2013		397
2014 — 2018		3,885

The Company expects to contribute $547 to the plans in 2009. The Company’s 2010 contribution to the plan is expected to increase due to changes in the fair value of plan assets and regulatory changes affecting the plan.

The Company has a defined contribution benefit plan sponsored by PMIC covering all employees who have attained age 21. Eligible employees may contribute up to 30% of their salary to the plan, subject to statutory limits. The Company matches 50% of employee contributions up to 3% of employee compensation. Amounts charged to operations were $225, $242, and $219 for 2008, 2007, and 2006, respectively.

(Continued)

F-29

PENN MILLERS MUTUAL HOLDING COMPANY AND SUBSIDIARY

Notes to Consolidated Financial Statements

(Dollars in thousands, except share data)

(10)	Federal Income Tax
	Components of the provision for income tax (benefit) expense from continuing operations for the years ended December 31, 2008, 2007 and 2006 are as follows:

	2008			2007			2006
Current expense:
Federal	$	(310	)		604			1,018
Deferred benefit:
Federal		(1,068	)		(208	)		(512	)
Total tax (benefit) expense	$	(1,378	)		396			506

The Company’s net payments (refunds)  for income taxes in 2008, 2007 and 2006 were $23, $1,963, and $(20), respectively.

A reconciliation of the expected and actual federal income tax (benefit) expense from continuing operations for the years ended December 31, 2008, 2007, and 2006 is as follows:

	2008			2007			2006
Expected tax at 34%	$	(1,985	)		627			822
Nontaxable investment income		(397	)		(378	)		(355	)
Accrual adjustment		(58	)		96			8
Increase in valuation reserve		1,026			—			—
Other items, net		36			51			31
Total tax (benefit) expense	$	(1,378	)		396			506

(Continued)

F-30

PENN MILLERS MUTUAL HOLDING COMPANY AND SUBSIDIARY

Notes to Consolidated Financial Statements
(Dollars in thousands, except share data)

Deferred income taxes reflect the tax effect of temporary differences between the amounts of assets and liabilities for financial reporting and the amounts for income tax purposes. Components of the Company’s deferred tax assets and liabilities from continuing operations for the years ended December 31, 2008 and 2007 are as follows:

	2008			2007
Deferred tax assets:
Discounting of unpaid losses	$	3,261			2,881
Unearned premium reserve		2,787			2,961
Capital losses carried forward		1,936			—
SFAS No. 158 pension benefit		1,063			512
Guaranty fund liability		456			442
Accrued retirement benefit		399			406
Accrued severance costs		245			271
Bad debt reserve		124			100
Accrued vacation expense		92			92
Disallowed contributions deductible in future periods		62			—
Alternative minimum tax recoverable in future periods		39			—
Investment impairments		—			258
Other items		75			50
Gross deferred tax assets		10,539			7,973
Valuation reserve		(1,026	)		—
Net deferred tax assets after valuation reserve		9,513			7,973
Deferred tax liabilities:
Deferred policy acquisition costs		3,604			3,745
Unrealized investment gains, net		466			1,598
Depreciation and amortization		195			88
Accrued premium tax credits		191			189
Prepaid expenses		115			109
Company-owned life insurance		79			88
Other items		135			284
Gross deferred tax liabilities		4,785			6,101
Net deferred tax asset	$	4,728			1,872

During 2008, a deferred tax benefit of $57 was recorded as a component of the income tax benefit included within discontinued operations.

A valuation reserve is required to be established for any portion of the deferred tax asset that management believes more likely than not will not be realized. Based on the level of capital losses realized by the Company in 2008, the Company does not expect to be able to generate enough capital gains during the next five years to offset all of these capital losses in its tax return.

(Continued)

F-31

PENN MILLERS MUTUAL HOLDING COMPANY AND SUBSIDIARY

Notes to Consolidated Financial Statements
(Dollars in thousands, except share data)

The tax benefit on these realized capital losses has only been recognized to the extent that the losses can be offset in the 2008 tax return against capital gains on current and prior years’ tax returns and offset against taxable capital gains generated from the sale of EIG in 2009. A valuation reserve of $1,026 has been established for the portion of these capital losses that the Company does not expect to recover as of December 31, 2008.

Effective January 1, 2008, the Company adopted FIN No. 48. As of January 1, 2008 and December 31, 2008, the Company had no material unrecognized tax benefits or accrued interest and penalties. The Company’s policy is to account for interest as a component of interest expense and penalties as a component of other expense. Federal tax years 2005 through 2008 were open for examination as of December 31, 2008.

(11)	Reinsurance
	Reinsurance is ceded by the Company on pro rata and excess of loss basis, with the Company’s retention generally at $500 per occurrence in 2008, 2007 and 2006. The Company purchased catastrophe excess-of-loss reinsurance with a retention of $2,000 per event in 2008 and 2007 and $1,500 per event in 2006.
	Effective January 1, 2008, the Company renewed its reinsurance coverage with a number of changes. The Company continues to retain $500 on any individual property and casualty risk. However, in 2008, the Company now retains 75% of losses in excess of $500 to $1,000 and 25% of losses in excess of $1,000 to $5,000. As a complement to this increased retention, the Company entered into a whole account, accident year aggregate excess of loss contract that covers accident years 2008 and 2009. The reinsurance contract provides coverage in the event that the accident year loss ratio exceeds 72%.
	The Company’s assumed reinsurance relates primarily to its participation in various involuntary pools and associations and the runoff of the Company’s participation in voluntary reinsurance agreements that have been terminated.
	The effect of reinsurance, with respect to premiums and losses, for the years ended December 31, 2008, 2007, and 2006 is as follows:
(a)	Premiums

	2008						2007						2006
	Written			Earned			Written			Earned			Written			Earned
Direct	$	94,985			96,239			94,073			90,796			84,544			81,223
Assumed		1,379			1,387			1,203			1,215			1,725			1,693
Ceded		(18,997	)		(18,889	)		(21,157	)		(21,041	)		(18,744	)		(18,271	)
Net	$	77,367			78,737			74,119			70,970			67,525			64,645

(Continued)

F-32

PENN MILLERS MUTUAL HOLDING COMPANY AND SUBSIDIARY

Notes to Consolidated Financial Statements
(Dollars in thousands, except share data)

(b)     Losses and Loss Adjustment Expenses

	2008			2007			2006
Direct	$	70,442			59,245			49,629
Assumed		1,003			1,845			3,085
Ceded		(14,055	)		(11,307	)		(8,948	)
Net	$	57,390			49,783			43,766

(c)     Unearned Premiums

	2008			2007			2006
Direct	$	45,310			46,576			43,262
Assumed		12			19			32
Prepaid reinsurance (ceded)		(4,342	)		(4,234	)		(4,119	)
Net	$	40,980			42,361			39,175

(d)     Loss and Loss Adjustment Expense Reserves

	2008		2007		2006
Direct	$	98,366		85,614		79,338
Assumed		9,699		10,342		10,067
Gross	$	108,065		95,956		89,405

(Continued)

F-33

PENN MILLERS MUTUAL HOLDING COMPANY AND SUBSIDIARY

Notes to Consolidated Financial Statements
(Dollars in thousands, except share data)

(12)	Liability for Losses and Loss Adjustment Expenses
	Activity in the liability for losses and loss adjustment expenses is summarized as follows:

	2008			2007			2006
Balance at January 1	$	95,956			89,405			83,849
Less reinsurance recoverables		18,727			20,089			22,817
Net liability at January 1		77,229			69,316			61,032
Incurred related to:
Current year		62,612			54,421			43,785
Prior years		(5,222	)		(4,638	)		(19	)
Total incurred		57,390			49,783			43,766
Paid related to:
Current year		26,578			22,191			14,222
Prior years		22,601			19,679			21,260
Total paid		49,179			41,870			35,482
Net liability at period-end		85,440			77,229			69,316
Add reinsurance recoverables		22,625			18,727			20,089
Balance at period-end	$	108,065			95,956			89,405

The Company recognized favorable development in the provision for insured events of prior years of $5,222, $4,638 and $19 in 2008, 2007, and 2006, respectively. Increases or decreases of this nature occur as the result of claim settlements during the current year, and as additional information is received regarding individual claims, causing changes from the original estimates of the cost of these claims. Recent loss development trends are also taken into account in evaluating the overall adequacy of unpaid losses and loss adjustment expenses.

The development in 2008 is primarily attributable to favorable development in the fire and allied ($2,229), workers’ compensation ($1,652), and commercial auto liability ($1,124) lines of business. The fire and allied lines development was the result of prior years’ claims settling for less than originally estimated. The development in the workers’ compensation and commercial auto lines was due to the general observation of declines in claims severity on prior accident years.

The development in 2007 is primarily attributable to the workers’ compensation ($2,757), commercial auto liability ($2,525), and fire and allied lines ($1,064). The Company broadly observed some decreasing frequency and severity in the commercial auto liability line and decreasing severity in the workers’ compensation line. The fire and allied lines development was attributable to claims settling for less than originally reserved.

(Continued)

F-34

PENN MILLERS MUTUAL HOLDING COMPANY AND SUBSIDIARY

Notes to Consolidated Financial Statements
(Dollars in thousands, except share data)

This development for 2007 was partly offset by $1,493 of unfavorable development in the commercial multi-peril line and reserve strengthening of $374 related to asbestos claims assumed from a terminated reinsurance pool. The commercial multi-peril line experienced an increase in newly reported claims for the 2005 accident year.

In 2006, the Company recognized net favorable development of $19. The primary lines of business experiencing favorable development were the workers compensation ($633) and other liability ($660) lines due to decreasing severity.

This favorable development in 2006 was partially offset by unfavorable development in the fire line ($474) on 2005 claims and in the commercial multi-peril ($245) line due to greater than expected claims severity on paid losses and loss adjustment expenses in the 2002 and 2003 accident years. Additional unfavorable development of $404 was attributable to reserve strengthening related to asbestos claims assumed from a terminated reinsurance pool.

(13)	Lines of Credit
	The Company currently maintains two unsecured lines of credit.
	The first unsecured line of credit is available for general corporate purposes. In August 2007, the Company amended its bank agreement to decrease the unsecured line of credit from $4,000 to $2,500. In October 2008, the Company amended the bank agreement to decrease the unsecured line of credit from $2,500 to $500. At December 31, 2008 and 2007, a total of $500 and $0, respectively, was outstanding.
	The credit line bears interest at a rate equal to the London Interbank Offered Rate (0.45% at December 31, 2008) plus a spread of 105 basis points. Any balances outstanding under the line of credit at July 1, following the date in which the loan is taken will be converted into a term loan. The term shall not exceed five years.
	The bank credit agreements subject the Company to certain covenants and restrictions, including limitations on additional borrowing arrangements, encumbrances, and sales of assets. Covenants also include maintenance of various financial ratios and amounts. The Company was in compliance with these covenants at December 31, 2008 and 2007.
	The line-of-credit agreement expires on June 30, 2010.
	Interest paid for the twelve months ended December 31, 2008, 2007, and 2006 relating to this unsecured bank credit agreement was $3, $14 and $6, respectively.
	The second unsecured line of credit for $2,000 was established in December 2008 and is available to finance temporary increased working capital needs primarily associated with costs for a planned public offering. At December 31, 2008, a total of $450 was outstanding.
	The credit line bears interest at a rate equal to the London Interbank Offered Rate plus a spread of 211 basis points. Accrued interest on the outstanding balance will commence on December 31, 2008. All principal and accrued interest is due and payable on July 31, 2009.

(Continued)

F-35

PENN MILLERS MUTUAL HOLDING COMPANY AND SUBSIDIARY

Notes to Consolidated Financial Statements

(Dollars in thousands, except share data)

(14)	Interest Rate Swap Agreement
	The Company entered into an interest rate swap agreement in 2005 to manage interest rate risk associated with its variable rate debt. The fixed interest rate as a result of the agreement is 5.55% for the full five year term of the debt. The notional amount of the swap is $1,432 and $1,745 at December 31, 2008 and 2007, respectively. Investment losses of $41, $49 and $3 were recorded within net realized investment (losses) gains on the consolidated statements of operations in 2008, 2007, and 2006, respectively.
(15)	Commitments and Contingencies
	The Company is involved in various claims and legal actions arising in the ordinary course of business. In the opinion of management, the ultimate disposition of these matters will not have a material adverse impact on the Company’s financial position or results of operations.
	In 2005, the Company recorded retirement expenses of $3,035 within underwriting and administrative expenses on the consolidated statements of operations relating to the departure of the President and Chief Executive Officer of which, $507 of this expense was unpaid as of December 31, 2006. In 2007, the Company incurred additional retirement and severance expense of $663. Total retirement and severance expense of $851 was unpaid as of December 31, 2007. As of December 31, 2008, the Company incurred additional retirement and severance expense of $254. Total retirement and severance expense of $831 was unpaid as of December 31, 2008.
(16)	Guaranty Fund and Other Insurance Related Assessments
	The Company records its estimated future payment related to guaranty fund assessments and its estimated ultimate exposure related to other insurance-related assessments in accordance with SOP No. 97-3, Accounting by Insurance and Other Enterprises for Insurance Related Assessments. Estimates are based on historical assessment and payment patterns, the Company’s historical premium volume, and known industry developments that affect these assessments, such as insurance company insolvencies and industry loss and pricing trends. The Company’s net accrued liability for guaranty fund and other insurance related assessments is $1,528 and $1,485 at December 31, 2008 and 2007, respectively. The accrual is expected to be paid as assessments are made over the next several years.
(17)	Acquisition of Business
	On March 1, 2005, EIG acquired 100% of GSR, an insurance agency. The results of GSR’s operations have been included in the consolidated financial statements since that date and are included within discontinued operations.
	The aggregate purchase price of $2,462 included $1,224 of net cash payments and the issuance of $1,238 in notes payable, net of imputed interest. Of the total notes payable, $818 is guaranteed and $420 is contingent on GSR attaining certain revenue objectives. Installment payments are due under the purchase agreement to former shareholders in four installments over a four-year term, commencing on March 1,

(Continued)

F-36

PENN MILLERS MUTUAL HOLDING COMPANY AND SUBSIDIARY

Notes to Consolidated Financial Statements

(Dollars in thousands, except share data)

	2006. EIG accrued for these contingent installment payments, as management believed they were determinable beyond a reasonable doubt. The Company made the final installment payment in March 2009.
	In 2005, EIG recorded $2,462 of goodwill and intangible assets in connection with the acquisition. These assets consist of $2,007 in goodwill, $400 for purchased customer relationships, and $55 for noncompete agreements. The weighted average useful lives of the above-acquired intangible assets are as follows: purchased customer relationships — ten years and noncompete agreements — five years. During 2008, 2007, and 2006, $38, $51 and $51, respectively, of amortization expense for these intangible assets was recorded within discontinued operations on the consolidated statements of operations. Total accumulated amortization at December 31, 2008 and 2007 was $183 and $145, respectively.
	On April 10, 2007, EIG acquired a book of business for $213. EIG recorded $213 of intangible assets in connection with the acquisition of these purchased customer relationships and is amortizing the book over a period of 15 years. During 2008 and 2007, $10 and $11 of amortization expense, respectively, for these intangible assets was recorded within discontinued operations on the consolidated statements of operations. Total accumulated amortization at December 31, 2008 and 2007 was $21 and $11, respectively.
	As discussed in note 1, EIG’s assets and liabilities have been classified as held for sale on the consolidated balance sheets. In accordance with SFAS No. 144, the long-lived assets to be disposed of should be measured at the lower of its carrying amount or fair value less costs to sell and requires amortization of the related intangibles to cease. As of September 30, 2008, the Company ceased all amortization of intangibles in EIG.
(18)	Segment Information
	The Company’s operations are organized into three segments: Agribusiness, Commercial Business, and Other. These segments reflect the manner in which the Company currently manages the business based on type of customer, how the business is marketed, and the manner in which risks are underwritten. Within each segment, the Company underwrites and markets its insurance products through a packaged offering of coverages sold to generally consistent types of customers.
	The Other segment includes the runoff of discontinued lines of insurance business and the results of mandatory-assigned risk reinsurance programs that the Company must participate in as a cost of doing business in the states in which the Company operates. The discontinued lines of insurance business include personal lines, which the Company began exiting in 2001, and assumed reinsurance contracts for which the Company participated on a voluntary basis. Participation in these assumed reinsurance contracts ceased in the 1980s and early 1990s.

(Continued)

F-37

PENN MILLERS MUTUAL HOLDING COMPANY AND SUBSIDIARY

Notes to Consolidated Financial Statements

(Dollars in thousands, except share data)

Segment information for the years ended December 31, 2008, 2007 and 2006 is as follows:

	2008			2007			2006
Revenues:
Premiums earned:
Agribusiness	$	45,298			40,245			35,889
Commercial Business		31,805			29,260			26,761
Other		1,634			1,465			1,995
Total premiums earned		78,737			70,970			64,645
Investment income, net of investment expense		5,335			5,324			4,677
Realized investment (losses) gains, net		(5,819	)		(702	)		349
Other income		411			508			345
Total revenues	$	78,664			76,100			70,016
Components of net (loss) income:
Underwriting (loss) income:
Agribusiness	$	313			441			2
Commercial Business		(5,046	)		(1,913	)		(678	)
Other		288			(998	)		(1,106	)
Total underwriting losses		(4,445	)		(2,470	)		(1,782	)
Investment income, net of investment expense		5,335			5,324			4,677
Realized investment (losses) gains, net		(5,819	)		(702	)		349
Other income		411			508			345
Corporate expense		(770	)		(506	)		(635	)
Interest expense		(184	)		(125	)		(222	)
Other expense, net		(365	)		(184	)		(314	)
Income (loss) from continuing operations, before income taxes		(5,837	)		1,845			2,418
Income tax (benefit) expense		(1,378	)		396			506
(Loss) income from continuing operations		(4,459	)		1,449			1,912
Discontinued operations:
(Loss) income on discontinued operations, before income taxes	$	(3,090	)		(489	)		292
Income tax (benefit) expense		(170	)		(126	)		124
(Loss) income on discontinued operations		(2,920	)		(363	)		168
Net (loss) income	$	(7,379	)		1,086			2,080

(Continued)

F-38

PENN MILLERS MUTUAL HOLDING COMPANY AND SUBSIDIARY

Notes to Consolidated Financial Statements

(Dollars in thousands, except share data)

(19) Reconciliation of Statutory Filings to Amounts Reported Herein

A reconciliation of the Company’s statutory net income (loss) and surplus to net income (loss) and equity, under GAAP, is as follows:

	2008			2007			2006
Net (loss) income:
Statutory net (loss) income	$	(4,718	)		878			1,374
Deferred policy acquisition costs		(413	)		633			735
Deferred federal income taxes		1,068			208			512
Other, including noninsurance amounts		(396	)		(270	)		(709	)
Discontinued operations		(2,920	)		(363	)		168
GAAP net (loss) income	$	(7,379	)		1,086			2,080
Surplus:
Statutory capital and surplus	$	42,569			50,795			50,524
Equity of noninsurance entities		(2,827	)		379			1,721
Deferred policy acquisition costs		10,601			11,014			10,381
Deferred federal income taxes		(4,111	)		(3,700	)		(4,023	)
Nonadmitted assets		3,342			1,598			1,533
Unrealized gains on fixed maturities, net of tax		908			1,185			183
Other items, net		273			130			211
GAAP equity	$	50,755			61,401			60,530

The above statutory basis net income (loss) and capital and surplus amounts relate to PMHC’s insurance subsidiaries, PMIC and AMIC.

PMHC’s insurance subsidiaries are required by law to maintain certain minimum surplus on a statutory basis, are subject to risk-based capital requirements, and are subject to regulations under which payment of a dividend from statutory surplus is restricted and may require prior approval of regulatory authorities. As of December 31, 2008, the Company was in compliance with its risk-based capital requirements. Applying the current regulatory restrictions as of December 31, 2008, approximately, $4,257 would be available for distribution to the Company during 2009 without prior approval. PMIC paid a dividend of $900 to PMHC in 2008.

(20) Discontinued Operations

In 2007, the Company’s board of directors approved a plan to pursue the sale of PSTS in order to better focus on its core competency within the insurance business.

(Continued)

F-39

PENN MILLERS MUTUAL HOLDING COMPANY AND SUBSIDIARY

Notes to Consolidated Financial Statements

(Dollars in thousands, except share data)

In July 2008, the Company entered into an asset purchase agreement and sold those assets of PSTS for $150. The assets sold included customer lists and related client information. The Company received cash of $50 at the time of sale and can receive up to $100 after one year, based on the retention of the book of business that was sold. The Company will recognize the $100 contingent portion of sale price as it is earned in future periods. The Company recorded a pretax loss on sale of $117.

The results of operations for PSTS were reported within discontinued operations in the accompanying consolidated statements of operations for all periods presented.

Operating results from PSTS for the years ended December 31, 2008, 2007 and 2006 are as follows:

	2008			2007			2006
Net revenue	$	720			1,458			1,825
(Loss) income on discontinued operations, before income taxes	$	(53	)		(196	)		125
Income tax (benefit) expense		(18	)		(59	)		50
(Loss) income from discontinued operations	$	(35	)		(137	)		75

Assets and liabilities of PSTS as of December 31, 2007, which are included in assets and liabilities held for sale on the consolidated balance sheets, comprise the following:

	2007
Assets:
Cash	$	191
Receivables		140
Other assets		229
Total assets	$	560
Liabilities:
Accounts payable and accrued expenses	$	196
Other liabilities		32
Total liabilities	$	228

(Continued)

F-40

PENN MILLERS MUTUAL HOLDING COMPANY AND SUBSIDIARY

Notes to Consolidated Financial Statements

(Dollars in thousands, except share data)

The Company retained $158 in net assets of PSTS after the aforementioned asset sale, which were reclassified to the corresponding caption of assets and liabilities.

In 2008, the Company’s board of directors approved a plan to explore the sale of EIG. The decision resulted from continued evaluation of the Company’s long term strategic plans and the role that the insurance brokerage segment played in that strategy. In the third quarter of 2008, the board approved a plan for a minority public offering and, at the same time, fully committed to the sale of EIG in order to concentrate solely on insurance underwriting as a long term core competency.

At September 30, 2008, the Company tested the goodwill carrying value of EIG for impairment. The possibility of impairment was evident based on information obtained in the selling process and the deterioration of local and national economic conditions. As a result of the impairment test, the Company recognized an impairment to goodwill of $2,435 within discontinued operations at September 30, 2008 (unaudited), which represented its best estimate, as discussed in note 2(o). The Company completed the sale of EIG on February 2, 2009. Pursuant to the asset purchase agreement, the Company sold substantially all of EIG’s assets and liabilities for proceeds of $3,109, less estimated costs to sell of $231. Based on the fair value determined by the final terms of the sale and finalization of step 2 of the goodwill impairment test, the Company recorded an additional write down of goodwill at December 31, 2008 of $165. In the first quarter of 2009, the Company recorded a pretax loss on sale of $6.

The results of operations for EIG were reported within discontinued operations in the accompanying consolidated statements of operations, and prior-period consolidated statements of operations have been reclassified to conform to this presentation.

EIG’s operating results for the years ended December 31, 2008, 2007 and 2006 are as follows:

	2008			2007			2006
Net revenue	$	3,437			4,130			4,282
(Loss) income on discontinued operations, before income taxes	$	(3,037	)		(293	)		167
Income tax (benefit) expense		(152	)		(67	)		74
(Loss) income from discontinued operations	$	(2,885	)		(226	)		93

(Continued)

F-41

PENN MILLERS MUTUAL HOLDING COMPANY AND SUBSIDIARY

Notes to Consolidated Financial Statements

(Dollars in thousands, except share data)

Assets and liabilities of EIG as of December 31, 2008 and 2007, which are included in assets and liabilities held for sale on the consolidated balance sheets, comprise the following:

	2008		2007
Assets:
Cash	$	—		137
Receivables		420		951
Goodwill		2,147		4,747
Intangible assets		464		513
Other assets		183		216
Total assets	$	3,214		6,564
Liabilities:
Accounts payable and accrued expenses	$	362		269
Acquisition payables		285		545
Total liabilities	$	647		814

EIG may continue to place insurance policies with PMIC. PMIC will continue to pay commissions to EIG for this business. Currently, commissions paid by PMIC to EIG represent less than 5% of EIG’s total revenue. The Company does not expect a material increase in this level of commissions. Operating results from total discontinued operations for the years ended December 31, 2008, 2007 and 2006 are as follows:

	2008			2007			2006
Net revenue	$	4,157			5,588			6,107
(Loss) income on discontinued operations, before income taxes	$	(3,090	)		(489	)		292
Income tax (benefit) expense		(170	)		(126	)		124
(Loss) income from discontinued operations	$	(2,920	)		(363	)		168

(Continued)

F-42

PENN MILLERS MUTUAL HOLDING COMPANY AND SUBSIDIARY

Notes to Consolidated Financial Statements

(Dollars in thousands, except share data)

Total assets and liabilities held for sale as of December 31, 2008 and 2007 comprise the following:

	2008		2007
Assets:
Cash	$	—		328
Receivables		420		1,091
Goodwill		2,147		4,747
Intangible assets		464		513
Other assets		183		445
Total assets	$	3,214		7,124
Liabilities:
Accounts payable and accrued expenses	$	362		465
Other liabilities		285		577
Total liabilities	$	647		1,042

(Continued)

F-43

PENN MILLERS MUTUAL HOLDING COMPANY AND SUBSIDIARY

Notes to Consolidated Financial Statements

(Dollars in thousands, except share data)

(21) Plan of Conversion

On April 22, 2009, the PMMHC’s board of directors adopted a Plan of conversion from Mutual to Stock Form (the Plan).

Under the Plan, the Company will offer shares of common stock in a public offering expected to commence in 2009. The number of shares to be offered will be based on an independent appraisal of the estimated pro forma market value of the Company on a consolidated basis.

The offering contemplated by the Plan is subject to the approval of the Pennsylvania Department of Insurance, pursuant to the Pennsylvania Insurance Commissioner’s 1998 order approving the creation of the Company’s current mutual holding company structure. The offering will be made only by means of a prospectus in accordance with the Securities Act of 1933, as amended, and all applicable state securities laws.

On April 22, 2009, the PMHC’s board of directors changed the name of Penn Millers Holding Corporation to PMHC Corp.

F-44

PENN MILLERS MUTUAL HOLDING COMPANY
Schedule II — Financial Information of Parent Company
Balance Sheets
December 31, 2008 and 2007
(Dollars in thousands)

	2008			2007
Assets
Cash and cash equivalents	$	16			16
Investments in common stock of subsidiary (equity method)		50,739			61,385
Total assets	$	50,755			61,401
Liabilities and Equity
Total liabilities	$	—			—
Retained earnings		51,914			59,293
Accumulated other comprehensive (loss) income		(1,159	)		2,108
Total equity		50,755			61,401
Total liabilities and equity	$	50,755			61,401

See accompanying notes to consolidated financial statements and report of independent registered public accounting firm.

F-45

PENN MILLERS MUTUAL HOLDING COMPANY
Schedule II — Financial Information of Parent Company
Statements of Operations
Years ended December 31, 2008, 2007, and 2006
(Dollars in thousands)

	2008			2007		2006
Equity in (loss) income of subsidiary	$	(7,379	)		1,086		2,080
Net (loss) income	$	(7,379	)		1,086		2,080

See accompanying notes to consolidated financial statements and report of independent registered public accounting firm.

F-46

PENN MILLERS MUTUAL HOLDING COMPANY
Schedule II — Financial Information of Parent Company
Statements of Cash Flows
Years ended December 31, 2008, 2007, and 2006
(Dollars in thousands)

	2008			2007			2006
Cash flows from operating activities:
Net (loss) income	$	(7,379	)		1,086			2,080
Adjustments to reconcile net (loss) income to net cash (used in) provided by operating activities:
Equity in net loss (income) of subsidiary		7,379			(1,086	)		(2,080	)
Net cash (used in) provided by operating activities		—			—			—
Net change in cash		—			—			—
Cash, beginning balance		16			16			16
Cash, ending balance	$	16			16			16

See accompanying notes to consolidated financial statements and report of independent registered public accounting firm.

F-47

PENN MILLERS MUTUAL HOLDING COMPANY AND SUBSIDIARY
Schedule III — Supplemental Insurance Information
Years ended December 31, 2008, 2007, and 2006
(Dollars in thousands)

			Future policy
			benefits, losses,				Other policy claims
	Deferred policy		claims and loss				and benefits
	acquisition costs		expenses		Unearned premiums		payable		Net premium earned
December 31, 2008
Agribusiness	$	5,981		47,212		27,352		—		45,298
Commercial Business		4,616		50,680		17,957		—		31,805
Other		4		10,173		13		—		1,634
Total	$	10,601		108,065		45,322		—		78,737
December 31, 2007
Agribusiness	$	6,429		42,881		27,552		—		40,245
Commercial Business		4,579		41,805		19,021		—		29,260
Other		6		11,270		22		—		1,465
Total	$	11,014		95,956		46,595		—		70,970
December 31, 2006
Agribusiness	$	6,252		40,391		26,686		—		35,889
Commercial Business		4,120		37,771		16,573		—		26,761
Other		9		11,243		35		—		1,995
Total	$	10,381		89,405		43,294		—		64,645

(Continued)

F-48

PENN MILLERS MUTUAL HOLDING COMPANY AND SUBSIDIARY
Schedule III — Supplemental Insurance Information
Years ended December 31, 2008, 2007, and 2006
(Dollars in thousands)

			Benefits, claims,
	Net investment		losses and		Amortization		Other operating
	income		settlement expenses		of DPAC		expenses		Premiums written
December 31, 2008
Agribusiness	$			31,137		13,024				45,110
Commercial Business				25,480		9,628				30,632
Other				773		429				1,625
Total	$	5,335		57,390		23,081		3,481		77,367
December 31, 2007
Agribusiness	$			27,313		12,436				41,402
Commercial Business				20,570		9,042				31,266
Other				1,900		452				1,451
Total	$	5,324		49,783		21,930		2,233		74,119
December 31, 2006
Agribusiness	$			23,795		11,148				38,350
Commercial Business				17,531		8,313				27,144
Other				2,440		619				2,031
Total	$	4,677		43,766		20,080		3,216		67,525

See note 18 of the notes to the consolidated financial statements.

See accompanying notes to consolidated financial statements and report of independent registered public accounting firm.

F-49

PENN MILLERS MUTUAL HOLDING COMPANY AND SUBSIDIARY

Schedule IV — Reinsurance

Years ended December 31, 2008, 2007, and 2006

(Dollars in thousands)

									Percentage of
			Ceded to other		Assumed from other				amount assumed to
Premiums earned	Gross amount		companies		companies		Net amount		net
2008	$	96,239		18,889		1,387		78,737		1.76	%
2007		90,796		21,041		1,215		70,970		1.71
2006		81,223		18,271		1,693		64,645		2.62

See accompanying notes to consolidated financial statements and report of independent registered public accounting firm.

F-50

PENN MILLERS MUTUAL HOLDING COMPANY AND SUBSIDIARY

Schedule V — Allowance for Uncollectible Premiums and Other Receivables

Years ended December 31, 2008, 2007, and 2006

(Dollars in thousands)

	2008			2007			2006
Beginning balance	$	295			250			147
Additions		335			202			173
Deletions		(266	)		(157	)		(70	)
Ending balance	$	364			295			250

See accompanying notes to consolidated financial statements and report of independent registered public accounting firm.

F-51

PENN MILLERS MUTUAL HOLDING COMPANY AND SUBSIDIARY

Schedule VI — Supplemental Information

Years ended December 31, 2008, 2007, and 2006

(Dollars in thousands)

	Deferred		Reserve for
	policy		Losses and		Discount if						Net
	acquisition		loss adj.		any deducted		Unearned		Net earned		investment
	costs		expenses		in column C		premium		premiums		income
2008	$	10,601		108,065		—		45,322		78,737		5,335
2007		11,014		95,956				46,595		70,970		5,324
2006		10,381		89,405				43,294		64,645		4,677

								Paid losses
								and
	Losses and LAE Incurred					Amortization		adjustment		Net written
	Current year		Prior year			of DPAC		expenses		premiums
2008	$	62,612		(5,222	)		23,081		49,179		77,367
2007		54,421		(4,638	)		21,930		41,870		74,119
2006		43,785		(19	)		20,080		35,482		67,525

See accompanying notes to consolidated financial statements and report of independent registered public accounting firm.

F-52

PART II INFORMATION NOT REQUIRED IN PROSPECTUS

Item 13. Other Expenses of Issuance and Distribution.

     The following table sets forth the costs and expenses payable by us in connection with the registration of our common stock hereunder. All amounts are estimated, except for the SEC registration fee and the CUSIP assignment fee. See “The Conversion and Offering” for a description of our obligation with respect to such expenses.

SEC registration fee	$	3,779
CUSIP assignment fee		124
Printing, postage and mailing		255,000
Legal fees and expenses		1,100,000
Underwriting expenses		5,000
Accounting fees and expenses		750,000
Valuation fees and expenses		200,000
Transfer and offering agent fees and expenses		60,000
Miscellaneous		196,097
Total	$	2,570,000

Item 14. Indemnification of Directors and Officers.

     Pennsylvania law provides that a Pennsylvania corporation may indemnify directors, officers, employees, and agents of the corporation against liabilities they may incur in such capacities for any action taken or any failure to act, whether or not the corporation would have the power to indemnify the person under any provision of law, unless such action or failure to act is determined by a court to have constituted recklessness or willful misconduct. Pennsylvania law also permits the adoption of a bylaw amendment, approved by shareholders, providing for the elimination of a director’s liability for monetary damages for any action taken or any failure to take any action unless the director has breached or failed to perform the duties of his office, and the breach or failure to perform constitutes self-dealing, willful misconduct or recklessness.

     Our bylaws provide for (i) the indemnification of the directors, officers, employees, and agents of Penn Millers Holding Corporation and its subsidiaries to the fullest extent permitted by Pennsylvania law and (ii) the elimination of a directors’ liability for monetary damages to the fullest extent permitted by Pennsylvania law unless the director has breached or failed to perform the duties of his or her office under Subchapter B of Chapter 17 of the Pennsylvania Business Corporation Law, and such breach or failure to perform constitutes self-dealing, willful misconduct or recklessness.

     We also maintain an insurance policy insuring our directors, officers and certain other persons against liabilities and expenses incurred by any of them in certain stated proceedings and under certain stated conditions.

     In the agency agreement with Griffin Financial, Griffin Financial agrees to indemnify our officers, directors and controlling persons against certain liabilities, including liabilities under the Securities Act of 1933 under certain conditions and with respect to certain limited information.

II-1

Item 15. Recent Sales of Unregistered Securities.

None.

Item 16. Exhibits and Financial Statement Schedules.

     (a) Exhibits

1.1	Form of Agency Agreement among Penn Millers Holding Corporation, Penn Millers Mutual Holding Company, PMHC Corp., Penn Millers Insurance Company and Griffin Financial Group, LLC
2.1	Plan of Conversion from mutual to stock form of Penn Millers Mutual Holding Company, dated as of April 22, 2009
3.1	Articles of Incorporation of Penn Millers Holding Corporation
3.2	Bylaws of Penn Millers Holding Corporation
4.1	Form of certificate evidencing shares of common stock of Penn Millers Holding Corporation
5.1	Opinion of Stevens & Lee regarding stock of Penn Millers Holding Corporation being issued
8.1	Opinion of Stevens & Lee regarding certain United States federal income tax issues
10.1	Stock-based incentive plan of Penn Millers Holding Corporation**
10.2	Employment Agreement between Penn Millers Mutual Holding Company, Penn Millers Holding Corporation, Penn Millers Insurance Company and Douglas A. Gaudet**
10.3	Employment Agreement between Penn Millers Mutual Holding Company, Penn Millers Holding Corporation, Penn Millers Insurance Company and Michael O. Banks**
10.4	Employment Agreement between Penn Millers Mutual Holding Company, Penn Millers Holding Corporation, Penn Millers Insurance Company and Kevin D. Higgins**
10.5	Employment Agreement between Penn Millers Mutual Holding Company, Penn Millers Holding Corporation, Penn Millers Insurance Company and Harold W. Roberts**
10.6	Employment Agreement, between Penn Millers Mutual Holding Company, Penn Millers Holding Corporation, Penn Millers Insurance Company and Frank Joanlanne*
10.7	Separation and General Release Agreement between Penn Millers Insurance Company, its affiliates and Frank Joanlanne*
10.8	Employment Agreement between Penn Millers Mutual Holding Company, Penn Millers Holding Corporation, Penn Millers Insurance Company and Jonathan C. Couch**
10.9	Separation and General Release Agreement between Eastern Insurance Group, Penn Millers Insurance Company, its affiliates and William H. Spencer, Jr.*
10.10	Whole Account Accident Year Aggregate Excess of Loss Reinsurance Contract

II-2

10.11	Property Catastrophe Excess of Loss Reinsurance Agreement
10.12	Property & Casualty Excess of Loss Reinsurance Agreement
10.13	Casualty Excess of Loss Reinsurance Agreement
10.14	Umbrella Quota Share Reinsurance Contract
10.15	Property Excess of Loss Reinsurance Contract
10.16	Supplemental Executive Retirement Plan, as amended and restated, effective January 1, 2006*
10.17	Nonqualified Deferred Compensation and Company Incentive Plan, effective June 1, 2006*
10.18	Success Sharing Bonus Plan**
10.19	Penn Millers Holding Corporation Employee Stock Ownership Plan*
21.1	Subsidiaries of Penn Millers Holding Corporation
23.1	Consent of KPMG LLP
23.2	Consent of Curtis Financial Group LLC.
23.3	Consent of Stevens & Lee (contained in Exhibits 5.1 and 8.1)
24.1	Power of Attorney (contained on signature page)*
99.1	Pro Forma Valuation Appraisal Report, dated as of April 1, 2009, prepared for Penn Millers Mutual Holding Company by Curtis Financial Group LLC.
99.2	Letter dated April 22, 2009, to Penn Millers Mutual Holding Company from Curtis Financial Group LLC regarding fair market value of subscription rights
99.3	Stock Order Form**
99.4	Question and Answer Brochure**
99.5	Letters to prospective purchasers of stock in offering**
99.6	Escrow Agreement, dated as of                     , 2009, between Penn Millers Holding Corporation and Bank of New York Mellon. **
99.7	Penn Millers Mutual Holding Company Member Proxy Statement**

*	Previously filed.
**	To be filed by amendment.

(b) Financial Statement Schedules

     The following schedules have been filed as a part of this Registration Statement and are included in the Registrant’s audited Financial Statements included in the prospectus at page F-1.

     Schedule II — Financial Information of Parent Company

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     Schedule III — Supplemental Insurance Information

     Schedule IV — Reinsurance

     Schedule V — Allowance for Uncollectible Premiums and Other Receivables

     Schedule VI — Supplemental Information

II-4

Item 17. Undertakings.

     The undersigned registrant hereby undertakes:

     (1) To file, during any period in which offers or sales are being made, a post-effective amendment to this registration statement: (i) to include any prospectus required by Section 10(a)(3) of the Securities Act of 1933; (ii) to reflect in the prospectus any fact or events arising after the effective date of the registration statement (or the most recent post-effective amendment thereof) which, individually or in the aggregate, represent a fundamental change in the information set forth in the registration statement; and (iii) to include any material information with respect to the plan of distribution not previously disclosed in the registration statement or any material change to such information in the registration statement.

     (2) That, for the purpose of determining any liability under the Securities Act of 1933, each such post-effective amendment shall be deemed to be a new registration statement relating to the securities offered therein, and the offering of such securities at that time shall be deemed to be the initial bona fide offering thereof.

     (3) To remove from registration by means of a post-effective amendment any of the securities being registered which remain unsold at the termination of the offering.

     The undersigned hereby undertakes to provide to the underwriter at the closing specified in the underwriting agreements certificates in such denominations and registered in such names as required by the underwriter to permit prompt delivery to each purchaser.

     Insofar as indemnification for liabilities arising under the Securities Act of 1933 may be permitted to directors, officers and controlling persons of the registrant pursuant to the forgoing provisions, or otherwise, the registrant has been advised that in the opinion of the Securities and Exchange Commission such indemnification is against public policy as expressed in the Securities Act of 1933 and is, therefore, unenforceable. In the event that a claim for indemnification against such liabilities (other than the payment by the registrant of expenses incurred or paid by a director, officer or controlling person of the registrant in the successful defense of any action, suit or proceeding) is asserted by such director, officer or controlling person in connection with the securities being registered, the registrant will, unless in the opinion of its counsel the matter has been settled by controlling precedent, submit to a court of appropriate jurisdiction the question whether such indemnification by it is against public policy as expressed in the Act and will be governed by the final adjudication of such issue.

     The undersigned registrant hereby undertakes that:

     (1) For purposes of determining any liability under the Securities Act of 1933, the information omitted from the form of prospectus filed as part of this registration statement in reliance upon Rule 430A and contained in a form of prospectus filed by the registrant pursuant to Rule 424(b) (1) or (4) or 497(h) under the Securities Act of 1933 shall be deemed to be part of this registration statement as of the time it was declared effective.

     (2) For the purpose of determining any liability under the Securities Act of 1933, each post-effective amendment that contains a form of prospectus shall be deemed to be a new registration statement relating to the securities offered therein, and the offering of such securities at that time shall be deemed to be the initial bona fide offering thereof.

II-5

SIGNATURES

     Pursuant to the requirements of the Securities Act of 1933, the Registrant has duly caused this Amendment No. 1 to Registration Statement to be signed on its behalf by the undersigned, thereunto duly authorized, in the City of Wilkes-Barre, Commonwealth of Pennsylvania, on April 22, 2009.

PENN MILLERS HOLDING CORPORATION
By:	/s/ Douglas A. Gaudet.
	Douglas A. Gaudet, President and
	Chief Executive Officer

II-6

     Pursuant to the requirements of the Securities Act of 1933, this Amendment No. 1 to Registration Statement has been signed below by the following persons in the capacities and on the dates indicated.

Signature	Capacity	Date
/s/ Douglas A. Gaudet Douglas A. Gaudet	Director President and Chief Executive Officer	April 22, 2009
/s/ J. Harvey Sproul, Jr. J. Harvey Sproul, Jr.	Director and Chairman	April 22, 2009
/s/ F. Kenneth Ackerman, Jr. F. Kenneth Ackerman, Jr.	Director and Vice Chairman	April 22, 2009
/s/ Heather M. Acker Heather M. Acker	Director	April 22, 2009
/s/ Dorrance R. Belin, Esq. Dorrance R. Belin, Esq.	Director	April 22, 2009
/s/ John L. Churnetski John L. Churnetski	Director	April 22, 2009
/s/ John M. Coleman John M. Coleman	Director	April 22, 2009
/s/ Kim E. Michelstein Kim E. Michelstein	Director	April 22, 2009
/s/ Robert A. Nearing, Jr. Robert A. Nearing, Jr.	Director	April 22, 2009
/s/ James M. Revie James M. Revie	Director	April 22, 2009
/s/ Michael O. Banks Michael O. Banks	Treasurer and Chief Financial Officer and Chief Accounting Officer	April 22, 2009

II-7

EXHIBIT INDEX

1.1	Form of Agency Agreement among Penn Millers Holding Corporation, Penn Millers Mutual Holding Company, PMHC Corp., Penn Millers Insurance Company and Griffin Financial Group, LLC
2.1	Plan of Conversion from mutual to stock form of Penn Millers Mutual Holding Company, dated as of April 22, 2009
3.1	Articles of Incorporation of Penn Millers Holding Corporation
3.2	Bylaws of Penn Millers Holding Corporation
4.1	Form of certificate evidencing shares of common stock of Penn Millers Holding Corporation
5.1	Opinion of Stevens & Lee regarding stock of Penn Millers Holding Corporation being issued
8.1	Opinion of Stevens & Lee regarding certain United States federal income tax issues
10.1	Stock-based incentive plan of Penn Millers Holding Corporation**
10.2	Employment Agreement between Penn Millers Mutual Holding Company, Penn Millers Holding Corporation, Penn Millers Insurance Company and Douglas A. Gaudet**
10.3	Employment Agreement between Penn Millers Mutual Holding Company, Penn Millers Holding Corporation, Penn Millers Insurance Company and Michael O. Banks**
10.4	Employment Agreement between Penn Millers Mutual Holding Company, Penn Millers Holding Corporation, Penn Millers Insurance Company and Kevin D. Higgins**
10.5	Employment Agreement between Penn Millers Mutual Holding Company, Penn Millers Holding Corporation, Penn Millers Insurance Company and Harold W. Roberts**
10.6	Employment Agreement, between Penn Millers Mutual Holding Company, Penn Millers Holding Corporation, Penn Millers Insurance Company and Frank Joanlanne*
10.7	Separation and General Release Agreement between Penn Millers Insurance Company, its affiliates and Frank Joanlanne*
10.8	Employment Agreement between Penn Millers Mutual Holding Company, Penn Millers Holding Corporation, Penn Millers Insurance Company and Jonathan C. Couch**
10.9	Separation and General Release Agreement between Eastern Insurance Group, Penn Millers Insurance Company, its affiliates and William H. Spencer, Jr.*
10.10	Whole Account Accident Year Aggregate Excess of Loss Reinsurance Contract
10.11	Property Catastrophe Excess of Loss Reinsurance Agreement

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10.12	Property & Casualty Excess of Loss Reinsurance Agreement
10.13	Casualty Excess of Loss Reinsurance Agreement
10.14	Umbrella Quota Share Reinsurance Contract
10.15	Property Excess of Loss Reinsurance Contract
10.16	Supplemental Executive Retirement Plan, as amended and restated, effective January 1, 2006*
10.17	Nonqualified Deferred Compensation and Company Incentive Plan, effective June 1, 2006*
10.18	Success Sharing Bonus Plan**
10.19	Penn Millers Holding Corporation Employee Stock Ownership Plan*
21.1	Subsidiaries of Penn Millers Holding Corporation
23.1	Consent of KPMG LLP
23.2	Consent of Curtis Financial Group LLC
23.3	Consent of Stevens & Lee (contained in Exhibits 5.1 and 8.1)
24.1	Power of Attorney (contained on signature page)*
99.1	Pro Forma Valuation Appraisal Report, dated as of April 1, 2009, prepared for Penn Millers Mutual Holding Company by Curtis Financial Group LLC.
99.2	Letter dated April 22, 2009, to Penn Millers Mutual Holding Company from Curtis Financial Group LLC regarding fair market value of subscription rights
99.3	Stock Order Form**
99.4	Question and Answer Brochure**
99.5	Letters to prospective purchasers of stock in offering**
99.6	Escrow Agreement, dated as of                     , 2009, between Penn Millers Holding Corporation and Bank of New York Mellon.**
99.7	Penn Millers Mutual Holding Company Member Proxy Statement**

*	Previously filed.
**	To be filed by amendment.

II-9

EX-1.1

PENN MILLERS HOLDING CORPORATION

Up to 6,772,222 Shares
COMMON STOCK ($0.01 Par Value)
Subscription Price $10.00 Per Share

AGENCY AGREEMENT

_______, 2009

Griffin Financial Group, LLC
620 Freedom Business Center, Suite 210
King of Prussia, Pennsylvania 19406

Ladies and Gentlemen:

     Penn Millers Holding Corporation, a Pennsylvania corporation (“HoldCo”), Penn Millers Mutual Holding Company, a Pennsylvania mutual insurance holding company (in both mutual and converted stock form, “PMMHC”), PMHC Corp., a Pennsylvania corporation (“PMHC”), and Penn Millers Insurance Company, a Pennsylvania corporation (“PMIC,” and together with HoldCo, PMMHC and PMHC, the “Primary Parties”), hereby confirm, jointly and severally, their agreement (the “Agreement”) with Griffin Financial Group, LLC (the “Agent”), as follows:

     1. The Offering. On April 22, 2009, the Board of Directors of PMMHC adopted a Plan of Conversion (the “Plan”), which provides for the conversion of PMMHC from mutual to stock form (the “Conversion”), the formation of HoldCo as a holding company that will own 100% of the common stock of PMMHC, and the issuance of all of PMMHC’s outstanding common stock to HoldCo.

     In connection with the Conversion, HoldCo is offering up to 6,772,222 shares (the “Shares”) of common stock, par value $0.01 per share (the “Common Stock”), in (i) a subscription offering (the “Subscription Offering”), and, if necessary, (ii) a direct community offering (the “Community Offering”), and (iii) a syndicated community offering (the “Syndicated Community Offering”). The Subscription Offering, the Community Offering and the Syndicated Community Offering are herein sometimes collectively referred to as the “Offering.”

     HoldCo will issue the Shares at a purchase price of $10.00 per share (the “Purchase Price”). If the number of Shares is increased or decreased in accordance with the Plan, the term “Shares” shall mean such greater or lesser number, where applicable.

     The shares of Common Stock to be offered in the Subscription Offering will be offered pursuant to nontransferable subscription rights in the following order of priority (subject to limitations set forth in the Plan):

• eligible members of PMMHC, who are the policyholders under individual policies of insurance issued by PMIC and in force on April 22, 2009 (“Eligible Members”);

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• an employee stock ownership plan to be established as a tax-qualified plan of HoldCo; and

• directors, officers and employees of the Primary Parties as of the commencement of the Offering.

     HoldCo may offer shares of Common Stock for which subscriptions have not been received in the Subscription Offering in the Community Offering to the following categories of subscribers (listed in order of priority) before offering them to the general public:

• licensed insurance agencies and/or brokers that have been appointed by or otherwise are under contract with PMIC to market and distribute policies of insurance; and

• named insureds under policies of insurance issued by PMIC after April 22, 2009; and

• natural persons and trusts of natural persons residing in Lackawanna or Luzerne Counties, Pennsylvania.

     In the event a Community Offering is held, it may be held at any time during or immediately after the Subscription Offering. Depending on market conditions, shares not subscribed for in the Subscription Offering or in the Community Offering may be offered in the Syndicated Community Offering to selected members of the general public through a syndicate of registered broker-dealers solely managed by the Agent which are members of the Financial Industry Regulatory Authority (“FINRA”).

     It is acknowledged that the number of Shares to be sold in the Offering may be increased or decreased as described in the Prospectus (as hereinafter defined), that the purchase of Shares in the Offering is subject to maximum and minimum purchase limitations as described in the Prospectus, and that HoldCo may reject, in whole or in part, any subscription received in the Community Offering or Syndicated Community Offering.

     HoldCo has filed with the U.S. Securities and Exchange Commission (the “Commission”) a Registration Statement on Form S-1 (File No. 333-156936) in order to register the Shares under the Securities Act of 1933, as amended (the “1933 Act”), and the regulations promulgated thereunder (the “1933 Act Regulations”) and has filed such amendments thereto as have been required to the date hereof (the “Registration Statement”). The prospectus, as amended, included in the Registration Statement at the time it initially becomes effective is hereinafter called the “Prospectus,” except that if any prospectus is filed by HoldCo pursuant to Rule 424(b) or (c) of the regulations of the Commission under the 1933 Act differing from the prospectus included in the Registration Statement at the time it initially becomes effective, the term “Prospectus” shall refer to the prospectus filed pursuant to Rule 424(b) or (c) from and after the time said prospectus is filed with the Commission and shall include any supplements and amendments thereto from and after their dates of effectiveness or use, respectively.

     Concurrently with the execution of this Agreement, HoldCo is delivering to the Agent copies of the Prospectus, dated                     , 2009, of HoldCo to be used in the Subscription Offering and Community Offering (if any), and, if necessary, will deliver copies of the

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Prospectus and any prospectus supplement for use in a Syndicated Community Offering as defined in the Prospectus.

     2. Appointment of the Agent. Subject to the terms and conditions of this Agreement, the Primary Parties hereby appoint the Agent to consult with and to advise and assist the Primary Parties with respect to the sale of the Shares in the Offering.

     On the basis of the representations and warranties of the Primary Parties contained in, and subject to the terms and conditions of, this Agreement, the Agent accepts such appointment and agrees to consult with and advise the Primary Parties as to the matters set forth in the letter agreement, dated October 23, 2008, between the PMMHC and the Agent (“Letter Agreement”) (a copy of which is attached hereto as Exhibit A). It is acknowledged by the Primary Parties that the Agent shall not be obligated to purchase any Shares and shall not be obligated to take any action which is inconsistent with any applicable law, regulation, decision or order. Except as provided in the last Paragraph of this Section 2 and Section 13, the appointment of the Agent hereunder shall terminate upon consummation of the Offering.

     If selected broker-dealers are used to assist in the sale of Shares in the Syndicated Community Offering, the Primary Parties hereby, subject to the terms and conditions of this Agreement, appoint the Agent to manage such broker-dealers in the Syndicated Community Offering. On the basis of the representations and warranties of the Primary Parties contained in, and subject to the terms and conditions of, this Agreement, the Agent accepts such appointment and agrees to manage the selling group of broker-dealers in the Syndicated Community Offering.

     3. Refund of Purchase Price. In the event that the Offering is not consummated for any reason, including but not limited to the inability to sell a minimum of 4,505,000 Shares during the Offering (including any permitted extension thereof) or such other minimum number of Shares as shall be established consistent with the Plan, this Agreement shall terminate and any persons who have subscribed for any of the Shares shall have refunded to them the full amount that has been received from such person, without interest, as provided in the Prospectus.

     4. Fees. In addition to the expenses specified in Section 9 hereof, as compensation for the Agent’s services under this Agreement, the Agent has received or will receive the following fees from the Primary Parties:

(a)	An advisory and marketing services fee in the amount of $100,000, paid as follows: (i) $50,000 was paid upon execution of the Letter Agreement, and (ii) $50,000 was paid upon the initial filing of the Registration Statement.
(b)	A fee of 1.5% of the dollar amount of the Shares sold in the Subscription Offering and Community Offering less the $100,000 amount previously paid pursuant to Section 4(a) upon the successful completion of the Offering.
(c)	If any of the Shares remain unsubscribed after the Subscription Offering and Community Offering, at the request of the Primary Parties, the Agent will form a group of approved broker-dealer firms (the “Assisting Brokers”) in accordance with Section 2 hereof for purposes of the Syndicated Community Offering. The

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Primary Parties, in consultation with the Agent, will determine which FINRA member firms will participate in the Syndicated Community Offering and the extent of their participation. The fees payable by the Primary Parties pursuant to this Section 4(c) will not exceed 5.5% of the aggregate dollar amount of the Shares sold in the Syndicated Community Offering. Of such fee, the Agent will receive 1.5% of the aggregate dollar amount of the Shares sold pursuant to this Section 4(c) as a management fee, and the Primary Parties will pay the remainder to the Assisting Brokers, which may include the Agent, in amounts relating to the number of Shares sold by such Assisting Brokers pursuant to this Section 4(c). All such fees payable under this Section 4(c) shall be in addition to all fees payable under Sections 4(a) and 4(b) and shall be paid at Closing (as defined in Section 5). A form of Assisting Brokers Agreement is attached hereto as Exhibit B.

     In the event that HoldCo resolicits subscribers for Shares in the Subscription and Community Offering and the Agent is required to provide significant additional services in connection with such a resolicitation, the Primary Parties and the Agent shall mutually agree to the dollar amount of additional fees due to the Agent, if any. Until any agreement called for by this paragraph is reached, the Agent shall not accrue expenses relating to any resolicitation in an amount that would cause the total expenses incurred by the Agent to be greater than as set forth in Section 9 hereof without the prior written consent of the Primary Parties, which consent shall not be unreasonably withheld.

     If this Agreement is terminated in accordance with the provisions of Sections 3, 10, or 14, and the sale of Shares is not consummated, the Agent shall not be entitled to receive the fees set forth in Sections 4(b) and(c), but the Agent will be entitled to retain the payment of $100,000 received by it for its advisory, administrative and marketing services, and the Primary Parties will reimburse the Agent for its reasonable expenses pursuant to Section 9. Any amount paid pursuant to Section 4(a) above shall be applied to any fees due upon termination.

     5. Closing. If the minimum number of Shares required to be sold in the Offering on the basis of the most recently updated evaluation of the pro forma market value of PMMHC, on a consolidated basis (the “Appraisal”) are subscribed for at or before the termination of the Offering, and the other conditions to the completion of the Offering are satisfied, HoldCo agrees to issue the Shares at the Closing Time (as hereinafter defined) against payment therefor by the means authorized by the Plan and to deliver certificates evidencing ownership of the Shares in such authorized denominations and registered in such names as may be indicated on the subscription order forms directly to the purchasers thereof as promptly as practicable after the Closing Time. The Closing (the “Closing”) shall be held at the offices of Stevens & Lee in King of Prussia, Pennsylvania, or at such other place as shall be agreed upon among the Primary Parties and the Agent, at 10:00 a.m., prevailing Eastern Time, on the business day selected by HoldCo or PMMHC, which business day shall be no less than two business days following the giving of prior notice by HoldCo or PMMHC to the Agent or at such other time as shall be agreed upon by HoldCo or PMMHC and the Agent. At the Closing, HoldCo shall deliver to the Agent by wire transfer in same-day funds the commissions, fees and expenses owing as set forth in Sections 4 and 9 hereof and the opinions and other documents required hereby shall be executed and delivered to effect the sale of the Shares as contemplated hereby and pursuant to

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the terms of the Prospectus; provided, however, that all out-of-pocket expenses to which the Agent is entitled under Section 9 hereof shall be due and payable upon receipt by HoldCo of a written accounting therefor setting forth in reasonable detail the expenses incurred by the Agent. The hour and date upon which HoldCo shall release the Shares for delivery in accordance with the terms hereof is referred to herein as the “Closing Time.”

     The Agent shall have no liability to any party for the records or other information provided by the Primary Parties (or their agents) to the Agent for use in allocating the Shares. Subject to the limitations of Section 11 hereof, the Primary Parties shall indemnify and hold harmless the Agent for any liability arising out of the allocation of the Shares in accordance with (i) the Plan generally, and (ii) the records or other information provided to the Agent by the Primary Parties (or their respective agents).

     6. Representations and Warranties of the Primary Parties. The Primary Parties jointly and severally represent and warrant to the Agent that, except as disclosed in the Prospectus:

(a)

Each of the Primary Parties has and, as of the Closing Time, will have all such power, authority, authorizations, approvals and orders as may be required to enter into this Agreement, to carry out the provisions and conditions hereof and to issue and sell the Shares as provided herein and as described in the Prospectus. Subject to the receipt of regulatory approval, the execution, delivery and performance of this Agreement and the Letter Agreement and the consummation of the transactions herein contemplated have been duly and validly authorized by all necessary corporate action on the part of each of the Primary Parties. This Agreement has been validly executed and delivered by each of the Primary Parties, and is a valid, legal and binding obligation of each of the Primary Parties, enforceable in accordance with its terms, except as the legality, validity, binding nature and enforceability thereof may be limited by (i) bankruptcy, insolvency, moratorium, conservatorship, receivership or other similar laws relating to or affecting the enforcement of creditors’ rights generally; (ii) general equity principles regardless of whether such enforceability is considered in a proceeding in equity or at law; and (iii) the extent, if any, that the provisions of Sections 11 or 12 hereof may be unenforceable as against public policy.

(b)

The Registration Statement was declared effective by the Commission on                     , 2009, and no stop order has been issued with respect thereto and no proceedings therefor have been initiated or, to the knowledge of the Primary Parties, threatened by the Commission. At the time the Registration Statement (including the Prospectus contained therein) became effective, the Registration Statement (including the Prospectus contained therein) complied as to form in all material respects with the 1933 Act and the regulations promulgated thereunder, and the Registration Statement (including the Prospectus contained therein) did not contain an untrue statement of a material fact or omit to state a material fact required to be stated therein or necessary to make the statements therein, in light of the circumstances under which they were made, not misleading. At the time any Rule 424(b) or (c) Prospectus was filed with the Commission and at the

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Closing Time referred to in Section 5, the Registration Statement, including the Prospectus contained therein (including any amendment or supplement thereto), and any state securities law application or any sales information authorized by the Primary Parties for use in connection with the Offering did not and will not contain an untrue statement of a material fact or omit to state a material fact necessary in order to make the statements therein, in light of the circumstances under which they were made, not misleading; provided, however, that the representations and warranties in this Section 6(b) shall not apply to statements or omissions made in reliance upon and in conformity with written information furnished to the Primary Parties by the Agent regarding the Agent or the method of conducting the Offering expressly for use in the Registration Statement or Prospectus or written statements or omissions from any sales information or information filed pursuant to state securities or blue sky laws or regulations.

(c)

At the time of filing the Registration Statement and at the date hereof, HoldCo was not, and is not, an ineligible issuer, as defined in Rule 405. At the time of the filing of the Registration Statement and at the time of the use of any issuer free writing prospectus, as defined in Rule 433(h), HoldCo met the conditions required by Rules 164 and 433 for the use of a free writing prospectus. If required to be filed, HoldCo has filed any issuer free writing prospectus related to the offered Shares at the time it is required to be filed under Rule 433 and, if not required to be filed, will retain such free writing prospectus in HoldCo’s records pursuant to Rule 433(g) and if any issuer free writing prospectus is used after the date hereof in connection with the offering of the Shares, HoldCo will file or retain such free writing prospectus as required by Rule 433.

(d)

As of the Applicable Time (as hereinafter defined), neither (i) the Issuer-Represented General Free Writing Prospectus(es) issued at or prior to the Applicable Time and the Statutory Prospectus, all considered together (collectively, the “General Disclosure Package”), nor (ii) any individual Issuer-Represented Limited-Use Free Writing Prospectus, when considered together with the General Disclosure Package, included any untrue statement of a material fact or omitted to state any material fact necessary in order to make the statements therein, in the light of the circumstances under which they were made, not misleading. The preceding sentence does not apply to statements in or omissions from any Prospectus included in the Registration Statement relating to the offered Shares or any Issuer-Represented Free Writing Prospectus based upon and in conformity with written information furnished to any of the Primary Parties by the Agent specifically for use therein. As used in this Paragraph and elsewhere in this Agreement:

(i)	“Applicable Time” means each and every date when a potential purchaser submitted a subscription or otherwise committed to purchase Shares.
(ii)	“Statutory Prospectus” as of any time, means the Prospectus relating to the offered Shares that is included in the Registration Statement relating to the

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offered Shares immediately prior to that time, including any document incorporated by reference therein.

(iii)	“Issuer-Represented Free Writing Prospectus” means any “issuer free writing prospectus,” as defined in Rule 433(h), relating to the offered Shares that is required to be filed with the Commission by HoldCo or required to be filed with the Commission. The term does not include any writing exempted from the definition of prospectus pursuant to clause (g) of Section 2(a)(10) of the 1933 Act, without regard to Rule 172 or Rule 173 under the 1933 Act Regulations.
(iv)	“Issuer-Represented General Free Writing Prospectus” means any Issuer-Represented Free Writing Prospectus that is intended for general distribution to prospective investors.
(v)	“Issuer-Represented Limited-Use Free Writing Prospectus” means any Issuer-Represented Free Writing Prospectus that is not an Issuer-Represented General Free Writing Prospectus. The term Issuer-Represented Limited-Use Free Writing Prospectus also includes any “bona fide electronic road show,” as defined in Rule 433 under the 1933 Act Regulations, that is made available without restriction pursuant to Rule 433(d)(8)(ii) under the 1933 Act Regulations or otherwise, even though not required to be filed with the Commission.

(e) Each Issuer-Represented Free Writing Prospectus, as of its date of first use and at all subsequent times through the completion of the Offering and sale of the offered Shares or until any earlier date that HoldCo notified or notifies the Agent (as described in the next sentence), did not, does not and will not include any information that conflicted, conflicts or will conflict with the information contained in the Registration Statement, including any document incorporated by reference therein that has not been superseded or modified. If at any time following the date of first use of an Issuer-Represented Free Writing Prospectus there occurred or occurs an event or development as a result of which such Issuer-Represented Free Writing Prospectus conflicted or would conflict with the information contained in the Registration Statement relating to the offered Shares or included or would include an untrue statement of a material fact or omitted or would omit to state a material fact necessary in order to make the statements therein, in the light of the circumstances prevailing at that subsequent time, not misleading, HoldCo has notified or will notify promptly the Agent so that any use of such Issuer-Represented Free-Writing Prospectus may cease until it is amended or supplemented, and HoldCo has promptly amended or will promptly amend or supplement such Issuer-Represented Free Writing Prospectus to eliminate or correct such conflict, untrue statement or omission. The foregoing two sentences do not apply to statements in or omissions from any Issuer-Represented Free Writing Prospectus based upon and in conformity with written information furnished to any of the Primary Parties by the Agent specifically for use therein.

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(f)	Pursuant to a 1998 Order from the Pennsylvania Insurance Commissioner (the “1998 Order”), PMMHC is required to obtain the approval of the Commissioner prior to effecting a conversion of PMMHC. PMMHC requested a letter from the Commissioner approving the conversion, and such letter has been received. At the date of such approval and at the Closing Time, the Plan will comply in all material respects with the 1998 Order.
(g)	HoldCo will promptly file the Prospectus and any supplemental sales literature with the Commission. The Prospectus and all supplemental sales literature, as of the date the Registration Statement became effective and at the Closing Time referred to in Section 5, will have received all required authorizations for use in final form.
(h)	Except for the 1998 Order, no order has been issued by the Department, the Commission, or any other state or federal regulatory authority, preventing or suspending the use of the Registration Statement, the Prospectus or any supplemental sales literature, and no action by or before any such government entity to revoke any approval, authorization or order of effectiveness related to the Offering is pending or, to the knowledge of the Primary Parties, threatened.
(i)	The Plan has been duly adopted by the Board of Directors of PMMHC. To the knowledge of the Primary Parties, no person has, or at the Closing Time will have, sought to obtain review of the final action of any state or federal regulatory authority with respect to the Plan or the Offering.
(j)	Curtis Financial Group LLC which prepared the valuation of PMMHC in connection with the Offering, has advised the Primary Parties in writing that it is independent with respect to each of the Primary Parties. The Primary Parties believe that Curtis Financial Group LLC is an expert in preparing appraisals of insurance companies.
(k)	KPMG LLP, which certified the financial statements included in the Registration Statement, has advised the Primary Parties that it is an independent registered public accounting firm within the meaning of the Code of Ethics of the American Institute of Certified Public Accountants (the “AICPA”), that it is registered with the Public Company Accounting Oversight Board (“PCAOB”), and that it is, with respect to each of the Primary Parties, an independent certified public accountant within the meaning of, and is not in violation of the auditor independence requirements of the 1933 Act, the 1933 Act Regulations, the regulations of the PCAOB and the Sarbanes Oxley Act of 2002 (the “Sarbanes-Oxley Act”).
(l)	The consolidated financial statements and the notes thereto which are included in the Registration Statement and which are a part of the Prospectus present fairly the financial condition and retained earnings of PMMHC and its subsidiaries as of the dates indicated and the results of operations and cash flows for the periods specified. The financial statements comply in all material respects with the applicable accounting requirements of the 1933 Act Regulations, Regulation S-X

8

of the Commission and accounting principles generally accepted in the United States of America (“GAAP”) applied on a consistent basis during the periods presented except as otherwise noted therein, and present fairly in all material respects the information required to be stated therein. The other financial, statistical and pro forma information and related notes included in the Prospectus present fairly the information shown therein on a basis consistent with the audited and unaudited financial statements included in the Prospectus, and as to the pro forma adjustments, the adjustments made therein have been properly applied on the basis described therein.

(m)	Since the respective dates as of which information is given in the Registration Statement, including the Prospectus, other than disclosed therein: (i) there has not been any material adverse change in the financial condition or in the earnings, capital, properties or business affairs of any of the Primary Parties or of the Primary Parties taken as a whole, whether or not arising in the ordinary course of business (“Material Adverse Effect”); (ii) there has not been any material change in total assets of the Primary Parties, nor have any of the Primary Parties issued any securities or incurred any liability or obligation for borrowings other than in the ordinary course of business; and (iii) there have not been any material transactions entered into by any of the Primary Parties, other than those in the ordinary course of business. The capitalization, liabilities, assets, properties and business of the Primary Parties conform in all material respects to the descriptions thereof contained in the Prospectus, and none of the Primary Parties has any material liabilities of any kind, contingent or otherwise, except as disclosed in Registration Statement or the Prospectus.
(n)	HoldCo is a corporation duly incorporated and validly existing under the laws of the Commonwealth of Pennsylvania, with corporate power and authority to own its properties and to conduct its business as described in the Prospectus, and will be qualified to transact business and in good standing in each jurisdiction in which the conduct of business requires such qualification unless the failure to qualify in one or more of such jurisdictions would not have a Material Adverse Effect. As of the Closing Time, HoldCo will be in good standing under the laws of the Commonwealth of Pennsylvania and will have obtained all licenses, permits and other governmental authorizations required for the conduct of its business, except those that individually or in the aggregate would not have a Material Adverse Effect; and all such licenses, permits and governmental authorizations are in full force and effect, and HoldCo will be in compliance therewith in all material respects.
(o)	PMMHC is a corporation duly incorporated and validly existing under the laws of the Commonwealth of Pennsylvania in mutual form, with corporate power and authority to own its properties and to conduct its business as described in the Prospectus, and will be qualified to transact business and in good standing in each jurisdiction in which the conduct of business requires such qualification unless the failure to qualify in one or more of such jurisdictions would not have a Material Adverse Effect. As of the Closing Time, PMMHC will be in good standing under

9

the laws of the Commonwealth of Pennsylvania and will have obtained all licenses, permits and other governmental authorizations required for the conduct of its business, except those that individually or in the aggregate would not have a Material Adverse Effect; and all such licenses, permits and governmental authorizations are in full force and effect, and PMMHC will be in compliance therewith in all material respects.

(p)	PMHC is a corporation duly incorporated and validly existing under the laws of the Commonwealth of Pennsylvania, with corporate power and authority to own its properties and to conduct its business as described in the Prospectus, and will be qualified to transact business and in good standing in each jurisdiction in which the conduct of business requires such qualification unless the failure to qualify in one or more of such jurisdictions would not have a Material Adverse Effect. As of the Closing Time, PMHC will be in good standing under the laws of the Commonwealth of Pennsylvania and will have obtained all licenses, permits and other governmental authorizations required for the conduct of its business, except those that individually or in the aggregate would not have a Material Adverse Effect; and all such licenses, permits and governmental authorizations are in full force and effect, and PMHC will be in compliance therewith in all material respects. All of the issued and outstanding shares of capital stock of PMHC are duly and validly issued and fully paid and nonassessable, and, as of the Closing Time, all capital stock of PMHC will be free and clear of any mortgage, pledge, lien, encumbrance, claim or restriction. PMHC does not own equity securities or any equity interest in any other business enterprise except as otherwise described in the Prospectus.
(q)	PMIC is a duly incorporated and validly existing Pennsylvania insurance company duly authorized to conduct its business as described in the Prospectus; the activities of PMIC as of the date hereof are and as of the Closing Time will be permitted by the rules and regulations of the Department; PMIC has obtained all licenses, permits and other governmental authorizations currently required for the conduct of its business except those that individually or in the aggregate would not have a Material Adverse Effect; all such licenses, permits and other governmental authorizations are and, as of the Closing Time will be, in full force and effect and PMIC is and, as of the Closing Time will be, in good standing under the laws of the Commonwealth of Pennsylvania; all of the issued and outstanding capital stock of PMIC is duly and validly issued and fully paid and nonassessable; and as of the Closing Time, HoldCo will directly own all of such capital stock free and clear of any mortgage, pledge, lien, encumbrance, claim or restriction. PMIC does not own equity securities or any equity interest in any other business enterprise except as otherwise described in the Prospectus.
(r)	American Millers is a duly incorporated and validly existing Pennsylvania insurance company duly authorized to conduct its business as described in the Prospectus; the activities of American Millers as of the date hereof are and as of the Closing Time will be permitted by the rules and regulations of the Department; American Millers has obtained all licenses, permits and other

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governmental authorizations currently required for the conduct of its business except those that individually or in the aggregate would not have a Material Adverse Effect; all such licenses, permits and other governmental authorizations are and, as of the Closing Time will be, in full force and effect and American Millers is and, as of the Closing Time will be, in good standing under the laws of the Commonwealth of Pennsylvania; all of the issued and outstanding capital stock of American Millers is duly and validly issued and fully paid and nonassessable; and as of the Closing Time, PMIC will directly own all of such capital stock free and clear of any mortgage, pledge, lien, encumbrance, claim or restriction. American Millers does not own equity securities or any equity interest in any other business enterprise except as otherwise described in the Prospectus.

(s)	Upon consummation of the Offering, the authorized, issued and outstanding equity capital of HoldCo will be within the range set forth in the Prospectus under the caption “Capitalization” (except for subsequent issuances, if any, pursuant to reservations, agreements or employee benefit plans referred to in the Prospectus); and the shares of Common Stock to be subscribed for in the Offering have been duly and validly authorized for issuance and, when issued and delivered by HoldCo pursuant to the Plan against payment of the consideration calculated as set forth in the Plan and the Prospectus, will be duly and validly issued and fully paid and nonassessable; the issuance of the Shares are not subject to preemptive rights, except for the Subscription Rights granted pursuant to the Plan; and the terms and provisions of the shares of Common Stock will conform in all material respects to the description thereof contained in the Prospectus. Upon issuance of the Shares, good title to the Shares will be transferred from HoldCo to the purchasers of Shares against payment therefor in the Offering as set forth in the Plan and the Prospectus.
(t)	Upon consummation of the Conversion, the authorized capital stock of PMMHC will be 10,000,000 shares of common stock, par value $0.01 per share (the “PMMHC Common Stock”), and no shares of PMMHC Common Stock have been or will be issued prior to the Closing Time. The shares of PMMHC Common Stock to be issued to HoldCo will have been duly authorized for issuance and, when issued and delivered by PMMHC, will be duly and validly issued and fully paid and nonassessable, and all such PMMHC Common Stock will be owned beneficially and of record by HoldCo and free and clear of any security interest, mortgage, pledge, lien, encumbrance or legal or equitable claim; the certificates representing the shares of PMMHC Common Stock will conform with the requirements of applicable laws and regulations.
(u)	None of the Primary Parties is and, as of the Closing Time, none of the Primary Parties will be, in violation of their respective articles of incorporation or their respective bylaws, or in material default in the performance or observance of any obligation, agreement, covenant, or condition contained in any contract, lease, loan agreement, indenture or other instrument to which they are a party or by which they, or any of their respective property, may be bound which would result in a Material Adverse Effect. The consummation of the transactions herein

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contemplated will not (i) conflict with or constitute a breach of, or default under, the articles of incorporation or bylaws of any of the Primary Parties, or materially conflict with or constitute a material breach of, or default under, any material contract, lease or other instrument to which any of the Primary Parties is a party or bound, or any applicable law, rule, regulation or order that is material to the financial condition of the Primary Parties, on a consolidated basis; (ii) violate any authorization, approval, judgment, decree, order, statute, rule or regulation applicable to the Primary Parties except for such violations which would not have a Material Adverse Effect; or (iii) result in the creation of any material lien, charge or encumbrance upon any property of the Primary Parties.

(v)	No default exists, and no event has occurred which with notice or lapse of time, or both, would constitute a material default on the part of any of the Primary Parties, in the due performance and observance of any term, covenant or condition of any indenture, mortgage, deed of trust, note, bank loan or credit agreement or any other material instrument or agreement to which any of the Primary Parties is a party or by which any of them or any of their property is bound or affected in any respect which, in any such case, is material to the Primary Parties individually or considered as one enterprise, and such agreements are in full force and effect; and no other party to any such agreements has instituted or, to the knowledge of the Primary Parties, threatened any action or proceeding wherein any of the Primary Parties is alleged to be in default thereunder under circumstances where such action or proceeding, if determined adversely to any of the Primary Parties, would have a Material Adverse Effect.
(w)	The Primary Parties have good and marketable title to all assets which are material to the businesses of the Primary Parties and to those assets described in the Prospectus as owned by them, free and clear of all material liens, charges, encumbrances, restrictions or other claims, except such as are described in the Prospectus or which do not have a Material Adverse Effect and all of the leases and subleases which are material to the businesses of the Primary Parties, as described in the Registration Statement or Prospectus, are in full force and effect.
(x)	The Primary Parties are not in material violation of any directive from the Department, the Commission, or any other agency to make any material change in the method of conducting their respective businesses; the Primary Parties have conducted and are conducting their respective businesses so as to comply in all respects with all applicable statutes and regulations (including, without limitation, regulations, decisions, directives and orders of the Department and the Commission), except where the failure to so comply would not reasonably be expected to result in any Material Adverse Effect, and there is no charge, investigation, action, suit or proceeding before or by any court, regulatory authority or governmental agency or body pending or, to the knowledge of any of the Primary Parties, threatened, which would reasonably be expected to materially and adversely affect the Offering, the performance of this Agreement, or the consummation of the transactions contemplated in the Plan as described in the

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Registration Statement, or which would reasonably be expected to result in a Material Adverse Effect.

(y)	The Primary Parties have received an opinion of their special counsel, Stevens & Lee, with respect to the federal income tax consequences of the Offering, as described in the Registration Statement and the Prospectus, and the facts and representations upon which such opinions are based are truthful, accurate and complete, and none of the Primary Parties will take any action inconsistent therewith. All material aspects of the aforesaid opinion are accurately summarized in the Prospectus.
(z)	The Primary Parties have timely filed all required federal and state tax returns, have paid all taxes that have become due and payable in respect of such returns, except where permitted to be extended, have made adequate reserves for similar future tax liabilities, and no deficiency has been asserted with respect thereto by any taxing authority.
(aa)	No approval, authorization, consent or other order of any regulatory or supervisory or other public authority is required for the execution and delivery by the Primary Parties of this Agreement and the issuance of the Shares, except (i) for the approval of the Pennsylvania Insurance Commissioner (which will have been received as of the Closing Time), (ii) the non-objection of FINRA, and (iii) any necessary qualification, notification, or registration or exemption under the securities or blue sky laws of the various states in which the Shares are to be offered for sale.
(bb)	None of the Primary Parties has: (i) issued any securities within the last 18 months (except for notes to evidence bank loans or other liabilities in the ordinary course of business or as described in the Prospectus); (ii) had any dealings with respect to sales of securities within the 18 months prior to the date hereof with any member of FINRA, or any person related to or associated with such member, other than discussions and meetings relating to the Offering and purchases and sales of U.S. government and agency and other securities in the ordinary course of business; (iii) entered into a financial or management consulting agreement except for the Letter Agreement and as contemplated hereunder; or (iv) engaged any intermediary between the Agent and the Primary Parties in connection with the Offering, and no person is being compensated in any manner for such services.
(cc)	Neither the Primary Parties nor, to the knowledge of the Primary Parties, any employee of the Primary Parties, has made any payment of funds of the Primary Parties as a loan to any person for the purchase of Shares, except for HoldCo’s loan to its employee stock ownership plan (“ESOP”), the proceeds of which will be used by the ESOP to purchase Shares, or has made any other payment of funds prohibited by law, and no funds have been set aside to be used for any payment prohibited by law.

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(dd)	PMMHC and its subsidiaries comply in all material respects with any applicable financial record keeping and reporting requirements of the Currency and Foreign Transactions Reporting Act of 1970, as amended, and the regulations and rules thereunder.
(ee)	The membership records of PMMHC, including, without limitation, as to Eligible Members, are accurate and complete in all material respects.
(ff)	The Primary Parties comply in all material respects with all laws, rules and regulations relating to environmental protection, and none of them has been notified or is otherwise aware that any of them is potentially liable, or is considered potentially liable, under the Comprehensive Environmental Response, Compensation and Liability Act of 1980, as amended, or any other federal, state or local environmental laws and regulations; no action, suit, regulatory investigation or other proceeding is pending, or to the knowledge of the Primary Parties, threatened against the Primary Parties relating to environmental protection, nor do the Primary Parties have any reason to believe any such proceedings may be brought against any of them; and no disposal, release or discharge of hazardous or toxic substances, pollutants or contaminants, including petroleum and gas products, as any of such terms may be defined under federal, state or local law, has occurred on, in, at or about any facilities or properties owned or leased by any of the Primary Parties.
(gg)	Each of the Primary Parties has fulfilled, in all material respects, its obligations, if any, under the minimum funding standards of Section 302 of the United States Employee Retirement Income Security Act of 1974, as amended (“ERISA”), and the regulations promulgated thereunder with respect to any “plan” (as defined in Section 3(3) of ERISA and the regulations thereunder), which is maintained by any of the Primary Parties for their employees, and any such plan is in compliance in all material respects with the presently applicable provisions of ERISA and the regulations thereunder. None of the Primary Parties has incurred any unpaid liability under Title IV of ERISA to the Pension Benefit Guaranty Corporation (other than for the payment of premiums in the ordinary course) or to any such plan.
(hh)	HoldCo has applied for approval, subject to completion of the Offering, to have the Shares listed on the NASDAQ Global Market effective as of the Closing Time.
(ii)	Except as disclosed in the Prospectus, all material reinsurance treaties or agreements to which PMIC is a party or is a named reinsured are in full force and effect. Neither PMIC, nor, to the knowledge of the Primary Parties, any other party thereto, is in default under any such agreement, and no party may terminate any such agreement by reason of the transactions contemplated by the Plan.
(jj)	HoldCo has filed a registration statement on Form 8-A to register the Common Stock under Section 12(g) of the Securities Exchange Act of 1934, as amended

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	(the “Exchange Act”), and pursuant to Form 8-A such registration statement shall be effective concurrent with the effectiveness of the Registration Statement.
(kk)	There is no contract or other document of a character required to be described in the Registration Statement or the Prospectus or to be filed as an exhibit to the Registration Statement which is not described or filed as required.
(ll)	The Primary Parties maintain a system of internal accounting controls sufficient to provide reasonable assurances that (i) transactions are executed in accordance with management’s general or specific authorizations, (ii) transactions are recorded as necessary to permit preparation of financial statements in conformity with generally accepted accounting principles and to maintain accountability for assets, (iii) access to cash and other liquid assets is permitted only in accordance with management’s general or specific authorization, and (iv) the recorded ledger assets are compared with existing assets at reasonable intervals and appropriate action is taken with respect to any differences.
(mm)	Except as described in the Prospectus, (i) there are no contractual encumbrances or contractual restrictions or regulatory restrictions on the ability of the Primary Parties to pay dividends or make any other distributions on its capital stock, and (ii) there are no contractual encumbrances or contractual restrictions on the ability of the Primary Parties (A) to pay any indebtedness owed to the Primary Parties or (B) to make any loans or advances to, or investments in, the Primary Parties, or (C) to transfer any of its property or assets to the Primary Parties.
(nn)	None of the Primary Parties are required to be registered as an investment company under the Investment Company Act of 1940.
(oo)	The Primary Parties have taken all actions necessary to obtain at the Closing Time a blue sky memorandum from Stevens & Lee.

     Any certificates signed by an officer of any of the Primary Parties and delivered to the Agent or its counsel that refer to this Agreement shall be deemed to be a representation and warranty by the Primary Parties to the Agent as to the matters covered thereby with the same effect as if such representation and warranty were set forth herein.

     7. Representations and Warranties of the Agent. The Agent represents and warrants to the Primary Parties that:

(a)	The Agent is a limited liability company and is validly existing in good standing under the laws of the Commonwealth of Pennsylvania, with full power and authority to provide the services to be furnished to the Primary Parties hereunder.
(b)	The execution and delivery of this Agreement and the consummation of the transactions contemplated hereby have been duly and validly authorized by all necessary action on the part of the Agent, and this Agreement and the Letter Agreement are the legal, valid and binding agreement of the Agent, enforceable in accordance with their terms except as the legality, validity, binding nature and

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enforceability thereof may be limited by (i) bankruptcy, insolvency, moratorium, conservatorship, receivership or other similar laws relating to or affecting the enforcement of creditors’ rights generally; (ii) general equity principles regardless of whether such enforceability is considered in a proceeding in equity or at law; and (iii) the extent, if any, that the provisions of Sections 11 or 12 hereof may be unenforceable as against public policy.

(c)	Each of the Agent and its employees, agents and representatives who shall perform any of the services hereunder has, and until the Offering is completed or terminated shall maintain, all licenses, approvals and permits necessary to perform such services.
(d)	No action, suit, charge or proceeding before the Commission, FINRA, any state securities commission or any court is pending, or to the knowledge of Agent threatened, against the Agent which, if determined adversely to Agent, would have a material adverse effect upon the ability of the Agent to perform its obligations under this Agreement.
(e)	The Agent is registered as a broker/dealer pursuant to Section 15(b) of the 1934 Act, as amended (the “1934 Act”) and is a member of FINRA.
(f)	Any funds received in the Offering by the Agent will be handled by the Agent in accordance with Rule 15c2-4 under the 1934 Act to the extent applicable.

     8. Covenants of the Primary Parties. The Primary Parties hereby jointly and severally covenant with the Agent as follows:

(a)

HoldCo will not, at any time after the date the Registration Statement is declared effective, file any amendment or supplement to the Registration Statement without providing the Agent and its counsel an opportunity to review such amendment or supplement or, except as may be required by law, file any amendment or supplement to which amendment or supplement the Agent or its counsel shall reasonably object. HoldCo will furnish promptly to the Agent and its counsel copies of all correspondence from the Commission with respect to the Registration Statement and HoldCo’s responses thereto.

(b)

HoldCo represents and agrees that, unless it obtains the prior consent of the Agent, and the Agent represents and agrees that, unless it obtains the prior consent of HoldCo, it has not made and will not make any offer relating to the offered Shares that would constitute an “issuer free writing prospectus,” as defined in Rule 433, or that would constitute a “free writing prospectus,” as defined in Rule 405, required to be filed with the Commission. Any such free writing prospectus consented to by HoldCo and the Agent is hereinafter referred to as a “Permitted Free Writing Prospectus.” HoldCo represents that it has treated or agrees that it will treat each Permitted Free Writing Prospectus as an “issuer free writing prospectus,” as defined in Rule 433, and has complied and will comply with the requirements of Rule 433 applicable to any Permitted Free

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Writing Prospectus, including timely Commission filing where required, legending and record keeping. HoldCo need not treat any communication as a free writing prospectus if it is exempt from the definition of prospectus pursuant to Clause (a) of Section 2(a)(10) of the 1933 Act without regard to Rule 172 or 173.

(c)	The Primary Parties will use commercially reasonable efforts to cause any post-effective amendment to the Registration Statement to be declared effective by the Commission and will immediately upon receipt of any information concerning the events listed below notify the Agent (i) when the Registration Statement, as amended, has become effective; (ii) of any request by the Commission or any other governmental entity for any amendment or supplement to the Registration Statement, or of any request for additional information; (iii) of the issuance by the Commission or any other governmental agency of any order or other action suspending the Offering or the use of the Registration Statement or the Prospectus or any other filing of the Primary Parties under the 1933 Act, the 1933 Act Regulations, the 1934 Act, the 1934 Act Regulations or other applicable law, or the threat of any such action; or (iv) of the issuance by the Commission of any stop order suspending the effectiveness of the Registration Statement or of the initiation or threat of initiation or threat of any proceedings for that purpose.
(d)	The Primary Parties will comply in all material respects with any and all terms, conditions, requirements and provisions with respect to the Offering and the transactions contemplated thereby imposed by the Commission, by applicable state law and regulations, and by the 1933 Act, the 1933 Act Regulations, the 1934 Act, and the rules and regulations of the Commission promulgated under the 1934 Act (the “1934 Act Regulations”), FINRA, and the NASDAQ Global Market, to be complied with prior to or subsequent to the Closing Time; and when the Prospectus is required to be delivered, the Primary Parties will comply in all material respects, at their own expense, with all material requirements imposed upon them by the Commission, by applicable state law and regulations and by the 1933 Act, the 1933 Act Regulations, the 1934 Act, and the 1934 Act Regulations, in each case as from time to time in force, so far as necessary to permit the continuance of sales or dealing in shares of Common Stock during such period in accordance with the provisions hereof and the Prospectus. If the updated valuation of the Company prepared by Curtis Financial Group, LLC following the Offering is not within the valuation range set forth in the Prospectus at the time of effectiveness and HoldCo decides to resolicit subscriptions, HoldCo will promptly prepare and file with the Commission a post-effective amendment to the Registration Statement relating to the results of the updated valuation prior to any resolicitation of subscriptions.
(e)	Each of the Primary Parties will inform the Agent of any event or circumstances of which it is or becomes aware as a result of which the Registration Statement and/or Prospectus, as then supplemented or amended, would include an untrue statement of a material fact or omit to state a material fact necessary in order to make the statements therein not misleading. If it is necessary, in the reasonable

17

opinion of counsel for the Primary Parties, to amend or supplement the Registration Statement or the Prospectus in order to correct such untrue statement of a material fact or to make the statements therein not misleading in light of the circumstances existing at the time of their use, the Primary Parties will, at their expense, prepare and file with the Commission, as necessary under applicable federal and state rules and regulations, and furnish to the Agent, a reasonable number of copies of an amendment or amendments of, or a supplement or supplements to, the Registration Statement and the Prospectus (in form and substance reasonably satisfactory to counsel for the Agent after a reasonable time for review) which will amend or supplement the Registration Statement and/or the Prospectus so that as amended or supplemented it will not contain an untrue statement of a material fact or omit to state a material fact necessary in order to make the statements therein, in light of the circumstances existing at the time, not misleading. For the purpose of this subsection, each of the Primary Parties will furnish such information with respect to itself as the Agent may from time to time reasonably request.

(f)	Pursuant to the terms of the Plan, HoldCo will endeavor in good faith, in cooperation with the Agent, to register or to qualify the Shares for offer and sale or to exempt such Shares from registration and to exempt HoldCo and its officers, directors and employees from registration as broker-dealers, under the applicable securities laws of the jurisdictions in which the Offering will be conducted; provided, however, that HoldCo shall not be obligated to file any general consent to service of process or to qualify as a foreign corporation to do business in any jurisdiction in which it is not so qualified. In each jurisdiction where any of the Shares shall have been registered or qualified as above provided, HoldCo will make and file such statements and reports as are or may be required by the laws of such jurisdiction as a result of, or in connection with, such registration or qualification.
(g)	HoldCo will not sell or issue, contract to sell or otherwise dispose of, for a period of 180 days after the date hereof, without the Agent’s prior written consent, which consent shall not be unreasonably withheld, any shares of Common Stock other than in connection with any plan or arrangement described in the Prospectus.
(h)	For the period of three years from the date of this Agreement, HoldCo will furnish to the Agent upon request (i) a copy of each report of HoldCo furnished to or filed with the Commission under the 1934 Act or any national securities exchange or system or the NASDAQ Global Market on which any class of securities of HoldCo is listed or quoted, (ii) a copy of each report of HoldCo mailed to holders of Common Stock or non-confidential report filed with the Commission, the Department, or any other supervisory or regulatory authority or any national securities exchange or system or the NASDAQ Global Market on which any class of the securities of HoldCo is listed or quoted, (iii) each press release and material news item and article released by the Primary Parties, and (iv) from time-to-time, such other publicly available information concerning the Primary Parties as the Agent may reasonably request; provided that, any information or documents

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available on the Commission’s Electronic Data Gathering, Analysis and Retrieval System shall be considered furnished for purposes of this Section 8(h).

(i)	The Primary Parties will use the net proceeds from the sale of the Common Stock in the manner set forth in the Prospectus under the caption “USE OF PROCEEDS.”
(j)	HoldCo will distribute the Prospectus or other offering materials in connection with the offering and sale of the Common Stock only in accordance with the 1933 Act, the 1933 Act Regulations, the 1934 Act and the 1934 Act Regulations, and the laws of any state in which the shares are qualified for sale.
(k)	Prior to the Closing Time, HoldCo shall register its Common Stock under Section 12(b) of the 1934 Act, as amended, and will request that such registration statement be effective as of the Closing Time. HoldCo will use commercially reasonable efforts to list, subject to notice of issuance, the Shares on the NASDAQ Global Market.
(l)	For so long as the Common Stock is registered under the 1934 Act, HoldCo will furnish to its stockholders after the end of each fiscal year, in the time periods prescribed by applicable law and regulations, such reports and other information as are required to be furnished to its stockholders under the 1934 Act (including consolidated financial statements of PMMHC and its subsidiaries, certified by independent public accountants).
(m)	HoldCo will report the use of proceeds of the Offering in accordance with Rule 463 under the 1933 Act.
(n)	The Primary Parties will maintain appropriate arrangements for depositing all funds received from persons mailing subscriptions for or orders to purchase Shares on a non-interest bearing basis as described in the Prospectus until the Closing Time and satisfaction of all conditions precedent to the release of HoldCo’s obligation to refund payments received from persons subscribing for or ordering Shares in the Offering, in accordance with the Plan as described in the Prospectus, or until refunds of such funds have been made to the persons entitled thereto or withdrawal authorizations canceled in accordance with the Plan and as described in the Prospectus. The Primary Parties will maintain, together with the Agent, such records of all funds received to permit the funds of each subscriber to be separately insured by the FDIC (to the maximum extent allowable) and to enable the Primary Parties to make the appropriate refunds of such funds in the event that such refunds are required to be made in accordance with the Plan and as described in the Prospectus.
(o)	The Primary Parties will take such actions and furnish such information as are reasonably requested by the Agent in order for the Agent to ensure compliance with Rule 2790 of FINRA.

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(p)	The Primary Parties will conduct their businesses in compliance in all material respects with all applicable federal and state laws, rules, regulations, decisions, directives and orders including, all decisions, directives and orders of the Commission and the Department.
(q)	The Primary Parties shall comply with any and all terms, conditions, requirements and provisions with respect to the Plan and the transactions contemplated thereby imposed by the Commission, the 1933 Act, the 1933 Act Regulations, the 1934 Act and the 1934 Act Regulations to be complied with subsequent to the Closing Time. HoldCo will comply with all provisions of all undertakings contained in the Registration Statement.
(r)	The Primary Parties will not amend the Plan without notifying the Agent prior thereto.
(s)	HoldCo shall provide the Agent with any information necessary to assist with the allocation of the Shares in the Offering in the event of an oversubscription, and such information shall be accurate and reliable in all material respects.
(t)	HoldCo will not deliver the Shares until the Primary Parties have satisfied or caused to be satisfied each condition set forth in Section 10 hereof, unless such condition is waived in writing by the Agent.
(u)	Immediately upon completion of the sale by HoldCo of the Shares contemplated by the Plan and the Prospectus, all of the issued and outstanding shares of capital stock of PMMHC shall be owned by HoldCo.
(v)	Prior to the Closing Time, the Plan shall have been approved by the eligible voting members of PMMHC in accordance with the provisions of PMMHC’s articles and bylaws.
(w)	On or before the Closing Time, the Primary Parties will have completed all conditions precedent to the Offering specified in the Plan and the offer and sale of the Shares will have been conducted in all material respects in accordance with the Plan and with all other applicable laws, regulations, decisions and orders, including all terms, conditions, requirements and provisions precedent to the Offering imposed upon any of the Primary Parties by the Department, the Commission or any other regulatory authority and in the manner described in the Prospectus.
(x)	HoldCo shall notify the Agent when funds shall have been received for the minimum number of Shares.

     9. Payment of Expenses. The Primary Parties will pay for all expenses incident to the performance of this Agreement, including without limitation: (a) the preparation, printing, filing, delivery and shipment of the Registration Statement, including the Prospectus, and all amendments and supplements thereto, and all filing fees related thereto; (b) all filing fees and expenses in connection with the qualification or registration of the Shares for offer and sale by

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HoldCo under the securities or “blue sky” laws, including without limitation filing fees, reasonable legal fees and disbursements of counsel in connection therewith, and in connection with the preparation of a blue sky law survey; (c) the filing fees of FINRA related to the Agent’s fairness filing under Rule 2710 (or any successor rule of FINRA); (e) fees and expenses related to the preparation of the Appraisal; (f) fees and expenses related to auditing and accounting services; (g) all expenses relating to advertising, postage, temporary personnel, investor meetings and the operation of the stock information center; (h) transfer agent fees and costs of preparation and distribution of stock certificates; and (i) fees and expenses of the Primary Parties relating to presentations or meetings undertaken in connection with the marketing of the Syndicated Community Offering and sale of the Shares in the Syndicated Community Offering to prospective investors and the Agent’s sales forces, including expenses associated with travel, lodging, and other expenses incurred by the officers of the Primary Parties; provided, however, that the Agent shall pay the fees and expenses of the Agent and any of its affiliates relating to presentations or meetings undertaken in connection with the marketing and sale of the Shares to prospective investors and the Agent’s sales forces, including expenses associated with the production of road show slides and graphics, fees and expenses of any consultants engaged in connection with the road show presentations, travel, lodging and other expenses incurred by the officers of the Agent and any such consultants. In the event that the Agent incurs any expenses on behalf of the Primary Parties, the Primary Parties will pay or reimburse the Agent for such expenses regardless of whether the Offering are successfully completed, and such reimbursements will not be included in the expense limitations set forth above. The Primary Parties also agree to reimburse the Agent for reasonable out-of-pocket expenses, including legal fees and expenses, in an amount up to $150,000 incurred by the Agent in connection with the services hereunder. In the Subscription and Community Offering, the Agent will not incur actual accountable reimbursable out-of-pocket expenses in excess of $5,000 without the consent of PMMHC or HoldCo. The Primary Parties and the Agent acknowledge, however, that expense caps may be increased by the mutual consent of PMMHC or HoldCo and the Agent, including in the event of a material delay in the Offering requiring more than two updates of the financial information contained in the Registration Statement, as amended or supplemented, to reflect a period later than that set forth in the original filing of the Registration Statement on January 26, 2009. Not later than two days prior to the Closing Time, the Agent will provide the Primary Parties with a detailed accounting of all reimbursable expenses to be paid at the Closing.

     10. Conditions to the Agent’s Obligations. The obligations of the Agent hereunder and the occurrence of the Closing are subject to the condition that all representations and warranties and other statements of the Primary Parties herein contained are, at and as of the commencement of the Offering and at and as of the Closing Time, true and correct in all material respects, the Primary Parties shall have performed all of their obligations hereunder to be performed on or before such dates, and to the following further conditions:

(a) The Registration Statement shall have been declared effective by the Commission, and no stop order or other action suspending the effectiveness of the Registration Statement shall have been issued under the 1933 Act or proceedings therefor initiated or, to any of the Primary Parties’ knowledge, threatened by the Commission or any state authority and no order or other action suspending the authorization for use of the Prospectus or the consummation of the Reorganization shall have been issued or proceedings therefor initiated or, to any

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of the Primary Parties’ knowledge, threatened by the Department, the Commission, or any other governmental body.

(b) At the Closing Time, the Agent shall have received:

          (1) The opinion, dated as of the Closing Time, of Morgan, Lewis & Bockius LLP, as special counsel to the independent directors of PMMHC, in form and substance satisfactory to counsel for the Agent, to the effect that:

(i)	HoldCo is a corporation duly incorporated and validly subsisting under the laws of the Commonwealth of Pennsylvania, with corporate power and authority to own its properties and to conduct its business as described in the Prospectus, and will be duly qualified to transact business and will be in good standing in each jurisdiction in which the conduct of its business requires such qualification and in which the failure to qualify would have a Material Adverse Effect.
(ii)	PMMHC is a duly incorporated and validly subsisting Pennsylvania mutual holding company with corporate power and authority to conduct its business as described in the Prospectus and to enter into this Agreement and perform its obligations hereunder, and is duly qualified to transact business and in good standing in each jurisdiction in which the conduct of its business requires such qualification and in which the failure to qualify would have a Material Adverse Effect (as defined in Section 6(m)).
(iii)	PMHC is a duly incorporated and validly subsisting corporation under the laws of the Commonwealth of Pennsylvania, with corporate power and authority to own its properties and to conduct its business as described in the Prospectus and to enter into this Agreement and perform its obligations hereunder, and is duly qualified to transact business and in good standing in each jurisdiction in which the conduct of its business requires such qualification and in which the failure to qualify would have a Material Adverse Effect.
(iv)	PMIC is a property and casualty insurance company duly incorporated and validly subsisting under the laws of the Commonwealth of Pennsylvania with corporate power and authority to own its properties and to conduct its business as described in the Prospectus and to enter into this Agreement and perform its obligations hereunder, and is duly qualified to transact business and in good standing in each jurisdiction in which the conduct of its business requires such qualification and in which the failure to qualify would have a Material Adverse Effect. PMIC has the requisite corporate power and authority to enter into and perform its obligations under this Agreement and to carry on an insurance business pursuant to and to the extent of the certificates of authority issued under the laws of the Commonwealth of Pennsylvania and each other jurisdiction in which it is licensed to carry on an insurance business.

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(v)	American Millers is a property and casualty insurance company duly incorporated and validly subsisting under the laws of the Commonwealth of Pennsylvania with corporate power and authority to own its properties and to conduct its business as described in the Prospectus and to enter into this Agreement and perform its obligations hereunder, and is duly qualified to transact business and in good standing in each jurisdiction in which the conduct of its business requires such qualification and in which the failure to qualify would have a Material Adverse Effect. American Millers has the requisite corporate power and authority to carry on an insurance business pursuant to and to the extent of the certificates of authority issued under the laws of the Commonwealth of Pennsylvania and each other jurisdiction in which it is licensed to carry on an insurance business.
(vi)	The authorized capital stock of HoldCo consists of 10,000,000 shares of Common Stock and 1,000,000 shares of preferred stock, having such par value, if any, as the board of directors shall fix and determine; HoldCo has no shares of capital stock issued and outstanding. Immediately upon consummation of the Offering, (a) the issued and outstanding capital stock of HoldCo will be within the range set forth in the Prospectus under the caption “Capitalization”; (b) the shares of Common Stock of HoldCo to be subscribed for in the Offering will have been duly and validly authorized for issuance, and when issued and delivered by HoldCo pursuant to the Plan against payment of the consideration calculated as set forth in the Plan, will be fully paid and nonassessable; and (c) the issuance of the shares of Common Stock of HoldCo will not be subject to preemptive rights under the articles of incorporation or bylaws of HoldCo, or arising or outstanding by operation of law or, to the knowledge of such counsel, under any contract, indenture, agreement, instrument or other document, except for the subscription rights under the Plan and restrictions arising under the 1998 Order.
(vii)	The execution and delivery of this Agreement and the consummation of the transactions contemplated hereby have been duly authorized by all necessary corporate action on the part of the Primary Parties; and this Agreement constitutes a valid, legal and binding obligation of each of the Primary Parties, enforceable in accordance with its terms, except to the extent that the provisions of Sections 11 and 12 hereof may be unenforceable as against public policy, and except to the extent that such enforceability may be limited by bankruptcy laws, insolvency laws, or other laws affecting the enforcement of creditors’ rights generally.
(viii)	The Plan has been duly adopted by the Board of Directors of PMMHC in the manner required by PMMHC’s articles of incorporation and bylaws.
(ix)	Upon consummation of the Offering, to the knowledge of such counsel, (a) the Offering was made in all material respects in accordance with the

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Plan, (b) all terms, conditions, requirements and provisions with respect to the Conversion and Offering imposed by the Commission, the Department, or any other Pennsylvania governmental agency, if any, were complied with by the Primary Parties in all material respects or appropriate waivers were obtained, and (c) all notice and waiting periods were satisfied or waived; provided, however, that no opinion need be expressed concerning the state securities or blue sky laws or foreign securities laws of various jurisdictions in which the Shares will be offered.

(x)	The Registration Statement has become effective under the 1933 Act and, to such counsel’s knowledge after making inquiry of the Commission, and based upon representations made by staff of the Commission, no stop order suspending the effectiveness of the Registration Statement has been issued, and, to such counsel’s knowledge, no proceedings for that purpose have been instituted or threatened.
(xi)	The description of the shares of Common Stock of HoldCo contained in the Registration Statement and the Prospectus, insofar as such statements purport to summarize certain provisions of the articles of incorporation and bylaws of HoldCo, provide a fair summary thereof, and the forms of certificates proposed to be used to evidence the shares of Common Stock of HoldCo comply in all material respects with all applicable laws and regulations, including, without limitation, as to form.
(xii)	At the time that the Registration Statement became effective, the Registration Statement, including the Prospectus contained therein, as amended or supplemented (other than the financial statements, notes to financial statements, financial tables or other financial and statistical data included therein and the appraisal valuation and the business plan as to which counsel need express no opinion), complied as to form in all material respects with the requirements of the 1933 Act and the 1933 Act Regulations.
(xiii)	To such counsel’s knowledge, there are no legal or governmental proceedings pending or threatened (i) asserting the invalidity of this Agreement or (ii) seeking to prevent the offer, sale or issuance of the Shares.
(xiv)	The information in the Prospectus under the captions “BUSINESS — “ Regulation,” “RESTRICTIONS ON ACQUISITION OF THE HOLDING COMPANY,” and “DESCRIPTION OF CAPITAL STOCK,” to the extent that it constitutes summaries of legal matters, documents or proceedings, or legal conclusions, fairly presents in all material respects the information required to be presented in Form S-1.
(xv)	None of the Primary Parties are required to be registered as an investment company under the Investment Company Act of 1940, as amended.

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(xvi) To such counsel’s knowledge, none of the Primary Parties is in violation of its articles of incorporation or its bylaws as in effect at the Closing Time or, to such counsel’s knowledge, any material obligation, agreement, covenant or condition contained in any material contract, indenture, mortgage, loan agreement, note, lease or other instrument filed as an exhibit to, or incorporated by reference in, the Registration Statement, which violation would have a material adverse effect on the financial condition of the Primary Parties considered as one enterprise, or on the earnings, capital, properties or business affairs of the Primary Parties considered as one enterprise. In addition, to such counsel’s knowledge, the execution and delivery of and performance under this Agreement by the Primary Parties, the incurrence of the obligations set forth herein and the consummation of the transactions contemplated herein will not result in any material violation of the provisions of the articles of incorporation or the bylaws (or other constituent documents) of any of the Primary Parties or any material violation of any applicable law, act, regulation, or to such counsel’s knowledge, order or court order, writ, injunction or decree.

     In rendering such opinion, such counsel may rely as to matters of fact, without independent investigation, on certificates of responsible officers of the Primary Parties (to the extent relevant) and public officials, provided copies of any such certificates are delivered to Agent together with the opinion to be rendered hereunder. Such opinion may be limited to the laws of the Commonwealth of Pennsylvania and the federal securities laws of the United States of America, and such opinion will not be deemed to be rendering any opinion or any other statements regarding the regulatory laws of any other state.

               (2) A letter of Morgan, Lewis & Bockius LLP addressed to the Agent to the effect that during the preparation of the Registration Statement and the Prospectus, representatives of Morgan, Lewis & Bockius LLP participated in conferences with certain officers of and other representatives of the Primary Parties, counsel to the Agent, representatives of the independent public accounting firm for the Primary Parties and representatives of the Agent at which the contents of the Registration Statement and the Prospectus and related matters were discussed, and although (without limiting the opinions provided pursuant to Section 10(b)(1)) Morgan, Lewis & Bockius LLP has not independently verified the accuracy, completeness or fairness of the statements contained in the Registration Statement and Prospectus, on the basis of the information obtained in the course of engagement as special counsel, nothing has come to the attention of the representatives of Morgan, Lewis & Bockius LLP providing services to the Company that caused them to believe that (i) the Registration Statement at the time it was ordered effective by the Commission, (ii) the General Disclosure Package as of the Closing Time, or (iii) the Prospectus, as of its date and as of the Closing Time, contained or contains any untrue statement of a material fact or omitted to state any material fact necessary to make the statements therein, in light of the circumstances under which they were made, not misleading (it being understood that counsel need not assume any responsibility for the accuracy, completeness or fairness of the statements contained in the Registration Statement, the General Disclosure Package and the Prospectus, and counsel need not express any belief with respect to the financial statements, schedules and other financial and statistical data included, statistical or appraisal

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methodology employed, or information concerning internal controls over financial reporting contained in, the Registration Statement, Prospectus or General Disclosure Package).

          (3) The favorable opinion, dated as of the Closing Time, of counsel for the Agent, with respect to such matters as the Agent may reasonably require; such opinion may rely, as to matters of fact, upon certificates of officers and directors of the Primary Parties delivered pursuant hereto or as such counsel may reasonably request and upon the opinion of counsel to the Primary Parties or other counsel acceptable to the Agent.

          (4) A blue sky memorandum from Stevens & Lee addressed to the Primary Parties and the Agent relating to the Offering, including the Agent’s participation therein. The Blue Sky Memorandum will address the necessity of obtaining or confirming exemptions, qualifications or the registration of the Common Stock under applicable state securities law.

(c)	Concurrently with the execution of this Agreement, the Agent shall receive a letter from KPMG LLP, dated the date hereof and addressed to the Agent, in the form set forth in Exhibit C hereto.
(d)	At the Closing Time, the Agent shall receive a letter from KPMG LLP dated the Closing Time, addressed to the Agent, confirming the statements made by its letter delivered by it pursuant to subsection (c) above, the “specified date” referred to in clause (iii)(C) and (D) thereof to be a date specified in such letter, which shall not be more than three business days prior to the Closing Time.
(e)	At the Closing Time, the Shares shall have been approved for listing on the NASDAQ Global Market.
(f)	At the Closing Time, counsel to the Agent shall have been furnished with such documents and opinions as counsel for the Agent may reasonably require for the purpose of enabling them to advise the Agent with respect to the issuance and sale of the Shares as herein contemplated and related proceedings, or in order to evidence the accuracy of any of the representations and warranties, or the fulfillment of any of the conditions herein contained.
(g)	At the Closing Time, the Agent shall receive a certificate of the Chief Executive Officer and Chief Financial Officer of each of the Primary Parties, dated as of the Closing Time, without personal liability to the effect that: (i) they have examined the Prospectus and at the time the Prospectus became authorized for final use, the Prospectus did not contain an untrue statement of a material fact or omit to state a material fact necessary in order to make the statements therein, in the light of the circumstances under which they were made, not misleading; (ii) there has not been, since the respective dates as of which information is given in the Prospectus, any Material Adverse Effect (as defined in Section 6(m)), whether or not arising in the ordinary course of business other than as disclosed in the Prospectus; (iii) the representations and warranties contained in Section 6 of this Agreement are true and correct with the same force and effect as though made at and as of the Closing Time; (iv) each of the Primary Parties has complied in all

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material respects with all material agreements and satisfied all conditions on its part to be performed or satisfied at or prior to the Closing Time including the conditions contained in this Section 10; (v) no stop order has been issued or, to their knowledge, is threatened, by the Commission or any other governmental body; and (vi) no order suspending the Offering, or the effectiveness of the Registration Statement has been issued and, to their knowledge, no proceedings for any such purpose have been initiated or threatened by the Department, the Commission, or any other federal or state authority.

(h)	At the Closing Time, the Agent shall receive a letter from Curtis Financial Group dated as of the Closing Time, stating that its opinion of the aggregate pro forma market value of PMMHC expressed in the Appraisal as most recently updated, remains in effect.
(i)	Prior to and at the Closing Time, none of the Primary Parties shall have sustained, since the date of the latest audited financial statements included in the Registration Statement and Prospectus, any material loss or interference with its business from fire, explosion, flood or other calamity, whether or not covered by insurance, or from any labor dispute or court or governmental action, order or decree, otherwise than as set forth in the Registration Statement and the Prospectus, and since the respective dates as of which information is given in the Registration Statement and the Prospectus, there shall not have been any material change, or any development involving a prospective Material Adverse Effect, otherwise than as set forth or contemplated in the Registration Statement and the Prospectus, the effect of which, in any such case described above, is in the Agent’s reasonable judgment sufficiently material and adverse as to make it impracticable or inadvisable to proceed with the Offering or the delivery of the Shares on the terms and in the manner contemplated in the Prospectus.
(j)	At or prior to the Closing Time, the Pennsylvania Insurance Commissioner shall have issued a letter or order to PMMHC, which shall have the force of (i) amending or rescinding the 1998 Order, (i) approving the Conversion and Offering, (ii) approving the establishment of an employee stock ownership plan and stock compensation plan, and (iv) approving the loan to the employee stock ownership plan to purchase Shares in the Offering.
(k)	Subsequent to the date hereof, there shall not have occurred any of the following: (i) a suspension or limitation in trading in securities generally on the New York Stock Exchange or American Stock Exchange or in the over-the-counter market, or quotations halted generally on the Nasdaq Stock Market, or minimum or maximum prices for trading have been fixed, or maximum ranges for prices for securities have been required by either of such exchanges or FINRA or by order of the Commission or any other governmental authority other than temporary trading halts (A) imposed as a result of intraday changes in the Dow Jones Industrial Average, (B) lasting no longer than until the regularly scheduled commencement of trading on the next succeeding business-day, and (C) which, when combined with all other such halts occurring during the previous five

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business days, total less than three; (ii) a general moratorium on the operations of federally-insured financial institutions or general moratorium on the withdrawal of deposits from federally-insured financial institutions declared by either federal or state authorities; or (iii) any outbreak of hostilities or escalation thereof or other calamity or crisis, including, without limitation, terrorist activities after the date hereof, the effect of any of (i) through (iii) herein, in the judgment of the Agent, is so material and adverse as to make it impracticable to market the Shares or to enforce contracts, including subscriptions or purchase orders, for the sale of the Shares.

     All such opinions, certificates, letters and documents will be in compliance with the provisions hereof only if they are reasonably satisfactory in form and substance to the Agent and to counsel for the Agent. Any certificate signed by an officer of PMMHC and delivered to the Agent or to counsel for the Agent shall be deemed a representation and warranty by PMMHC to the Agent as to the statements made therein. If any condition to the Agent’s obligations hereunder to be fulfilled prior to or at the Closing Time is not fulfilled, the Agent may terminate this Agreement (provided that if this Agreement is so terminated but the sale of Shares is nevertheless consummated, the Agent shall be entitled to the reimbursement of all expenses to the extent contemplated by Section 14 hereof but shall not be entitled to any compensation provided for in Section 4(b) or (c) hereof) or, if the Agent so elects, may waive any such conditions which have not been fulfilled or may extend the time of their fulfillment.

     11. Indemnification.

(a) The Primary Parties jointly and severally agree to indemnify and hold harmless the Agent, its officers, directors, agents, and employees and each person, if any, who controls the Agent within the meaning of Section 15 of the 1933 Act or Section 20(a) of the 1934 Act, against any and all loss, liability, claim, damage or expense whatsoever (including but not limited to settlement expenses, subject to the limitation set forth in the last sentence of Paragraph (c) below), joint or several, that the Agent or any of such officers, directors, agents, employees and controlling Persons (collectively, the “Related Persons”) may suffer or to which the Agent or the Related Persons may become subject under all applicable federal and state laws or otherwise, and to promptly reimburse the Agent and any Related Persons upon written demand for any reasonable expenses (including reasonable fees and disbursements of counsel) incurred by the Agent or any Related Persons in connection with investigating, preparing or defending any actions, proceedings or claims (whether commenced or threatened) to the extent such losses, claims, damages, liabilities or actions: (i) arise out of or are based upon any untrue statement or alleged untrue statement of a material fact contained in the Registration Statement (or any amendment or supplement thereto), the Prospectus (or any amendment or supplement thereto), any Issuer-Represented Free Writing Prospectus or any blue sky application or other instrument or document of the Primary Parties or based upon written information supplied by any of the Primary Parties filed in any state or jurisdiction to register or qualify any or all of the Shares under the securities laws thereof (collectively, the “Blue Sky Applications”), or any application or other document, advertisement, or

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communication (“Sales Information”) prepared, made or executed by or on behalf of any of the Primary Parties with its consent or based upon written information furnished by or on behalf of any of the Primary Parties, whether or not filed in any jurisdiction in order to qualify or register the Shares under the securities laws thereof, (ii) arise out of or are based upon the omission or alleged omission to state in any of the foregoing documents or information, a material fact required to be stated therein or necessary to make the statements therein, in light of the circumstances under which they were made, not misleading; (iii) arise from any theory of liability whatsoever relating to or arising from or based upon the Registration Statement (or any amendment or supplement thereto), the Prospectus (or any amendment or supplement thereto), any Issuer-Represented Free Writing Prospectus, or any Blue Sky Applications or sales information or other documentation distributed in connection with the Offering; or (iv) result from any claims made with respect to the accuracy, reliability and completeness of the records of policy holders, including without limitation, Eligible Members, or for any denial or reduction of a subscription or order to purchase Common Stock, whether as a result of a properly calculated allocation pursuant to the Plan or otherwise, based upon such records; provided, however, that no indemnification is required under this Paragraph (a) to the extent such losses, claims, damages, liabilities or actions arise out of or are based upon any untrue material statements or alleged untrue material statements in, or material omission or alleged material omission from, the Registration Statement (or any amendment or supplement thereto) or the Prospectus (or any amendment or supplement thereto), any Issuer-Represented Free Writing Prospectus, the Blue Sky Applications or Sales Information or other documentation distributed in connection with the Offering made in reliance upon and in conformity with written information furnished to the Primary Parties by the Agent or its representatives (including counsel) with respect to the Agent expressly for use in any such document (or any amendment or supplement thereto); provided, further, that the Primary Parties will not be responsible for any loss, liability, claim, damage or expense to the extent that a court of competent jurisdiction finds that they result primarily from material oral misstatements by the Agent to a purchaser of Shares which are not based upon information in the Registration Statement or Prospectus, and the Agent agrees to repay to the Primary Parties any amounts advanced to it by the Primary Parties in connection with matters as to which it is found by a court of competent jurisdiction not to be entitled to indemnification hereunder.

(b) The Agent agrees to indemnify and hold harmless the Primary Parties, their directors and officers, agents, and employees and each person, if any, who controls any of the Primary Parties within the meaning of Section 15 of the 1933 Act or Section 20(a) of the 1934 Act against any and all loss, liability, claim, damage or expense whatsoever (including but not limited to settlement expenses, subject to the limitation set forth in the last sentence of Paragraph (c) below), joint or several which they, or any of them, may suffer or to which they, or any of them, may become subject under all applicable federal and state laws or otherwise, and to promptly reimburse the Primary Parties and any such persons upon written demand for any reasonable expenses (including fees and

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disbursements of counsel) incurred by them in connection with investigating, preparing or defending any actions, proceedings or claims (whether commenced or threatened) to the extent such losses, claims, damages, liabilities or actions arise out of or are based upon any untrue statement or alleged untrue statement of a material fact contained in the Registration Statement (or any amendment of supplement thereto), any Issuer-Represented Free Writing Prospectus, or any Blue Sky Applications or Sales Information or are based upon the omission or alleged omission to state in any of the foregoing documents a material fact required to be stated therein or necessary to make the statements therein, in the light of the circumstances under which they were made, not misleading; provided, however, that the Agent’s obligations under this Section shall exist only if and only to the extent that such untrue statement or alleged untrue statement was made in, or such material fact or alleged material fact was omitted from, the Registration Statement (or any amendment or supplement thereto), the Prospectus (or any amendment or supplement thereto), the Blue Sky Applications or Sales Information in reliance upon and in conformity with written information furnished to any of the Primary Parties by the Agent or its representatives (including counsel) with respect to the Agent expressly for use therein.

(c) Each indemnified party shall give prompt written notice to each indemnifying party of any action, proceeding, claim (whether commenced or threatened), or suit instituted against it in respect of which indemnity may be sought hereunder, but failure to so notify an indemnifying party shall not relieve it from any liability which it may have on account of this Section, Section 12 or otherwise, except to the extent that such failure or delay causes actual harm to the indemnifying party with respect to such action, proceeding, claim or suit. An indemnifying party may participate at its own expense in the defense of such action. In addition, if it so elects within a reasonable time after receipt of such notice, an indemnifying party, jointly with any other indemnifying parties receiving such notice, may assume the defense of such action with counsel chosen by it reasonably acceptable to the indemnified parties that are defendants in such action, unless such indemnified parties reasonably object to such assumption on the ground that there may be legal defenses available to them that are different from or in addition to those available to such indemnifying party. If an indemnifying party assumes the defense of such action, the indemnifying parties shall not be liable for any fees and expenses of counsel for the indemnified parties incurred thereafter in connection with such action, proceeding or claim, other than reasonable costs of investigation. In no event shall the indemnifying parties be liable for the fees and expenses of more than one separate firm of attorneys (unless an indemnified party or parties shall have reasonably concluded that there may be defenses available to it or them which are different from or in addition to those of other indemnified parties) for all indemnified parties in connection with any one action, proceeding or claim or separate but similar or related actions, proceedings or claims in the same jurisdiction arising out of the same general allegations or circumstances. The indemnifying party shall be liable for any settlement of any claim against the indemnified party (or its directors, officers, employees, affiliates or controlling persons) made with the indemnifying party’s consent, which consent shall not be

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unreasonably withheld. The indemnifying party shall not, without the written consent of indemnified party, settle or compromise any claim against the indemnified party based upon circumstances giving rise to an indemnification claim against the indemnifying party hereunder unless such settlement or compromise provides that indemnified party and the other indemnified parties shall be unconditionally and irrevocably released from all liability in respect of such claim.

(d) The agreements contained in this Section and in Section 12 hereof and the representations and warranties of the Primary Parties set forth in this Agreement shall remain operative and in full force and effect regardless of (i) any investigation made by or on behalf of the Agent or its officers, directors, controlling persons, agents or employees or by or on behalf of any of the Primary Parties or any officers, directors, controlling persons, agents or employees of any of the Primary Parties; (ii) delivery of and payment hereunder for the Shares; or (iii) any termination of this Agreement.

     12. Contribution.

(a) In order to provide for just and equitable contribution in circumstances in which the indemnification provided for in Section 11 is due in accordance with its terms but is found in a final judgment by a court to be unavailable from the Primary Parties or the Agent, the Primary Parties and the Agent shall contribute to the aggregate losses, claims, damages and liabilities of the nature contemplated by such indemnification in such proportion so that (i) the Agent is responsible for that portion represented by the percentage that the fees paid to the Agent pursuant to Section 4 of this Agreement (not including expenses) (“Agent’s Fees”) bear to the total proceeds received by the Primary Parties from the sale of the Shares in the Offering, net of the Agent’s Fees, and (ii) the Primary Parties shall be responsible for the balance. If, however, the allocation provided above is not permitted by applicable law, then each indemnifying party shall contribute to such amount paid or payable by such indemnified party in such proportion as is appropriate to reflect not only such relative fault of the Primary Parties on the one hand and the Agent on the other in connection with the statements or omissions which resulted in such losses, claims, damages or liabilities (or actions, proceedings or claims in respect thereof), but also the relative benefits received by the Primary Parties on the one hand and the Agent on the other from the Offering, as well as any other relevant equitable considerations. The relative benefits received by the Primary Parties on the one hand and the Agent on the other hand shall be deemed to be in the same proportion as the total proceeds from the Offering, net of the Agent’s Fees, received by the Primary Parties bear to the Agent’s Fees. The relative fault shall be determined by reference to, among other things, whether the untrue or alleged untrue statement of a material fact or the omission or alleged omission to state a material fact relates to information supplied by the Primary Parties on the one hand or the Agent on the other and the parties relative intent, good faith, knowledge, access to information and opportunity to correct or prevent such statement or omission. The Primary Parties

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and the Agent agree that it would not be just and equitable if contribution pursuant to this Section 12 were determined by pro-rata allocation or by any other method of allocation which does not take account of the equitable considerations referred to above in this Section 12. The amount paid or payable by an indemnified party as a result of the losses, claims, damages or liabilities (or action, proceedings or claims in respect thereof) referred to above in this Section 12 shall be deemed to include any legal or other expenses reasonably incurred by such indemnified party in connection with investigating or defending any such action, proceeding or claim. It is expressly agreed that the Agent shall not be liable for any loss, liability, claim, damage or expense or be required to contribute any amount which in the aggregate exceeds the amount paid (excluding reimbursable expenses) to the Agent under this Agreement. It is understood and agreed that the above-stated limitation on the Agent’s liability is essential to the Agent and that the Agent would not have entered into this Agreement if such limitation had not been agreed to by the parties to this Agreement. No person found guilty of any fraudulent misrepresentation (within the meaning of Section 11(f) of the 1933 Act) shall be entitled to contribution from any person who was not found guilty of such fraudulent misrepresentation. For purposes of this Section 12, each of the Agent’s and the Primary Parties’ officers and directors and each person, if any, who controls the Agent or any of the Primary Parties within the meaning of the 1933 Act and the 1934 Act shall have the same rights to contribution as the Primary Parties and the Agent. Any party entitled to contribution, promptly after receipt of notice of commencement of any action, suit, claim or proceeding against such party in respect of which a claim for contribution may be made against another party under this Section 12, will notify such party from whom contribution may be sought, but the omission to so notify such party shall not relieve the party from whom contribution may be sought from any other obligation it may have hereunder or otherwise than under this Section 12, except to the extent that such failure or delay causes actual harm to the indemnifying party with respect to such action, proceeding, claim or suit.

     13. Survival. All representations, warranties and indemnities and other statements contained in this Agreement or contained in certificates of officers of the Primary Parties or the Agent submitted pursuant hereto, shall remain operative and in full force and effect, regardless of any termination or cancellation of this Agreement or any investigation made by or on behalf of the Agent or its controlling persons, or by or on behalf of the Primary Parties and shall survive the issuance of the Shares, and any legal representative, successor or assign of the Agent, any of the Primary Parties, and any indemnified person shall be entitled to the benefit of the respective agreements, indemnities, warranties and representations.

     14. Termination. Agent may terminate this Agreement by giving the notice indicated below in this Section at any time after this Agreement becomes effective as follows:

(a) In the event that (i) the Plan is abandoned or terminated by PMMHC or HoldCo, (ii) HoldCo fails to consummate the sale of the minimum number of the Shares by December 31, 2009, in accordance with the provisions of the Plan, or (iii) the Agent terminates this relationship because there has been a Material Adverse

32

Effect, this Agreement shall terminate and no party to this Agreement shall have any obligation to the other hereunder, except that (i) the Primary Parties shall remain liable for any amounts due pursuant to Sections 3, 4, 9, 11 and 12 hereof, unless the transaction is not consummated due to the breach by the Agent of a warranty, representation or covenant and (ii) the Agent shall remain liable for any amount due pursuant to Sections 11 and 12 hereof, unless the transaction is not consummated due to the breach by the Primary Parties of a warranty representation or covenant.

(b)	If any of the conditions specified in Section 10 shall not have been fulfilled when and as required by this Agreement, or by the Closing Time, or waived in writing by the Agent, this Agreement and all of the Agent’s obligations hereunder may be canceled by the Agent by notifying PMMHC or HoldCo of such cancellation in writing at any time at or prior to the Closing Time, and any such cancellation shall be without liability of any party to any other party except that (i) the Primary Parties shall remain liable for any amounts due pursuant to Sections 3, 4, 9, 11 and 12 hereof, unless the transaction is not consummated due to breach by the Agent of a warrant, representation or covenant, and (ii) the Agent shall remain liable for any amount due pursuant to Sections 11 and 12 hereof, unless the transaction is not consummated due to the breach by the Primary Parties of a warranty representation or covenant.
(c)	If Agent elects to terminate this Agreement as provided in this Section, PMMHC or HoldCo shall be notified by the Agent as provided in Section 15 hereof.
(d)	If this Agreement is terminated in accordance with the provisions of this Agreement, the Primary Parties shall pay the Agent the fees earned pursuant to Section 4 and will reimburse the Agent for its reasonable expenses pursuant to Section 9.

     15. Notices. All notices and other communications hereunder shall be in writing and shall be deemed to have been duly given if mailed by United States certified mail, return receipt requested, or sent by a nationally recognized commercial courier promising next business day delivery (such as Federal Express) or transmitted by any standard form of telecommunication (such as facsimile or email) with confirming copy sent by regular U.S. mail. Notices shall be sent as follows:

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If to Agent:	Griffin Financial Group, LLCM 620 Freedom Business Center, Suite 210 King of Prussia, Pennsylvania 19406 Attention: Jeffrey P. Waldron, Senior Managing Director Facsimile: 610-371-7974 Email: jpw@go2griffin.com
If to the Primary Parties:	Penn Millers Mutual Holding Company 72 North Franklin Street, P.O. Box P Wilkes-Barre, Pennsylvania 18773-0016 Attention: Douglas A. Gaudet, President and Chief Executive Officer Facsimile: 570-829-4568 Email: dgaudet@pennmillers.com
With a copy to:	Morgan, Lewis & Bockius LLP 1701 Market Street Philadelphia, Pennsylvania 19103 Attention: David L. Harbaugh, Esquire Facsimile: 215-963-5001 Email: dharbaugh@morganlewis.com

     Any party may change the address or other information for notices set forth above by written notice to the other parties, which notice shall be given in accordance with this Section 15.

     16. Parties. This Agreement shall inure to the benefit of and be binding upon the Agent and the Primary Parties and their respective successors. Nothing expressed or mentioned in this Agreement is intended or shall be construed to give any person, firm or corporation, other than the parties hereto and their respective successors and the controlling persons and officers, directors, agents and employees referred to in Sections 11 and 12 and their heirs and legal representatives, any legal or equitable right, remedy or claim under or in respect of this Agreement or any provisions herein contained. It is understood and agreed that this Agreement is the exclusive agreement among the parties, supersedes any prior Agreement among the parties and may not be varied except by a writing signed by all parties, except for Section 11 of this Agreement, which may not be so amended.

     17. Partial Invalidity. In the event that any term, provision or covenant herein or the application thereof to any circumstances or situation shall be invalid or unenforceable, in whole or in part, the remainder hereof and the application of said term, provision or covenant to any other circumstance or situation shall not be affected thereby, and each term, provision or covenant herein shall be valid and enforceable to the full extent permitted by law.

     18. Construction. This Agreement shall be construed in accordance with the laws of the Commonwealth of Pennsylvania applicable to contracts executed and to be wholly performed therein without giving effects to its conflicts of laws principles or rules.

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     If the foregoing is in accordance with your understanding of our agreement, please sign and return to us a counterpart hereof, whereupon this instrument along with all counterparts will become a binding agreement between you and us in accordance with its terms.

Very truly yours, PENN MILLERS INSURANCE COMPANY
By:
	Douglas A. Gaudet, President and
	Chief Executive Officer
PMHC CORP.
By:
	Douglas A. Gaudet, President and
	Chief Executive Officer
PENN MILLERS HOLDING CORPORATION
By:
	Douglas A. Gaudet, President and
	Chief Executive Officer
PENN MILLERS MUTUAL HOLDING COMPANY
By:
	Douglas A. Gaudet, President and
	Chief Executive Officer

[COUNTERPART SIGNATURE OF GRIFFIN FINANCIAL ON FOLLOWING PAGE]

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     The foregoing Agency Agreement is hereby confirmed and accepted as of the date first set and above written.

GRIFFIN FINANCIAL GROUP, LLC
By:
	Senior Managing Director

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Exhibit A

Engagement Letter with Griffin Financial Group, LLC

Exhibit B

Form of Assisting Brokers Agreement

Exhibit C

Form of Comfort Letter from KPMG LLP

EX-2.1

Exhibit 2.1

PENN MILLERS MUTUAL HOLDING COMPANY

PLAN OF CONVERSION

FROM MUTUAL TO STOCK FORM

Adopted by the Board of Directors on April 22, 2009

PENN MILLERS MUTUAL HOLDING COMPANY

PLAN OF CONVERSION
FROM MUTUAL TO STOCK FORM

          1. GENERAL.

          Penn Millers Mutual Holding Company (“PMMHC”) is a Pennsylvania mutual corporation with a wholly-owned subsidiary, PMHC Corp. (“PMHC”), and is the mutual holding company for Penn Millers Insurance Company (“PMIC”). On April 22, 2009, the Board of Directors of PMMHC, after careful study and consideration, unanimously adopted this Plan of Conversion (the “Plan”). Under this Plan, PMMHC proposes to convert from mutual to stock form and to offer and sell shares of the common stock of Penn Millers Holding Corporation (“HoldCo” and together with HoldCo, PMIC, PMHC and PMMHC, the “Company”), a newly formed holding company for PMMHC (the “Common Stock”). The shares of Common Stock will be offered and sold first to qualifying offerees under the Subscription Offering and then to qualifying offerees under the Community Offering (each as hereinafter defined).

          Because it involves the conversion of PMMHC from mutual to stock form, this Plan must be approved by the Pennsylvania Insurance Commissioner pursuant to the Commissioner’s 1998 Order approving the conversion transaction by which the Company’s current mutual holding company structure was created. Accordingly, and in order to ensure that this Plan is fair to members of PMMHC, the Company has discussed this Plan with senior staff at the Pennsylvania Insurance Department (“PID”), and, as a condition to the Offering, will obtain from the Insurance Commissioner an approval of the Offering or, as applicable, will obtain written confirmation from the Commissioner that such approval is not required and that the Company may proceed with the Offering.

          This Plan is subject to the approval of the members of PMMHC in accordance with Section 2105 of the Pennsylvania Business Corporation Law of 1988, as amended, as provided in Section 10 and Section 11 hereof.

          2. DEFINITIONS.

          As used in this Plan, the terms set forth below have the following meanings:

          2.1 “Affiliate” means a Person who, directly or indirectly, through one or more intermediaries, controls or is controlled by or is under common control with the Person specified.

          2.2 “Appraised Value” means the final estimated consolidated pro forma market value of PMMHC, as determined by the Independent Appraiser at the conclusion of the Offering.

          2.3 “Associate” when used to indicate a relationship with any Person, means (i) a corporation or organization (other than the Company or a majority-owned subsidiary of the same) of which such Person is a director, officer or partner or is, directly or indirectly, the beneficial owner of 10% or more of any class of equity securities; (ii) any trust or other estate in which such Person has a substantial beneficial interest or as to which such Person serves as trustee or in a similar fiduciary

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capacity (exclusive of any Tax-Qualified Employee Stock Benefit Plan or Non-Tax Qualified Employee Stock Benefit Plan of HoldCo or the Company); (iii) any relative or spouse of such Person, or any relative of such spouse, who has the same home as such Person or who is a Director or Officer of the Company, or any of its subsidiaries; and (iv) any Person acting in concert with any of the Persons or entities specified in clauses (i) through (iii) above.

          2.4 “Code” means the Internal Revenue Code of 1986, as amended.

          2.5 “Commissioner’s 1998 Order” means the 1998 order of the Pennsylvania Insurance Commissioner approving the conversion transaction by which the Company’s current mutual holding company structure was created.

          2.6 “Common Stock” means common stock, par value $0.01 per share, of HoldCo.

          2.7 “Community Offering” means the offering for sale by HoldCo of any shares of Common Stock not subscribed for in the Subscription Offering as set forth in Section 6 hereof. HoldCo may retain the assistance of a broker-dealer or syndicate of broker-dealers to assist it in connection with the sale of Common Stock in the Community Offering.

          2.8 “Company” means HoldCo, PMIC, PMHC and PMMHC.

          2.9 “Conversion” means: (i) the amendment of the articles of incorporation of PMMHC to authorize the issuance of shares of capital stock and to conform to the requirements of a stock corporation under the laws of the Commonwealth of Pennsylvania, and (ii) the offer and sale of Common Stock by HoldCo in the Offering.

          2.10 “Director” means any Person who is a director of the Company or any subsidiary thereof.

          2.11 “Effective Date” means the date of closing of the sale of shares of Common Stock in the Offering conducted pursuant to this Plan.

          2.12 “Eligibility Record Date” means the close of business on April 22, 2009, the effective date of the adoption of the Plan by the Board of Directors of PMMHC.

          2.13 “Eligible Member” means a Person who, on the Eligibility Record Date, is (i) a Person who is a named insured under a Qualifying Policy that is a group policy, or (ii) a Person who is a named insured under a Qualifying Policy that is an individual policy.

          2.14 “Employee” means any natural person who is a full or part-time employee of the Company or any of its subsidiaries at the Effective Date.

          2.15 “ESOP” means the employee stock ownership plan to be established by HoldCo or the Company as a Tax-Qualified Employee Stock Benefit Plan.

          2.16 “HoldCo” means Penn Millers Holding Corporation, a Pennsylvania corporation that will become the holding company for PMMHC in connection with the Conversion.

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          2.17 “Independent Appraiser” means the independent investment banking or financial consulting firm retained by the Company to determine the Valuation Range and Appraised Value.

          2.18 “Insider” means any Officer or Director of the Company or any Affiliate of the Company, and any Person acting in concert with any such Officer or Director.

          2.19 “MRPs” means any restricted stock plan, such as a management recognition plan established or to be established by HoldCo or any of its affiliates.

          2.20 “Offering” means the offering of shares of Common Stock pursuant to this Plan in the Subscription Offering and the Community Offering or any Public Offering.

          2.21 “Officer” means the chairman of the board of directors, president, vice-president (but not an assistant vice president, second vice president or other vice president having authority similar to an assistant or second vice president), secretary, treasurer or principal financial officer, controller or principal accounting officer and any other Person performing similar functions with respect to any organization whether incorporated or unincorporated.

          2.22 “Option Plan” means any stock option plan established or to be established by the Company or any of its subsidiaries.

          2.23 “Order Form” means the form provided on behalf of HoldCo, containing all such terms and provisions as set forth in Section 8 hereof, to a Person by which Common Stock may be ordered in the Offering.

          2.24 “Participant” means a Person to whom Common Stock is offered under the Subscription Offering.

          2.25 “Pennsylvania BCL” means the Pennsylvania Business Corporation Law of 1988, as amended.

          2.26 “PID” means the Pennsylvania Insurance Department.

          2.27 “Person” means any corporation, partnership, association, limited liability company, trust, or any other entity or a natural person.

          2.28 “Plan” means this Plan of Conversion as adopted by the Board of Directors of PMMHC, as it may be amended from time to time pursuant to the terms hereof.

          2.29 “PMHC” means PMHC Corp., a Pennsylvania corporation which is the wholly-owned subsidiary of PMMHC and the holding company for PMIC.

          2.30 “PMIC” means Penn Millers Insurance Company, a Pennsylvania insurance company which is the wholly-owned subsidiary of PMHC.

          2.31 “PMMHC” means Penn Millers Mutual Holding Company, a Pennsylvania mutual company which is the holding company for PMHC.

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          2.32 “Prospectus” means the one or more documents to be used in offering the Common Stock in the Subscription Offering and, to the extent applicable, the Community Offering, and for providing information to Persons in connection with the Offering.

          2.33 “Public Offering” means an underwritten firm commitment or best efforts offering to the public through one or more underwriters.

          2.34 “Purchase Price” means the price per share at which the Common Stock is ultimately sold by HoldCo to Persons in the Offering in accordance with the terms hereof.

          2.35 “Qualifying Policy” means a policy of insurance issued by PMIC and in force as of the close of business on the Eligibility Record Date.

          2.36 “SEC” means the U.S. Securities and Exchange Commission.

          2.37 “Subscription Offering” means the offering of the Common Stock that is described in Section 5 hereof.

          2.38 “Subscription Rights” means non-transferable rights to subscribe for Common Stock in the Subscription Offering granted to Participants pursuant to the terms of this Plan.

          2.39 “Tax-Qualified Employee Stock Benefit Plan” means any defined benefit plan or defined contribution plan, such as an employee stock ownership plan, stock bonus plan, profit-sharing plan or other plan, which is established for the benefit of the Employees of the Company or any of its subsidiaries and which, with its related trust, meets the requirements to be qualified under Section 401 of the Code as from time to time in effect. A “Non-Tax-Qualified Employee Stock Benefit Plan” is any defined benefit plan or defined contribution plan which is not so qualified.

          2.40 “Valuation Range” means the range of the estimated aggregate pro forma market value of the total number of shares of Common Stock to be issued in the Offering, as determined by the Independent Appraiser in accordance with Section 3 hereof.

          2.41 “Voting Record Date” means the date established by the Board of Directors of PMMHC to determine members eligible to vote at the special meeting of members called to vote to approve the Plan, as provided in Section 11 hereof.

        3. TOTAL NUMBER OF SHARES AND PURCHASE PRICE OF COMMON STOCK.

          The number of shares of Common Stock required to be offered and sold by HoldCo in the Offering will be determined as follows:

          (a) Independent Appraiser. The Independent Appraiser will be retained by the Company to determine the Valuation Range. The Valuation Range will consist of a midpoint valuation, a valuation fifteen percent (15%) above the midpoint valuation (the “Maximum of the Valuation Range”) and a valuation fifteen percent (15%) below the midpoint valuation (the “Minimum of the Valuation Range”). The Valuation Range will be based upon the financial condition and results of operations of the Company, a comparison of the Company with

4

comparable publicly-held insurance companies, and such other factors as the Independent Appraiser may deem to be relevant, including that value which the Independent Appraiser estimates to be necessary to attract a full subscription for the Common Stock. The Independent Appraiser will submit to PMMHC the Valuation Range and a related report that describes the data and methodology used to determine the Valuation Range.

          (b) Purchase Price. The Purchase Price is a per share price for Common Stock that will be uniform as to all purchasers in the Offering and will be determined by HoldCo.

          (c) Number of Shares of Common Stock to be Offered. The maximum number of shares of Common Stock to be offered in the Offering shall be equal to the sum of: (i) the Maximum of the Valuation Range divided by the Purchase Price, plus (ii) the number of shares required to enable the ESOP to purchase in the aggregate ten percent (10%) of the total shares of Common Stock issued in the Offering.

          (d) Number of Shares of Common Stock to be Sold. Immediately following the completion of the Offering, the Appraiser will submit to PMMHC the Appraised Value as of the last day of the Offering. If the Appraised Value does not fall within the Valuation Range, then PMMHC may cancel the Offering and terminate this Plan, establish a new Valuation Range and extend, reopen or hold a new Offering, or take such other action as it deems to be reasonably necessary.

          (e) If the Appraised Value falls within the Valuation Range, the following steps will be taken:

               (i) Subscription Offering Meets or Exceeds Maximum. If the number of shares to which Participants subscribe in the Subscription Offering multiplied by the Purchase Price is equal to or greater than the Maximum of the Valuation Range, then HoldCo on the Effective Date shall issue shares of Common Stock to the subscribing Participants; provided, however, that the number of shares of Common Stock issued shall not exceed the number of shares of Common Stock offered in the Offering. In the event of an oversubscription in the Subscription Offering, shares of Common Stock shall be allocated among the subscribing Participants as provided in Sections 5 and 6 below; provided, however, that no fractional shares of Common Stock shall be issued.

               (ii) Subscription Offering Meets or Exceeds Minimum. If the number of shares of Common Stock subscribed for by Participants in the Subscription Offering multiplied by the Purchase Price is equal to or greater than the Minimum of the Valuation Range, but less than the Maximum of the Valuation Range, then HoldCo on the Effective Date shall issue shares of Common Stock to the subscribing Participants in an amount sufficient to satisfy the subscriptions of such Participants in full. To the extent that shares of Common Stock remain unsold after the subscriptions of all Participants in the Subscription Offering have been satisfied in full, HoldCo shall have the right in its absolute discretion to accept, in whole or in part, subscriptions received from subscribers in the Community Offering; provided, however, that the number of shares of Common Stock issued shall not exceed the Maximum of the Valuation Range; and, provided further, that no fractional shares of Common Stock shall be issued.

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               (iii) Subscription Offering Does Not Meet Minimum. If the number of shares of Common Stock subscribed for by Participants in the Subscription Offering multiplied by the Purchase Price is less than the Minimum of the Valuation Range, then in such event HoldCo may accept subscriptions received from subscribers in the Community Offering. If the aggregate number of shares of Common Stock subscribed for in the Subscription Offering together with the orders for shares accepted in the Community Offering multiplied by the Purchase Price is equal to or greater than the Minimum of the Valuation Range, then on the Effective Date HoldCo shall: (A) issue shares of Common Stock to subscribing Participants in an amount sufficient to satisfy the subscriptions of such Participants in full, and (B) issue to subscribers in the Community Offering whose orders have been accepted such additional number of shares of Common Stock such that the aggregate number of shares of Common Stock to be issued to subscribing Participants and to subscribers in the Community Offering multiplied by the Purchase Price shall be equal to the Minimum of the Valuation Range; provided, however, that no fractional shares of Common Stock shall be issued. HoldCo may in its absolute discretion elect to issue shares of Common Stock to subscribers in the Community Offering in excess of the number determined by reference to clause (B) of the preceding sentence; provided, however, that the number of shares of Common Stock issued shall not exceed the Maximum of the Valuation Range.

               (iv) Offering Does Not Meet Minimum. If the aggregate number of shares of Common Stock subscribed for in the Subscription Offering together with the orders for shares accepted in the Community Offering multiplied by the Purchase Price is less than the Minimum of the Valuation Range, then in such event HoldCo may (w) cancel the Offering and terminate this Plan, (x) establish a new Valuation Range, (y) extend, reopen or hold a new Offering, or (z) take such other action as it deems reasonably necessary. If a new Valuation Range is established and the Offering is extended, reopened or continued as part of a new Offering, Persons who previously submitted subscriptions will be required to confirm, revise or cancel their original subscriptions. If original subscriptions are canceled, any related payment will be refunded (without interest).

               If, following a reduction in the Valuation Range, the aggregate number of shares of Common Stock subscribed for, or for which orders have been accepted, in the Offering multiplied by the Purchase Price is equal to or greater than the Minimum of the Valuation Range (as such Valuation Range has been reduced), then HoldCo on the Effective Date shall: (i) issue shares of Common Stock to Participants in the Subscription Offering in an amount sufficient to satisfy the subscriptions of such subscribers in full, and (ii) issue to purchasers in the Community Offering whose orders have been accepted such additional number of shares of Common Stock such that the aggregate number of shares of Common Stock to be issued multiplied by the Purchase Price shall be at least equal to the Minimum of the Valuation Range (as such Valuation Range has been reduced).

               (v) Participant Eligibility. Notwithstanding anything to the contrary set forth in this Plan, HoldCo shall have the right in its absolute discretion and without liability to any subscriber, purchaser, underwriter or any other Person to determine which proposed Persons and which subscriptions and orders in the Offering meet the criteria provided in this Plan for eligibility to purchase Common Stock and the number of shares eligible for purchase by any Person. HoldCo’s determination of these matters shall be final and binding on all parties and all Persons. HoldCo shall have absolute and sole discretion to accept or reject, in whole or in part,

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any offer to purchase that is made or received in the course of the Community Offering, irrespective of a Person’s eligibility under this Plan to participate in the Community Offering.

        4. GENERAL PROCEDURE FOR THE OFFERINGS.

          As soon as practicable after the registration of the Common Stock under the Securities Act of 1933, as amended, and after the receipt of all required regulatory approvals, the Common Stock shall be first offered for sale in a Subscription Offering. It is anticipated that any shares of Common Stock remaining unsold after the Subscription Offering will be sold through a Community Offering. The purchase price per share for the Common Stock shall be a uniform price determined in accordance with Section 3 hereof.

        5. SUBSCRIPTION OFFERING.

          Subscription Rights to purchase shares of Common Stock at the Purchase Price will be distributed by HoldCo to the Participants in the following priorities:

          (a) Eligible Members (First Priority). Each Eligible Member shall receive, without payment, non-transferable Subscription Rights to purchase up to five percent (5%) of the total shares of Common Stock sold in the Offering (or such maximum purchase limitation as may be established for the Community Offering or Public Offering); provided, however, that the maximum number of shares that may be purchased by Eligible Members in the aggregate shall be equal to the Maximum of the Valuation Range divided by the Purchase Price.

          In the event of an oversubscription for shares of Common Stock pursuant to Section 5(a), available shares shall be allocated among subscribing Eligible Members so as to permit each such Eligible Member, to the extent possible, to purchase a number of shares which will make his or her total allocation equal to the lesser of (i) the number of shares subscribed for or (ii) 1,000 shares. Any shares of Common Stock remaining after such initial allocation will be allocated among the subscribing Eligible Members whose subscriptions remain unsatisfied in the proportion in which (i) the aggregate number of shares as to which each such Eligible Member’s subscription remains unsatisfied bears to (ii) the aggregate number of shares as to which all such Eligible Members’ subscriptions remain unsatisfied; provided, however, that no fractional shares of Common Stock shall be issued. If, because of the magnitude of the oversubscription, shares of Common Stock cannot be allocated among subscribing Eligible Members so as to permit each such Eligible Member to purchase the lesser of 1,000 shares or the number of shares subscribed for, then shares of Common Stock will be allocated among the subscribing Eligible Members in the proportion in which: (i) the aggregate number of shares subscribed for by each such Eligible Member bears to (ii) the aggregate number of shares subscribed for by all Eligible Members; provided, however, that no fractional shares of Common Stock shall be issued.

          (b) ESOP (Second Priority). The ESOP shall receive, without payment, non-transferable Subscription Rights to purchase at the Purchase Price a number of shares of Common Stock equal to ten percent (10%) of the total number of shares of Common Stock to be issued in the Offering as set forth in Section 3(c). An oversubscription by Eligible Members shall not reduce the number of shares of Common Stock that may be purchased by the ESOP under this section.

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          (c) Directors, Officers and Employees (Third Priority). Each Director, Officer and Employee shall receive, without payment, non-transferable Subscription Rights to purchase up to five percent (5%) of the total shares of Common Stock sold in the Offering (or such maximum purchase limitation as may be established for the Community Offering or Public Offering); provided, however, that such Subscription Rights shall be subordinated to the Subscription Rights of the Eligible Members and the ESOP; and provided, further, that such Subscription Rights may be exercised only to the extent that there are shares of Common Stock that could have been purchased by Eligible Members and the ESOP, but which remain unsold after satisfying the subscriptions of all Eligible Members and the ESOP; provided, however, that the aggregate number of shares purchased by all of the Directors, Officers and Employees and their Associates shall not exceed 35% of the total number of shares issued in the Offering. In the event of an oversubscription among the Directors, Officers, and Employees the subscription of any one Director, Officer or Employee shall be equal to the product of (i) the number of shares available for subscription by all Directors, Officers, and Employees, and (ii) a fraction, expressed as a percentage, the numerator of which is the number of shares to which the subscribing Director, Officer or Employee subscribed and the denominator of which is the total number of shares subscribed by all Directors, Officers and Employees.

          A Director, Officer or Employee who subscribes to purchase shares of Common Stock and who also is eligible to purchase shares of Common Stock as an Eligible Member will be deemed to purchase Common Stock first in his or her capacity as an Eligible Member.

          (d) Limitations on Subscription Rights. Subscription rights granted under this Plan will be nontransferable, nonnegotiable personal rights to subscribe for and purchase shares of Common Stock at the purchase price established hereunder. Subscription Rights under this Plan will be granted without payment, but subject to all the terms, conditions and limitations of this Plan. Any Person purchasing Common Stock hereunder will be deemed to represent and affirm to HoldCo and the Company that such Person is purchasing for his or her own account and not on behalf of any other Person.

        6. COMMUNITY OFFERING OR PUBLIC OFFERING.

          (a) If less than the total number of shares of the Common Stock are sold in the Subscription Offering, it is anticipated that remaining shares of Common Stock shall, if practicable, be sold by HoldCo in the Community Offering.

          (b) In the Community Offering, HoldCo may accept, in its sole and absolute discretion, orders received from the following categories of preferred purchasers before accepting orders from the general public:

               (i) licensed insurance agencies and/or brokers that have been appointed by or otherwise are under contract with PMIC to market and distribute policies of insurance;

               (ii) named insureds under policies of insurance issued by PMIC after the Eligibility Record Date; and

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               (iii) natural persons and trusts of natural persons (including individual retirement and Keogh retirement accounts and personal trusts in which such natural persons have substantial interests) who are residents of Lackawanna or Luzerne County, Pennsylvania.

          (c) A Prospectus and an Order Form shall be furnished to such Persons as the Company may select in connection with the Community Offering, and each order for Common Stock in the Community Offering shall be subject to the absolute right of HoldCo to accept or reject any such order in whole or in part either at the time of receipt of an order or as soon as practicable following completion of the Community Offering. In the event of an oversubscription, subject to the preferences described above and the right of HoldCo to accept or reject, in its sole discretion, any order received in the Community Offering, any available shares will be allocated so as to permit each purchaser whose order is accepted in the Community Offering to purchase, to the extent possible, the lesser of 1,000 shares and the number of shares subscribed for by such person. Thereafter, any shares remaining will be allocated among purchasers whose orders have been accepted but remain unsatisfied on a pro rata basis, provided no fractional shares shall be issued.

          (d) HoldCo may commence the Community Offering concurrently with, at any time during, or as soon as practicable after the end of, the Subscription Offering, and the Community Offering must be completed within 45 days after the completion of the Subscription Offering, unless extended by HoldCo.

          (e) HoldCo may sell any shares of Common Stock remaining following the Subscription Offering and Community Offering in a Public Offering, if desired. The provisions of Section 7 shall not be applicable to the sales to underwriters for purposes of the Public Offering, but shall be applicable to sales by the underwriters to the public. The price to be paid by the underwriters in such an offering shall be equal to the Purchase Price less an underwriting discount to be negotiated among such underwriters and HoldCo, subject to any required regulatory approval or consent.

          (f) If for any reason a Public Offering of shares of Common Stock not sold in the Subscription Offering and the Community Offering cannot be effected, or if the number of shares of Common Stock remaining to be sold after the Subscription Offering and Community Offering is so small that a Public Offering of those remaining shares would be impractical, the Company shall use its best efforts to obtain other purchases in such manner and upon such condition as may be necessary.

        7. LIMITATIONS ON SUBSCRIPTIONS AND PURCHASES OF COMMON STOCK.

          The following additional limitations and exceptions shall apply to all purchases of Common Stock in the Offering:

          (a) To the extent that shares are available, no Person may purchase fewer than the lesser of (i) 25 shares of Common Stock or (ii) shares of Common Stock having an aggregate purchase price of $250.00 in the Offering.

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          (b) In addition to the other restrictions and limitations set forth herein, the maximum amount of Common Stock which any Person together with any Associate or group of Persons acting in concert may, directly or indirectly, subscribe for or purchase in the Offering (including without limitation the Subscription Offering and/or Community Offering), shall not exceed five percent (5%) of the total shares of Common Stock sold in the Offering, except that the ESOP may purchase ten percent (10%) of the total shares of Common Stock issued in the Offering as set forth in Section 3(c). The limit set forth in this section shall not be construed to increase any other purchase limit provided herein. Purchases of shares of Common Stock in the Offering by any Person shall not exceed five percent (5%) of the total shares of Common Stock sold in the Offering irrespective of the different capacities in which such person may have received Subscription Rights under this Plan.

          (c) For purposes of the foregoing limitations and the determination of Subscription Rights, (i) Directors, Officers, and Employees shall not be deemed to be Associates or a group acting in concert solely as a result of their capacities as such, (ii) shares purchased by the ESOP or other Tax-Qualified Employee Stock Benefit Plans or Non Tax-Qualified Employee Stock Benefit Plans shall not be attributable to the individual trustees, beneficiaries or participants of any such plan for purposes of determining compliance with the limitations set forth in this section, and (iii) shares of Common Stock purchased by any plan participant in a Tax-Qualified Employee Stock Benefit Plan using funds therein pursuant to the exercise of Subscription Rights granted to such plan participant in his individual capacity as an Eligible Member or Director or Officer or Employee and/or purchases by such plan participant in the Community Offering shall not be deemed to be purchases by the ESOP or other Tax-Qualified Employee Stock Benefit Plans for purposes of calculating the maximum amount of Common Stock that the ESOP and other Tax-Qualified Employee Stock Benefit Plans may purchase.

          (d) The Company may increase or decrease any of the purchase limitations set forth herein at any time; provided that in no event shall the maximum purchase limitation applicable to Eligible Members be less than the maximum purchase limitation percentage applicable to any other class of subscribers or purchasers in the Offering. In the event that either an individual or aggregate purchase limitation is increased after commencement of the Offering, any Person who ordered the maximum number of shares of Common Stock shall be permitted to purchase an additional number of shares such that such Person may subscribe for or order the then maximum number of shares permitted to be subscribed for by such Person, subject to the rights and preferences of any person who has priority rights to purchase shares of Common Stock in the Offering. In the event that either an individual or the aggregate purchase limitation is decreased after commencement of the Offering, the orders of any Person who subscribed for the maximum number of shares of Common Stock shall be decreased by the minimum amount necessary so that such Person shall be in compliance with the then maximum number of shares permitted to be subscribed for or ordered by such Person.

          (e) Each Person who purchases Common Stock in the Offering shall be deemed to confirm that such purchase does not conflict with the purchase limitations under this Plan or otherwise imposed by law. The Company shall have the right to take any action as it may, in its sole discretion, deem necessary, appropriate or advisable in order to monitor and enforce the terms, conditions, limitations and restrictions contained in this section and elsewhere in this Plan and the terms, conditions and representations contained in the Order Form, including, but not

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limited to, the absolute right of HoldCo to reject, limit or revoke acceptance of any order and to delay, terminate or refuse to consummate any sale of Common Stock which it believes might violate, or is designed to, or is any part of a plan to, evade or circumvent such terms, conditions, limitations, restrictions and representations. Any such action shall be final, conclusive and binding on all Persons and HoldCo and the Company shall be free from any liability to any Person on account of any such action.

        8. TIMING OF THE OFFERINGS, MANNER OF PURCHASING COMMON STOCK AND ORDER FORMS.

          (a) The exact timing of the commencement of the Offering shall be determined by HoldCo in consultation with any financial or advisory or investment banking firm retained by it in connection with the Offering. HoldCo may consider a number of factors in determining the exact timing of the commencement of the Offering, including, but not limited to, its current and projected future earnings, local and national economic conditions and the prevailing market for stocks in general and stocks of insurance companies in particular. HoldCo shall have the right to withdraw, terminate, suspend, delay, revoke or modify the Offering at any time and from time to time, as it in its sole discretion may determine, without liability to any Person, subject to any necessary regulatory approval or concurrence.

          (b) HoldCo shall have the absolute right, in its sole discretion and without liability to any Person, to reject any Order Form, including, but not limited to, any Order Form that is (i) improperly completed or executed, (ii) not timely received, (iii) not accompanied by the proper payment, or (iv) submitted by a Person whose representations HoldCo believes to be false or who it otherwise believes, either alone, or acting in concert with others, is violating, evading or circumventing, or intends to violate, evade or circumvent, the terms and conditions of this Plan. HoldCo may, but will not be required to, waive any irregularity on any Order Form or may require the submission of corrected Order Forms or the remittance of full payment for shares of Common Stock by such date as they may specify. The interpretation of HoldCo of the terms and conditions of the Order Forms shall be final and conclusive. Once HoldCo receives an Order Form, the order shall be deemed placed and will be irrevocable.

          (c) HoldCo shall make reasonable efforts to comply with the securities laws of all jurisdictions in the United States in which Persons entitled to subscribe reside. However, HoldCo has no obligation to offer or sell shares to any Person under the Plan if such Person resides in a foreign country or in a jurisdiction of the United States with respect to which (i) there are few Persons otherwise eligible to subscribe for shares under this Plan who reside in such jurisdiction, (ii) the granting of Subscription Rights or the offer or sale of shares of Common Stock to such Persons would require HoldCo or its Directors, Officers or Employees, under the laws of such jurisdiction, to register as a broker or dealer, salesman or selling agent or to register or otherwise qualify the Common Stock for sale in such jurisdiction, or HoldCo would be required to qualify as a foreign corporation or file a consent to service of process in such jurisdiction, or (iii) such registration or qualification in the judgment of HoldCo would be impracticable or unduly burdensome for reasons of cost or otherwise.

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        9. PAYMENT FOR COMMON STOCK.

          (a) Payment for shares of Common Stock ordered by Persons in the Offering shall be equal to the Purchase Price per share multiplied by the number of shares which are being ordered. Such payment shall be made by check or money order at the time the Order Form is delivered to HoldCo.

          (b) Consistent with applicable laws and regulations, payment for shares of Common Stock ordered by Tax-Qualified or Non-Tax-Qualified Employee Stock Benefit Plans may be made with funds contributed or loaned by HoldCo or the Company and/or funds obtained pursuant to a loan from an unrelated financial institution pursuant to a loan commitment which is in force from the time that any such plan submits an Order Form until the closing of the transactions contemplated hereby.

          (c) Each share of Common Stock issued in the Offering shall be non-assessable upon payment in full of the Purchase Price.

        10. CONDITIONS TO THE OFFERINGS.

          Consummation of the Offering is subject to (i) the receipt of all required federal and state approvals for the issuance of Common Stock in the Offering, (ii) approval of the Plan by the members of PMMHC as provided in Section 2105 of the Pennsylvania BCL, and (iii) the sale in the Offering of such minimum number of shares of Common Stock within the Valuation Range as may be determined by the Board of Directors of PMMHC and HoldCo.

        11. SPECIAL MEETING OF MEMBERS.

          Following the approval of the Plan by the PID, a special meeting of the members of PMMHC will be held by PMMHC in accordance with the Bylaws of PMMHC and applicable Pennsylvania law. The Board of Directors of PMMHC shall establish a record date for members entitled to vote at the special meeting in accordance with the Bylaws of PMMHC and applicable Pennsylvania law (the “Voting Record Date”). Notice of the special meeting will be given by PMMHC to members eligible to vote as of the Voting Record Date by mailing (i) a notice of the special meeting, (ii) a proxy statement, (iii) a form of proxy by which members may vote in favor of or against the Conversion, and (iv) a copy of this Plan as approved by the PID, to the address of each member eligible to vote as such address appears on the records of PMMHC on the Voting Record Date.

          Pursuant to Section 2105 of the Pennsylvania BCL and the Bylaws of PMMHC, the Plan must be approved by the affirmative vote of at least a majority of the votes entitled to be cast at the special meeting. Voting may be in person or by proxy. PMMHC shall be promptly notified of the vote of the members taken at the special meeting.

        12. ARTICLES OF INCORPORATION.

          As part of the Conversion, the existing Articles of Incorporation of PMMHC will be amended and restated to authorize PMMHC to operate as a stock corporation. By approving this Plan, the members of PMMHC will also be requested to approve the amendment and restatement

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of PMMHC’s existing Articles of Incorporation. A form of the amended and restated Articles of Incorporation is attached hereto as “EXHIBIT A” Prior to completion of the Conversion, the form of amended and restated Articles of Incorporation may be revised in accordance with the provisions and limitations for amending this Plan under Section 17 hereof. The amendment and restatement of the existing Articles of Incorporation of PMMHC shall occur on the Effective Date.

13. REQUIREMENT FOLLOWING OFFERING FOR REGISTRATION, MARKET MAKING AND STOCK EXCHANGE LISTING.

          HoldCo shall register the Common Stock pursuant to the Securities Exchange Act of 1934, as amended. HoldCo shall use its best efforts to (i) encourage and assist a market maker to establish and maintain a market for that class of stock and (ii) list that class of stock on a national or regional securities exchange or to have quotations for that class of stock disseminated on the Nasdaq Stock Market.

        14. RESTRICTIONS ON TRANSFER OF COMMON STOCK.

          (a) All shares of the Common Stock which are purchased in the Offering by Persons other than Insiders shall be transferable without restriction. Shares of Common Stock purchased by Insiders in the Offering shall be subject to the restriction that such shares shall not be sold or otherwise disposed of for value for a period of six months following the date of purchase, except for any disposition of such shares following the death of the Insider or Associate. The shares of Common Stock issued by HoldCo to Insiders and their Associates shall bear the following legend giving appropriate notice of such six-month restriction:

The shares represented by this Certificate may not be sold by the registered holder hereof for a period of six months from the date of the issuance printed hereon, except in the event of the death of the registered holder. This restrictive legend shall be deemed null and void after six months from the date of this Certificate.

          (b) In addition, HoldCo shall give appropriate instructions to the transfer agent for its Common Stock with respect to the applicable restrictions relating to the transfer of restricted stock. Any shares issued at a later date as a stock dividend, stock split or otherwise with respect to any such restricted stock shall be subject to the same holding period restrictions as may then be applicable to such restricted stock.

          (c) The foregoing restriction on transfer shall be in addition to any restrictions on transfer that may be imposed by federal and state securities laws.

        15. STOCK COMPENSATION PLANS.

          Subject to the approval of the adoption of a Tax-Qualified Employee Stock Benefit Plan as required by the Commissioner’s 1998 Order and the further approval of the appropriate Board of Directors, the Company plans to adopt one or more Tax-Qualified Employee Stock Benefit Plans in connection with the Offering, including, without limitation, the ESOP. Subsequent to the Offering, subject to Pennsylvania Insurance Commissioner approval and the further approval

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of the appropriate Board of Directors, the Company may adopt Non-Tax Qualified Employee Stock Benefit Plans, including without limitation, Option Plans and MRPs; provided however, that, any such plan shall be implemented in accordance with applicable laws and regulations. Subject to Pennsylvania Insurance Commissioner approval and the further approval of the appropriate Board of Directors, this Plan authorizes the grant and issuance by HoldCo of awards of Common Stock pursuant to an MRP or Option Plan in accordance with any applicable laws and regulations. In no event shall the aggregate amount of shares issued under such Option Plans and MRPs exceed 14% of the outstanding shares of Common Stock of HoldCo as of the close of the Offering.

        16. VOTING RIGHTS.

          After consummation of the Conversion, exclusive voting rights with respect to PMMHC shall be vested in HoldCo, which will hold of all of PMMHC’s outstanding capital stock.

        17. AMENDMENT OR TERMINATION.

          This Plan may be substantively amended at any time by the Board of Directors of PMMHC as a result of comments from regulatory authorities or otherwise. This Plan may be terminated at any time by the Board of Directors of PMMHC.

        18. INTERPRETATION.

          References herein to provisions of federal and state law shall in all cases be deemed to refer to the provisions of the same which were in effect at the time of adoption of this Plan by the Board of Directors of PMMHC and any subsequent amendments to such provisions. All interpretations of this Plan and application of its provisions to particular circumstances by a majority of the Board of Directors of PMMHC shall be final.

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EXHIBIT A

AMENDED AND RESTATED
ARTICLES OF INCORPORATION

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AMENDED AND RESTATED ARTICLES OF INCORPORATION
OF PMMHC CORP.

     FIRST. The name of the Corporation is PMMHC Corp.

     SECOND. The location and post office address of the registered office of the Corporation in this Commonwealth is 72 North Franklin Street, Wilkes-Barre, Pennsylvania 18773-0016.

     THIRD. The Corporation is incorporated under the provisions of the Pennsylvania Business Corporation Law of 1988 (“PABCL”). The purpose of the Corporation is, and it shall have unlimited power, to engage in and to perform any lawful act concerning, any and all lawful business for which company may be incorporated under the PABCL.

     FOURTH. The term of the Corporation’s existence is perpetual.

     FIFTH. The aggregate number of shares of capital stock which the company shall have authority to issue is One Million (1,000,000) shares of common stock, with a par value of $0.01 per share. Any or all classes of shares of the Corporation, or any part thereof, may be represented by uncertificated shares to the extent determined by the Board of Directors, except that shares represented by a certificate that is issued and outstanding shall be represented thereby until the certificate is surrendered to the Corporation.

     SIXTH. The management, control and government of the Corporation shall be vested in a board of directors consisting of not less than three (3) nor more than fifteen (15) members in number, as fixed by the board of directors of the Corporation from time to time. The directors of the Corporation shall be divided into three classes: Class I, Class II and Class III. Each Class shall be as nearly equal in number as possible. If the number of Class I, Class II or Class III directors is fixed for any term of office, it shall not be increased during that term, except by a majority vote of the board of directors. The term of office of the initial Class I directors shall expire at the annual election of directors by the shareholders of the Corporation in 2010; the term of office of the initial Class II directors shall expire at the annual election of directors by the shareholders of the Corporation in 2011; and the term of office of the initial Class III directors shall expire at the annual election of directors by the shareholders of the Corporation in 2012. After the initial term of each Class, the term of office of each Class shall be three (3) years, so that the term of office of one class of directors shall expire each year when their respective successors have been duly elected by the shareholders and qualified. At each annual election by the shareholders of the Corporation, the directors chosen to succeed those whose terms then expire shall be identified as being of the same class as the directors they succeed.

     SEVENTH. The Corporation reserves the right to amend, alter, change or repeal any provision contained in its Articles of Incorporation in the manner now or hereafter

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prescribed by statute and all rights conferred upon shareholders and directors herein are hereby granted.

     IN TESTIMONY WHEREOF, a duly authorized officer of the company has signed these amended and restated Articles of Incorporation this ___day of                     , 2009.

Douglas A. Gaudet, President and Chief

Executive Officer

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EX-3.1

Exhibit 3.1

ARTICLES OF INCORPORATION
OF
PENN MILLERS HOLDING CORPORATION

     FIRST. The name of the Corporation is Penn Millers Holding Corporation.

     SECOND. The location and post office address of the Corporation’s registered office in this Commonwealth is 72 North Franklin Street, P.O. Box P, Wilkes-Barre, Pennsylvania 18773-0016.

     THIRD. The purpose of the Corporation is, and it shall have unlimited power to engage in and to do, any lawful act concerning any or all lawful business for which corporations may be incorporated under provisions of the Business Corporation Law of 1988, the Act approved December, 1988, P.L. 1444, as amended (the “Pennsylvania Business Corporation Law”).

     FOURTH. The term of the Corporation’s existence is perpetual.

     FIFTH. The aggregate number of shares of capital stock that the Corporation shall have authority to issue is eleven million (11,000,000) shares, divided into ten million (10,000,000) shares of common stock, having a par value of $0.01 per share (“Common Stock”), and one million (1,000,000) shares of preferred stock, having such par value, if any, as the board of directors shall fix and determine, as provided in Article SIXTH below (“Preferred Stock”). Any or all classes of shares of the Corporation, or any part thereof, may be represented by uncertificated shares to the extent determined by the Board of Directors, except that shares represented by a certificate that is issued and outstanding shall be represented thereby until the certificate is surrendered to the Corporation.

     SIXTH. The Preferred Stock may be issued from time to time as a class without series or, if so determined by the board of directors of the Corporation, either in whole or in part, in one or more series. There is hereby expressly granted to and vested in the board of directors of the Corporation authority to fix and determine (except as fixed and determined herein), by resolution, the par value, voting powers, full or limited, or no voting powers, and such designations, preferences and relative, participating, optional or other special rights, if any, and the qualifications, limitations or restrictions thereof, if any, including specifically, but not limited to, the dividend rights, conversion rights, redemption rights and liquidation preferences, if any, of any wholly unissued series of Preferred Stock (or the entire class of Preferred Stock if none of such shares have been issued), the number of shares constituting any such series and the terms and conditions of the issue thereof. Prior to the issuance of any shares of Preferred Stock, a statement setting forth a copy of each such resolution or resolutions and the number of shares of Preferred Stock of each such class or series shall be executed and filed in accordance with the Pennsylvania Business Corporation Law. Unless otherwise provided in any such resolution or resolutions, the number of shares of capital stock of any such class or series so set forth in such resolution or resolutions may thereafter be increased or decreased (but not below the number of shares then outstanding), by a statement likewise executed and filed setting forth a statement that a specified increase or decrease therein had been authorized and directed by a resolution or resolutions likewise adopted by the board of directors of the Corporation. In case the number of

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such shares shall be decreased, the number of shares so specified in the statement shall resume the status they had prior to the adoption of the first resolution or resolutions.

     SEVENTH. Each holder of record of Common Stock shall have the right to one vote for each share of Common Stock standing in such holder’s name on the books of the Corporation. No shareholder shall be entitled to cumulate any votes for the election of directors.

     EIGHTH. The management, control and government of the Corporation shall be vested in a board of directors consisting of not less than three (3) nor more than fifteen (15) members in number, as fixed by the board of directors of the Corporation from time to time. The directors of the Corporation shall be divided into three classes: Class I, Class II and Class III. Each Class shall be as nearly equal in number as possible. If the number of Class I, Class II or Class III directors is fixed for any term of office, it shall not be increased during that term, except by a majority vote of the board of directors. The term of office of the initial Class I directors shall expire at the annual election of directors by the shareholders of the Corporation in 2010; the term of office of the initial Class II directors shall expire at the annual election of directors by the shareholders of the Corporation in 2011; and the term of office of the initial Class III directors shall expire at the annual election of directors by the shareholders of the Corporation in 2012. After the initial term of each Class, the term of office of each Class shall be three (3) years, so that the term of office of one class of directors shall expire each year when their respective successors have been duly elected by the shareholders and qualified. At each annual election by the shareholders of the Corporation, the directors chosen to succeed those whose terms then expire shall be identified as being of the same class as the directors they succeed. Unless waived by the board of directors of the Corporation, in order to qualify for election as a director of the Corporation, a person must have been a shareholder of record of the Corporation for a period of time equal to the lesser of (i) one (1) year, or (ii) the time elapsed since the initial issuance of shares of capital stock of the Corporation. Shareholders of another corporation that merges with the Corporation, is acquired by, or acquires the Corporation, or enters into any similar transaction with the Corporation shall qualify for election as a director of the Corporation if such shareholder was a shareholder of record of the other corporation for a period of time equal to the lesser of (i) one (1) year, or (ii) the time elapsed since the initial issuance of shares of capital stock of the Corporation. If, for any reason, a vacancy occurs on the board of directors of the Corporation, a majority of the remaining directors shall have the exclusive power to fill the vacancy by electing a director to hold office for the unexpired term in respect of which the vacancy occurred. No director of the Corporation shall be removed from office, as a director, by the vote of shareholders, unless the votes of shareholders cast in favor of the resolution for the removal of such director constitute at least a majority of the votes which all shareholders would be entitled to cast at an annual election of directors.

     NINTH. No holder of any class of capital stock of the Corporation shall have preemptive rights, and the Corporation shall have the right to issue and to sell to any person or persons any shares of its capital stock or any option, warrant or right to acquire capital stock, or any securities having conversion or option rights without first offering such shares, rights or securities to any holder of any class of capital stock of the Corporation.

     TENTH. Except as set forth below, the affirmative vote of shareholders entitled to cast at least eighty percent (80%) of the votes which all shareholders of the Corporation are entitled to cast, and if any class of shares is entitled to vote as a separate class, the affirmative vote of shareholders entitled to cast at least a majority of the votes entitled to be cast by the

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outstanding shares of such class (or such greater amount as required by the provisions of these Articles of Incorporation establishing such class) shall be required to approve any of the following:

          (a) any merger or consolidation of the Corporation with or into any other corporation;

          (b) any share exchange in which a corporation, person or entity acquires the issued or outstanding shares of capital stock of the Corporation pursuant to a vote of shareholders;

          (c) any sale, lease, exchange or other transfer of all, or substantially all, of the assets of the Corporation to any other corporation, person or entity; or

          (d) any transaction similar to, or having similar effect as, any of the foregoing transactions.

     An affirmative vote as provided in the foregoing provisions shall be, to the extent permitted by law, in lieu of the vote of the shareholders otherwise required by law.

     The board of directors of the Corporation shall have the power and duty to determine, for purposes of this Article TENTH, on the basis of information known to the board, if any transaction is similar to, or has an effect similar to, any of the transactions identified above in this Article TENTH. Any such determination shall be conclusive and binding for all purposes of this Article TENTH.

     The Corporation may voluntarily completely liquidate and/or dissolve only in accordance with all applicable laws and only if the proposed liquidation and/or dissolution is approved by the affirmative vote of shareholders entitled to cast at least eighty percent (80%) of the votes which all shareholders are entitled to cast.

     The provisions of this Article TENTH shall not apply to any transaction which is approved in advance by two-thirds of the members of the board of directors of the Corporation, at a meeting duly called and held.

     ELEVENTH.

          Subsection 1. No Person or Group Acting in Concert shall Acquire Voting Control of the Corporation, at any time, except in accordance with the provisions of this Article ELEVENTH. The terms “Acquire,” “Voting Control,” “Group Acting in Concert,” and “Person” as used in this Article ELEVENTH are defined in Subsection 4 hereof.

          Subsection 2. If Voting Control of the Corporation is acquired in violation of this Article ELEVENTH, all shares with respect to which any Person or Group Acting in Concert has acquired Voting Control in excess of the number of shares the beneficial ownership of which is deemed under Subsection 4 hereof to confer Voting Control of the Corporation (as determined without regard to this Subsection 2) shall be considered from and after the date of acquisition by such Person or Group Acting in Concert to be “excess shares” for purposes of this Article ELEVENTH. All shares deemed to be excess shares shall thereafter no longer be entitled to vote on any matter or to take other shareholder action. If, after giving effect to the first two sentences

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of this Subsection 2, any Person or Group Acting in Concert still shall be deemed to be in Voting Control of the Corporation based on the number of votes then entitled to be cast (rather than the number of issued and outstanding shares of common stock of the Corporation), then shares held in excess of the number of shares deemed to confer Voting Control upon such Person or Group Acting in Concert also shall not be entitled to vote on any matter or take any other shareholder action, but this subsequent reduction in voting rights shall be effected only once. The provisions of this Subsection 2 deeming shares to be excess shares shall only apply for so long as such shares shall be beneficially owned by such Person or Group Acting in Concert who has acquired Voting Control. Notwithstanding the foregoing, shares held in excess of the number of shares the beneficial ownership of which would otherwise be deemed under Subsection 4 to confer Voting Control of the Corporation shall not be deemed to be excess shares if such shares are held by a Qualified Stock Plan.

          Subsection 3. The provisions of this Article ELEVENTH shall be of no further force and effect after the consummation of a transaction in which another Person Acquires shares of capital stock of the Corporation entitled to cast eighty percent (80%) or more of the votes which all shareholders are entitled to cast (as determined without regard to the application of this Article ELEVENTH) and such transaction was approved in advance by two-thirds of the members of the board of directors of the Corporation.

          Subsection 4. For purposes of this Article ELEVENTH:

          (a) The term “Acquire” includes every type of acquisition, whether effected by purchase, exchange, operation of law or otherwise.

          (b) “Voting Control” means the sole or shared power to vote or to direct the voting of, or to dispose or to direct the disposition of, more than ten percent (10%) of the issued and outstanding common stock of the Corporation; provided that (i) the solicitation, holding and voting of proxies obtained by the board of directors of the Corporation pursuant to a solicitation under Regulation 14A of the General Rules and Regulations under the Securities Exchange Act of 1934, as amended (the “Exchange Act”) shall not constitute Voting Control, (ii) a Qualified Stock Plan that holds more than ten percent (10%) of the voting shares of the Corporation shall not be deemed to have Voting Control of the Corporation, and (iii) any trustee, member of any administrative committee or employee beneficiary of a Qualified Stock Plan shall not be deemed to have Voting Control of the Corporation either (A) as a result of their control of a Qualified Stock Plan, and/or their beneficial interest in voting shares held by a Qualified Stock Plan, or (B) as a result of the aggregation of both their beneficial interest in voting shares held by a Qualified Stock Plan and voting shares held by such trustee, administrative committee member or employee beneficiary independent of a Qualified Stock Plan.

          (c) “Group Acting in Concert” includes Persons (i) knowingly participating in a joint activity or interdependent conscious parallel action toward a common goal whether or not pursuant to an express agreement; or (ii) seeking to combine or pool their voting or other interests in the voting shares for a common purpose, pursuant to any contract, understanding, relationship, agreement or other arrangement, whether written or otherwise, provided, that a “Group Acting in Concert” shall not include (i) the members of the board of directors of the Corporation solely as a result of their board membership, (ii) the members of the board of directors of the Corporation as a result of their solicitation, holding and voting of proxies obtained by them pursuant to a solicitation subject to rules and regulations promulgated under

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the Exchange Act or any successor statute or (iii) any member or all the members of the board of directors of the Corporation, and (iv) any Qualified Stock Plan and the trustees, administrative committee members and employee beneficiaries thereof.

          (d) The term “Person” includes an individual, a Group Acting in Concert, a corporation, a partnership, a limited liability company, an association, a joint stock company, a trust, an unincorporated organization, or any similar entity, syndicate or any other group formed for the purpose of acquiring, holding or disposing of the equity securities of the Corporation.

          (e) The term “Qualified Stock Plan” means any defined benefit plan or defined contribution plan of the Corporation, such as an employee stock ownership plan, stock bonus plan, profit sharing plan or other plan, that, with its related trust, meets the requirements to be “qualified” under Section 401 of the Internal Revenue Code of 1986, as amended.

          Subsection 5. This Article ELEVENTH shall not apply to the purchase of securities of the Corporation by underwriters in connection with a public offering of such securities by the Corporation or by a holder of shares of capital stock of the Corporation with written consent of the board of directors of the Corporation; provided, however, that purchasers of securities of the Corporation from any underwriter shall be subject to the provisions of this Article ELEVENTH.

          Subsection 6. The board of directors of the Corporation shall have the power and duty to determine, for purposes of this Article ELEVENTH, on the basis of information known to the Board, if and when such other Person has acquired Voting Control of the Corporation, and/or if any transaction is similar to, or has a similar effect as, any of the transactions identified in this Article ELEVENTH. Any such determination shall be conclusive and binding for all purposes of this Article ELEVENTH.

     TWELFTH. No action required to be taken or which may be taken at any annual or special meeting of shareholders of the Corporation may be taken without a meeting, and the power of the shareholders of the Corporation to consent in writing to action without a meeting is specifically denied. The presence, in person or by proxy, of shareholders entitled to cast at least a majority of the votes which all shareholders are entitled to cast shall constitute a quorum of shareholders at any annual or special meeting of shareholders of the Corporation.

     THIRTEENTH. Except as required by applicable law, the authority to make, amend, alter, change or repeal the Bylaws of the Corporation is hereby expressly and solely granted to and vested in the board of directors of the Corporation, subject always to the power of the shareholders to change such action by the affirmative vote of shareholders of the Corporation entitled to cast at least sixty-six and two-thirds percent (66 ²/₃%) of the votes which all shareholders are entitled to cast, except that provisions of the Bylaws of the Corporation relating to limitations on directors’ liabilities and indemnification of directors, officers and others may not be amended to increase the exposure to liability for directors or to decrease the indemnification of directors, officers and others except by the affirmative vote of sixty-six and two-thirds percent (66 ²/₃%) of the entire board of directors or by the affirmative vote of shareholders of the Corporation entitled to cast at least eighty percent (80%) of the votes which all shareholders are entitled to cast.

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     FOURTEENTH. The board of directors of the Corporation, when evaluating any offer of another party to (a) make a tender or exchange offer for any equity security of the Corporation, (b) merge or consolidate the Corporation with another corporation, (c) purchase or otherwise acquire all or substantially all of the properties and assets of the Corporation, or (d) engage in any transaction similar to, or having similar effects as, any of the foregoing transactions, may, in connection with the exercise of its judgment in determining what is in the best interests of the Corporation and its shareholders, give due consideration to all relevant factors, including without limitation (i) the social and economic effects of the proposed transaction on the policyholders, employees, suppliers and other constituents of the Corporation and its subsidiaries and on the communities in which the Corporation and its subsidiaries operate or are located, (ii) the business reputation of the other party, and (iii) the board of directors’ evaluation of the then value of the Corporation in a freely negotiated sale and of the future prospects of the Corporation as an independent entity.

     FIFTEENTH. If any corporation, person, entity, or group becomes the beneficial owner, directly or indirectly, of shares of capital stock of the Corporation having the right to cast in the aggregate twenty-five percent (25%) or more of all votes entitled to be cast by all issued and outstanding shares of capital stock of the Corporation entitled to vote, such corporation, person, entity or group shall within thirty (30) days thereafter offer to purchase all shares of capital stock of the Corporation issued, outstanding and entitled to vote. Such offer to purchase shall be at a price per share equal to the highest price paid for shares of the respective class or series of capital stock of the Corporation purchased by such corporation, person, entity or group within the preceding twelve (12) months. If such corporation, person, entity or group did not purchase any shares of a particular class or series of capital stock of the Corporation within the preceding twelve (12) months, such offer to purchase shall be at a price per share equal to the fair market value of such class or series of capital stock on the date on which such corporation, person, entity or group becomes the beneficial owner, directly or indirectly, of shares of capital stock of the Corporation having the right to cast in the aggregate twenty-five percent (25%) or more of all votes entitled to be cast by all issued and outstanding capital stock of the Corporation. Such offer shall provide that the purchase price for such shares shall be payable in cash.

     The provisions of this Article FIFTEENTH shall not apply if two-thirds of the members of the board of directors of the Corporation approve in advance the acquisition of beneficial ownership by such corporation, person, entity or group, of shares of capital stock of the Corporation having the right to cast in the aggregate twenty-five percent (25%) or more of all votes entitled to be cast by all issued and outstanding shares of capital stock of the Corporation.

     SIXTEENTH. The Corporation reserves the right to amend, alter, change or repeal any provision contained in its Articles of Incorporation in the manner now or hereafter prescribed by statute and all rights conferred upon shareholders and directors herein are hereby granted subject to this reservation; provided, however, that the provisions set forth in Articles SEVENTH through SIXTEENTH, inclusive, and Article EIGHTEENTH of these Articles of Incorporation may not be repealed, altered or amended, in any respect whatsoever, unless such repeal, alteration or amendment is approved by either (a) the affirmative vote of shareholders of the Corporation entitled to cast at least eighty percent (80%) of the votes which all shareholders of the Corporation are then entitled to cast, or (b) the affirmative vote of two-thirds of the members of the board of directors of the Corporation and the affirmative vote of shareholders of

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the Corporation entitled to cast at least a majority of the votes which all shareholders of the Corporation are then entitled to cast.

     SEVENTEENTH. Subchapters E, F, G and H of Chapter 25 of the Pennsylvania Business Corporation Law shall not be applicable to the Corporation or any transfer or acquisition of the stock or other securities of the Corporation or to any business combination involving the Corporation or the stock or other securities of the Corporation. Nothing in this Article SEVENTEENTH shall be deemed a waiver of or a limitation on any Article herein.

     EIGHTEENTH. A special meeting of the shareholders of the Corporation may be called only by: (i) the Chief Executive Officer, (ii) the Executive Committee of the Board of Directors, or (iii) two-thirds of the members of the board of directors of the Corporation.

     NINETEENTH. The name and post office address of the incorporator of the Corporation is: Douglas A. Gaudet, 72 North Franklin Street, P.O. Box P, Wilkes-Barre, Pennsylvania 18773-0016.

  IN TESTIMONY WHEREOF, the undersigned incorporator of the Corporation has signed these Articles of Incorporation this 22^nd day of April, 2009.

/s/ Douglas A. Gaudet

Douglas A. Gaudet  

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EX-3.2

Exhibit 3.2

BYLAWS
OF
PENN MILLERS HOLDING CORPORATION

ARTICLE I

SHAREHOLDERS

Section 1.01 — Annual Meeting -

(a)

General. The annual meeting of shareholders shall be held on such day each year as may be fixed from time to time by the Board of Directors, not later than six (6) months after the end of the Corporation’s fiscal year. If the annual meeting shall not have been called and held within nine (9) months after the end of the Corporation’s fiscal year, any shareholder may call the meeting at any time thereafter. At each annual meeting of shareholders, directors shall be elected, reports of the affairs of the Corporation shall be considered, and such other business as may properly come before the meeting may be transacted.

(b)

Conduct of Meetings. At every meeting of the shareholders, the Chairman of the Board or, in his absence, the officer designated by the Chairman of the Board, or, in the absence of such designation, a chairman (who shall be one of the officers, if any is present) chosen by a majority of the members of the Board of Directors shall act as chairman of the meeting. The chairman of the meeting shall have any and all powers and authority necessary in the chairman’s sole discretion to conduct an orderly meeting and preserve order and to determine any and all procedural matters, including imposing reasonable limits on the amount of time at the meeting taken up in remarks by any one shareholder or group of shareholders. In addition, until the business to be completed at a meeting of the shareholders is completed, the chairman of a meeting of the shareholders is expressly authorized to temporarily adjourn and postpone the meeting from time to time. The Secretary of the Corporation or in his absence, an assistant secretary, shall act as Secretary of all meetings of the shareholders. In the absence at such meeting of the Secretary or assistant secretary, the chairman of the meeting may appoint another person to act as Secretary of the meeting.

Section 1.02 — Special Meetings - Special meetings of the shareholders may be called only in accordance with the articles of incorporation of the Corporation. Upon written request to the Chief Executive Officer or the Secretary, sent by registered mail or delivered to such officer in person, of any person or persons entitled to call a special meeting of the shareholders, it shall be the duty of the Secretary to fix the date, place and time of the meeting, which shall be held not more than sixty (60) days after the receipt of the request. If the Secretary neglects or refuses to fix the date, place, and time of the meeting, the person or persons who duly made such written request may do so.

Section 1.03 — Place of Meeting - All meetings of the shareholders shall be held at such place, within or outside the Commonwealth of Pennsylvania, as may be designated by the Board of

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Directors in the notice of meeting. In the absence of such designation, shareholders’ meetings shall be held at the registered office of the Corporation.

Section 1.04 — Notice of Meetings of Shareholders - Except as provided otherwise in these bylaws or required by law, written notice of every meeting of the shareholders shall be given by, or at the direction of, the Secretary or other authorized person, to each shareholder of record entitled to vote at the meeting at least ten (10) days prior to the day named for the meeting.

Section 1.05 — Contents - The notice of the meeting shall specify the place, day and hour of the meeting and, in the case of a special meeting, the general nature of the business to be transacted. If the purpose, or one of the purposes, of the meeting is to consider the adoption, amendment or repeal of the bylaws, there shall be included in, enclosed with, or accompanied by, the notice a copy of the proposed amendment or a summary of the changes to be made by the amendment.

Section 1.06 — Quorum - Any annual or special meeting of the shareholders duly called shall not be organized for the transaction of business unless a quorum is present. The presence in person or by proxy of shareholders entitled to cast at least a majority of the votes that all shareholders are entitled to cast on a particular matter to be acted upon at the meeting shall constitute a quorum for the purposes of consideration and action on such matter. The shareholders present at a duly organized annual meeting can continue to do business until adjournment notwithstanding the withdrawal of enough shareholders to leave less than a quorum.

If a proxy casts a vote on behalf of a shareholder on any issue other than a procedural motion considered at a meeting of shareholders, the shareholder shall be deemed to be present during the entire meeting for purposes of determining whether a quorum is present for consideration of any other issue.

Section 1.07 — Adjournments - If a meeting of the shareholders duly called cannot be organized because a quorum has not attended, the chairman of the meeting or a majority of shareholders present in person or by proxy and entitled to vote may adjourn the meeting to such time and place as they may determine.

When a meeting of the shareholders is adjourned, it shall not be necessary to give any notice of the adjourned meeting or of the business to be transacted at the adjourned meeting other than by announcement at the meeting at which the adjournment is taken, unless the Board of Directors fixes a new record date for the adjourned meeting or unless notice of the business to be transacted was required by the Pennsylvania Business Corporation Law of 1988, as amended (hereinafter “PABCL”), to be stated in the original notice of the meeting and such notice had not been previously provided.

Those shareholders entitled to vote who attend a meeting called for the election of directors that has previously adjourned for lack of a quorum, although less than a quorum is fixed in this section, shall nevertheless constitute a quorum for the purpose of electing directors.

Section 1.08 — Action by Shareholders - Whenever any corporate action is to be taken by vote of the shareholders, it shall be authorized upon receiving the affirmative vote of a majority of the votes cast by all shareholders entitled to vote thereon and, if any shareholders are entitled to vote thereon as a class, upon receiving the affirmative vote of the majority of the votes cast by the

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shareholders entitled to vote as a class on the matter, except when a different vote is required by law, or the articles of incorporation, or these bylaws.

Section 1.09 — Voting Rights of Shareholders - Unless otherwise provided in the articles of incorporation, every shareholder of the Corporation shall be entitled to one vote for every share outstanding in the name of the shareholder on the books of the Corporation.

Section 1.10 — Voting and Other Action by Proxy -

(a)	General. Every shareholder entitled to vote at a meeting of shareholders or to express consent or dissent to corporate action in writing without a meeting may authorize another person or persons to act for that shareholder by proxy. The presence of, or vote or other action at a meeting of shareholders, or the expression of consent or dissent to corporate action, by a proxy of a shareholder shall constitute the presence of, or vote or action by, or written consent or dissent of the shareholder.
	Where two or more proxies of a shareholder are present, the Corporation shall, unless otherwise expressly provided in the proxy, accept as the vote of all shares represented thereby the vote cast by a majority of them and, if a majority of the proxies cannot agree whether the shares represented shall be voted, or upon the manner of voting the shares, the voting of the shares shall be divided equally among those persons.
(b)	Minimum Requirements. Every proxy shall be executed by the shareholder or by the duly authorized attorney-in-fact of the shareholder and filed with the Secretary of the Corporation. A telegram, telex, cablegram, datagram, email or similar transmission from a shareholder or attorney-in-fact, or a photographic, facsimile or similar reproduction of a writing executed by a shareholder or attorney-in-fact:

(1)	may be treated as properly executed; and
(2)	shall be so treated if it sets forth a confidential and unique identification number or other mark furnished by the Corporation to the shareholder for the purposes of a particular meeting or transaction.

(c)

Revocation. A proxy, unless coupled with an interest, shall be revocable at will, notwithstanding any other agreement or any provision in the proxy to the contrary, but the revocation of a proxy shall not be effective until written notice thereof has been given to the Secretary of the Corporation. An unrevoked proxy shall not be valid after three (3) years from the date of its execution unless a longer time is expressly provided therein. A proxy shall not be revoked by the death or incapacity of the maker unless, before the vote is counted or the authority is exercised, written notice of the death or incapacity is given to the Secretary of the Corporation.

(d)

Expenses. The Corporation shall pay the reasonable expenses of solicitation of votes, proxies or consents of shareholders by or on behalf of the Board of Directors or its nominees for election to the Board, including solicitation by professional proxy solicitors and otherwise.

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Section 1.11 — Voting by Fiduciaries and Pledgees - Shares of the Corporation standing in the name of a trustee or other fiduciary and shares held by an assignee for the benefit of creditors or by a receiver may be voted by the trustee, fiduciary, assignee or receiver. A shareholder whose shares are pledged shall be entitled to vote the shares until the shares have been transferred into the name of the pledgee, or a nominee of the pledgee, but nothing in this section shall affect the validity of a proxy given to a pledgee or nominee.

Section 1.12 — Voting of Joint Holders of Shares -

(a) General. Where shares of the Corporation are held jointly or as tenants in common by two or more persons, as fiduciaries or otherwise:

(1)	if only one or more of such persons is present in person or by proxy, all of the shares standing in the name of such persons shall be deemed to be represented for the purpose of determining a quorum and the Corporation shall accept as the vote of all the shares the vote cast by a joint owner or a majority of them; and
(2)	if the persons are equally divided upon whether the shares held by them shall be voted or upon the manner of voting the shares, the voting of the shares shall be divided equally among the persons without prejudice to the rights of the joint owners or the beneficial owners thereof among themselves.

(b) Exception. If there has been filed with the Secretary of the Corporation a copy, certified by an attorney at law to be correct, of the relevant portions of the agreement under which the shares are held or the instrument by which the trust or estate was created or the order of court appointing them or of an order of court directing the voting of the shares, the persons specified as having such voting power in the document latest in date of operative effect so filed, and only those persons, shall be entitled to vote the shares, but only in accordance therewith.

Section 1.13 — Voting by Entities –

(a)

Entity Shareholders. Any entity that is a shareholder of this Corporation may vote by any of its officers or agents, or by proxy appointed by any officer or agent, unless, if such entity is a corporation, some other person, by resolution of the Board of Directors of the other corporation or a provision of its articles or bylaws, a copy of which resolution or provision certified to be correct by one of its officers has been filed with the Secretary of this Corporation, is appointed its general or special proxy, in which case that person shall be entitled to vote the shares.

(b)

Controlled Shares. Shares of this Corporation owned, directly or indirectly, by it and controlled, directly or indirectly by the Board of Directors of this Corporation, as such, shall not be voted at any meeting and shall not be counted in determining the total number of outstanding shares for voting purposes at any given time.

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Section 1.14 — Determination of Record Date –

(a)

Fixing Record Date. The Board of Directors may fix a time prior to the date of any meeting of shareholders as a record date for the determination of the shareholders entitled to notice of, or to vote at, the meeting, which time, except in the case of an adjourned meeting, shall be not more than ninety (90) days prior to the date of the meeting of shareholders. Only shareholders of record on the date fixed shall be so entitled notwithstanding any transfer of shares on the books of the Corporation after any record date fixed as provided in this section. The Board of Directors may similarly fix a record date for the determination of shareholders of record for any other purpose. When a determination of shareholders of record has been made as provided in this section for purposes of a meeting, the determination shall apply to any adjournment thereof unless the Board fixes a new record date for the adjourned meeting.

(b)

Determination When a Record Date is Not Fixed. If a record date is not fixed:

(1)	The record date for determining shareholders entitled to notice of or to vote at a meeting of shareholders shall be at the close of business on the day next preceding the day on which notice is given or, if notice is waived, at the close of business on the day immediately preceding the day on which the meeting is held.
(2)	The record date for determining shareholders entitled to express consent or dissent to corporate action in writing without a meeting, when prior action by the Board of Directors is not necessary, to call a special meeting of the shareholders, or to propose an amendment of the articles of incorporation, shall be the close of business on the day on which the first written consent or dissent, request for a special meeting or petition proposing an amendment of the articles of incorporation is filed with the secretary of the Corporation.
(3)	The record date for determining shareholders for any other purpose shall be at the close of business on the day on which the Board of Directors adopts the resolution relating thereto.

Section 1.15 — Voting List - The officer or agent having charge of the transfer books for shares of the Corporation shall make a complete list of the shareholders entitled to vote at any meeting of shareholders, arranged in alphabetical order, with the address of and the number of shares held by each. The list shall be produced and kept open at the time and place of the meeting and shall be subject to the inspection of any shareholder during the whole time of the meeting for the purposes thereof.

Failure to comply with the requirements of this section shall not affect the validity of any action taken at a meeting prior to a demand at the meeting by any shareholder entitled to vote thereat to examine the list. The original share register or transfer book, or a duplicate thereof kept in Pennsylvania, shall be prima facie evidence as to who are the shareholders entitled to examine the list or share register or transfer book or to vote at any meeting of shareholders.

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Section 1.16 — Judges of Election - In advance of any meeting of shareholders of the Corporation, the Board of Directors may appoint judges of election, who need not be shareholders, to act at the meeting or any adjournment thereof. If judges of election are not so appointed, the presiding officer of the meeting may, and on the request of any shareholder shall, appoint judges of election at the meeting. The number of judges shall be one or three. No person who is a candidate for office to be filled at the meeting shall act as a judge of election.

In the event any person appointed as a judge fails to appear or fails or refuses to act, the vacancy may be filled by appointment made by the Board of Directors in advance of the convening of the meeting or at the meeting by the presiding officer thereof.

The judges of election shall determine (i) the number of shares outstanding and the voting power of each, (ii) the shares represented at the meeting, (iii) the existence of a quorum, and (iv) the authenticity, validity and effect of proxies. The judges of election shall also receive votes or ballots, hear and determine all challenges and questions in any way arising in connection with the right to vote, count and tabulate all votes, determine the result and do such acts as may be proper to conduct the election or vote with fairness to all shareholders. The judge or judges of election shall perform their duties impartially, in good faith, to the best of their ability and as expeditiously as is practical. If there are three (3) judges of election, the decision, act or certificate of a majority shall be effective in all respects as the decision, act or certificate of all.

On request of the presiding officer of the meeting, or of any shareholder, the judge or judges shall make a report in writing of any challenge or question or matter determined by them, and execute a certificate of any fact found by them. Any report or certificate made by them shall be prima facie evidence of the facts stated therein.

Section 1.17 — Agenda for Shareholder Meetings — Matters to be placed on the agenda for consideration at annual meetings of shareholders may be proposed by the Board of Directors or by any shareholder entitled to vote for the election of directors. Matters to be placed on the agenda for consideration at special meetings of shareholders may be proposed only by the Board of Directors or by all but not less than all of the persons calling such meeting. Matters proposed for the annual meeting agenda by shareholders entitled to vote for the election of directors shall be made by notice in writing, delivered or mailed by first class United States mail, postage prepaid, to the Secretary of the Corporation not less than ninety (90) days nor more than one hundred and fifty (150) days prior to any annual meeting of shareholders; provided, however, that if less than twenty-one (21) days notice of the meeting is given to shareholders, a shareholder’s written notice of a proposed matter shall be delivered or mailed, as prescribed, to the Secretary of the Corporation not later than the close of the seventh (7^th) day following the day on which notice of the meeting was mailed to shareholders. Notice of matters which are proposed by the Board of Directors shall be given by the Chairman of the Board or any other appropriate officer. Each notice given by a shareholder shall set forth a brief description of the business desired to be brought before the annual meeting. The Chairman of the meeting of shareholders may determine and declare to the meeting that a matter proposed for the agenda was not made in accordance with the foregoing procedure, and if he should so determine, he shall so declare to the meeting and the matter shall be disregarded.

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Section 1.18 — Minors as Securityholders — The Corporation may treat a minor who holds shares or obligations of the Corporation as having capacity to receive and to empower others to receive dividends, interest, principal and other payments or distributions, to vote or express consent or dissent and to make elections and exercise rights relating to such shares or obligations unless, in the case of payments or distributions on shares, the corporate officer responsible for maintaining the list of shareholders or the transfer agent of the Corporation or, in the case of payments or distributions on obligations, the treasurer or paying officer or agent has received written notice that the holder is a minor.

ARTICLE II

BOARD OF DIRECTORS

Section 2.01 — General - Unless otherwise provided by statute, all powers vested by law in the Corporation shall be exercised by or under the authority of, and the business and affairs of the Corporation shall be managed under the direction of, the Board of Directors of the Corporation.

Section 2.02 — Number, Qualifications, Selection and Term of Office - The Board of Directors of the Corporation shall consist of at least three (3) and not more than fifteen (15) directors, the exact number to be set from time to time by resolution of the Board of Directors. The directors of the Corporation shall be divided into three classes as described in the Corporation’s articles of incorporation. Each director shall be a natural person of full age and at least a majority of the directors shall be persons who are: (i) not employees of the Corporation or of any entity controlling, controlled by or under common control with the Corporation, (ii) not beneficial owners of a controlling interest in the voting stock of the Corporation or of any entity controlling, controlled by or under common control with the Corporation, and (iii) otherwise independent within the meaning of any applicable statute or any listing requirement of a stock exchange or over the counter market on which any security of the Corporation is admitted for trading. A director having the attributes set forth in (i), (ii) and (iii) shall hereinafter be deemed an Independent Director. Each director shall hold office until the expiration of the term for which he or she was selected and until a successor has been selected and qualified or until his or her earlier death, resignation or removal. A decrease in the number of directors shall not have the effect of shortening the term of any incumbent director.

Section 2.03 — Nominations for Directors - Nominations for the election of directors may be made by the Board of Directors or by any shareholder entitled to vote for the election of directors. Nominations made by a shareholder entitled to vote for the election of directors shall be made by notice in writing, delivered or mailed by first class United States mail, postage prepaid, to the Secretary of the Corporation not less than ninety (90) days prior to any meeting of the shareholders called for the election of directors; provided, however, that if less than twenty-one (21) days notice of the meeting is given to shareholders, such written notice shall be delivered or mailed, as prescribed, to the Secretary of the Corporation not later than the close of the seventh (7 ^th) day following the day on which notice of the meeting was mailed to shareholders. Notice of nominations which are proposed by the Board of Directors shall be given by the Chairman of the Board or any other appropriate officer. Each notice of nominations

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made by a shareholder shall set forth (i) the name, age, business address and, if known, residence address of each nominee proposed in such notice, (ii) the principal occupation or employment of each such nominee, and (iii) the number of shares of capital stock of the Corporation which are beneficially owned by each such nominee. Upon receiving a notice of nomination made by a shareholder, the Board of Directors shall be entitled to request any other information relating to such nominee deemed relevant by the Board. The Chairman of the meeting may, if the facts warrant, determine and declare to the meeting that a nomination was not made in accordance with the foregoing procedure, and if he should so determine, he shall so declare to the meeting and the defective nomination shall be disregarded.

Section 2.04 — Election - Except as otherwise provided in these bylaws, directors of the Corporation shall be elected by the shareholders. In elections for directors, voting need not be by ballot unless required by a vote of the shareholders before the voting for election of directors begins. The candidates receiving the highest number of votes, up to the number of directors to be elected, shall be elected.

Section 2.05 — Vacancies -

(a)	Vacancies. Vacancies in the Board of Directors shall exist in the case of the happening of any of the following events: (i) the death or resignation of any director; (ii) if at any annual or special meeting the shareholders at which directors are to be elected, the shareholders fail to elect the full authorized number of directors to be voted for at that meeting; (iii) an increase in the number of directors by resolution of the Board of Directors; (iv) the removal of a director by the affirmative vote of shareholders of the Corporation in accordance with the articles of incorporation of the Corporation; or (v) the removal of a director by the Board of Directors or a court of competent jurisdiction in accordance with these bylaws or otherwise in accordance with law.
(b)	Filling Vacancies. Vacancies in the Board of Directors, including vacancies resulting from an increase in the number of directors, may be filled by a majority vote of the remaining members of the Board though less than a quorum, or by a sole remaining director, and each person so selected shall be a director to serve for the balance of the unexpired term and until his or her successor has been selected and qualified or until his or her earlier death, resignation or removal.
(c)	Action by Resigned Directors. When one or more directors resign from the Board effective at a future date, the directors then in office, including those who have so resigned, shall have power by the applicable vote to fill the vacancies, the vote thereon to take effect when the resignations become effective.

Section 2.06 — Removal and Resignation -

(a)	Removal by Shareholders. A director may be removed by shareholders only in accordance with the articles of incorporation of the Corporation.
(b)	Removal by Action of the Directors. The Board of Directors may declare vacant the office of a director if that director: (i) has been judicially declared of unsound mind;

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(ii) has been convicted of an offense punishable by imprisonment for a term of more than one (1) year; (iii) has failed to attend at least seventy-five percent (75%) of the regular meetings (within the meaning of Section 2.07) of the Board of Directors held during an entire calendar year (within the meaning of Section 2.07), (iv) if within sixty (60) days after notice of his or her election, the director does not accept such office either in writing or by attending a meeting of the Board of Directors and fulfilling such other requirements of qualification as these bylaws or the articles of incorporation may provide; or (iv) is ineligible for any reason to serve as a director of the Corporation’s principal insurance subsidiaries.

(c)	Resignation. Any director may resign at any time from his or her position as a director upon written notice to the Corporation. The resignation shall be effective upon its receipt by the Corporation or at such later time as may be specified in the notice of resignation.
(d)	Mandatory Resignation. Any director elected, who subsequently attains the age of seventy-five (75), must resign at the annual meeting following such director’s seventy-fifth birthday and may not stand for reelection to the Board of Directors after age seventy-five (75).

Section 2.07 — Regular Meetings - The Board of Directors of the Corporation shall hold an annual meeting for the election of officers and the consideration of other proper business either as soon as practical after, and at the same place as, the annual meeting of shareholders of the Corporation, or at such other day, hour and place as may be fixed by the Board. The Board of Directors may designate by resolution the day, hour and place, within or outside the Commonwealth of Pennsylvania, of other regular meetings.

Section 2.08 — Special Meetings - Special meetings of the Board of Directors may be called by the Chairman of the Board, the Chief Executive Officer, or the President of the Corporation or a majority of the directors then in office. The person or persons calling the special meeting may fix the day, hour and place, within or outside the Commonwealth of Pennsylvania, of the meeting.

Section 2.09 — Notice of Meetings -

(a)

General. No notice of any annual or regular meeting of the Board of Directors of the Corporation need be given. Written notice of each special meeting of the Board of Directors, specifying the place, day and hour of the meeting, shall be given to each director at least twenty-four (24) hours before the time set for the meeting. Neither the business to be transacted at, nor the purpose of, any annual, regular or special meeting of the Board need be specified in the notice of the meeting.

(b)

Validation of Meeting Defectively Called or Noticed. The transactions of any meeting of the Board of Directors, however called and noticed or wherever held, are as valid as though taken at a meeting duly held after regular call and notice, if a quorum is present and if, either before or after the meeting, each of the directors not present signs a waiver of notice. All such waivers shall be filed with the corporate

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records or made a part of the minutes of the meeting. Attendance of a director at any meeting shall constitute a waiver of notice of such meeting except where a director attends a meeting for the express purpose of objecting to the transaction of any business because the meeting is not lawfully called or convened.

Section 2.10 — Quorum and Action by Directors - A majority of the directors in office shall be necessary to constitute a quorum for the transaction of business. The acts of a majority of directors present and voting at a meeting at which a quorum is present shall be the acts of the Board of Directors, except where a different vote is required by law, the articles of incorporation or these bylaws. Every director shall be entitled to one vote.

Any action required or permitted to be taken at a meeting of the Board of Directors may be taken without a meeting if, prior or subsequent to the action, a consent or consents thereto by all of the directors in office is filed with the Secretary of the Corporation.

Section 2.11 — Presumption of Assent - A director of the Corporation who is present at a meeting of the Board of Directors, or of a committee of the Board , at which action on any corporate matter is taken on which the director is generally competent to act, shall be presumed to have assented to the action taken unless his or her dissent is entered in the minutes of the meeting or unless that director files his or her written dissent to the action with the Secretary of the meeting before its adjournment or submits the dissent in writing to the Secretary of the Corporation immediately after the adjournment of the meeting. Such right to dissent shall not apply to a director who voted in favor of the action. Nothing in this section shall bar a director from asserting that the minutes of a meeting incorrectly omitted that director’s dissent if, promptly upon receipt of a copy of those minutes, the director notified the Secretary, in writing, of the asserted omission or inaccuracy.

Section 2.12 — Presiding Officer - All meetings of the Board of Directors of the Corporation shall be called to order and presided over by the Chairman of the Board of Directors, or in the Chairman’s absence, by the Chief Executive Officer of the Corporation or, in the absence of the Chairman and the Chief Executive Officer, by a chairman of the meeting elected at such meeting by the Board of Directors. The Secretary of the Corporation shall act as Secretary of the Board of Directors unless otherwise specified by the Board of Directors. In case the Secretary shall be absent from any meeting, the chairman of the meeting may appoint any person to act as secretary of the meeting.

Section 2.13 — Committees - The Board of Directors may, by resolution adopted by a majority of the directors in office, establish one or more committees. Each committee is to consist of at least two (2) directors of the Corporation and not less than two-thirds of the members of each committee shall be Independent Directors, unless a greater number or percentage of Independent Directors is required by applicable law or the listing requirements of any stock exchange or over the counter market on which any security of the Corporation is admitted for trading. The Board may designate one or more directors as alternate members of any committee who may replace any absent or disqualified member at any meeting of the committee or for purposes of any written action of the committee.

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A committee, to the extent provided in the resolution of the Board of Directors creating it, shall have and may exercise all of the powers and authority of the Board of Directors except that a committee shall not have any power or authority regarding: (i) the submission to shareholders of any action requiring the approval of shareholders under the PABCL, (ii) the creation or filling of vacancies in the Board of Directors, (iii) the adoption, amendment or repeal of these bylaws, (iv) the amendment, adoption or repeal of any resolution of the Board of Directors that by its terms is amendable or repealable only by the Board of Directors, or (v) any action on matters committed by the bylaws or resolution of the Board of Directors to another committee of the Board . Each committee of the Board shall serve at the pleasure of the Board.

Section 2.14 — Audit Committee - There shall be a standing committee of the Board of Directors to be known as the Audit Committee. The Audit Committee shall be comprised of at least three (3) directors each of whom shall be Independent Directors. The Audit Committee shall: (i)  engage the independent accountants for the Corporation, (ii) review with the independent accountants the scope of their examination, (iii) receive the reports of the independent accountants and meet with the representatives of such accountants for the purpose of reviewing and considering questions relating to their examination and such reports, (iv) review the internal accounting and auditing procedures of the Corporation, (v) perform duties assigned by the Board or as provided in the Audit Committee’s charter, and (vi) perform such other duties as may be deemed necessary from time to time to fulfill its obligations under applicable law and the listing requirements of any stock exchange or over the counter market on which any security of the Corporation is admitted for trading. The Board shall appoint one member of the Audit Committee to serve as the Chairman of the Audit Committee, who shall also be a member of the boards of directors of Penn Millers Mutual Holding Company and Penn Millers Insurance Company, unless this qualification is otherwise waived by the Board of Directors.

Section 2.15 — Compensation Committee - There shall be a standing committee of the Board of Directors to be known as the Compensation Committee. The Compensation Committee shall be comprised of at least three (3) directors each of whom shall be Independent Directors. The Compensation Committee shall make recommendations to the Board of Directors with respect to the compensation of the directors, executive officers, and employees of the Corporation and perform such other duties as assigned by the Board or as provided in the Compensation Committee’s charter.

Section 2.16 — Governance and Bylaws Committee - There shall be a standing committee of the Board of Directors to be known as the Governance and Bylaws Committee. The Governance and Bylaws Committee shall be comprised of at least three (3) directors each of whom shall be Independent Directors. The Governance and Bylaws Committee shall nominate candidates for election as director and shall make recommendations to the Board of Directors with respect to the qualifications and nomination of directors, CEO succession, the Corporation’s corporate governance policies, and perform other duties as assigned by the Board or as provided in the Governance and Bylaws Committee’s charter.

Section 2.17 — Personal Liability of Directors - To the fullest extent permitted by Pennsylvania law, a director of the Corporation shall not be personally liable for monetary damages for any action taken, or any failure to take any action, unless the director has breached or failed to perform the duties of his or her office under Subchapter B of Chapter 17 of the PABCL and such

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breach or failure to perform constitutes self-dealing, willful misconduct or recklessness; provided, however, that the foregoing provision shall not eliminate or limit (i) the responsibility or liability of that director under any criminal statute, or (ii) the liability of a director for the payment of taxes according to local, state or federal law. Any repeal, modification or adoption of any provision inconsistent with this section shall be prospective only, and neither the repeal or modification of this bylaw nor the adoption of any provision inconsistent with this bylaw shall adversely affect any limitation on the personal liability of a director of the Corporation existing at the time of such repeal or modification or the adoption of such inconsistent provision.

Section 2.18 — Attendance - Failure of any director to attend at least seventy-five percent (75%) of the regular meetings of the Board of Directors held during an entire calendar year shall allow the Board to exercise its rights under Section 2.06(b) hereof. Also, any member of any Board committee who shall fail to attend at least seventy five percent (75%) of that committee’s meetings held during an entire calendar year shall automatically be deemed to have surrendered his or her committee membership and such membership shall be considered terminated as of the end of that calendar year unless prior to that time the Board of Directors excuses the absence.

ARTICLE III

OFFICERS

Section 3.01 — Officers and Qualifications - The Corporation shall have a Chairman of the Board, a Chief Executive Officer, a President, a Secretary, and a Treasurer, each of whom shall be elected or appointed by the Board of Directors. The Board may also elect one or more vice chairman, vice presidents, and such other officers and assistant officers as the Board deems necessary or advisable. All officers shall be natural persons of full age. Any two or more offices may be held by the same person. It shall not be necessary for officers to be directors of the Corporation, nor shall there be any requirement or implication that a director who serves as Chairman or Vice Chairman be or is an employee of the Corporation. Officers of the Corporation shall have such authority and perform such duties in the management of the Corporation as is provided by or under these bylaws, or in the absence of controlling provisions in these bylaws as is determined by or under resolutions or orders of the Board of Directors.

Section 3.02 — Election — Term and Vacancies - The officers and assistant officers of the Corporation shall be elected by the Board of Directors at the annual meeting of the Board or from time to time as the Board shall determine, and each officer shall hold until his or her successor has been duly elected and qualified or until that officer’s earlier death, resignation or removal. A vacancy in any office occurring in any manner may be filled by the Board of Directors and, if the office is one for which these bylaws prescribe a term, shall be filled for the unexpired portion of the term.

Section 3.03 — Subordinate Officers, Committees and Agents - The Board of Directors may from time to time elect such other officers and appoint such committees, employees or other agents as the business of the Corporation may require, including one or more assistant secretaries, and one or more assistant treasurers, each of whom shall hold office for such period, have such authority, and perform such duties as are provided in these bylaws or as the Board of Directors may from time to time determine. The Board of Directors may delegate to any officer or committee the

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power to elect subordinate officers and to retain or appoint employees or other agents, or committees thereof and to prescribe the authority and duties of such subordinate officers, committees, employees or other agents.

Section 3.04 — Removal; Resignation and Bonding -

(a)	Removal. Any officer or agent of the Corporation may be removed by the Board of Directors with or without cause, but such removal shall be without prejudice to the contract rights, if any, of the person so removed. Election or appointment of an officer or agent shall not of itself create contract rights.
(b)	Resignation. Any officer may resign at any time upon written notice to the Corporation. The resignation shall be effective upon its receipt by the Corporation or at such later time as may be specified in the notice of resignation.
(c)	Bonding. The Corporation may secure the fidelity of any or all of its officers by bond or otherwise.

Section 3.05 — Chairman of the Board - The Chairman of the Board of Directors of the Corporation, if one is elected, shall preside at all meetings of the shareholders and of the directors at which he or she is present, and shall have such authority and perform such other duties as the Board of Directors may from time to time designate. The director elected as Chairman shall also serve as Chairman of the boards of directors of Penn Millers Mutual Holding Company and Penn Millers Insurance Company, unless this qualification is waived by a majority of the Board of Directors.

Section 3.06 — Vice Chairman of the Board – In the absence of the Chairman of the Board, the Vice Chairman of the Board, if one is elected, shall preside at all meetings of the shareholders and of the directors at which he or she is present, and shall have such authority and perform such other duties as the Board of Directors may from time to time designate. The director elected as Vice Chairman shall also serve as Vice Chairman of the boards of directors of Penn Millers Mutual Holding Company and Penn Millers Insurance Company, unless this qualification is waived by a majority of the Board of Directors.

Section 3.07 — Chief Executive Officer - The Chief Executive Officer shall, in the absence of the Chairman of the Board and Vice Chairman, preside at all meetings of the shareholders and of the Board of Directors at which he or she is present. Subject to the control of the Board of Directors of the Corporation and, within the scope of their authority, any committees thereof, the Chief Executive Officer shall (a) have general and active management of all the business, property and affairs of the Corporation, (b) see that all orders and resolutions of the Board of Directors and its committees are carried into effect, (c) appoint and remove subordinate officers and agents, other than those appointed or elected by the Board of Directors, as the business of the Corporation may require, (d) have custody of the corporate seal, or entrust the same to the Secretary, (e) act as the duly authorized representative of the Board in all matters, except where the Board has formally designated some other person or group to act, (f) sign, execute and acknowledge, in the name of the Corporation, deeds, mortgages, bonds, contracts or other instruments authorized by the Board of Directors, except in cases where signing and execution thereof shall be delegated by the Board

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of Directors, or by these bylaws, to some other officer or agent of the Corporation, and (g) in general perform all the usual duties incident to the office of Chief Executive Officer and such other duties as may be assigned to such person by the Board of Directors. The Chief Executive Officer shall be a member of the Corporation’s Board of Directors, and a member of the boards of directors of Penn Millers Mutual Holding Company and Penn Millers Insurance Company, unless this qualification is waived by a majority of the Board of Directors.

Section 3.08 — President - The President shall perform the duties of Chief Executive Officer either when he has been chosen as Chief Executive Officer or when the Chief Executive Officer is absent or unable to perform the duties of his office. The President shall have such other powers and perform such other duties as from time to time as may be prescribed by him by the Board of Directors or prescribed by the bylaws.

Section 3.09 — Vice Presidents - Each vice president, if any, shall perform such duties as may be assigned to him or her by the Board of Directors or the Chief Executive Officer. One vice president shall be designated by the Board of Directors to perform the duties of the Chief Executive Officer, in the event of the absence or disability of the Chief Executive Officer.

Section 3.10 — Secretary - The Secretary shall (a) keep or cause to be kept the minutes of all meetings of the shareholders, the Board of Directors, and any committees of the Board of Directors in one or more books kept for that purpose, (b) have custody of the corporate records, stock books and stock ledgers of the Corporation, (c) keep or cause to be kept a register of the address of each shareholder, which address has been furnished to the Secretary by the shareholder, (d) see that all notices are duly given in accordance with law, the articles of incorporation, and these bylaws, and (e) in general perform all the usual duties as may be assigned to him or her by the Board of Directors or the Chief Executive Officer.

Section 3.11 — Assistant Secretary - The Assistant Secretary, if any, or Assistant Secretaries if more than one, shall perform the duties of the Secretary in his or her absence and shall perform other duties as the Board of Directors, the Chief Executive Officer or the Secretary may from time to time designate.

Section 3.12 — Treasurer - The Treasurer shall have general supervision of the fiscal affairs of the Corporation. The Treasurer shall, with the assistance of the Chief Executive Officer and managerial staff of the Corporation: (a) see that a full and accurate accounting of all financial transactions is made; (b) invest and reinvest the capital funds of the Corporation in such manner as may be directed by the Board of Directors or the Investment Committee of the Board of Directors, unless that function shall have been delegated to a nominee or agent; (c) deposit or cause to be deposited in the name and to the credit of the Corporation, in such depositories as the Board of Directors shall designate, all monies and other valuable effects of the Corporation not otherwise employed; (d) prepare any financial reports that may be requested from time to time by the Board of Directors; (e) cooperate in the conduct of any annual audit of the Corporation’s financial records by certified public accountants duly appointed by the Board of Directors; and (f) in general perform all the usual duties incident to the office of treasurer and such other duties as may be assigned to him or her by the Board of Directors or the Chief Executive Officer.

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Section 3.13 — Officer Salaries - The salaries of each of the executive officers elected by the Board of Directors shall be fixed from time to time by the Board of Directors taking into account the recommendation of the Compensation Committee of the Board of Directors. The salaries of all other officers of the Corporation shall be fixed from time to time by the Chief Executive Officer or such other person as may be designated from time to time by the Chief Executive Officer or the Board of Directors based on guidelines approved by the Compensation Committee of the Board of Directors.

No officer shall be prevented from receiving such salary or other compensation by reason of the fact that the officer is also a director of the Corporation.

ARTICLE IV

SHARE CERTIFICATES AND TRANSFERS

Section 4.01 — Share Certificates - The shares of the Corporation shall be represented by certificates, or shall be uncertificated shares that may be evidenced by a book entry system maintained by the registrar of such stock, or a combination of both. To the extent that shares are represented by certificates, such certificates shall be in such form as shall be approved by the Board of Directors and shall state: (i) that the Corporation is incorporated under the laws of the Commonwealth of Pennsylvania, (ii) the name of the person to whom issued, and (iii) the number and class of shares and the designation of the series, if any, that the share certificate represents.

The share register or transfer books and blank share certificates shall be kept by the Secretary or by any transfer agent or registrar designated by the Board of Directors for that purpose.

If the Corporation is authorized to issue shares of more than one class or series, certificates for shares of the Corporation, if such shares are certificated, shall set forth upon the face or back of the certificate (or shall state on the face or back of the certificate that the Corporation will furnish to any shareholder upon request and without charge), a full or summary statement of the designations, voting rights, preferences, limitations and special rights of the shares of each class or series authorized to be issued so far as they have been fixed and determined and the authority of the Board of Directors to fix and determine the designations, voting rights, preferences, limitations and special rights of the classes and series of shares of the Corporation.

Section 4.02 — Issuance - To the extent that shares are represented by certificates, such certificates of the Corporation shall be numbered and registered in the share register or transfer books of the Corporation as they are issued. They shall be signed on behalf of the Corporation by the President or a vice president and by the Secretary or an Assistant Secretary or the Treasurer or an Assistant Treasurer; but where a certificate is signed by a transfer agent or a registrar, the signature of any corporate officer upon the certificate may be a facsimile, engraved or printed. In case any officer who has signed, or whose facsimile signature has been placed upon, any share certificate shall have ceased to be such officer because of death, resignation or otherwise, before the certificate is issued, it may be issued with the same effect as if the officer had not ceased to be such at the date of its issue. The provisions of this section shall be subject

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to any inconsistent or contrary agreement at the time between the Corporation and any transfer agent or registrar.

Section 4.03 — Transfer of Shares - Transfer of shares of stock of each class of the Corporation shall be made only on the books of the Corporation by the registered holder thereof, or by such holder’s attorney thereunto authorized by a power of attorney duly executed and filed with the Secretary or transfer agent for such stock, if any, and if such shares are represented by a certificate, upon surrender of the certificates therefor, endorsed by the person named in the certificate or by his attorney, lawfully constituted in writing. No transfer shall be made which is inconsistent with law.

Section 4.04 — Record Holder of Shares - The Corporation shall be entitled to treat the person in whose name any share or shares of the Corporation stand on the books of the Corporation as the absolute owner thereof, and shall not be bound to recognize any equitable or other claim to, or interest in, such share or shares on the part of any other person.

Section 4.05 — Lost, Destroyed, Mutilated or Stolen Certificates - If the registered owner of a share certificate claims that the security has been lost, destroyed, mutilated or wrongfully taken, another may be issued in lieu thereof in a manner and upon such terms as the Board of Directors may authorize and shall be issued in place of the original security, in accordance with law, if the owner: (a) so requests before the Corporation has notice that the security has been acquired by a bona fide purchaser; (b) files with the Corporation, if requested by the Corporation, a sufficient indemnity bond; and (c) satisfies any other reasonable requirements imposed by the Corporation, including paying any administrative or processing fees.

ARTICLE V

NOTICE, WAIVERS, AND MEETINGS

Section 5.01 — Manner of Giving Notice - Whenever written notice is required to be given to any person under the provisions of the PABCL, or by the articles of incorporation or these bylaws, it may be given to the person either personally or by sending a copy of it by first class or express mail, postage prepaid; or by telegram (with messenger service specified), by courier service, charges prepaid; or by facsimile transmission, to the shareholder’s address (or to shareholder’s facsimile number) appearing on the books of the Corporation; or by electronic mail if a return receipt or other acknowledgment from the recipient can be obtained; or, in the case of directors, supplied by the director to the Corporation for the purpose of notice. Notice sent by mail, by telegraph or by courier service shall be deemed to have been given to the person entitled thereto when deposited in the United States mail or with a telegraph office or courier service for delivery to that person, or in the case of fax, when received except that, in the case of directors, notice sent by regular mail shall be deemed to have been given forty-eight (48) hours after being deposited in the United States mail or, in the case of facsimile, when dispatched.

A notice of meeting shall specify the place, day and hour of the meeting and any other information required by any other provision of the PABCL, the articles of incorporation or these bylaws.

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Section 5.02 — Waiver of Notice - Whenever any written notice is required to be given by statute or the articles of incorporation or these bylaws, a waiver of the notice in writing, signed by the person or persons entitled to the notice, whether before or after the time stated in it, shall be deemed equivalent to the giving of the notice. Neither the business to be transacted at, nor the purpose of, a meeting need be specified in the waiver of notice of such meeting. Attendance of a person, either in person or by proxy, at any meeting shall constitute a waiver of notice of the meeting, except where the person attends the meeting for the express purpose of objecting, at the beginning of the meeting, to the transaction of any business because the meeting was not lawfully called or convened.

Section 5.03 — Modification of Proposal - Whenever the language of a proposed resolution is included in a written notice of a meeting required to be given under the provisions of the PABCL, or the articles of incorporation or these bylaws, the meeting considering the resolution may without further notice adopt it with such clarifying or other amendments as do not enlarge its original purpose.

Section 5.04 — Use of Conference Telephone and Similar Equipment - One or more persons may participate in a meeting of the directors, or of any committee of directors, by means of conference telephone or similar communications equipment by means of which all persons participating in the meeting can hear each other. Such participation shall constitute presence in person at the meeting.

ARTICLE VI

INDEMNIFICATION AND INSURANCE

Section 6.01 — Indemnification -

(a)

Indemnification of Directors and Officers. The Corporation shall indemnify any person who was or is a party or is threatened to be made a party to any threatened, pending, or completed action, suit, or proceeding, whether civil, criminal, administrative, or investigative (including, without limitation, actions by or in the right of the Corporation), by reason of the fact that such person is or was a director or officer of the Corporation, or such director or officer of the Corporation is or was serving at the request of the Corporation as a director, officer, employee, or agent of another corporation, partnership, joint venture, trust or other enterprise, against expenses (including attorneys’ fees), amounts paid in settlement, judgments, and fines actually and reasonably incurred by such person in connection with such action, suit, or proceeding; provided, however, that no indemnification shall be made in any case where the act or failure to act giving rise to the claim for indemnification is determined by a court to have constituted willful misconduct or recklessness.

(b)

Indemnification of Others. The Corporation may, at its discretion, indemnify any person who was or is a party or is threatened to be made a party to any threatened, pending, or completed action, suit, or proceeding, whether civil, criminal, administrative, or investigative (including, without limitation, actions by or in the right of the Corporation), by reason of the fact that such person is or was an

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	employee or agent of the Corporation who is not entitled to rights under Section 6.01(a) hereof, or such person is or was serving at the request of the Corporation as an employee or agent of another corporation, partnership, joint venture, trust or other enterprise, against expenses (including attorneys’ fees), amounts paid in settlement, judgments, and fines actually and reasonably incurred by such person in connection with such action, suit, or proceeding; provided, however, that no indemnification shall be made in any case where the act or failure to act giving rise to the claim for indemnification is determined by a court to have constituted willful misconduct or recklessness.
(c)	Advancing Expenses. Expenses (including attorneys’ fees) incurred in defending a civil or criminal action, suit, or proceeding, under Section 6.01(a) of this Article VI shall be paid by the Corporation in advance of the final disposition of such action, suit, or proceeding upon receipt of an undertaking by or on behalf of the director, officer, employee, or agent to repay such amount if it shall be ultimately determined that he is not entitled to be indemnified by the Corporation as authorized in this Article VI.
(d)	Rights Not Exclusive. The indemnification and advancement of expenses provided by this Article VI shall not be deemed exclusive of any other right to which persons seeking indemnification and advancement of expenses may be entitled under any agreement, vote of shareholders or disinterested directors, or otherwise, both as to actions in such persons’ official capacity and as to their actions in another capacity while holding office, and shall continue as to a person who has ceased to be a director, officer, employee, or agent and shall inure to the benefit of the heirs, executors, and administrators of such person.
(e)	Insurance; Other Security. The Corporation may purchase and maintain insurance on behalf of any person, may enter into contracts of indemnification with any person, may create a fund of any nature (which may, but need not be, under the control of a trustee) for the benefit of any person, and may otherwise secure in any manner its obligations with respect to indemnification and advancement of expenses, whether arising under this Article VI or otherwise, to or for the benefit of any person, whether or not the Corporation would have the power to indemnify such person against such liability under the provisions of this Article VI.

Section 6.02 — Contract Rights; Amendment or Repeal - All rights under this Article VI shall be deemed a contract between the Corporation and the indemnified representative pursuant to which the Corporation and each indemnified representative intend to be legally bound. Any repeal, amendment or modification hereof shall be prospective only and shall not affect any rights or obligations then existing.

Section 6.03 — Reliance on Provisions - Each person who shall act as an indemnified representative of the Corporation shall be deemed to be doing so in reliance upon the rights provided by this Article VI.

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Section 6.04 — Interpretation - The provisions of this Article are intended to constitute bylaws authorized by Section 1746 of the PABCL.

ARTICLE VII

MISCELLANEOUS

Section 7.01 — Registered Office - The registered office of the Corporation, required by law to be maintained in the Commonwealth of Pennsylvania, may be, but need not be, the principal place of business of the Corporation. The address of the registered office may be changed from time to time by the Board of Directors of the Corporation.

Section 7.02 — Other Offices - The Corporation may have additional offices and business in such places, within or outside the Commonwealth of Pennsylvania, as the Board of Directors of the Corporation may designate or as the business of the Corporation may require.

Section 7.03 — Corporate Seal - The Corporation may have a corporate seal, which shall have inscribed on it the name of the Corporation, the year of organization, and the words “Corporate Seal—Pennsylvania” or such inscription as the Board of Directors of the Corporation may determine. The seal may be used by causing it or a facsimile of it to be impressed or affixed, or in any manner reproduced.

Section 7.04 — Fiscal Year - The fiscal year of the Corporation shall be the calendar year.

Section 7.05 — Checks - All checks, notes, bills of exchange or other orders in writing shall be signed by such person or persons as the Board of Directors or, any person authorized by resolution of the Board of Directors may from time to time designate.

Section 7.06 — Contracts - Except as otherwise provided in the PABCL, in the case of transactions that require action by the shareholders, the Board of Directors may authorize any officer or agent to enter into any contract or to execute or deliver any instrument on behalf of the Corporation, and such authority may be general or confined to specific instances.

Any note, deed, mortgage, evidence of indebtedness, contract or other document, or any assignment or endorsement thereof, executed or entered into between the Corporation and any other person, when signed by one or more officers or agents having actual or apparent authority to sign it, or by the Chief Executive Officer, the President, or any vice president and the Secretary, Assistant Secretary, Treasurer, or Assistant Treasurer of the Corporation, shall be held to have been properly executed for and on behalf of the Corporation, without prejudice to the rights of the Corporation against any person who shall have executed the instrument in excess of his or her actual authority.

Section 7.07 — Interested Directors or Officers; Quorum -

(a) General Rule. A contract or transaction between the Corporation and one or more of its directors or officers or between the Corporation and another corporation, partnership, joint venture, trust or other enterprise in which one or more of its directors or officers are directors or officers or have a financial or other interest, shall

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not be void or voidable solely for that reason, or solely because the director or officer is present at or participates in the meeting of the Board of Directors that authorizes the contract or transaction, or solely because his, her or their votes are counted for that purpose, if:

(1)	the material facts as to the relationship or interest and as to the contract or transaction are disclosed or are known to the Board of Directors and the Board authorizes the contract or transaction by the affirmative votes of a majority of disinterested directors even though the disinterested directors are less than a quorum;
(2)	the material facts as to his relationship or interest and as to the contract or transaction are disclosed or are known to the shareholders entitled to vote thereon and the contract or transaction is specifically approved in good faith by vote of those shareholders; or
(3)	the contract or transaction is fair as to the Corporation as of the time it is authorized, approved or ratified by the Board of Directors or the shareholders.

(b) Quorum. Common or interested directors may be counted in determining the presence of a quorum at a meeting of the Board which authorizes a contract or transaction specified in subsection (a).

Section 7.08 — Corporate Records -

(a)

Required Records. The Corporation shall keep complete and accurate books and records of account, minutes of the proceedings of the incorporators, shareholders and directors and a share register giving the names and addresses of all shareholders and the number and class of shares held by each. The share register shall be kept at the registered office of the Corporation by the Commonwealth of Pennsylvania, at its principal place of business wherever situated, at any actual business office of the Corporation, or at the office of its registrar or transfer agent. Any books, minutes or other records may be in written form or any other form capable of being converted into written form within a reasonable time.

(b)

Right of Inspection by Shareholders. Every shareholder shall, upon written verified demand stating the purpose thereof, have a right to examine, in person or by agent or attorney, during the usual hours for business for any proper purpose, the share register, books and records of account, and records of the proceedings of the incorporators, shareholders and directors and to make copies or extracts therefrom. A proper purpose shall mean a purpose reasonably related to the interest of the person as a shareholder. In every instance where an attorney or other agent is the person who seeks the right of inspection, the demand shall be accompanied by a verified power of attorney or other writing that authorizes the attorney or other agent to so act on behalf of the shareholder. The demand shall be directed to the Corporation at its registered office in the Commonwealth of Pennsylvania, at its

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principal place of business wherever situated, or in care of the person in charge of an actual business office of the Corporation.

Section 7.09 — Amendment of Bylaws - These bylaws may be amended, altered, changed or repealed as provided in the articles of incorporation. Any change in the bylaws shall take effect when adopted unless otherwise provided in the resolution effecting the change.

Section 7.10 — Severability - If any provision of these bylaws or the application thereof to any person or circumstance shall be invalid or unenforceable to any extent, the remainder of these bylaws and the application of such provisions to other persons or circumstances shall not be affected thereby and shall be deemed to be applicable to the greatest extent permitted by law.

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EX-4.1

Exhibit 4.1

CUSIP NO. 707561 106

COMMON STOCK	COMMON STOCK
CERTIFICATE NO.	SHARES

PENN MILLERS HOLDING CORPORATION
ORGANIZED UNDER THE LAWS OF THE COMMONWEALTH OF PENNSYLVANIA

[SPECIMEN]

is the owner of:

FULLY PAID AND NONASSESSABLE SHARES OF COMMON STOCK WITH A
$0.01 PAR VALUE PER SHARE OF PENN MILLERS HOLDING CORPORATION
a Pennsylvania stock corporation.

     The shares represented by this certificate are transferable only on the stock transfer books of Penn Millers Holding Corporation (the “Company”) by the holder of record hereof, or by his duly authorized attorney or legal representative, upon the surrender of this certificate properly endorsed. This certificate and the shares represented hereby are issued and shall be held subject to all the provisions contained in the Company’s official corporate papers filed with the Department of State of the Commonwealth of Pennsylvania (copies of which are on file with the Transfer Agent), to all of the provisions the holder by acceptance hereof, assents.

     This certificate is not valid unless countersigned and registered by the Transfer Agent and Registrar.

     IN WITNESS WHEREOF, PENN MILLERS HOLDING CORPORATION has caused this certificate to be executed by the signatures of its duly authorized officers and has caused its corporate seal to be hereunto affixed.

Dated:

[SEAL]

President and Chief Executive Officer Secretary

PENN MILLERS HOLDING CORPORATION

The shares represented by this certificate are subject to a limitation contained in the articles of incorporation (the “Articles”) to the effect that no person or entity may acquire more than 10% of the issued and outstanding shares of common stock (“Voting Control”) of the Company. If Voting Control of the corporation is acquired in violation of such limitation, all shares in excess of Voting Control shall be considered from and after the date of acquisition to be “excess shares”, and all shares deemed to be excess shares shall no longer be entitled to vote on any matter or to take other shareholder action.

Preferred stock may be issued from time to time as a class without series or, if so determined by the board of directors of the Company, either in whole or in part, in one or more series. The board of directors of the Company has the authority to fix and determine, by resolution, the par value, voting powers, full or limited, or no voting power, and such designations, preferences and relative, participating, optional, or other special rights, if any, and the qualifications, limitations, or restrictions thereof, if any, including specifically, but not limited to, the dividend rights, conversion rights, redemption rights and liquidation preferences, if any, of any wholly unissued series of preferred stock (or the entire class of preferred stock if none of such shares have been issued), the number of shares constituting any such series and the terms and conditions of the issue thereof. The Company will furnish to any shareholder upon request and without charge a full description of each class of stock and any series thereof.

The shares represented by this certificate may not be cumulatively voted in the election of directors of the Company. The Articles also require either (a) the affirmative vote of holders of at least 80% of the issued and outstanding shares of common stock of the Company entitled to vote or (b) the affirmative vote of 66 ^2/3% of the members of the board of directors of the Company and the affirmative vote of holders of at least a majority of the votes which all shareholders of the Company are then entitled to cast to amend provisions of the Articles with respect to the approval of certain transactions.

The following abbreviations, when used in the inscription on the face of this certificate, shall be construed as though they were written out in full according to applicable laws or regulations:

TEN COM -	as tenants in common	UNIF GIFTS MIN ACT -	custodian
			(Cust)                    (Minor)
TEN ENT -	as tenants by the entireties		under Uniform Gifts to Minors Act
			(State)
JT TEN -	as joint tenants with right of survivorship and not as tenants in common

Additional abbreviations may also be used though not in the above list.

For value received                      hereby sell, assign and transfer unto

PLEASE INSERT SOCIAL SECURITY OR OTHER IDENTIFICATION NUMBER OF ASSIGNEE

Please print or typewrite name and address including postal zip code of assignee.

                                          shares of the common stock represented by this certificate and do hereby irrevocably constitute and appoint                                          , attorney, to transfer the said stock on the books of the within-named corporation with full power of substitution in the premises.

DATED
	NOTICE: The signature to this assignment must correspond with the name as written upon the face of the certificate in every particular without alteration or enlargement or any change whatever.

SIGNATURE GUARANTEED:
	THE SIGNATURE(S) SHOULD BE GUARANTEED BY AN ELIGIBLE GUARANTOR INSTITUTION, (BANKS, STOCKBROKERS, SAVINGS AND LOAN ASSOCIATIONS AND CREDIT UNIONS WITH MEMBERSHIP IN AN APPROVED SIGNATURE GUARANTEE MEDALLION PROGRAM), PURSUANT TO SEC RULE 17Ad-15

EX-5.1

Exhibit 5.1

Stevens & Lee
Lawyers & Consultants

620 Freedom Business Center
Suite 200
P. O. Box 62330
King of Prussia, PA 19406
(610) 205-6000 Fax (610) 337-4374
www.stevenslee.com

April 29, 2009

Board of Directors
Penn Millers Holding Corporation
72 North Franklin Street
Wilkes-Barre, Pennsylvania 18773

Re: Registration Statement on Form S-1

Ladies and Gentlemen:

     We have acted as counsel to Penn Millers Holding Corporation (the “Company”) in connection with the Company’s proposed offering of up to 6,772,222 shares of the Company’s common stock, with a par value of $0.01 per share (the “Common Stock”). This offering is covered by the Company’s Registration Statement on Form S-1, filed with the Securities and Exchange Commission. In connection with delivering this opinion, we have reviewed the following documents:

1.	The articles of incorporation of the Company.
2.	The bylaws of the Company as presently in effect.
3.	The resolutions of the Board of Directors of Penn Millers Mutual Holding Company (“PMMHC”), the incorporator of the Company, adopted at a meeting held on April 22, 2009, as certified by the Secretary of the Company.
4.	The Registration Statement, including the prospectus (the “Prospectus”) contained therein.
5.	The form of the certificate representing shares of the Common Stock.

     Based upon our review of the documents listed above, it is our opinion that the shares of Common Stock covered by the Registration Statement have been duly authorized and, when issued and sold against payment therefor, pursuant to the terms described in the Registration Statement, will be legally issued by the Company and fully paid and nonassessable.

Philadelphia      •      Reading      •      Valley Forge      •      Lehigh Valley      •      Harrisburg      •      Lancaster       •      Scranton
Williamsport      •      Wilkes-Barre      •      Princeton      •      Cherry Hill      •      New York      •      Wilmington

A PROFESSIONAL CORPORATION

Stevens & Lee
Lawyers & Consultants

April 29, 2009
Page 2

     We consent to the filing of this opinion as an exhibit to the Registration Statement, and to the reference to us under the heading “Legal Matters” in the Prospectus. In giving this consent, we do not admit that we come within the category of persons whose consent is required under Section 7 of the Securities Act of 1933, as amended, or the rules and regulations of the Securities and Exchange Commission thereunder.

Very truly yours,

STEVENS & LEE

/s/ Stevens & Lee

Philadelphia      •      Reading      •      Valley Forge      •      Lehigh Valley      •      Harrisburg      •      Lancaster       •      Scranton
Williamsport      •      Wilkes-Barre      •      Princeton      •      Cherry Hill      •      New York      •      Wilmington

A PROFESSIONAL CORPORATION

EX-8.1

Exhibit 8.1

Law Offices of
Stevens & Lee
A Professional Corporation

111 North Sixth Street
P. O. Box 679
Reading, PA 19603-0679
(610) 478-2000 Fax (610) 376-5610

April 28, 2009

Board of Directors
Penn Millers Holding Corporation
72 North Franklin Street
Wilkes-Barre, PA 18773

Re: Plan of Conversion of Penn Millers Mutual Holding Company From Mutual to Stock Form

Ladies and Gentlemen:

     Reference is made to the information set forth under the heading “Federal Income Tax Considerations” (the “Federal Income Tax Summary”) contained in the Registration Statement on Form S-1, Registration No. 333-156936 (the “Registration Statement”), filed by Penn Millers Holding Corporation with the Securities and Exchange Commission (the “SEC”).

     We have participated in the preparation of the Registration Statement, including, in particular, the Federal Income Tax Summary. We hereby confirm that the statements in the Registration Statement under the heading, “Federal Income Tax Considerations,” to the extent they constitute statements of United States federal income tax law or legal conclusions with respect thereto, are correct in all material respects, based upon the provisions of the Internal Revenue Code of 1986, as amended, Treasury Department temporary and final regulations, judicial decisions, and rulings and administrative interpretations published by the Internal Revenue Service (“IRS”), as each of the foregoing exists on the date hereof. Our opinion is also based on the facts, representations and assumptions set forth in the Registration Statement and certain representations as to facts provided by Penn Millers Holding Corporation (“PMHC”) and Penn Millers Mutual Holding Company (“PMMHC”), which PMHC and PMMHC believe are consistent with the facts that will exist on the effective date and at the effective time of the transactions, and upon the assumption that the transactions described in the Registration Statement will be completed in accordance with the Plan of Conversion From Mutual to Stock Form adopted by the board of directors of Penn Millers Mutual Holding Company on April 22, 2009.

     Our opinion is not binding on the IRS or a court of law, and no assurance can be given that the IRS will not challenge the Federal Income Tax Summary or the opinions set forth therein or that the Federal Income Tax Summary or the opinions set forth therein will be sustained by a court if so challenged. In addition, no assurance can be given that legislative or administrative action or judicial decisions that differ from our opinion will not be forthcoming. Any such

Philadelphia      •      Reading      •      Valley Forge      •      Lehigh Valley      •      Harrisburg      •      Lancaster       •      Scranton
Williamsport      •      Wilkes-Barre      •      Princeton      •      Cherry Hill      •      New York      •      Wilmington

A PROFESSIONAL CORPORATION

Law Offices of
Stevens & Lee
A Professional Corporation

Board of Directors
Penn Millers Holding Corporation
April 28, 2009
Page 2

differences could be retroactive to transactions or business operations prior to such actions or decisions. We can give no assurance that, after such change, our opinion would not be different. We undertake no responsibility to update or supplement our opinion following the effective date of the Registration Statement.

     This opinion is furnished to you solely for your benefit in connection with the filing of the Registration Statement and is not to be used, circulated, quoted or otherwise referred to for any other purpose or relied upon by any other person for any purpose without our written consent. We also consent to the use of our name in the Federal Income Tax Summary and to the filing of this opinion with the SEC as an exhibit to the Registration Statement. In giving such consent, we do not thereby admit that we are in the category of persons whose consent is required under Section 7 of the Securities Act of 1933, as amended, or the rules and regulations of the SEC promulgated thereunder.

Very truly yours,

STEVENS & LEE

/s/ Stevens & Lee

EX-10.10

Exhibit 10.10

1.

WHOLE ACCOUNT, ACCIDENT YEAR AGGREGATE
EXCESS OF LOSS CONTRACT

issued to

PENN MILLERS INSURANCE COMPANY
AMERICAN MILLERS INSURANCE COMPANY

INDEX

ARTICLE	SUBJECT	PAGE
ARTICLE 1 BUSINESS COVERED			1
ARTICLE 2 COMMENCEMENT AND TERMINATION			1
ARTICLE 3 EXCLUSIONS			2
ARTICLE 4 DEFINITIONS			3
ARTICLE 5 RETENTION AND LIMITS			7
ARTICLE 6 PREMIUM AND ADDITIONAL PREMIUM			7
ARTICLE 7 FUNDS WITHHELD ACCOUNT AND PROFIT SHARING			8
ARTICLE 8 INTEREST CREDIT			9
ARTICLE 9 REPORTS AND REMITTANCES/LOSS PAYMENTS			9
ARTICLE 10 COMMUTATION			10
ARTICLE 11 FUNDS TRANSFER CLAUSE			11
ARTICLE 12 NET RETAINED LINES AND INURING REINSURANCE PROTECTIONS			13
ARTICLE 13 ULTIMATE NET LOSS			13
ARTICLE 14 EXTRA CONTRACTUAL OBLIGATIONS AND EXCESS LIMITS LIABILITY			14
ARTICLE 15 MATERIAL CHANGES			15
ARTICLE 16 RESERVES			15
ARTICLE 17 SALVAGE AND SUBROGATION			19
ARTICLE 18 TAXES			20
ARTICLE 19 ACCESS TO AND RETENTION OF RECORDS			20
ARTICLE 20 SERVICE OF SUIT			21
ARTICLE 21 ARBITRATION			22
ARTICLE 22 INSOLVENCY			26
ARTICLE 23 INTERMEDIARY			27
ARTICLE 24 CONFIDENTIALITY			27
ARTICLE 25 ORIGINAL CONDITIONS			28
ARTICLE 26 REGULATORY COMPLIANCE AND REPRESENTATIONS AND WARRANTIES OF REASSURED			29
ARTICLE 27 ERRORS AND OMISSIONS			30
ARTICLE 28 CURRENCY			30
ARTICLE 29 OFFSET			30
ARTICLE 30 NOTICE			30
ARTICLE 31 SPECIAL TERMINATION			31
ARTICLE 32 VARIOUS OTHER TERMS			33

2.

CLAUSES ATTACHED HERETO AND FORMING PART OF THIS CONTRACT:

NUCLEAR INCIDENT EXCLUSION CLAUSE — PHYSICAL DAMAGE -
REINSURANCE — U.S.A. — BRMA 35B
NUCLEAR INCIDENT EXCLUSION CLAUSE — LIABILITY — REINSURANCE -
U.S.A. — BRMA 35A
INSOLVENCY FUND EXCLUSION CLAUSE
NUCLEAR, CHEMICAL, AND BIOLOGICAL TERRORISM EXCLUSION CLAUSE
SCHEDULE A — INURING REINSURANCE
SCHEDULE B — SAMPLE CALCULATION OF RETENTION

1.

WHOLE ACCOUNT, ACCIDENT YEAR AGGREGATE
EXCESS OF LOSS CONTRACT
(the “Contract”)

issued to

PENN MILLERS INSURANCE COMPANY
AMERICAN MILLERS INSURANCE COMPANY
(the “Reassured”)

by

EACH REINSURER TAKING A REINSURER’S SHARE UNDER THE
INTERESTS AND LIABILITIES AGREEMENT
(each, the “Reinsurer”)

ARTICLE 1

BUSINESS COVERED

     In consideration of the payment of the Reinsurance Premium and subject to the terms, conditions, exclusions and limitations contained in this Contract, the Reinsurer shall indemnify the Reassured in respect of the net retained liability as herein provided and specified which may accrue to the Reassured during the Term of this Agreement as a result of Ultimate Net Loss and Loss Adjustment Expenses subject to this Agreement, during the Term, as defined below, under all policies, unless specifically excluded, written by the Reassured in respect of business written by the Reassured as of the Inception Date, including, but not limited to, business classified by the Reassured as: Commercial Multiple Peril, Fire, Allied Lines, Inland Marine, Commercial Auto Liability, Commercial Auto Physical Damage, Workers Compensation, Umbrella Liability, General and Professional Liability, and Homeowner’s Multiple Peril (hereinafter “Business Covered”).

ARTICLE 2

COMMENCEMENT AND TERMINATION

     The Term of this Contract shall be from January 1, 2008, 12:01 AM Eastern Standard Time (the “Inception Date”) through January 1, 2010, 12:00 AM Eastern Standard Time (the “Term”).

2.

ARTICLE 3

EXCLUSIONS

No reinsurance indemnity will be afforded under this Contract for:

1. Nuclear Incident, in accordance with the following clauses attached hereto:

a. Nuclear Incident Exclusion Clause – Physical Damage – Reinsurance – U.S.A. – BRMA 35B;

b. Nuclear Incident Exclusion Clause – Liability – Reinsurance – U.S.A. – BRMA 35A;

2. War Risks, in accordance with the War Risks Exclusion Clause attached hereto;

3. Insolvency, in accordance with the Insolvency Funds Exclusion Clause attached hereto;

4. Earthquake, when written as a separate policy;

5. Flood, when written as a separate policy (except for those policies in-force as of the Inception Date);

6. Liability arising out of ownership, maintenance or use of any aircraft or flight operations;

7. Insolvency and Financial Guarantee;

8. Pollution coverage written by the Reassured which does not contain ISO Pollution Exclusion Endorsement IL 09 28 (Ed. 6/85) or as subsequently amended; however, this exclusion does not apply to any risk located in a jurisdiction that has not approved the ISO exclusion or where other regulatory constraints prohibit the Reassured from attaching such endorsement.

9. Nuclear, Biological, or Chemical, Acts of Terrorism (per the attached Exclusion).

10. Losses arising from lines of business not written by the Reassured as of the Inception Date, unless by written consent of the Reinsurer (such consent shall not be unreasonably withheld).

11. Losses arising from any other company not named as the Reassured as of the Inception Date.

3.

ARTICLE 4

DEFINITIONS

A. “Allocated Loss Adjustment Expenses” or “ALAE” shall mean: (a) allocated expenses and costs sustained in connection with settlement and litigation of claims and suits, satisfaction of judgments, and negotiations concerning a loss; (b) legal expenses and costs incurred in connection with coverage questions and legal actions, including declaratory judgment actions connected thereto, relating to a specific claim; and (c) all interest on judgments, and shall exclude any overhead or internal fees and expenses payable by the Reassured whether or not paid to its managers or apportioned to the cost of handling claims or losses.

B. “Change in Rates” as used in this Contract shall mean the percentage change in the rates for Business Covered, which shall include changes in manual rates, increases or reductions in rating plan net credits/net debits, and increases or decreases in the ratio of insurance to value for property coverages. Change in Rates shall not include changes solely due to the impact on premiums related to changes in the Reassured’s classification of underlying exposures. Change in Rates shall be determined by the actual change in the Reassured’s rates for Business Covered during the 2008 Contract Year, and the Reassured’s planned rate changes for the Reassured’s 2009 Contract Year, both as reflected in the Reassured’s Renewal Increases – Decreases Report as of December 31, 2008 (pursuant to the Article entitled REPORTS AND REMITTANCES/LOSS PAYMENTS hereof. Change in Rates shall be weighted for each class and line of business in the Reassured’s SNEP Budget for the 2009 Contract Year.

C. “Contract Year” as used in this Contract shall mean each twelve (12) month period after the Inception Date during the Term.

D. “Discount Percentage” as used in this Contract have the meaning as set forth in the Article entitled MATERIAL CHANGES (A)(2).

E. “Extra Contractual Obligations” or “ECO” shall have the meaning as set forth in the Article entitled EXTRA CONTRACTUAL OBLIGATIONS AND EXCESS LIMITS LIABILITY (B).

F. “Excess Limits Liability” or “ELL” shall have the meaning as set forth in EXTRA CONTRACTUAL OBLIGATIONS AND EXCESS LIMITS LIABILITY(C).

G. “FWA” shall have the meaning as set forth in the Article entitled FUNDS WITHHELD ACCOUNT AND PROFIT SHARING (A).

H. “Inception Date” shall have the meaning set forth in the Article entitled COMMENCEMENT AND TERMINATION.

4.

I. “Interest Credit” shall have the meaning as set forth in the Article entitled INTEREST CREDIT.

J. “Mix Factor” shall mean the impact on the projected 2009 Subject Loss Ratio due to any planned change in mix of business, and shall be calculated as follows:

     (LR2 — LR1) — 2%, where

     LR1 equals the Reassured’s Subject Loss Ratio utilizing the loss ratio estimated by the Reassured’s external actuary (The Reassured’s external actuary as at the inception of the Contract is the firm, By the Numbers,) for the 2008 Contract Year weighted by the actual Subject Net Earned Premium for the lines and classes of Business Covered for such Contract Year; and

     LR2 equals the Reassured’s projected Subject Loss Ratio, as defined hereinbelow, for the 2009 Contract Year computed by utilizing the loss ratios for each line and class of Business Covered actually estimated by the Reassured’s external actuary for the 2008 Contract year and weighted by the projected SNEP for the 2009 Contract Year pursuant to the SNEP Budget for the 2009 Contract Year. [For the avoidance of doubt, the projected SNEP for the 2009 Contract Year SNEP Budget shall be adjusted to remove the impact of any planned rate actions by the Company for the 2009 Contract Year.]

The Mix Factor cannot be less than zero.

     For the purposes of this Contract, Subject Loss Ratio shall mean the applicable Subject Ultimate Net Loss divided by the applicable SNEP.

K. “Obligations” shall have the meaning as set forth in the Article entitled RESERVES (E).

L. “Policy” or “policies” shall mean any one or all of the Reassured’s policies, binders, contracts, or agreements of insurance or reinsurance, whether written or oral, that fall within the description of Business Covered as stated in the Article entitled BUSINESS COVERED and within all of the other terms and conditions of this Contract.

M. “Premium” shall have the meaning set forth in the Article entitled PREMIUM AND ADDITIONAL PREMIUM (A).

N. “Property Catastrophe Loss Occurrence” as used in this Contract shall mean the sum of all individual losses directly occasioned by any one disaster, accident or loss or series of disasters, accidents or losses arising out of one event impacting Property Lines of Business which occurs within the area of one state of the United States or province of Canada and states or provinces contiguous thereto and to one another. However, the duration and extent of any one “Property

5.

Catastrophe Loss Occurrence” shall be limited to all individual losses sustained by the Reassured occurring during any period of 168 consecutive hours arising out of and directly occasioned by the same event except that the term “Property Catastrophe Loss Occurrence” shall be further defined as follows:

1. As regards windstorm, hail, tornado, hurricane, cyclone, including ensuing collapse and water damage, all individual losses sustained by the Reassured occurring during any period of 72 consecutive hours arising out of and directly occasioned by the same event. However, the event need not be limited to one state or province or states or provinces contiguous thereto.

2. As regards riot, riot attending a strike, civil commotion, vandalism and malicious mischief, all individual losses sustained by the Reassured occurring during any period of 72 consecutive hours within the area of one municipality or county and the municipalities or counties contiguous thereto arising out of and directly occasioned by the same event. The maximum duration of 72 consecutive hours may be extended in respect of individual losses which occur beyond such 72 consecutive hours during the continued occupation of an assured’s premises by strikers, provided such occupation commenced during the aforesaid period.

3. As regards earthquake (the epicentre of which need not necessarily be within the territorial confines referred to in the opening paragraph of this Article) and fire following directly occasioned by the earthquake, only those individual fire losses which commence during the period of 168 consecutive hours may be included in the Reassured’s “Property Catastrophe Loss Occurrence”.

4. As regards “Freeze”, only individual losses directly occasioned by collapse, breakage of glass and water damage (caused by bursting of frozen pipes and tanks) may be included in the Reassured’s “Loss Occurrence”.

     For all “Property Catastrophe Loss Occurrences” the Reassured may choose the date and time when any such period of consecutive hours commences provided that it is not earlier than the date and time of the occurrence of the first recorded individual loss sustained by the Reassured arising out of that disaster, accident or loss and provided that only one such period of 168 consecutive hours shall apply with respect to one event except for those “Property Catastrophe Loss Occurrences” referred to in sub-paragraphs 1 and 2 of this Definition where only one such period of 72 consecutive hours shall apply with respect to one event.

     No individual losses occasioned by an event that would be covered by 72 hours clauses may be included in any “Property Catastrophe Loss Occurrence” claimed under the 168 hours provision.

6.

Losses arising, directly or indirectly, out of:

(i) loss of, alteration of, or damage to

     or

(ii)	a reduction in the functionality, availability or operation of:
	a computer system, hardware, program, software, data, information repository, microchip, integrated circuit or similar device in computer equipment or non-computer equipment, whether the property of the policyholder of the Reassured or not, do not in and of themselves constitute an event unless arising out of one or more of the following perils:

fire, lightning, explosion, aircraft or vehicle impact, falling objects, windstorm, hail, tornado, cyclone, hurricane, earthquake, volcano, tsunami, flood, freeze or weight of snow.

     Losses arising from Fungi shall not in and of themselves constitute an event for the purposes of recovery hereunder. For the purposes of this Contract, Fungi shall be taken to include any type or form of fungus, mold or mildew and any mycotoxins, spores, scents or by products produced or released by fungi.

O. “Property Lines of Business” as used in this Contract shall mean all business classified by the Reassured as Property business including Auto Physical Damage (excluding collision).

P. “Reinsurance Premium” shall have the meaning set forth in the Article entitled PREMIUM AND ADDITIONAL PREMIUM (B).

Q. “Reinsurer’s Expense” shall have the meaning set forth in Article entitled PREMIUM AND ADDITIONAL PREMIUM (C).

R. “Retention” shall have the meaning as set forth in the Article entitled RETENTION AND LIMITS (A).

S. “SNEP Budget” shall mean the Reassured’s budgeted SNEP detailed by line of business and class of Business Covered for the applicable Contract Year as approved by the Reassured’s Board of Directors.

T. “Subject Net Earned Premium” or “SNEP” shall mean the gross earned premium of the Reassured, plus additions, less return premium for cancellations and refunds, and less premium for reinsurance that inures to the benefit of this Contract.

7.

U. “Term” shall have the meaning set forth in the Article entitled COMMENCEMENT AND TERMINATION.

V. “Trust Account” shall have the meaning as set forth in the Article entitled FUNDS TRANSFER CLAUSE.

W. “Ultimate Net Loss” shall have the meaning as set forth in the Article entitled ULTIMATE NET LOSS.

ARTICLE 5

RETENTION AND LIMITS

A. Retention. Subject to the Annual Limit and Aggregate Limit set forth below, the Reinsurer agrees to indemnify the Reassured for the aggregate amount of Ultimate Net Loss resulting from Business Covered in excess of the Retention as follows:

1. The Retention for the 2008 Contract Year shall be equal to 72.0% of SNEP.

2. For the 2009 Contract Year, the Retention shall be equal to: (a) the greater of 72.0%; or (b) (72.0% divided by [1 + R]) plus M, where R is equal to the overall Change in Rates and M is equal to the Mix Factor.

B. Annual Limit. The Reinsurer’s limit of liability for Ultimate Net Loss for any one Contract Year shall not exceed 20.0% of SNEP for the applicable Contract Year.

C. Aggregate Limit. The Reinsurer’s aggregate limit of liability under this Contract for the Term shall be equal to the sum of the two Annual Limits.

ARTICLE 6

PREMIUM AND ADDITIONAL PREMIUM

A. Premium. For each Contract Year, the Reassured shall pay a minimum and deposit amount of $2,400,000 (the “Premium”), deposited to the Funds Withheld Account with effect from January 1 of the applicable Contract Year. The amount of the Premium shall be adjusted so that the Premium equals 3.00% of SNEP with effect from January 1 of the applicable Contract Year and payable pursuant to the Article entitled REPORTS AND REMITTANCES/LOSS PAYMENTS (B) hereunder.

8.

B. Additional Premium. For each Contract Year, there shall be an Additional Premium equal to 20.0% of ceded Ultimate Net Loss, with effect from January 1 of each Contract Year, subject to a maximum Additional Premium for any Contract Year equal to 4.0% of SNEP. The sum of Premium and Additional Premium, for each Contract Year, shall be referred to herein as the “Reinsurance Premium”.

C. Reinsurer’s Expense. The Reassured shall pay to the Reinsurer, via wire transfer of immediately available funds, Reinsurer’s Expense equal to 33.0% of Premium. The Reinsurer’s Expense shall be due in equal semi-annual installments of $396,000 on January 1 and July 1 of each Contract Year (i.e. $792,000 of total Reinsurer’s Expense deposits for each Contract Year), deducted from Premium and payable directly to the Reinsurer. Reinsurer’s Expense related to adjustments of Premium shall be due in accordance with the Article entitled REPORTS AND REMITTANCES/LOSS PAYMENTS for the quarter in which the adjustment is computed. For the avoidance of doubt, Reinsurer’s Expense shall be a component of Premium and not in addition. The Reinsurer’s Expense shall be non-returnable and fully earned when paid; for the sake of clarity, this provision, in no way, shall limit the Reassured’s rights to recoveries of Ultimate Net Loss, subject to the Reinsurer’s rights of commutation hereunder.

ARTICLE 7

FUNDS WITHHELD ACCOUNT AND PROFIT SHARING

A. The Reassured shall establish and maintain a Funds Withheld Account (“FWA”) and shall hold the Reinsurance Premium in the FWA, net of the Reinsurer’s Expense (which shall be paid to the Reinsurer). For the purposes of calculating interest credit in accordance with the Article entitled INTEREST CREDIT, Premium shall be deemed credited to the FWA as of January 1, 2008 and Additional Premium shall be deemed credited to the FWA with effect from January 1 of the applicable Contract Year. The amount required to be maintained in the FWA shall be calculated on a cumulative basis over the Term of the Contract as follows:

	100% of Premium (including subsequent adjustments) when due;
Plus	100% of Additional Premium when due;
Less	100% of all Reinsurer’s Expense when paid;
Plus	100% of all Interest Credits;
Less	100% of ceded Ultimate Net Loss paid.

B. Payment of FWA to Reinsurer. If this Contract is not commuted pursuant to the Article entitled COMMUTATION hereunder on or before January 1, 2015, then the FWA shall be payable to the Reinsurer at commutation.

9.

C. Profit Sharinq. If this Contract is commuted on or before January 1, 2015, then the Reassured shall be entitled to a Profit Sharing equal to 100% of the residual balance of the FWA at such commutation (in accordance with the Article entitled COMMUTATION). After January 1, 2015, the Profit Sharing shall be zero.

ARTICLE 8

INTEREST CREDIT

     The Reassured shall credit the FWA with interest (the “Interest Credit”) calculated quarterly on a pro-rata basis at a rate calculated to be the equivalent of a 4.75% effective annual interest rate. The Interest Credit shall continue to accrue in the event of insolvency, rehabilitation, or liquidation of the Reassured.

ARTICLE 9

REPORTS AND REMITTANCES/LOSS PAYMENTS_,

A. Loss Settlements. The Reassured shall investigate and adjust all claims and have the right to settle all claims under its policies. All loss settlements made by the Reassured, other than ex-gratia payments, provided they are within the terms of this Contract, shall be unconditionally binding upon the Reinsurer.

B. Quarterly Report. Forty-five (45) days after each calendar quarter, the Reassured will submit a report to the Reinsurer providing the following, for each Contract Year of this Contract and cumulative amounts for the Contract, as applicable:

1. Subject Net Earned Premium

2. Paid Ultimate Net Loss

3. Incurred Ultimate Net Loss Premiums paid for reinsurances which inure to the benefit of this Contract

4. Ceded Ultimate Net Loss paid and outstanding (including IBNR)

5. Reinsurance Premiums

For any quarter, any adjustments to Reinsurer’s Expenses and/or Premium shall be due and payable with the quarterly report.

C. Annual Reports. Sixty (60) days after the end of Contract Year 2008, the Reassured shall submit the following Reports:

10.

1. A report of the Reassured’s increases or decreases in policy renewals, by class and line of business (the “Reassured’s Renewal Increases-Decreases Report”);

2. The calculation of the Company’s Retention for the 2009 Contract Year, including supporting analysis. An example of the information required for this report is attached as Schedule B and made a part of this Contract;

3. Any other information reasonably requested by the Reinsurer in respect of this Contract.

D. Loss Payments from FWA. Loss payments shall be made out of the FWA forty-five (45) days after the end of the respective quarterly period. Loss payments shall be made out of the FWA first until depleted. Thereafter the Reinsurer shall pay from other funds of the Reinsurer. Should the Reinsurer have paid losses from its own funds and subsequently it is determined that this should not have been the case because losses are restated or premiums are credited to the FWA, then all necessary payments shall be reversed with interest as stipulated under the Article entitled INTEREST CREDIT. The period for which interest shall be paid shall be from the time of the Reinsurer’s initial payment to the time of the repayment to the Reinsurer.

ARTICLE 10

COMMUTATION

A. Commutation if FWA is Positive. The Reassured, at its sole option, may commute this Contract at any time after expiration provided that the FWA up to January 1, 2015, after giving effect to outstanding ceded Ultimate Net Loss (including IBNR), is in a positive balance as of that date. Upon such commutation, the Reinsurer shall be released from any and all past, current and future liabilities hereunder. Furthermore, the Reassured shall release the residual balance in the FWA to the Reinsurer (if applicable, the Reinsurer will consent to the release of the assets in the Trust Account), if any, and the Reinsurer shall immediately pay to the Reassured 100% of such positive balance as Profit Sharing. The parties hereto shall execute a commutation and release agreement to document such commutation.

B. Commutation if FWA is Neqative and Commutations after January 1, 2015. If the FWA balance is not positive after giving effect to the aforementioned outstanding ceded Ultimate Net Loss and/or if this Contract is commuted subsequent to January 1, 2015, commutation shall be upon mutual written consent. Notwithstanding the foregoing, if this Contract has not been commuted prior to December 31, 2019, then it shall be commuted as of such date. Upon commutation under either such circumstance, the Reassured shall pay the balance of the FWA to the Reinsurer (pursuant to the Funds Withheld and Profit Sharing Article), and the Reinsurer shall pay the Reassured the present value of the ceded

11.

Ultimate Net Loss (if applicable, the Reinsurer shall release the amount of the assets in the Trust Account) and the Reinsurer shall be released from any and all past, current, and future liabilities hereunder. For the purposes of this provision, the present value of the ceded Ultimate Net Loss shall be discounted to present value utilizing the Interest Credited Rate. If the Reassured and the Reinsurer cannot agree on the amount of the present value of the ceded Ultimate Net Loss, then they shall engage a mutually acceptable nationally recognized independent third party actuary whose findings shall be binding. If the Reassured and the Reinsurer cannot agree on the engagement of an actuarial firm within thirty (30) days after either requests one, it shall be determined by drawing lots. The parties hereto shall execute a commutation and release agreement to document such commutation.

C. Special Commutation Rights of the Reinsurer. If any of the following occurs: (i) the Reassured fails to maintain an active underwriting operation; or (ii) its domiciliary state insurance department or other legal authority having jurisdiction over the Reassured orders the Reassured to cease underwriting business; or (iii) the Reassured, without the written consent of the Reinsurer enters into an agreement to (a) become merged with, acquired, or controlled by any company, corporation or individuals(s) not controlling or affiliated with the Reassured’s operations at the Inception Date, or (b) directly or indirectly assigns essentially all of its entire liability for its obligations under this Contract, or (c) any demutualization, without the consent of the Reinsurer of the Reassured’s ultimate parent or any mutual holding company controlling the Reassured (for the avoidance of doubt, this shall specifically not apply to any capital raising activities of the Reassured, the Reassured’s ultimate parent, or any mutual or downstream holding company affiliated with the Reassured, wherein the mutual holding company structure of the Reassured’s ultimate parent is maintained), then this Contract shall terminate and shall be immediately commuted as of the effective date of any of the events described above. If the FWA balance is positive as of the effective date of any such commutation, the parties shall release the liabilities of the Reinsurer and value the FWA as set forth in Article 10, Section A hereinabove. In the event the FWA is negative as of the effective date of any such commutation, parties shall release the liabilities of the Reinsurer and value the FWA as set forth in the Article entitled COMMUTATION, Section B hereinabove.

ARTICLE 11

FUNDS TRANSFER CLAUSE

A. Circumstances for Funds Transfer. If any of the following occurs, to or by the Reassured, then the Reassured shall, within ten (10) days, transfer to the Reinsurer the amount of funds held in the FWA, and the Reinsurer shall transfer the amount equal to the FWA balance into a trust account that complies with credit for reinsurance regulations under Pennsylvania law (the “Trust Account”):

1. The Reassured does not maintain an AM Best rating of A- or better;

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2. A material change in management of the Reassured (defined as the departure of the Chief Underwriting Officer, Chief Executive Officer and the Chief Financial Officer within a one year period) occurs;

3. The Reassured’s policyholders’ surplus decreases by more than 25% as compared to the Reassured’s policyholders’ surplus as of December 31, 2007, during any annual period;

4. The Reassured fails to deposit any additional assets as may be required in accordance with the Article entitled FUNDS WITHHELD ACCOUNT AND PROFIT SHARING;

5. The Reassured fails to pay any amounts due to the Reinsurer within sixty (60) days of the due date; or

6. The Reassured without written consent of the Reinsurer enters into an agreement with respect to the merger, consolidation, assignment, or sale of the Reassured.

7. The Reassured fails to furnish any reports when due to the Reinsurer within sixty (60) days after the due date of such
Report(s).

B. Remedy if Reassured Fails to Comply. Failure of the Reassured to comply with any of the provisions of the Article entitled FUNDS TRANSFER CLAUSE and/or if the Reassured fails to maintain the value of the Trust Account as set forth in this Article, then this Contract shall terminate immediately and shall be commuted between the parties as of the date of such non-compliance. In such event, the maximum liability of the Reinsurer for ceded Ultimate Net Losses under this Contract as of such commutation date shall be an amount equal to the total of all Reinsurance Premiums paid less the Reinsurer’s Expense plus 100% of all Interest Credits due under this Contract as of such date and the Reinsurer shall be released from any and all past, current and future liabilities under the Contract as of such commutation date.

C. Notional Funds Withheld Balance to be Maintained. The Reassured shall calculate a notional FWA balance as set forth in the Funds Withheld Account Article. The Reassured must remit to the Reinsurer funds to maintain the value of the Trust Account equal or greater than the FWA balance as of each quarter.

D. Costs of the Trust Account. The costs of the Trust Account shall be borne by the Reassured.

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ARTICLE 12

NET RETAINED LINES AND INURING REINSURANCE PROTECTIONS

A. Contract Applies to Insurance Retained Net for Reassured’s Own Account. This Contract applies only to that portion of any insurance which the Reassured retains net for its own account. In calculating the amount of any Ultimate Net Loss hereunder, and also in computing the amount or amounts of Ultimate Net Loss in excess of which this Contract attaches, only loss or losses in respect of that portion of any insurance which the Reassured retains net for its own account shall be included. All other applicable reinsurance shall inure to the benefit of this Contract.

B. Inuring Reinsurance Premiums. Reinsurance premiums ceded on account of any reinsurance which inures to the benefit of this Contract shall be deducted from the calculation of the Reassured’s SNEP for all purposes hereunder.

C. Reinsurer’s Liability Not Increased by Inability to Collect from any Other Reinsurer. The amount of the Reinsurer’s liability hereunder in respect of any loss or losses shall not be increased by reason of the inability of the Reassured to collect from any other reinsurer, whether specific or general, any amount which may become due from them, whether such inability arises from the insolvency of such other reinsurers or not.

D. Inuring Protection Deemed in Place. For the purposes of this Contract, the Reassured’s inuring reinsurance protection as at April 1, 2008 shall be deemed in place for the entire Term of this Contract unless otherwise prior agreed in writing by the Reinsurer. Such inuring reinsurances shall be as set forth in Schedule A and made a part of this Contract.

ARTICLE 13

ULTIMATE NET LOSS

A. Ultimate Net Loss Definition. The term Ultimate Net Loss shall mean the actual loss incurred (inclusive of paid loss, case reserves and reserves for losses incurred but not reported, “IBNR”) by the Reassured that it retains for its own account resulting from covered claims in settlement of the claims reinsured hereunder, including Allocated Loss Adjustment Expense, pre-judgment interest, post-judgment interest, and payments attributable to Extra Contractual Obligations and Excess Limits Liability.

B. Salvages, Recoveries, Etc. All salvages, recoveries, payments and reversals or reductions of verdicts or judgments (net of the cost of obtaining such salvage, recovery, payment or reversal or reduction of a verdict or judgment) whether collected or not, shall be applied as if recovered, received or obtained prior to the aforesaid settlement and shall be deducted from the actual losses sustained to arrive at the amount of the Ultimate Net Loss.

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C. Property Catastrophe Occurrence Limit. The maximum Property Catastrophe Loss Occurrence that may contribute to Ultimate Net Loss shall be equal to $25,000,000 prior to the application of the property catastrophe treaties (which are detailed in the Article entitled NET RETAINED LINES AND INURING REINSURANCE PROTECTIONS, Paragraph [D][1]).

ARTICLE 14

EXTRA CONTRACTUAL OBLIGATIONS AND EXCESS LIMITS LIABILITY

A. Coverage for ECO/ELL. This Contract will extend to cover any losses arising from claims related Extra Contractual Obligations and/or Excess Limits Liability.

B. Definition of ECO. “Extra Contractual Obligations” or “ECO” as used in this Contract will mean those liabilities not covered under any other provision of this Contract, which arise from the handling of any claim on Business Covered hereunder, such liabilities arising because of, but not limited to, the following: failure by the Reassured to settle within the Policy limit, by reason of alleged or actual negligence, fraud, or bad faith in rejecting an offer of settlement, in the preparation of the defense, in the trial of any action against the insured or reinsured, or in the preparation or prosecution of an appeal consequent to such action.

C. Definition of ELL. “Excess Limits Liability” or “ELL” as used in this Contract will mean liability in excess of the Policy limit as a result of the Reassured’s alleged or actual negligence, fraud, or bad faith in failing to settle and/or rejecting a settlement within its Policy limit, in the preparation of the defense, in the trial of any action against the insured or Reassured, or in the preparation or prosecution of an appeal consequent to such action. Excess Limits Liability will mean any amounts for which the Reassured would have been contractually liable to pay had it not been for the Policy limits.

D. No Recovery for ECO/ELL Arising from Fraud. There will be no recovery hereunder where the Extra Contractual Obligation or Excess Limits Liability has been incurred due to fraud committed by a member of the Board of Directors or a corporate officer of the Reassured, acting individually, collectively, or in collusion with a member of the Board of Directors, a corporate officer, or a partner of any other corporation, partnership, or organization involved in the defense or settlement of a claim on behalf of the Reassured.

E. Date ECO/ELL Incurred. The date on which any Extra Contractual Obligation and/or Excess Limits Liability is incurred by the Reassured will be deemed, in all circumstances, to be the date of the original occurrence. Nothing in this Article will be construed to create a separate or distinct occurrence apart from the original covered occurrence that gave rise to the Extra Contractual Obligation

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and/or Excess Limits Liability discussed in the preceding paragraphs. In no event will the total liability of the Reinsurer exceed its applicable limit of liability as set forth in the Article entitled RETENTION AND LIMITS.

ARTICLE 15

MATERIAL CHANGES

A. Material Change in Claims Practice. A material change in claims practice shall be deemed to have occurred if:

1. the Reassured’s claims handling and/or administration is, for whatever reason, outsourced, outside the Reassured’s normal course of business, to an entity other than an affiliated entity of the Reassured; and

2. as a result of the change referred to in paragraph A.1. of this Article, the Ultimate Net Loss would reasonably be expected to have a discounted value back to the inception of the Coverage Year, utilizing a 4.75% effective annual interest rate (the “Discount Percentage”) of greater than 90.0% of the nominal value of such Ultimate Net Loss.

B. Remedy in the Event of Material Change in Claims Practice. In the event that there has been a material change in claims practice, the Ultimate Net Loss shall be restated on a paid basis as though such change had not occurred.

C. In the Event of Disagreement. If the Reassured and the Reinsurer cannot agree on the value of the Discount Percentage and/or the impact of the restatement of the paid Ultimate Net Loss described in paragraph C of this Article within a three (3) month period, the Reassured and the Reinsurer shall engage an independent third-party nationally recognized actuarial firm that is mutually acceptable to both parties to determine the Discount Percentage and/or such impact of the restatement of the paid Ultimate Net Loss. In the event the parties cannot agree on the choice of the independent third-party nationally recognized actuarial firm within such three (3) month period, both parties shall nominate one firm and the chosen firm shall be selected by the drawing of lots. The cost of such actuarial firm shall be borne equally by the parties. If the independent third party actuarial firm makes this determination, such determination shall be binding upon the Reassured and the Reinsurer.

ARTICLE 16

RESERVES

A. Security of Reinsurer’s Obligations. If any Reinsurer is unauthorized or otherwise unqualified in any state or other United States jurisdiction, and if, without such security, a financial penalty to the Reassured would result on any statutory statement or report it is required to make or file with insurance regulatory

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authorities, then such Reinsurer will timely secure the Reinsurer’s share of Obligations under this Contract in a manner, form, and amount acceptable to the Reassured and to all applicable insurance regulatory authorities in accordance with this Article.

B. Timing and Form of Security. The Reinsurer shall secure such obligations, within thirty (30) days after the receipt of the Reassured’s written request regarding the Reinsurer’s share of obligations under this Contract (but not later than December 31) of each year by either (at the Reinsurer’s option):

1. Clean, irrevocable, and unconditional evergreen letter(s) of credit issued and confirmed, if confirmation is required by the applicable insurance regulatory authorities, by a qualified United States financial institution as defined under the Insurance Law of the Reassured’s domiciliary state and acceptable to the Reassured and to insurance regulatory authorities;

2. A trust account meeting at least the standards of the Insurance Law of the Reassured’s domiciliary state; or

3. Cash advances or funds withheld (i.e. the FWA) or a combination of both, which will be under the exclusive control of the Reassured (“Funds Deposit”).

C. Payment of Security Costs. The costs of providing such security in excess of any FWA maintained by the Reassured shall be borne by the Reinsurer, but the Reassured shall pay to the Reinsurer such collateral costs (on a quarterly basis in arrears) at the rate of 0.50% per annum on the face amount of such security provided.

D. Canadian Obligations. If any Reinsurer is unauthorized or otherwise unqualified in any province or other Canadian jurisdiction, and if, without such security, a financial penalty to the Reassured would result on any statement or report it is required to make or file with insurance regulatory authorities, then such Reinsurer will fund 110% of its share of Canadian Obligations under this Contract by Funds Deposit.

E. Definition of Obliqations for the Purposes of This Article. The “Obligations” referred to herein means the then current (as of the end of each calendar quarter) sum of:

1. The amount of the ceded unearned premium reserve for which the Reinsurer is responsible to the Reassured;

     2. The amount of Ultimate Net Losses and other amounts paid by the Reassured for which the Reinsurer is responsible to the Reassured but has not yet paid;

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3. The amount of ceded reserves for Ultimate Net Losses for which the Reinsurer is responsible to the Reassured; and

4. The amount of return and refund premiums paid by the Reassured for which the Reinsurer is responsible to the Reassured but has not yet paid.

F. Draws Upon Security. The Reassured, or its successors in interest, may draw, at any time and from time to time, with prior notice to the Reinsurer upon the:

1. Established letter of credit (or subsequent cash deposit);
2. Established trust account (or subsequent cash deposit); or
3. Funds Deposit;

without diminution or restriction because of the insolvency of either the Reassured or the Reinsurer for one or more of the following purposes set forth below.

Draws shall be made only for the following purposes:

1. To make payment to and reimburse the Reassured for the Reinsurer’s share of Ultimate Net Loss and other amounts paid by the Reassured under its Policies and for which the Reinsurer is responsible under this Contract that is due to the Reassured but unpaid by the Reinsurer including but not limited to the Reinsurer’s share of premium refunds and returns; and

2. To obtain a cash advance of the entire amount of the remaining balance under any letter of credit or trust account (if applicable) in the event that the Reassured:

a. has received notice of non-renewal or expiration of the letter of credit or trust account;

b. has not received assurances satisfactory to the Reassured of any required increase in the amount of the letter of credit or trust account, or its replacement or other continuation of the letter of credit or trust account at least thirty (30) days before its stated expiration date;

c. has been made aware that others may attempt to attach or otherwise place in jeopardy the security represented by the letter of credit or trust account; or

d. has concluded that the trustee or issuing (or confirming) bank’s financial condition is such that the security represented by the letter of credit or trust account may be in jeopardy;

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and under any of those circumstances where the Reinsurer’s entire Obligations, or part thereof, under this Contract remain un-liquidated and un-discharged at least thirty (30) days prior to the stated expiration date or at the time the Reassured learns of the possible jeopardy to the security represented by the letter of credit or trust account.

G. If the Reassured Draws to Obtain Cash Advance. If the Reassured draws on the letter of credit or trust account to obtain a cash advance, the Reassured will hold the amount of the cash advance so obtained in the name of the Reassured in any qualified United States financial institution as defined under the Insurance Law of the Reassured’s domiciliary state in trust solely to secure the Obligations referred to above and for the use and purposes enumerated above and to return any balance thereof to the Reinsurer:

1. Upon the complete and final liquidation and discharge of all of the Reinsurer’s Obligations to the Reassured under this Contract; or

2. In the event the Reinsurer subsequently provides alternate or replacement security consistent with the terms hereof and acceptable to the Reassured.

     The Reassured will prepare and forward, at annual intervals or more frequently as determined by the Reassured, but not more frequently than quarterly to the Reinsurer, a statement for the purposes of this Article, showing the Reinsurer’s share of the Obligations as set forth above. If the Reinsurer’s share thereof exceeds the then existing balance of the security provided, the Reinsurer will, within fifteen (15) days of receipt of the Reassured’s statement, but never later than December 31 of any year, increase the amount of the letter of credit, (or subsequent cash deposit), trust account or Funds Deposit to the required amount of the Reinsurer’s share of the Obligations set forth in the Reassured’s statement, but never later than December 31 of any year. If the Reinsurer’s share thereof is less than the then existing balance of the cash advance, the Reassured will release the excess thereof to the Reinsurer upon the Reinsurer’s written request. The Reinsurer will not attempt to prevent the Reassured from holding the cash advance or Funds Deposit so long as the Reassured is acting in accordance with this Article.

H. Assets Deposited in Trust Account. Any assets deposited to a trust account will be valued according to their current fair market value and will consist only of cash (U.S. legal tender), certificates of deposit issued by a qualified United States financial institution as defined under the Insurance Law of the Reassured’s domiciliary state and payable in cash, and investments of the types no less conservative than those specified in Sections 1404 (a)(1),(2),(3),(8), and (10) of the New York Insurance Law and which are admitted assets under the Insurance Law of the Reassured’s domiciliary state. Investments issued by the parent, subsidiary, or affiliate of either the Reassured or the Reinsurer will not be eligible investments.

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All assets so deposited will be accompanied by all necessary assignments, endorsements in blank, or transfer of legal title to the trustee in order that the Reassured may negotiate any such assets without the requirement of consent or signature from the Reinsurer or any other entity.

I. Settlements. All settlements of account between the Reassured and the Reinsurer will be made in cash or its equivalent. All income earned and received by the amount held in an established trust account will be added to the principal.

J. Successors in Interest. The Reassured’s “successors in interest” will include those by operation of law, including without limitation, any liquidator, rehabilitator, receiver, or conservator.

K. Statutory Credit. The Reinsurer will take any other reasonable steps that may be required for the Reassured to take full credit on its statutory financial statements for the reinsurance provided by this Contract.

ARTICLE 17

SALVAGE AND SUBROGATION

A. Application of Recoveries. All recoveries, including but not limited to salvage, subrogation, payments and reversals or reductions of verdicts or judgments (net of the cost of obtaining such recovery, payment or reversal or reduction of a verdict or judgment) whether recovered, received or obtained prior or subsequent to a loss settlement under this Contract, including amounts recoverable under other reinsurance whether collected or not, shall be applied as if recovered, received or obtained prior to the aforesaid settlement and shall be deducted from the actual losses sustained to arrive at the amount of the Ultimate Net Loss. Nothing in this Article shall be construed to mean losses are not recoverable until the final Ultimate Net Loss to the Reassured has been ascertained. Amounts recovered from salvage and/or subrogation will always be used to reimburse any excess reinsurers (and the Reassured should it carry a portion of excess coverage net) before being used in any way to reimburse the Reassured and the Reinsurer hereon, who will share pro-rata in any remainder.

B. Subrogation Rights._ The Reinsurer shall be subrogated, as respects any loss for which the Reinsurer shall actually pay or become liable, but only to the extent of the amount of payment by or the amount of liability to the Reinsurer, to all the rights of the Reassured against any person or other entity who may be legally responsible for damages as a result of said loss. Should the Reassured elect not to enforce such rights, the Reinsurer is hereby authorized and empowered to bring any appropriate action in the name of the Reassured or its policyholders, or otherwise to enforce such rights. The Reinsurer shall promptly remit to the Reassured the amount of any judgment awarded in such an action in excess of the amount of payment by, or the amount of liability to, the Reinsurer hereunder.

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ARTICLE 18

TAXES

A. Tax Liability. To the extent that any portion of the Reinsurance Premium is subject to the Federal Excise Tax (as imposed under Section 4371 of the Internal Revenue Code) and the Reinsurer is not exempt therefrom, the Reinsurer shall not be liable for the payment of the Federal Excise Tax. The Reinsurer is not responsible for any and all other taxes relating to this Contract, except for any income taxes payable by the Reinsurer hereunder.

B. Premium Deduction. In consideration of the terms under which this Contract is issued, the Reassured undertakes not to claim any deduction of the Reinsurance Premium hereon when making Canadian Tax returns or when making tax returns, other than Income or Profits Tax returns, to any state or territory of the United States of America or to the District of Columbia.

ARTICLE 19

ACCESS TO AND RETENTION OF RECORDS

A. The Reassured shall place at the disposal of the Reinsurer at all reasonable times, and the Reinsurer shall have the right to inspect (and make reasonable copies) through its designated representatives, during the Term of this Contract and thereafter, all non-privileged books, records and papers of the Reassured directly related to this Contract, including without limitation, any reinsurance hereunder, provided that if the Reinsurer has ceased active market operations, this right of access shall be subject to that Reinsurer being current in all payments owed the Reassured that are not currently the subject of a formal dispute, as defined by the NAIC under the instructions for Schedule F of the Annual Statement, i.e. litigation, arbitration, or notification, where notification means “a formal written communication from a Reinsurer denying the validity of coverage,” which notification shall contain the reason(s) why the Reinsurer is denying the validity of coverage. For the purposes of this Article, “non-privileged” refers to books, records and papers that are not subject to Attorney-client privilege or the Attorney-work product doctrine, as defined hereinbelow. If any of the books, records and papers of the Reassured are considered by the Reassured to be privileged communications or Attorney work product not subject to inspection by the Reinsurer without waiving these privileges in the applicable jurisdiction governing a particular claim, the Reassured and the Reinsurer shall work together in good faith to develop and implement a method or process to provide the Reinsurer with all pertinent factual and other information needed to evaluate the claim and protect these privileges and comply with the law, and the Reassured and the Reinsurer agree to abide by the agreed and reasonable method or process.

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B. “Attorney-client privilege” and “Attorney-work product” shall have the meanings ascribed to each by statute and/or the court of final adjudication in the jurisdiction whose laws govern the substantive law of a claim arising under a Policy reinsured under this Contract.

C. Notwithstanding anything to the contrary in this Contract, for any claim or loss under a Policy reinsured under this Contract, should the Reinsurer assert, pursuant to the Common Interest Doctrine (“Doctrine”), that it has the right to examine any document that the Reassured alleges is subject to the Attorney-client privilege or the Attorney-work product privilege, upon the Reinsurer providing to the Reassured substantiation of any law which reasonably supports the basis for the Reinsurer’s conclusion that the Doctrine applies and the Doctrine will be upheld as applying between the Reassured and the Reinsurer as against third parties pursuant to the substantive Iaw(s) which govern the claim or loss, the Reassured shall give the Reinsurer access to such document.

D. Notwithstanding any other provision to the contrary, once a claim and all directly related claims are finally settled by the Reassured, or finally adjudicated, the Reinsurer shall be entitled to review all reasonable and applicable claims records that support a Reassured request for payment of a claim hereunder for Net Loss for Business Covered hereunder. In the event that the Reinsurer shall have paid an amount for Net Loss to the Reassured and the records do not support the obligation of the Reinsurer to have paid the claim, the Reassured shall promptly return any payment made in error.

ARTICLE 20

SERVICE OF SUIT_,

A. Applicability of this Article. This Article only applies to a Reinsurer domiciled outside of the United States and/or unauthorized in any state, territory or district of the United States having jurisdiction over the Reassured. Furthermore, this Article will not be read to conflict with or override the obligations of the parties to arbitrate their disputes as provided for in the Article entitled ARBITRATION. This Article is intended as an aid to compelling arbitration or enforcing such arbitration or arbitral award, not as an alternative to the Article entitled ARBITRATION_, for resolving disputes arising out of this Contract.

B. Event of Any Dispute. In the event of any dispute, the Reinsurer, at the request of the Reassured, shall submit to the jurisdiction of a court of competent jurisdiction within the United States. Nothing in this Article constitutes or should be understood to constitute a waiver of any obligation to arbitrate disputes arising from this Contract or the Reinsurer’s rights to commence an action in any court of competent jurisdiction in the United States, to remove an action to a United States District Court, or to seek a transfer of a case to another court as permitted by the laws of the United States or of any state in the United States.

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C. Service of Process. Service of process in any such suit against the Reinsurer may be made upon Lord, Bissell & Brook LLP, 115 South LaSalle Street, Chicago, Illinois 60603-3901, or the entity identified on the Reinsurer’s signature page to this Contract, (“Firm”) and in any suit instituted, the Reinsurer shall abide by the final decision of such court or of any Appellate Court in the event of an appeal.

D. Authorization of Firm. The Firm is authorized and directed to accept service of process on behalf of the Reinsurer in any such suit and/or upon the request of the Reassured to give a written undertaking to the Reassured that they shall enter a general appearance upon the Reinsurer’s behalf in the event such a suit shall be instituted.

E. Lawful Attorney for Reassured. Further, as required by and pursuant to any statute of any state, territory or district of the United States which makes provision therefore, the Reinsurer hereby designates the Superintendent, Commissioner or Director of Insurance or other officer specified for that purpose in the statute, or his successor or successors in office, as their true and lawful attorney upon whom may be served any lawful process in any action, suit or proceeding instituted by or on behalf of the Reassured or any beneficiary hereunder arising out of this Contract, and hereby designates the above-named as the person to whom the said officer is authorized to mail such process or a true copy thereof.

ARTICLE 21

ARBITRATION

A. Disputes Submitted to Arbitration. Any and all disputes between the Reassured and the Reinsurer arising out of, relating to, or concerning this Contract, whether sounding in contract or tort and whether arising during or after termination of this Contract, shall be submitted to the decision of a board of arbitration composed of two arbitrators and an umpire (“Board”) meeting at a site in the city in which the principal headquarters of the Reassured are located. The arbitration shall be binding and shall be conducted under the Federal Arbitration Act and shall proceed as set forth below.

B. Notice Requesting Arbitration. A notice requesting arbitration, or any other notice made in connection therewith, shall be in writing and be sent certified or registered mail, return receipt requested to the affected parties. The notice requesting arbitration shall state in particulars all issues to be resolved in the view of the claimant, shall appoint the arbitrator selected by the claimant and shall set a tentative date for the hearing, which date shall be no sooner than ninety (90) days and no later than one hundred fifty (150) calendar days from the date that the notice requesting arbitration is mailed. Within thirty (30) calendar days of receipt of claimant’s notice, the respondent shall notify claimant of any additional issues to be resolved in the arbitration and of the name of its appointed arbitrator.

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C. Arbitration Board. Unless otherwise mutually agreed, the members of the Board shall be impartial and disinterested and shall be current or former senior officers of property-casualty insurance companies, reinsurance companies, or Lloyds Underwriters or active or inactive lawyers with at least twenty (20) years of experience in insurance and reinsurance not currently representing any party participating in the arbitration. The Reassured and the Reinsurer as aforesaid shall each appoint an arbitrator and the two arbitrators shall choose an umpire before instituting the hearing. As time is of the essence, if the respondent fails to appoint its arbitrator within thirty (30) calendar days after having received claimant’s written request for arbitration, the claimant is authorized to and shall appoint the second arbitrator. If the two arbitrators fail to agree upon the appointment of an umpire within thirty (30) calendar days after notification of the appointment of the second arbitrator, within ten (10) calendar days thereof, the two arbitrators shall request ARIAS U.S. (“ARIAS”) to apply its procedures to appoint an umpire for the arbitration with the qualifications set forth above in this Article. If the use of ARIAS procedures fails to name an umpire, either party may apply to the court named below to appoint an umpire with the above required qualifications. The umpire shall promptly notify in writing all parties to the arbitration of his selection and of the scheduled date for the hearing. Upon resignation or death of any member of the Board, a replacement shall be appointed in the same fashion as the resigning or deceased member was appointed.

D. Initial and Reply Briefs. The claimant and respondent shall each submit initial briefs to the Board outlining the facts, the issues in dispute and the basis, authority, and reasons for their respective positions within thirty (30) calendar days of the date of notice of appointment of the umpire. The claimant and the respondent may submit a reply brief to the Board within ten (10) calendar days after filing of the initial brief(s). Initial and reply briefs may be amended by the submitting party at any time, but not later than ten (10) calendar days prior to the date of commencement of the arbitration hearing. Reasonable responses shall be allowed at the arbitration hearing to new material contained in any amendments filed to the briefs but not previously responded to.

E. Contract is an Honorable Engagement. The Board shall consider this Contract as an honorable engagement and shall make a decision and award with regard to the terms expressed in this Contract, the original intentions of the parties to the extent reasonably ascertainable, and the custom and usage of the property and casualty insurance and reinsurance business.

F. Rules of Evidence Shall Not Strictly Apply. The Board shall be relieved of all judicial formalities and the decision and award shall be based upon a hearing in which evidence shall be allowed though the formal rules of evidence shall not strictly apply. Cross examination and rebuttal shall be allowed. At its own election or at the request of the Board, either party may submit a post-hearing brief for consideration of the Board within twenty (20) calendar days of the close of the hearing.

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G. Decision of Board. The Board shall render its decision and award in writing within thirty (30) calendar days following the close of the hearing or the submission of post-hearing briefs, whichever is later, unless the parties consent to an extension. Every decision by the Board shall be by a majority of the members of the Board and each decision and award by the majority of the members of the Board shall be final and binding upon all parties to the proceeding.

H. Awarding of Interest, Attorney Fees, Punitive/Treble Damages. The Board may award (i) interest at a rate of up to 400 basis points above the prime rate as published in the Wall Street Journal (Eastern Edition), but not less than 12% per annum, on the date of the award calculated from the date the Board determines that any amounts due the prevailing party should have been paid to the prevailing party, (ii) attorney fees and punitive, exemplary, or treble damages if the actions of either party in prosecuting, defending or causing the arbitration are made in bad faith and constitute outrageous behavior in the opinion of the Board.

I. Application to Court of Competent Jurisdiction for Confirmation. Either party may apply to a court of competent jurisdiction for an order confirming any decision and the award; a judgment of that Court shall thereupon be entered on any decision or award.

J. Expenses of Proceeding. Except in the event of a consolidated arbitration, each party shall bear the expense of the one arbitrator appointed by it and shall jointly and equally bear with the other party the expense of any stenographer requested, and of the umpire. The remaining costs of the arbitration proceedings shall be finally allocated by the Board.

K. Discovery. Subject to customary and recognized legal rules of privilege, each party participating in the arbitration shall have the obligation to produce those documents and as witnesses at the arbitration those of its employees, those of its affiliates, and those of any intermediary as any other participating party reasonably requests providing always that the same witnesses and documents be obtainable and relevant to the issues before the arbitration.

L. Pre-Hearing. The parties may mutually agree as to pre-hearing discovery prior to the arbitration hearing and in the absence of agreement, upon the request of any party, pre-hearing discovery may be conducted as the Board shall determine in its sole discretion to be in the interest of fairness, full disclosure, and a prompt hearing, decision and award by the Board.

M. Board Shall be Final Judge. The Board shall be the final judge of the procedures of the Board, the conduct of the arbitration, of the rules of evidence, the rules of privilege and production and of excessiveness and relevancy of any witnesses and documents upon the petition of any participating party. To the

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extent permitted by law, the Board shall have the authority to issue subpoenas and other orders to enforce their decisions. The Board shall also have the authority to issue interim decisions or awards in the interest of fairness, full disclosure, and a prompt and orderly hearing and decision and award by the Board.

N. Consolidated Hearing. If applicable, upon request of the Reassured made to the affected Reinsurers and to the Board not later than ten (10) calendar days after the umpire’s appointment, the Board may order a consolidated hearing between the Reassured and all affected Reinsurers participating in this Contract if the Board is satisfied in its discretion that the issues in dispute affect more than one Reinsurer and a consolidated hearing would be in the interest of fairness, and a prompt and cost effective resolution of the issues in dispute.

1. If the parties mutually agree to or the Board orders a consolidated hearing, all other affected participating Reinsurers shall join and participate in the arbitration under time frames established by the Board and will be bound by the Board’s decision and award unless excused by the Board in its discretion.

2. Any Reinsurer may decline to actively participate in a consolidated arbitration if in advance of the hearing, that Reinsurer shall file with the Board a written agreement in form satisfactory to the Board to be bound by the decision and award of the Board in the same fashion and to the same degree as if it actively participated in the arbitration.

3. In the event of an order of consolidation by the Board, the arbitrator appointed by the original Reinsurer shall be subject to being and may be replaced within thirty (30) calendar days of the decision to have a consolidated arbitration by an arbitrator named collectively by the Reinsurers or in the absence of agreement, by the Lead Reinsurer, or if there is no Lead Reinsurer, the Reinsurer with the largest participation in this Contract affected by the dispute. In the event two or more Reinsurers affected by the dispute each have the same largest participation, they shall agree among themselves as to the replacement arbitrator, if any, to be appointed. The umpire shall be the final determiner in the event of any dispute over replacement of that arbitrator. All other aspects of the arbitration shall be conducted as provided for in this Article provided that (1) each party actively participating in the consolidated arbitration will have the right to its own attorney, position, and related claims and defenses; (2) each party will not, in presenting its position, be prevented from presenting its position by the position set forth by any other party; and (3) the cost and expense of the arbitration, exclusive of attorney’s fees (which will be borne exclusively by the respective retaining party) but including the expense of any stenographer by each party actively participating in the consolidated arbitration or as the Board shall determine to be fair and appropriate under the circumstances.

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ARTICLE 22

INSOLVENCY

(This Article shall be deemed to read as required to meet the statutory insolvency clause requirements of the Reassured.)

A. Event of Insolvency of Reassured. In the event of insolvency and the appointment of a conservator, liquidator, or statutory successor of the Reassured, the portion of any risk or obligation assumed by the Reinsurer shall be payable to the conservator, liquidator, or statutory successor on the basis of claims allowed against the insolvent Reassured by any court of competent jurisdiction or by any conservator, liquidator, or statutory successor of the Reassured having authority to allow such claims, without diminution because of that insolvency, or because the conservator, liquidator, or statutory successor has failed to pay all or a portion of any claims.

B. Payments by the Reinsurer. Payments by the Reinsurer as above set forth shall be made directly to the Reassured or to its conservator, liquidator, or statutory successor, except where the contract of insurance or reinsurance specifically provides another payee of such reinsurance or except as provided by applicable law and regulation (such as subsection (a) of Section 4118 of the New York Insurance Laws) in the event of the insolvency of the Reassured.

C. Pendency of Claim Against Insolvent Reassured on Reinsured Policies. In the event of the insolvency of the Reassured, the liquidator, receiver, conservator or statutory successor of the Reassured shall give written notice to the Reinsurer of the pendency of a claim against the insolvent Reassured on the Policy or Policies reinsured within a reasonable time after such claim is filed in the insolvency proceeding and during the pendency of such claim any Reinsurer may investigate such claim and interpose, at its own expense, in the proceeding where such claim is to be adjudicated any defense or defenses which it may deem available to the Reassured or its liquidator, receiver, conservator or statutory successor. The expense thus incurred by the Reinsurer shall be chargeable subject to court approval against the insolvent Reassured as part of the expense of liquidation to the extent of a proportionate share of the benefit which may accrue to the Reassured solely as a result of the defense undertaken by the Reinsurer.

D. Two or More Reinsurers Involved. Where two or more Reinsurers are involved in the same claim and a majority in interest elect to interpose defense to such claim, the expense shall be apportioned in accordance with the terms of this Contract as though such expense had been incurred by the Reassured.

E. No Riqhts of Original Insured Against the Reinsurer. Neither a claimant, original insured nor the policyholder shall have any rights against the Reinsurer which are not specifically set forth in this Contract, or in a specific agreement between the Reinsurer and the original insured or policyholder.

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ARTICLE 23

INTERMEDIARY

A. Intermediary. Towers Perrin Forster & Crosby, Inc. (“Towers Perrin”) is hereby recognized as the Reassured’s Intermediary negotiating this Contract for all business hereunder. All communications (including but not limited to notices, statements, premium, return premium, commissions, taxes, losses, loss adjustment expense, salvages and loss settlements) relating thereto shall be transmitted to the Reassured or the Reinsurer through Towers Perrin, 1500 Market Street, Centre Square East, Philadelphia, PA 19102. Payments by the Reassured to the Intermediary shall be deemed to constitute payment to the Reinsurer. Payments by the Reinsurer to the Intermediary shall be deemed to constitute payment to the Reassured only to the extent that such payments are actually received by the Reassured, subject to the Article entitled INSOLVENCY hereunder.

B. Form of Notice. Whenever notice is required within this Contract, such notice may be given by any of: certified mail, registered mail, electronic mail, fax, overnight express mail or any other means by which the issuing party shall be able to give such notice and depend upon reliable receipt. Notice shall be deemed to be given on the date any notice is sent by electronic mail; in all other instances, the date received by the receiving party.

ARTICLE 24

CONFIDENTIALITY

A. Confidential Information. Except as otherwise provided in law, the written information, data, and other materials provided by the Reassured or the Reinsurer to the other arising from consideration and participation in this Contract whether contained in the reinsurance submission, this Contract, or in materials or discussions arising from or related to this Contract, may contain confidential or proprietary information as expressly indicated by the disclosing party in writing from time to time to the other party of the respective parties (such confidential and proprietary information being referred to as “Confidential Information”). This Confidential Information is intended for the sole use of the parties to this Contract (and their retrocessionaires, affiliates, respective auditors, consultants, regulators, rating agencies, legal counsel and any other persons or entities to whom such disclosure is required to effect, administer, or enforce a reinsurance contract). Disclosing Confidential Information disclosed under this Contract for any purpose beyond (i) the scope of this Contract, (ii) the reasonable extent necessary to administer, report to and effect recoveries from retrocessional reinsurers, or (iii) persons with a need to know the information is expressly forbidden without the prior written consent of the party disclosing Confidential Information (the “Disclosing Party”). The party receiving Confidential Information (the “Receiving Party”) shall

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inform any third party to whom disclosure of Confidential Information is made of the obligation to maintain the confidentiality of the Confidential Information and shall be responsible for any failure by any such third party to maintain the confidentiality of the Confidential Information.

B. Event of Receiving Party Receiving a Demand to Disclose Confidential Information. Should a Receiving Party receive a third party demand pursuant to subpoena, summons, or court or governmental order, to disclose Confidential Information that has been provided by another party to this Contract (“Disclosing Party”), the Receiving Party shall, to the extent permitted by law, make commercially reasonable efforts to notify the Disclosing Party promptly upon receipt of the demand and prior to disclosure of the Confidential Information and provide the Disclosing Party a reasonable opportunity to object to the disclosure. If such notice is provided, the Receiving Party may after the passage of five (5) business days after providing notice, proceed to disclose the Confidential Information as necessary to satisfy such a demand without violating this Contract. If the Disclosing Party timely objects to the release of the Confidential Information, the Receiving Party will comply with the reasonable requests of the Disclosing Party in connection with the Disclosing Party’s efforts to resist release of the Confidential Information. The Disclosing Party shall bear the cost of resisting the release of the Confidential Information.

C. Term of Obligation of Confidentiality. Notwithstanding anything herein to the contrary, except to the extent confidentiality is required to be maintained for a longer period of time by the laws of the United States of America or the Commonwealth of Pennsylvania with respect to personal health information, the obligations of confidentiality set forth in the preceding two paragraphs shall expire (a) three (3) years from the date hereof in the event that there are no claims made under this Contract or (b) in the event of any claim being made under this Contract, three (3) years from the date of the last payment by the Reinsurer on the last claim covered by this Contract. Furthermore, except for non-public personal information and protected health information, which must be held confidential without time limitation as provided in the Article entitled ACCESS TO AND RETENTION OF RECORDS, of this Contract, the Reassured will provide notice of any Confidential Information that must remain confidential more than three (3) years after the Termination Date of this Contract.

ARTICLE 25

ORIGINAL CONDITIONS

     The Reinsurer’s liability to the Reassured shall attach simultaneously with that of the Reassured and the reinsurance of all Business Covered hereunder shall be subject in all respects to the same risks, terms, clauses, conditions, interpretations, alterations, modifications, cancellations and waivers as the respective insurances (or reinsurances) of the Reassured’s Policies and the Reinsurer shall pay losses as may be paid thereon, the true intent of this Contract

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being that in each and every case to which this Contract applies, the Reinsurer shall follow the settlements and fortunes of the Reassured, subject always to the limits, terms and conditions of this Contract.

ARTICLE 26

REGULATORY COMPLIANCE AND REPRESENTATIONS AND WARRANTIES OF REASSURED

A. In connection with this Contract, the Reassured represents the following:

1. It is a duly organized and validly existing insurer under the laws of the jurisdiction of its organization.

2. The execution, delivery and performance of this Contract do not violate or conflict with any law or order of government or agency applicable to it.

3. It has not received and is not relying upon any legal, tax, regulatory, accounting or other advice (whether written, oral, implied or assumed) of the Reinsurer regarding this transaction.

4. It has the capacity to evaluate (internally or through independent advice) this Contract and has consulted its own tax, accounting and legal advisors in connection with this Contract, including a financial analysis with respect to the transfer of insurance risk.

5. It (i) has disclosed or agrees to fully disclose in a timely fashion, the Contract to its internal accountants and independent auditors and (ii) where appropriate in the reasonable opinion of the Reassured, has made or shall make appropriate disclosure to, or consult with, its legal counsel and any relevant regulatory and tax authorities.

6. It will account for this Contract in accordance with accounting principles prescribed or permitted by the Commonwealth of Pennsylvania, and the Reassured is not entering into this Contract for the purpose of altering its financial or statutory accounting statements in a manner that would be misleading to users of such statements.

7. All data delivered to the Reinsurer was accurate and complete

B. In connection with this Contract, the Reassured warrants that all other reinsurance contracts of the Reassured which inure to the benefit of this Contract shall be deemed in place until all liability herein is finalized.

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ARTICLE 27

ERRORS AND OMISSIONS

     Inadvertent delays, errors or omissions made by the Reassured in connection with this Contract (including the reporting of claims) shall not relieve the Reinsurer from any liability which would have attached had such delay, error or omission not occurred, provided always that such delay, error or omission shall be rectified as soon as possible after discovery by the Reassured’s Home Office.

ARTICLE 28

CURRENCY

     Whenever the word “Dollars” or the “$” sign appears in this Contract, they shall be construed to mean United States Dollars and all transactions under this Contract shall be in United States Dollars. Amounts paid or received by the Reassured in any other currency shall be converted to United States Dollars at the rate of exchange at the date such transaction is entered on the books of the Reassured.

ARTICLE 29

OFFSET

     The Reassured and the Reinsurer shall have the right to offset any balance or amounts due from one party to the other under the terms of this Contract. The party asserting the right of offset may exercise such right any time whether the balances due are on account of premiums or losses or otherwise and immediately inform the Intermediary accordingly. In the event of the insolvency of any party, offset shall be as permitted by applicable law.

ARTICLE 30

NOTICE

     As used in this Contract, notice shall mean any and all notices, requests, demands or other communications required or permitted to be given hereunder, and all notices shall be given or mailed by first class certified mail, return receipt requested, by an overnight delivery service or by confirmed telecopy, addressed to the parties at the addresses set forth in the Contracts.

     The Reinsurer designates its address to which all notices, reports and remittances are to be sent, as set forth in the attached signature page.

     The Reassured hereby designates the following as its address to which all notices, reports and remittances are to be sent:

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Mr. Michael Banks
Executive Vice President & Chief Financial Officer 72 North
Franklin, PO Box P
Wilkes Barre, PA 18773

ARTICLE 31

SPECIAL TERMINATION

A. The Reassured may terminate or commute this Contract upon the happening of any one of the following circumstances at any time by the giving of fifteen (15) days prior written notice to the Reinsurer:

1. The Reinsurer ceases active underwriting operations or a State Insurance Department or other legal authority orders the Reinsurer to cease writing business in all jurisdictions. Or

2. The Reinsurer has filed a plan to enter into a Scheme of Arrangement or similar procedure. “Scheme of Arrangement” is defined as a legislative or regulatory process that provides a solvent Reinsurer the opportunity to settle its obligations with the Reassured either (i) without the Reassured’s unrestrained consent or (ii) prior to the Reassured having the ability to determine, with exact certainty, the actual amount of the obligations still outstanding and ultimately due to the Reassured. Or

3. The Reinsurer has: (a) become insolvent, (b) been placed under supervision (voluntarily or involuntarily), (c) been placed into liquidation or receivership, or d) had instituted against it proceedings for the appointment of a supervisor, receiver, liquidator, rehabilitator, conservator or trustee in bankruptcy, or other agent known by whatever name, to take possession of its assets or control of its operations or (d) the Reinsurer’s AM Best’s insurer financial strength rating becomes less than “A-” or the Reinsurer’s Standard and Poor’s Insurance Rating becomes less than “BBB”.

B. In the event that notice of termination is given by reason of an Event described in A(4) above (the “Termination Notice”) and prior to the effective date of the termination (the “Termination Date”), the chief financial officer of the Reinsurer represents and certifies in writing to the Reassured that (i) the deterioration of the Reinsurer’s financial condition is the direct and sole result of a recent major property catastrophe(s) or the result of an Act(s) of Terrorism (either the “Event”) and (ii) that it is actively seeking and has a high probability of successfully obtaining additional capital to substantially replace the capital loss because of the Event (the “Extension Notice”), the Termination Date shall be extended an additional thirty (30) days from the Termination Date (the “Extended Termination Date”). If prior to the Extended Termination Date, the chief financial officer of the Reinsurer represents and certifies in writing to the Reassured that (a) it has raised sufficient

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capital so as to return its PHS or C&S to within 5% of the Reinsurer’s PHS or C&S last filed with its domiciliary regulatory authorities prior to the Event, (b) obtained reinstatement of its rating agency grade(s) to the level as existed immediately prior to the Event, and (c) as respects Reinsurers domiciled in the United States of America, raised its adjusted capital to at least 250% of its authorized control level risk-based capital, the Termination Notice shall be null and void. Otherwise, this Contract shall terminate on the Extended Termination Date in the manner described in the Termination Notice.

C. In the event the Reassured elects to terminate, the Reassured shall, with the notice of termination, specify that termination will be on a run-off or cut-off basis. In the event such termination is on a run-off basis, the Reassured shall relieve the Reinsurer for losses occurring subsequent to the specified Termination Date, and that Reinsurer shall not receive deposit premium installments beyond the date at which termination of the Reinsurer is effected. The Reinsurer shall within fifteen (15) days of the Termination Date return a pro-rata portion of any ceded deposit premium paid hereunder, calculated as of the Termination Date, and cash in that amount (less applicable ceding commission, if any, allowed thereon) and the minimum premium provisions, if any, shall be waived. (The fraction of the deposit premium to be returned to the Reassured shall equal the number of days from the Termination Date until the original expiration date of the Contract period divided by the number of days in the original Contract period). Upon final determination of the adjusted premium for the Contract period, the Reinsurer shall be credited with a portion of premium for this Contract, in the amount equal to the fraction of the number of days the terminated Reinsurer participated in the Contract period divided by the number of days in the Contract period multiplied by the reinsurance premium for the Contract period.

D. In the event the Reassured elects to terminate this Contract on a cut-off basis, the parties shall commute all liabilities relating to this Contract and the Reinsurer shall return the sum total of the net present value (“capitalized”) of the ceded (1) Net Loss Reserves for losses occurring prior to the Termination Date, (2) Loss Adjustment Expense Reserves for losses occurring prior to the Termination Date, (3) incurred but not reported reserves for losses occurring prior to the Termination Date, and (4) unearned premium reserve (after deduction for any ceding commission allowed thereon). In the event the parties are unable to agree on the capitalized value of the reserves to be returned to the Reassured, the Reassured and the Reinsurer shall jointly appoint an independent actuary experienced in such matters and the mutually agreed actuary shall render a decision. In the event that the Reassured and the Reinsurer are unable to agree upon a single actuary within thirty (30) days, the parties shall ask the then current President of the Casualty Actuarial Society to appoint an actuary with those qualifications within another thirty (30) days. The decision of the actuary will be final and binding on both parties. The Reassured and the Reinsurer shall share

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equally the fees and expenses of the actuary. Upon payment of the amount so agreed or determined by the actuary to the Reassured, the Reinsurer and the Reassured shall each be completely released from all liability to each other under this Contract.

E. If the Reinsurer is not otherwise obligated under the Article entitled RESERVES of this Contract, to provide the Reassured security in order for the Reassured to obtain credit for the reinsurance provided by this Contract and the Reinsurer has not cured the conditions described above, other than as expressed in conditions 5 and 6 above, the Reassured shall also have the option, if it does not elect the commutation option described above, to require the Reinsurer to provide the Reassured with collateral funding as if the Reinsurer were otherwise obligated to provide security for the Reinsurer’s obligations under this Contract in an amount and manner and as provided for under the Article entitled RESERVES of this Contract. The Reassured shall have the option to require the Reinsurer to provide collateral funding but, provided it is reasonably acceptable to the Reassured and any insurance regulatory authorities involved, the Reinsurer shall have the sole option of determining the method of funding referred to above. In recognition of security a participating Reinsurer or Lloyd’s Syndicate may place under the terms of a master trust agreement, such as the US Lloyd’s Credit for Reinsurance Trust, the provisions of this Paragraph shall not apply to that participating Reinsurer or Lloyd’s Syndicate that has fully funded 100% of the Obligations to the Reassured, as the term Obligations is defined in the Article entitled RESERVES, pursuant to the terms of that trust agreement and the applicable funding requirements and procedures.

ARTICLE 32

VARIOUS OTHER TERMS

A. This Contract shall be binding upon and inure to the benefit of the Reassured and Reinsurer and their respective successors and assigns provided, however, that this Contract may not be assigned by either party without the prior written consent of the other which consent may be withheld by either party in its sole unfettered discretion. This provision shall not be construed to preclude the assignment by the Reassured of reinsurance recoverables to another party for collection.

B. The territorial limits of this Contract shall be identical with those of the Reassured’s Policies.

C. This Contract shall constitute the entire agreement between the parties with respect to the Business Covered hereunder. There are no understandings between the parties other than as expressed in this Contract. Any change or modification of this Contract shall be null and void unless made by amendment to the Contract and signed by both parties.

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D. Except as may be provided in the Article entitled ARBITRATION, this Contract shall be governed by and construed according to the laws of the state of the location of the Reassured’s principal headquarters’ offices, exclusive of that state’s rules with respect to conflicts of law.

E. The headings preceding the text of the Articles and paragraphs of this Contract are intended and inserted solely for the convenience of reference and shall not affect the meaning, interpretation, construction or effect of this Contract.

F. This Contract is solely between the Reassured and the Reinsurer, and in no instance shall any insured, claimant or other third party have any rights under this Contract, including without limitation, any company hereafter acquired, merged, or controlled by the Reassured (without the written consent of the Reinsurer) or any company which owns or controls the Reassured that is not a named Reassured hereunder.

G. If any provision of this Contract should be invalid under applicable laws, the latter shall control but only to the extent of the conflict without affecting the remaining provisions of this Contract.

H. The failure of the Reassured or Reinsurer to insist on strict compliance with this Contract or to exercise any right or remedy shall not constitute a waiver of any rights contained in this Contract nor estop the parties from thereafter demanding full and complete compliance nor prevent the parties from exercising any remedy.

I. Each party shall be excused for any reasonable failure or delay in performing any of its respective obligations under this Contract, if such failure or delay is caused by Force Majeure. “Force Majeure” shall mean any act of God, strike, lockout, act of public enemy, any accident, explosion, fire, storm, earthquake, flood, drought, peril of sea, riot, embargo, war or foreign, federal, state or municipal order or directive issued by a court or other authorized official, seizure, requisition or allocation, any failure or delay of transportation, shortage of or inability to obtain supplies, equipment, fuel or labor or any other circumstance or event beyond the reasonable control of the party relying upon such circumstance or event; provided, however, that no such Force Majeure circumstance or event shall excuse any failure or delay beyond a period exceeding ten (10) days from the date such performance would have been due but for such circumstance or event.

J. This Contract should be construed as a separate Contract between each ceding company, part of the Reassured, and each participating Reinsurer, provided that if coverage is afforded without reference to the number of Policies involved in a single occurrence loss, the retention and limit of the Contract shall be calculated as if all involved ceding companies were one and recovery due hereunder shall be due each ceding company in direct proportion to its portion of the total loss.

K. All Articles of this Contract shall survive the termination of this Contract until all obligations between the parties have been finally settled.

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L. This Contract may be executed by the parties hereto in any number of counterparts, and by each of the parties hereto in separate counterparts, each of which counterparts, when so executed and delivered, shall be deemed to be an original, but all such counterparts shall together constitute but one and the same instrument.

M. Whenever the word “Reassured” is used in this Contract, such term shall mean each and all affiliated companies which are or may hereafter be under common control provided notice be given to the Reinsurers of any such newly affiliated companies which may hereafter come under common control as soon as practicable with full particulars as to how such affiliation is likely to affect this Contract. In the event that either Party maintains that such affiliation calls for altering the terms of this contract and an agreement for alteration not being arrived at, then the Business Covered of such newly affiliated company is covered at existing terms for a period of not to exceed forty-five (45) days after notice but either party that is does not wish to cover the business of the newly affiliated company at the existing terms.

N. The term “Reinsurer” shall refer to each Reinsurer participating severally and not jointly in this Contract. The subscribing (re)insurers’ obligations under contracts of (re)insurance to which they subscribe are several and not joint and are limited solely to the extent of their individual subscriptions. The subscribing (re)insurers are not responsible for the subscriptions of any co-subscribing (re)insurer who for any reason does not satisfy all or part of its obligations.

O. Whenever the word “Company” is used in this Contract, such term shall mean “Reinsured”, “Reassured” or whatever other term is used in the document to designate the reinsured company or companies.

P. Whenever the content of this Contract requires, the gender of all words shall include the masculine, feminine and neuter, and the number of all words shall include the singular and the plural. This Contract shall be construed without regard to any presumption or other rule requiring against the party causing this Contract to be drafted.

Q. As required by SSAP 62 (8)(d), the Reassured shall furnish the Reinsurers a periodic statement showing a report of the premium, the unearned premium, the total loss and loss expense ceded under this Contract, and such other information as may be required by regulatory authorities for completion of financial statements.

1.

NUCLEAR INCIDENT EXCLUSION CLAUSE — PHYSICAL DAMAGE — REINSURANCE (BRMA 35B)

1. This reinsurance does not cover any loss or liability accruing to the Reassured, directly or indirectly, and whether as Insurer or Reinsurer, from any Pool of Insurers or Reinsurers formed for the purpose of covering Atomic or Nuclear Energy risks.

2. Without in any way restricting the operation of paragraph (1) of this Clause, this reinsurance does not cover any loss or liability accruing to the Reassured, directly or indirectly, and whether as Insurer or Reinsurer, from any insurance against Physical Damage (including business interruption or consequential loss arising out of such Physical Damage) to:

I.	Nuclear reactor power plants including all auxiliary property on the site, or
II.	Any other nuclear reactor installation, including laboratories handling radioactive materials in connection with reactor installations and “critical facilities” as such, or
III.	Installations for fabricating complete fuel elements or for processing substantial quantities of “special nuclear material” and for reprocessing, salvaging, chemically separating, storing or disposing of “spent” nuclear fuel or waste materials, or
IV.	Installations other than those listed in paragraph (2) III above using substantial quantities of radioactive isotopes or other products of nuclear fission.

3. Without in any way restricting the operations of paragraphs (1) and (2) hereof, this reinsurance does not cover any loss or liability by radioactive contamination accruing to the Reassured, directly or indirectly, and whether as Insurer or Reinsurer, from any insurance on property which is on the same site as a nuclear reactor power plant or other nuclear installation and which normally would be insured therewith except that this paragraph (3) shall not operate:

(a)	where Reassured does not have knowledge of such nuclear reactor power plant or nuclear installation, or
(b)	where said insurance contains a provision excluding coverage for damage to property caused by or resulting from radioactive contamination, however caused. However, on and after 1st January 1960, this sub-paragraph (b) shall only apply provided the said radioactive contamination exclusion provision has been approved by the Governmental Authority having jurisdiction thereof.

4. Without in any way restricting the operations of paragraphs (1), (2) and (3) hereof, this reinsurance does not cover any loss or liability by radioactive contamination accruing to the Reassured, directly or indirectly, and whether as Insurer or Reinsurer, when such radioactive contamination is a named hazard specifically insured against.

5. It is understood and agreed that this Clause shall not extend to risks using radioactive isotopes in any form where the nuclear exposure is not considered by the Reassured to be the primary hazard.

6. The term “special nuclear material” shall have the meaning given it in the Atomic Energy Act of 1954 or by any law amendatory thereof.

2.

7. Reassured to be sole judge of what constitutes:

(a)	substantial quantities, and
(b)	the extent of installation, plant or site.

Notes: Without in any way restricting the operation of paragraph (1) hereof, it is understood and agreed that:

(a)	All policies issued by the Reassured on or before 31st December 1957 shall be free from the application of the other provisions of this Clause until expiry date or 31st December 1960 whichever first occurs whereupon all the provisions of this Clause shall apply.
(b)	With respect to any risk located in Canada policies issued by the Reassured on or before 31st December 1958 shall be free from the application of the other provisions of this Clause until expiry date or 31st December 1960 whichever first occurs whereupon all the provisions of this Clause shall apply.

1.

NUCLEAR INCIDENT EXCLUSION CLAUSE — LIABILITY — REINSURANCE U.S.A. (BRMA 35A)

1. This reinsurance does not cover any loss or liability accruing to the Reassured as a member of, or subscriber to, any association of insurers or reinsurers formed for the purpose of covering nuclear energy risks or as a direct or indirect reinsurer of any such member, subscriber or association.

2. Without in any way restricting the operation of paragraph 1 of this Clause, it is understood and agreed that for all purposes of this reinsurance all the original policies of the Reassured (new, renewal and replacement) of the classes specified in Clause II of this paragraph 2 from the time specified in Clause III in this paragraph 2 shall be deemed to include the following provision (specified as the Limited Exclusion Provision)

     Limited Exclusion Provision*

	It is agreed that the policy does not apply under any liability coverage, to (In/ary, ,ICknea., tll, .. tle.m ar tl.awouon (bodily Injury or property damage
	with respect to which an insured under the policy is also an insured under a nuclear energy liability policy issued by Nuclear Energy Liability Insurance Association, Mutual Atomic Energy Liability Underwriters or Nuclear Insurance Association of Canada, or would be an insured under any such policy but for its termination upon exhaustion of its limit of liability.
II.	Family Automobile Policies (liability only), Special Automobile Policies (private passenger automobiles, liability only), Farmers Comprehensive Personal Liability Policies (liability only), Comprehensive Personal Liability Policies (liability only) or policies of a similar nature; and the liability portion of combination forms related to the four classes of policies stated above, such as the Comprehensive Dwelling Policy and the applicable types of Homeowners Policies.
II.	The inception dates and thereafter of all original policies as described in II above, whether new, renewal or replacement, being policies which either

(a)	become effective on or after 1st May, 1960, or
(b)	become effective before that date and contain the Limited Exclusion Provision set out above;

provided this paragraph 2 shall not be applicable to Family Automobile Policies, Special Automobile Policies, or policies or combination policies of a similar nature, issued by the Reassured on New York risks, until 90 days following approval of the Limited Exclusion Provision by the Governmental Authority having jurisdiction thereof.

3. Except for those classes of policies specified in Clause II of paragraph 2 and without in any way restricting the operation of paragraph 1 of this Clause, it is understood and agreed that for all purposes of this reinsurance the original liability policies of the Reassured (new, renewal and replacement) affording the following coverages:

Owners, Landlords and Tenants Liability, Contractual Liability, Elevator Liability, Owners or Contractors (including railroad), Protective Liability, Manufacturers and Contractors Liability, Product Liability, Professional and Malpractice Liability, Storekeepers Liability, Garage Liability, Automobile Liability (including Massachusetts Motor Vehicle or Garage Liability)

shall be deemed to include, with respect to such coverages, from the time specified in Clause V of this paragraph 3, the following provision (specified as the Broad Exclusion Provision):

     Broad Exclusion Provision*

     It is agreed that the policy does not apply:

I. Under any Liability Coverage, to (injury sickness, disease, death or destruction (bodily injury or property damage

(a)

with respect to which an insured under the policy is also an insured under a nuclear energy liability policy issued by Nuclear Energy Liability Insurance Association, Mutual Atomic Energy Liability Underwriters or Nuclear Insurance Association of Canada, or would be an insured under any such policy but for its termination upon exhaustion of its limit of liability; or

(b)

resulting from the hazardous properties of nuclear material and with respect to which (1) any person or organization is required to maintain financial protection pursuant to the Atomic Energy Act of 1954, or any law amendatory thereof, or (2) the insured is, or had this policy not been issued would be, entitled to indemnity from the United States of America, or any agency thereof, under any agreement entered into by the United States of America, or any agency thereof, with any person or organization.

II. Under any Medical Payments Coverage, or under any Supplementary Payments Provision relating to (immediate medical or surgical rape (first aid to expenses incurred with respect to (bodily Injury, sickness, d,cease or death (buddy injury resulting from the hazardous properties of nuclear material and arising out of the operation of a nuclear facility by any person or organization.

2.

III. Under any Liability Coverage, to (Injury, sickness, disease, death or destruction (bodily injury or property damage resulting from the hazardous properties of nuclear material, if

(a)	the nuclear material (1) is at any nuclear facility owned by, or operated by or on behalf of, an insured, or (2) has been discharged or dispersed therefrom;
(b)	the nuclear material is contained in spent fuel or waste at any time possessed, handled, used, processed, stored, transported or disposed of by or on behalf of an insured; or
(c)	the (injury, sickness, disease, death or destruction (bodily injury or property damage arises out of the furnishing by an insured of services, materials, parts or equipment in connection with the planning, construction, maintenance, operation or use of any nuclear facility, but if such facility is located within the United States of America, its territories, or possessions or Canada, this exclusion (c) applies only to (injury to or destruction o/property at such nuclear facility (property damage to such nuclear facility and any property thereat.

IV.

As used in this endorsement:

“Hazardous properties” include radioactive, toxic or explosive properties; “nuclear material” means source material, special nuclear material or byproduct material; "source material", “special nuclear material", and “byproduct material” have the meanings given them in the Atomic Energy Act of 1954 or in any law amendatory thereof; “spent fuel” means any fuel element or fuel component, solid or liquid, which has been used or exposed to radiation in a nuclear reactor; “waste” means any waste material (1) containing byproduct material other than tailings or wastes produced by the extraction or concentration of uranium or thorium from any ore processed primarily for its source material content, and (2) resulting from the operation by any person or organization of any nuclear facility included under the first two paragraphs of the definition of nuclear facility; “nuclear facility” means:

(a) any nuclear reactor,

(b) any equipment or device designed or used for (1) separating the isotopes of uranium or plutonium, (2) processing or utilizing spent fuel, or (3) handling, processing or packaging waste,

(c) any equipment or device used for the processing, fabricating or alloying of special nuclear material if at any time the total amount of such material in the custody of the insured at the premises where such equipment or device is located consists of or contains more than 25 grams of plutonium or uranium 233 or any combination thereof, or more than 250 grams of uranium 235,

(d) any structure, basin, excavation, premises or place prepared or used for the storage or disposal of waste,

and includes the site on which any of the foregoing is located, all operations conducted on such site and all premises used for such operations; “nuclear reactor” means any apparatus designed or used to sustain nuclear fission in a self-supporting chain reaction or to contain a critical mass of fissionable material;

(With respect to injury to or destruction of property, the word “injury” or “destruction” (“property damage^" includes all forms of radioactive contamination of property (includes all forms of radioactive contamination of property

V  The inception dates and thereafter of all original policies affording coverages specified in this paragraph 3, whether new, renewal or replacement, being policies which become effective on or after 1st May, 1960, provided this paragraph 3 shall not be applicable to:

(a) Garage and Automobile Policies issued by the Reassured on New York risks, or

(b) statutory liability insurance required under Chapter 90, General Laws of Massachusetts,

until 90 days following approval of the Broad Exclusion Provision by the Governmental Authority having jurisdiction thereof.

4. Without in any way restricting the operation of paragraph 1 of this Clause, it is understood and agreed that paragraphs 2 and 3 above are not applicable to original liability policies of the Reassured in Canada and that with respect to such policies this Clause shall be deemed to include the Nuclear Energy Liability Exclusion Provisions adopted by the Canadian Underwriters’ Association or the Independent Insurance Conference of Canada.

*NOTE: The words printed in italics in the Limited Exclusion Provision and in the Broad Exclusion Provision shall apply only in relation to original liability policies which include a Limited Exclusion Provision or a Broad Exclusion Provision containing those words.

INSOLVENCY FUND EXCLUSION CLAUSE

This Contract shall not afford coverage for liability of the Reassured arising, by contract, operation of law, or otherwise, from its participation or membership, whether voluntary or involuntary, in any insolvency fund. For the purpose of this exclusion, an insolvency fund includes any guaranty fund, insolvency fund, plan, pool, association, fund or other arrangement, howsoever denominated, established or governed which provides for any assessment of or payment or assumption by the Reassured of part or all of any claim, debt, charge, fee or other obligation of an insurer, or its successors or assigns, which has been declared by any competent authority to be insolvent, or which is otherwise deemed unable to meet any claim, debt, charge, fee or other obligation in whole or in part.

NUCLEAR, CHEMICAL AND BIOLOGICAL TERRORISM EXCLUSION CLAUSE

A            This Contract shall not apply to Acts of Terrorism that:

involves the use, release, or escape of nuclear materials, or directly or indirectly results in nuclear reaction or radiation or radioactive contamination; or is carried out by means of the dispersal or application or pathogenic or poisonous, biological or chemical materials; or releases pathogenic or poisonous, biological or chemical materials, and it appears that one purpose of the Act of Terrorism was to release such materials.

SCHEDULE A
INURING REINSURANCE

PENN MILLERS INSURANCE COMPANY

2008 Property Catastrophe Program

																			ROL
	Placement			Limit		Attachment		Rate			Rate Change			Deposit Premium		ROL			Change
First Excess		95	%	$	1,000,000	$	2,000,000		0.8318	%		-23.97	%	$	275,111		28.96	%		-15.38	%
Second Excess		95	%	$	2,000,000	$	3,000,000		0.8912	%		-23.34	%	$	294,758		15.51	%		-14.67	%
Third Excess		95	%	$	5,000,000	$	5,000,000		1.0247	%		-25.07	%	$	338,912		7.13	%		-16.61	%
Fourth Excess		95	%	$	15,000,000	$	10,000,000		1.4855	%		-28.53	%	$	491,318		3.45	%		-20.46	%
Totals		95	%	$	23,000,000	$	2,000,000		4.2332	%		-25.77	%	$	1,400,099		6.41	%		-17.36	%

All Layers – 1 Reinstatement@100%

Subject Premiums	2008 Estimate
	$	33,074,228

2008 Per Risk Program

											Deposit
	Placement			Limit		Attachment		Rate			Premium		Reinstatements		Additional Terms		Terrorism
Multi Line		25	%	$	500,000	$	500,000		6.0000	%		1,377,458	Unlimited			1,500,000	One Limit
Property per Risk – First		75	%	$	4,000,000	$	1,000,000		7.0000	%		2,318,125	2 Free, 1@100	%	Property occurrence	5,000,000	One Limit
Property per Risk – Second		100	%	$	5,000,000	$	5,000,000		1.5000	%		662,321	1@50%, 1@100	%	limit:	10,000,000	One Limit
Property per Risk – Third		100	%		10,000,000	$	10,000,000		1.2457	%		500,036	1@100% 2 Full Reins: 2@$35% for first $1M,			10,000,000	One Limit
Casualty – First		75	%	$	4,000,000	$	1,000,000		2.3900	%		854,500	2@65% for next $3M		MAOL	7,500,000	One Limit
Casualty — Second		100	%	$	5,000,000	$	5,000,000		0.7866	%		375,018	1@100%		MAOL	7,500,000	Excluded
Grant Total Results											$	6,137,647

Subject Premiums	2008 Estimate
Property	$	44,154,62
Casualty	$	47,675,783
Multi Line	$	91,830,554

2008 Umbrella Program

								Coding
	Placement			Limit		Total Limit		Commission
Umbrella Quota Share		75	%	$	1,000,000	$	4,750,000		32	%
		100	%	$	4,000,000

SCHEDULE B
SAMPLE CALCULATION OF RETENTION

Penn Millers
Insurance Company
Business Mix Factor

SNEP Yr 1	$	80,000,000
SNEP Yr 2	$	80,000,000

				Subject Net		Ultimate Incurred
LOB	2008% Mix			Earned Premium		Net Subject Loss Ratio			Ultimate Incurred Losses		WTD Ave LR
Commercial Auto Liability		15.96	%		12,766,549		37.32	%		4,764,179
Workers Compensation		14.35	%		11,482,181		74.86	%		8,595,998
Other Liability including Umbrella		14.72	%		11,773,995		51.28	%		6,037,844
Homeowners		0.20	%		158,450		48.01	%		76,066
Commercial Multi — Peril		15.94	%		12,754,246		61.68	%		7,866,439
Fire & Allied		25.73	%		20,584,575		48.77	%		10,039,097
Inland Marine		2.91	%		2,328,537		35.81	%		833,793
Auto Physical Damage		5.23	%		4,187,886		59.01	%		2,471,447
Product Liability		4.69	%		3,755,267		25.44	%		955,426
All Other		0.26	%		208,313		2.32	%		4,841
Total		100.00	%	$	80,000,000					41,645,131		52.06	%

2009 SNEP Budget

				Subject Net		Ultimate Incurred
LOB	2009 % Mix			Earned Premium		Net Subject Loss Ratio			Ultimate incurred Losses		WTD AVG LR
Commercial Auto Liability		10.00	%		8,000,000		37.32	%		2,985,414
Workers Compensation		20.00	%		16,000.000		74.86	%		11,978,210
Other Liability Including Umbrella		13.00	%		10,400,000		51.28	%		5,333,243
Homeowners		0.00	%		—		48.01	%		—
Commercial Multi — Peril		20.00	%		16,000,000		61.68	%		9,868,323
Fire & Allied		22.00	%		17,600,000		48.77	%		8,583,520
Inland Marine		2.00	%		1,600,000		35.81	%		572,922
Auto Physical Damage		11.00	%		8,800,000		59.01	%		5,193,249
Product Liability		2.00	%		1,600,000		25.44	%		407,077
All Other		0.00	%		—		2.32	%		—
Total		100.00	% S		80,000,000					44,921,957		56.15	%

Mix Factor	LR 1	52.06	%
	LR 2	56.15	%
	Change	4.10	%
	Allowance from calculated change	-200	%
	Mix Factor	2.10	%

Signature page attached and incorporated into

WHOLE ACCOUNT, ACCIDENT YEAR AGGREGATE

EXCESS OF LOSS CONTRACT

EFFECTIVE 12:01 A.M., EASTERN STANDARD TIME, JANUARY 1, 2008

between

PENN MILLERS INSURANCE COMPANY

AMERICAN MILLERS INSURANCE COMPANY

WILKES BARRE, PENNSYLVANIA

(hereinafter called the “Reassured”)

and

HANNOVER REINSURANCE (IRELAND) LTD.

DUBLIN, IRELAND

(hereinafter called the “Subscribing Reinsurer”) Under the terms
of this Contract the above Reinsurer agrees to assume severally and
not jointly with other participants
a 40.00% share

of the liability described in the attached Contract and, as consideration, the Reinsurer shall receive a 40.00% share of the premium named therein.

Signed in Dublin, Ireland, this            day of      , 2008,

HANNOVER REINSURANCE (IRELAND) LTD.

BY

TITLE

Signature page attached and incorporated into

WHOLE ACCOUNT, ACCIDENT YEAR AGGREGATE

EXCESS OF LOSS CONTRACT

EFFECTIVE 12:01 A.M., EASTERN STANDARD TIME, JANUARY 1, 2008

between

PENN MILLERS INSURANCE COMPANY

AMERICAN MILLERS INSURANCE COMPANY

WILKES BARRE, PENNSYLVANIA

(hereinafter called the “Reassured”)

and

XL RE LTD

HAMILTON, BERMUDA

(hereinafter called the “Subscribing Reinsurer”) Under the terms
of this Contract the above Reinsurer agrees to assume severally and
not jointly with other participants
a 60.00% share

of the liability described in the attached Contract and, as consideration, the Reinsurer shall receive a 60.00% share of the premium named therein.

Signed in Hamilton, Bermuda, this           day of      , 2008,

HANNOVER REINSURANCE (IRELAND) LTD.

BY

TITLE

IN WITNESS WHEREOF signed by its duly authorized representative.

PENN MILLERS INSURANCE COMPANY
AMERICAN MILLERS INSURANCE COMPANY
Signed in Wilkes Barre, Pennsylvania

BY:

TITLE:

DATE:

EX-10.11

Exhibit 10.11

PROPERTY CATASTROPHE EXCESS OF LOSS REINSURANCE CONTRACT

EFFECTIVE JANUARY 1, 2009

between

PENN MILLERS INSURANCE COMPANY

AMERICAN MILLERS INSURANCE COMPANY

WILKES BARRE, PENNSYLVANIA

(hereinafter called the “Company”)

by

THE UNDERWRITERS AT LLOYD’S
who are signatories hereto, each for the
proportion underwritten and not one for another

(hereinafter called the “Reinsurers”)

Under the terms of this Contract the above Reinsurers agree to assume

EXHIBIT “I” — FIRST EXCESS:	a 10,00% share
EXHIBIT “II” — SECOND EXCESS:	a 25.00% share
EXHIBIT “III” — THIRD EXCESS:	a 26.00% share
EXHIBIT “IV” — FOURTH EXCESS:	a 50.00% share
EXHIBIT “V” — FIFTH EXCESS:	a 28.50% share

of the liability described in the attached Contract and, as consideration, the above Reinsurers shall receive the same proportionate share of the premium named therein.

Signed in London, England, this       day of                , 2009.

The share attaching to this Contract is subscribed by the Underwriters, Members of the Syndicates the definitive numbers of which and the proportions reinsured are contained in the schedule attached.

PROPERTY CATASTROPHE EXCESS OF LOSS REINSURANCE CONTRACT

EFFECTIVE JANUARY 1, 2009

between

PENN MILLERS INSURANCE COMPANY

AMERICAN MILLERS INSURANCE COMPANY

WILKES BARRE, PENNSYLVANIA

by

AMERICAN AGRICULTURAL INSURANCE COMPANY

INDIANA

(hereinafter called, with other participants, the “Reinsurers”)

Under the terms of this Contract the above Reinsurers agree to assume severally and not jointly with other participants

EXHIBIT “I” — FIRST EXCESS:	a 07.00% share
EXHIBIT “II” — SECOND EXCESS:	an 11.00% share
EXHIBIT “Ill” — THIRD EXCESS:	an 11.00% share
EXHIBIT “IV” — FOURTH EXCESS:	a 05.00% share
EXHIBIT “V” — FIFTH EXCESS:	a 04.00% share

of the liability described in the attached Contract and, as consideration, the above Reinsurers shall receive the same proportionate share of the premium named therein.

Signed in Schaumburg Illinois, this      day of                , 2009,

AMERICAN AGRICULTURAL INSURANCE
COMPANY

TITLE

PROPERTY CATASTROPHE EXCESS OF LOSS REINSURANCE CONTRACT

EFFECTIVE JANUARY 1, 2009

between

PENN MILLERS INSURANCE COMPANY

AMERICAN MILLERS INSURANCE COMPANY

WILKES BARRE, PENNSYLVANIA

by

EMPLOYERS MUTUAL CASUALTY COMPANY

IOWA

(hereinafter called, with other participants, the “Reinsurers”)

Under the terms of this Contract the above Reinsurers agree to assume severally and not jointly with other participants

EXHIBIT “I” — FIRST EXCESS:	a 04.00% share
EXHIBIT “II” — SECOND EXCESS:	a 04.00% share
EXHIBIT “III” — THIRD EXCESS:	a 04.00% share
EXHIBIT “IV” — FOURTH EXCESS:	a 04.00% share
EXHIBIT “V” — FIFTH EXCESS:	a 03.00% share

of the liability described in the attached Contract and, as consideration, the above Reinsurers shall receive the same proportionate share of the premium named therein.

Signed in Des Moines, Iowa, this           day of                , 2009,

EMPLOYERS MUTUAL CASUALTY COMPANY

BY

TITLE

PROPERTY CATASTROPHE EXCESS OF LOSS REINSURANCE CONTRACT

EFFECTIVE JANUARY 1, 2009

between

PENN MILLERS INSURANCE COMPANY

AMERICAN MILLERS INSURANCE COMPANY

WILKES BARRE, PENNSYLVANIA

by

FLAGSTONE REASSURANCE SUISSE LTD.

ZURICH, SWITZERLAND

(hereinafter called, with other participants, the “Reinsurers”)

Under the terms of this Contract the above Reinsurers agree to assume severally and not jointly with other participants

EXHIBIT “I” — FIRST EXCESS:	a 35.00% share
EXHIBIT “II” — SECOND EXCESS:	a 25.00% share
EXHIBIT “III” — THIRD EXCESS:	a 20.00% share
EXHIBIT “IV” — FOURTH EXCESS:	a 10.00% share
EXHIBIT “V” — FIFTH EXCESS:	a 00.00% share

of the liability described in the attached Contract and, as consideration, the above Reinsurers shall receive the same proportionate share of the premium named therein.

Signed in Zurich, Switzerland, this      day of                , 2009,

FLAGSTONE REASSURANCE SUISSE LTD.

BY

TITLE

PROPERTY CATASTROPHE EXCESS OF LOSS REINSURANCE CONTRACT

EFFECTIVE JANUARY 1, 2009

between

PENN MILLERS INSURANCE COMPANY

AMERICAN MILLERS INSURANCE COMPANY

WILKES BARRE, PENNSYLVANIA

by

HANNOVER RE (BERMUDA) LTD.

HAMILTON, BERMUDA

(hereinafter called, with other participants, the “Reinsurers”)

Under the terms of this Contract the above Reinsurers agree to assume severally and not jointly with other participants

EXHIBIT “I” — FIRST EXCESS:	a 00.00% share
EXHIBIT “Il” — SECOND EXCESS:	a 00.00% share
EXHIBIT “III” — THIRD EXCESS:	a 00.00% share
EXHIBIT “IV” — FOURTH EXCESS:	a 00.00% share
EXHIBIT “V” — FIFTH EXCESS:	a 10.00% share

of the liability described in the attached Contract and, as consideration, the above Reinsurers shall receive the same proportionate share of the premium named therein.

Signed in Hamilton, Bermuda, this      day of                , 2009,

HANNOVER RE (BERMUDA) LTD.

BY

TITLE

PROPERTY CATASTROPHE EXCESS OF LOSS REINSURANCE CONTRACT

EFFECTIVE JANUARY 1, 2009

between

PENN MILLERS INSURANCE COMPANY

AMERICAN MILLERS INSURANCE COMPANY

WILKES BARRE, PENNSYLVANIA

by

P.R.A.M. — SIRIUS INTERNATIONAL INSURANCE CORPORATION

STOCKHOLM, SWEDEN

(hereinafter called, with other participants, the “Reinsurers”)

Under the terms of this Contract the above Reinsurers agree to assume severally and not jointly with other participants

EXHIBIT “I” — FIRST EXCESS:	a 14.00% share
EXHIBIT “II” — SECOND EXCESS:	a 10.00% share
EXHIBIT “III” — THIRD EXCESS:	a 12.00% share
EXHIBIT “IV” — FOURTH EXCESS:	a 12.00% share
EXHIBIT “V” — FIFTH EXCESS:	a 15.00% share

of the liability described in the attached Contract and, as consideration, the above Reinsurers shall receive the same proportionate share of the premium named therein.

Signed in Stockholm, Sweden, this      day of                , 2009,

P.R.A.M. SIRIUS INTERNATIONAL INSURANCE CORPORATION

BY

TITLE

PROPERTY CATASTROPHE EXCESS OF LOSS REINSURANCE CONTRACT

EFFECTIVE JANUARY 1, 2009

between

PENN MILLERS INSURANCE COMPANY

AMERICAN MILLERS INSURANCE COMPANY

WILKES BARRE, PENNSYLVANIA

by

PARIS RE S.A.

PARIS, FRANCE

(hereinafter called, with other participants, the “Reinsurers”)

Under the terms of this Contract the above Reinsurers agree to assume severally and not jointly with other participants

EXHIBIT “I” — FIRST EXCESS:	a 00.00% share
EXHIBIT “II” — SECOND EXCESS:	a 05.00% share
EXHIBIT “III” — THIRD EXCESS:	a 05.00% share
EXHIBIT “IV” — FOURTH EXCESS:	a 04.00% share
EXHIBIT “V” — FIFTH EXCESS:	a 01.00% share

of the liability described in the attached Contract and, as consideration, the above Reinsurers shall receive the same proportionate share of the premium named therein.

Signed in Paris, France, this      day of                 , 2009,

PARIS RE S.A.

BY

TITLE

PROPERTY CATASTROPHE EXCESS OF LOSS REINSURANCE CONTRACT

EFFECTIVE JANUARY 1, 2009

between

PENN MILLERS INSURANCE COMPANY

AMERICAN MILLERS INSURANCE COMPANY

WILKES BARRE, PENNSYLVANIA

by

QBE REINSURANCE CORPORATION

PENNSYLVANIA

(hereinafter called, with other participants, the “Reinsurers”)

Under the terms of this Contract the above Reinsurers agree to assume severally and not jointly with other participants

EXHIBIT “I” — FIRST EXCESS:	a 00.00% share
EXHIBIT “II” — SECOND EXCESS:	a 00.00% share
EXHIBIT “Ill” — THIRD EXCESS:	a 00.00% share
EXHIBIT “IV” — FOURTH EXCESS:	a 00.00% share
EXHIBIT “V” — FIFTH EXCESS:	a 03.50% share

of the liability described in the attached Contract and, as consideration, the above Reinsurers shall receive the same proportionate share of the premium named therein.

Signed in New York, New York, this      day of                , 2009,

QBE REINSURANCE CORPORATION

BY

TITLE

PROPERTY CATASTROPHE EXCESS OF LOSS REINSURANCE CONTRACT

EFFECTIVE JANUARY 1, 2009

between

PENN MILLERS INSURANCE COMPANY

AMERICAN MILLERS INSURANCE COMPANY

WILKES BARRE, PENNSYLVANIA

by

R+V VERSICHERUNG AG

WIESBADEN, GERMANY

(hereinafter called, with other participants, the “Reinsurers”)

Under the terms of this Contract the above Reinsurers agree to assume severally and not jointly with other participants

EXHIBIT “I” — FIRST EXCESS:	a 30.00% share
EXHIBIT “II” — SECOND EXCESS:	a 20.00% share
EXHIBIT “III” — THIRD EXCESS:	a 22.00% share
EXHIBIT “IV” — FOURTH EXCESS:	a 15.00% share
EXHIBIT “V” — FIFTH EXCESS:	a 35.00% share

of the liability described in the attached Contract and, as consideration, the above Reinsurers shall receive the same proportionate share of the premium named therein.

Signed in Wiesbaden, Germany, this       day of                , 2009,

R+V VERSICHERUNG AG

BY

TITLE

and signed in Wilkes, Barre , this       day of                ,2009.

PENN MILLERS INSURANCE COMPANY AMERICAN MILLERS INSURANCE	COMPANY
BY
TITLE

PROPERTY CATASTROPHE EXCESS OF LOSS
REINSURANCE CONTRACT

EFFECTIVE JANUARY 1, 2009

issued to

PENN MILLERS INSURANCE COMPANY

AMERICAN MILLERS INSURANCE COMPANY

PENN MILLERS INSURANCE COMPANY

AMERICAN MILLERS INSURANCE COMPANY

PROPERTY CATASTROPHE EXCESS OF LOSS REINSURANCE CONTRACT

EFFECTIVE JANUARY 1, 2009

INDEX

ARTICLE	SUBJECT	PAGE
ARTICLE 1	BUSINESS COVERED		1
ARTICLE 2	COMMENCEMENT AND TERMINATION		1
ARTICLE 3	SPECIAL TERMINATION		2
ARTICLE 4	EXCLUSIONS		4
ARTICLE 5	RETENTION AND LIMIT		7
ARTICLE 6	REINSTATEMENT		7
ARTICLE 7	PREMIUM		7
ARTICLE 8	DEFINITION OF LOSS OCCURRENCE		7
ARTICLE 9	NET RETAINED LINE		9
ARTICLE 10	NET LOSS		9
ARTICLE 11	EXTRA-CONTRACTUAL OBLIGATIONS/ LOSS EXCESS OF POLICY LIMITS		10
ARTICLE 12	NOTICE OF LOSS AND LOSS SETTLEMENT		12
ARTICLE 13	ERRORS AND OMISSIONS		12
ARTICLE 14	OFFSET		13
ARTICLE 15	CURRENCY		13
ARTICLE 16	FEDERAL EXCISE TAX AND OTHER TAXES		13
ARTICLE 17	ACCESS TO RECORDS		14
ARTICLE 18	SERVICE OF SUIT		15
ARTICLE 19	CONFIDENTIALITY		16
ARTICLE 20	PRIVACY		17
ARTICLE 21	ARBITRATION		17
ARTICLE 22	INSOLVENCY		21
ARTICLE 23	RESERVES		22
ARTICLE 24	MODE OF EXECUTION		25
ARTICLE 25	LATE PAYMENTS		26
ARTICLE 26	VARIOUS OTHER TERMS		27
ARTICLE 27	INTERMEDIARY		29

2.

ATTACHMENTS:

NUCLEAR INCIDENT EXCLUSION CLAUSE — PHYSICAL DAMAGE — REINSURANCE (BRMA 35B)

POOLS, ASSOCIATIONS AND SYNDICATES EXCLUSION CLAUSE TRANSMISSION AND DISTRIBUTION LINES EXCLUSION — ABOVE GROUND FUNGI COVERAGE LIMITATION

TERRORISM EXCLUSION CLAUSE (NMA 29308)

INFORMATION TECHNOLOGY HAZARDS CLARIFICATION CLAUSE (NMA2912)

EXHIBIT I -	PROPERTY FIRST CATASTROPHE EXCESS OF LOSS REINSURANCE CONTRACT
EXHIBIT II -	PROPERTY SECOND CATASTROPHE EXCESS OF LOSS REINSURANCE CONTRACT
EXHIBIT III -	PROPERTY THIRD CATASTROPHE EXCESS OF LOSS REINSURANCE CONTRACT
EXHIBIT IV -	PROPERTY FOURTH CATASTROPHE EXCESS OF LOSS REINSURANCE CONTRACT
EXHIBIT V -	PROPERTY FIFTH CATASTROPHE EXCESS OF LOSS REINSURANCE CONTRACT

1.

PENN MILLERS INSURANCE COMPANY

AMERICAN MILLERS INSURANCE COMPANY

WILKES-BARRE, PENNSYLVANIA

PROPERTY CATASTROPHE EXCESS OF LOSS REINSURANCE CONTRACT

EFFECTIVE JANUARY 1, 2009

ARTICLE 1

BUSINESS COVERED

A. This Contract applies to all Loss Occurrences that occur with a date of loss during the term of this Contract and arising from those Policies, except as hereinafter excluded, classified by the Company as Fire, Allied Lines, Automobile Physical Damage (excluding Collision), Section I of Homeowners and Multiple Peril Policies, Inland Marine and Property Agri Business that are in force at the inception of this Contract or are written with a Policy periods (new and renewal) effective during the term of this Contract (“Business Covered”).

B. The term “Policies”, whenever used herein, shall mean all binders, policies, contracts, certificates and other obligations, whether oral or written, of insurance or reinsurance that are Business Covered.

C. The reinsurance of all Business Covered hereunder shall be subject in all respects to the same risks, terms, clauses, conditions, interpretations, alterations, modifications, cancellations and waivers as the respective insurances (or reinsurances) of the Company’s Policies and the Reinsurer shall pay losses as may be paid thereon, subject to the liability of the Company and the terms and conditions of this Contract.

ARTICLE 2

COMMENCEMENT AND TERMINATION

     This Contract shall incept at 12:01 a.m., Eastern Standard Time, January 1, 2009, and remain in force until 12:01 a.m., Eastern Standard Time, January 1, 2010. Should this Contract terminate while a Loss Occurrence is in progress, the entire loss arising out of the Loss Occurrence shall be subject to this Contract and its terms and conditions.

2.

ARTICLE 3

SPECIAL TERMINATION

A. The Company or the Reinsurer may terminate, or commute Obligations arising under this Contract in accordance with Paragraph C. below, upon the happening of any one of the following circumstances at any time by the giving of thirty (30) days prior written notice to the other party:

1. A party ceases active underwriting operations or a State Insurance Department or other legal authority orders the Reinsurer to cease writing business in all jurisdictions; or

2. The Reinsurer has filed a plan to enter into a Scheme of Arrangement or similar procedure. “Scheme of Arrangement” is defined as a legislative or regulatory process that provides a solvent Reinsurer the opportunity to settle its obligations with the Company either (i) without the Company’s unrestrained consent or (ii) prior to the Company having the ability to determine, with exact certainty, the actual amount of the obligations still outstanding and ultimately due to the Company; or

3. A party has: a) become insolvent, b) been placed under supervision (voluntarily or involuntarily), c) been placed into liquidation or receivership, or d) had instituted against it proceedings for the appointment of a supervisor, receiver, liquidator, rehabilitator, conservator or trustee in bankruptcy, or other agent known by whatever name, to take possession of its assets or control of its operations; or

4. A reduction in the Reinsurer’s surplus, risk based capital or financial strength rating occurs:

a. As respects Reinsurers domiciled in the United States of America, (i) the Reinsurer’s policyholders’ surplus (“PHS”) has been reduced by, whichever is greater, thirty percent (30%) of the amount of PHS at the inception of this Contract or thirty percent (30%) of the amount of PHS stated in its last filed quarterly or annual statutory statement with its state of domicile; or (ii) the Reinsurer’s total adjusted capital is less than two hundred percent (200%) of its authorized control level risk-based capital; or (iii) the Reinsurer’s AM Best’s insurer financial strength rating becomes less than “A-”.

3.

b. As respects Reinsurers domiciled outside the United States of America, other than Lloyd’s Syndicates (i) the Reinsurer’s Capital & Surplus (“C&S”) has been involuntarily reduced by, whichever is greater, thirty percent (30%) of the published currency amount of C&S at the inception of this Contract or thirty percent (30%) of the published currency amount of C&S stated in its last filed financial statement with its local regulatory authority; or (ii) as respects Lloyd’s Syndicates, the Reinsurer’s total stamp capacity has been reduced by more than thirty percent (30%) of the amount of total stamp capacity which stood at the inception of this Contract. (This provision does not apply to any Lloyd’s Syndicate that voluntarily reduces its total stamp capacity.) or (iii) the Reinsurer’s AM Best’s insurer financial strength rating becomes less than “A-” or the Reinsurer’s Standard & Poor’s Insurance Rating becomes less than “BBB”. or

5. A party has entered into a definitive agreement to (a) become merged with, acquired or controlled by any company, corporation or individual(s) not controlling or affiliated with the party’s operations previously; or (b) directly or indirectly assign all or essentially all of its entire liability for obligations under this Contract to another party without the other party’s prior written consent; or

6. There is either:

a. a severance or obstruction of free and unfettered communication and/or normal commercial or financial intercourse between the United States of America and the country in which the Reinsurer is incorporated or has its principal office as a result of war, currency regulations or any circumstances arising out of political, financial or economic uncertainty; or

b. a severance (of any kind) of any two (2) or more of the following executives of the Reinsurer from active employment of the Reinsurer during the most recent forty five (45) day period: chief underwriting officer, chief actuary, chief executive officer or chief financial officer. This condition does not apply whenever the severance in employment is for the publicly announced purpose of the individual’s assuming within thirty (30) days a known position with another identified firm in the (re)insurance industry or related field.

B. In the event the Company elects to terminate, the Company shall, with the notice of termination, specify that termination will be on a Cut-Off basis, in which event the Company shall relieve the Reinsurer for losses occurring subsequent to the specified Termination Date, and that Reinsurer shall not receive deposit premium installments beyond the date at which termination of the Reinsurer is effected. The Reinsurer shall within fifteen (15) days of the Termination Date return

4.

a pro-rata portion of any ceded deposit premium paid hereunder, calculated as of the Termination Date, and cash in that amount (less applicable ceding commission, if any, allowed thereon) and the minimum premium provisions, if any, shall be waived. (The fraction of the deposit premium to be returned to the Company shall equal the number of days from the Termination Date until the original expiration date of the Contract period divided by the number of days in the original Contract period) Upon final determination of the adjusted premium for the Contract period, the Reinsurer shall be credited with a portion of premium for this Contract, in the amount equal to the fraction of the number of days the terminated Reinsurer participated in the Contract period divided by the number of days in the Contract period multiplied by the reinsurance premium for the Contract period.

C. If both parties agree to commute, then within sixty (60) days after such agreement, the Company shall submit a statement of valuation of the total of the net present value (“capitalized”) of the ceded (1) Net Loss Reserves, (2) Loss Adjustment Expense Reserves, and (3) unearned premium reserve, after deduction for any ceding commission allowed thereon, (the “Valuation Statement”). If agreement cannot be reached, the effort can be abandoned or alternately the Company and the Reinsurers may mutually appoint an actuary or appraiser to investigate, determine the capitalized value of the reserves to be returned to the Company. Such actuary shall be an independent and neutral actuary, Casualty Actuarial Society, experienced in such matters and the mutually agreed actuary shall render a decision. In the event that the Company and the Reinsurer are unable to agree upon a single actuary within thirty (30) days, the parties shall ask the then current President of the Casualty Actuarial Society to appoint an actuary with those qualifications within another thirty (30) days. The decision of the actuary will be final and binding on both parties. The Company and the Reinsurer shall share equally the fees and expenses of the actuary. Upon payment of the amount so agreed or determined by the actuary to the Company, the Reinsurer and the Company shall each be completely released from all liability to each other under this Contract.

ARTICLE 4

EXCLUSIONS

A. This Contract shall not cover:

1. Policies or portions thereof classified by the Company as: Accident and Health, Aviation, Casualty, Crop Hail, Fidelity and Surety, and Ocean Marine.

2, Collision.

3. Policies of Excess of Loss Reinsurance.

4. Financial Guarantee and Insolvency.

5. Mortgage Impairment and Difference In Conditions business.

6. Flood damage, except under Automobile Physical Damage, Inland Marine, Homeowners or Commercial Multi-Peril Policies.

5.

7. Loss or liability excluded by the provisions of the “Nuclear Incident Exclusion Clause — Physical Damage — Reinsurance (BRMA 35B)” attached to and forming part of this Contract.

8. a. Pool, Association or Syndicate business except for participation in the Mutual Reinsurance Bureau, as excluded by the provisions of the “Pools Exclusion Clause”. Nevertheless, it is specifically agreed that liability accruing to the Company from its participation in the following shall not be excluded:

i.	The following so-called Coastal Pools:
	Alabama Insurance Underwriting Association Florida Windstorm Underwriting Association Louisiana Insurance Underwriting Association Mississippi Insurance Underwriting Association North Carolina Insurance Underwriting Association South Carolina Windstorm and Hail Underwriting Association Texas Catastrophe Property Insurance Association Georgia Insurance Underwriting Association
ii.	All “FAIR Plan” business
	for all perils including riot and civil disorder otherwise protected hereunder shall not be excluded except, however, that this Contract does not include any increase in such liability resulting from:
	a) the inability of any other participant in such FAIR
	Plan or Coastal Pool to meet its liability
	b) any claim against such FAIR Plan or Coastal Pool, or any participant therein, including the Company, whether by way of subrogation or otherwise, brought by or on behalf of any insolvency fund (as defined in the Insolvency Funds Exclusion Clause incorporated in this Contract).

b. Fire and Lightning losses on Mill and Elevator properties processed through or not processed through the Association of American Mill & Elevator Mutual Insurance Companies, known as the Mill Mutuals, Itasca, Illinois and the Association of American Mill and Agri Insurers.

9. Loss/or Damage/or Costs/or Expenses arising from Seepage and/or Pollution and/or Contamination, other than Contamination from Smoke Damage. Nevertheless, this exclusion does not preclude payment of the cost of the removal of debris of property damaged by a loss otherwise covered

6.

hereunder, but subject always to a limit of not more than five thousand dollars ($5,000) plus twenty five percent (25%) of the Company’s property loss under original Policy.

10. Regarding interests which at time of loss or damage are on shore, no liability shall attach hereto in respect of any loss or damage which is occasioned by war, invasion, hostilities, acts of foreign enemies, civil war, rebellion, insurrection, military or usurped power, or martial law or confiscation by order of any government or public authority.

     This War Exclusion Clause shall not, however, apply to interests which at time of loss or damage are within the territorial limits of the United States of America (comprising the fifty States of the Union and the District of Columbia and including Bridges between the U.S.A. and Mexico, provided they are under United States ownership), Canada, St. Pierre and Miquelon, provided such interests are insured under Policies, endorsements, or binders containing a standard war or hostilities or warlike operations exclusion clause.

11. Any liability of the Company arising, by contract, operation of law, or otherwise, from its participation or membership, whether voluntary or involuntary, in any insolvency fund is excluded from this Contract. “Insolvency Fund” includes any guaranty fund, insolvency fund, plan, pool, association, fund or other arrangement, howsoever denominated, established or governed, which provides for any assessment of or payment or assumption by the Company of part or all of any claim, debt, charge, fee, or other obligation of an insurer, or its successors or assigns, which has been declared by any competent authority to be insolvent, or which is otherwise deemed unable to meet any claim, debt, charge, fee or other obligation in whole or in part.

12. Transmission and Distribution Lines Exclusion — Above Ground (150M Exclusion)

13. Fungi Coverage Limitation (NMA 2955)

14. Terrorism (NMA 2930b)

15. Information Technology Hazard Clarification Clause (NMA 2912)

B. Any exclusion listed above (other than exclusions A(4), A(6), A(7), A(9), A(10), A(11), A(14) & A(15)) shall be automatically waived as respects a Policy issued by the Company on a risk with respect to which only a minor or incidental part of the operations covered involves the exclusion. An incidental part of an insured’s regular operations shall mean not greater than ten percent (10%) of the insured’s regular operations.

7.

ARTICLE 5

RETENTION AND LIMIT

See EXHIBITS I, II, III, IV and V attached to and forming part of this Contract.

ARTICLE 6

REINSTATEMENT

See EXHIBITS 1, II, III, IV and V attached to and forming part of this Contract.

ARTICLE 7

PREMIUM

See EXHIBITS I, II, III, IV and V attached to and forming part of this Contract.

ARTICLE 8

DEFINITION OF LOSS OCCURRENCE

A. The term “Loss Occurrence” shall mean the sum of all individual losses directly occasioned by any one disaster, accident or loss or series of disasters, accidents or losses arising out of one event which occurs within the area of one state of the United States or province of Canada and states or provinces contiguous thereto and to one another. However, the duration and extent of any one (“Loss Occurrence” shall be limited to all individual losses sustained by the Company occurring during any period of one hundred sixty eight (168) consecutive hours arising out of and directly occasioned by the same event except that the term “Loss Occurrence” shall be further defined as follows:

1. As regards windstorm, hail, tornado, hurricane, cyclone, including ensuing collapse and water damage, all individual losses sustained by the Company occurring during any period of seventy two (72) consecutive hours arising out of and directly occasioned by the same event. However, the event need not be limited to one state or province or states or provinces contiguous thereto.

2. As regards riot, riot attending a strike, civil commotion, vandalism and malicious mischief, all individual losses sustained by the Company occurring during any period of seventy two (72) consecutive hours within the area of one municipality or county and the municipalities or counties contiguous thereto arising out of and directly occasioned by the same event. The maximum duration of seventy two (72) consecutive hours may be extended in

8.

respect of individual losses which occur beyond such seventy two (72) consecutive hours during the continued occupation of an assured’s premises by strikers, provided such occupation commenced during the aforesaid period.

3. As regards earthquake (the epicentre of which need not necessarily be within the territorial confines referred to in the opening paragraph of this Article) and fire following directly occasioned by the earthquake, only those individual fire losses which commence during the period of one hundred sixty eight (168) consecutive hours may be included in the Company’s “Loss Occurrence”.

4. As regards “Freeze”, only individual losses directly occasioned by collapse, breakage of glass and water damage (caused by bursting of frozen pipes and tanks) may be included in the Company’s “Loss Occurrence”.

5. As regards firestorms, brush fires and any other fires or series of fires, irrespective of origin (except as provided in A(2) and A(3) above), which spread through trees, grassland or other vegetation, all individual losses sustained by the Company which commence during any period of one hundred sixty eight (168) consecutive hours within a one hundred (100) mile radius of any fixed point selected by the Company where a claim has actually been made may be included in the Company’s “Loss Occurrence.” However, an individual loss subject to this subparagraph cannot be included in more than one “Loss Occurrence”.

B. Except for those “Loss Occurrences” referred to in A(1) and A(2) the Company may choose the date and time when any such period of consecutive hours commences provided that it is not earlier than the date and time of the occurrence of the first recorded individual loss sustained by the Company arising out of that disaster, accident or loss and provided that only one such period of one hundred sixty eight (168) consecutive hours shall apply with respect to one event.

C. However, as respects those “Loss Occurrences” referred to in A(1) and A(2), if the disaster, accident or loss occasioned by the event is of greater duration than seventy two (72) consecutive hours, then the Company may divide that disaster, accident or loss into two (2) or more “Loss Occurrences” provided no two (2) periods overlap and no individual loss is included in more than one such period and provided that no period commences earlier than the date and time of the occurrence of the first recorded individual loss sustained by the Company arising out of that disaster, accident or loss.

D. No individual losses occasioned by an event that would be covered by seventy two (72) hours clauses may be included in any “Loss Occurrence” claimed under the one hundred sixty eight (168) hours provision.

9.

ARTICLE 9

NET RETAINED LINE

A. This Contract applies only to that portion of any Policy which the Company retains net for its own account, and in calculating the amount of any loss hereunder and also in computing the amount or amounts in excess of which this Contract attaches, only loss or losses in respect of that portion of any Policy which the Company retains net for its own account shall be included.

B. The amount of the Reinsurers’ liability hereunder in respect of any loss or losses shall not be increased by reason of the inability of the Company to collect from any other Reinsurers, whether specific or general, any amounts which may have become due from such Reinsurers, whether such inability arises from the insolvency of such other Reinsurers or otherwise,

C. Inter-company reinsurance among the companies collectively called the “Company” shall be entirely disregarded for all purposes of this Contract.

D. Permission is hereby granted the Company to carry underlying reinsurance and layers of catastrophe reinsurance both below and above this layer of coverage and recoveries made thereunder shall be disregarded for all purposes of this Contract and shall inure to the sole benefit of the Company.

ARTICLE 10

NET LOSS

A. The term “Net Loss” shall mean the actual loss sustained by the Company from Business Covered hereunder including (i) sums paid in settlement of claims and suits and in satisfaction of judgments, (ii) prejudgment interest when added to a judgment, (iii) ninety percent (90%) of any Extra-Contractual Obligations (iv) ninety percent (90%) of any Losses Excess of Policy Limits, (v) any interest on judgments other than prejudgment interest when added to a judgment and (vi) all Loss Adjustment Expenses incurred by the Company. In the event that the Company’s original Policies and/or specific coverage parts of their original Policies are issued on a cost inclusive basis, such loss adjustment expenses shall be included within the Company’s Net Loss for the purposes of recovery hereunder.

B. “Loss Adjustment Expenses” shall mean: (i) expenses sustained in connection with adjustment, defense, settlement and litigation of claims and suits, satisfaction of judgments, resistance to or negotiations concerning a loss (which shall include the expenses and the pro rata share of the salaries of the Company’s field employees according to the time occupied in adjusting such Loss and the expenses of the Company’s employees while diverted from their normal duties to the service of field adjustment but shall not include any salaries of officers or normal overhead expenses of the Company), (ii) legal expenses and costs incurred

10.

in connection with coverage questions regarding specific claims and legal actions, including Declaratory Judgment Expenses, connected thereto, (iii) all interest on judgments other than prejudgment interest except when included in Net Loss, and (iv) expenses sustained to obtain recoveries, salvages or other reimbursements, or to secure the reverse or reduction of a verdict or judgment.

C. “Declaratory Judgment Expenses” as used in this Contract shall mean legal expenses paid by the Company in the investigation, analysis, evaluation, resolution or litigation of coverage issues between the Company and its insured’s), under Policies reinsured hereunder, for a specific loss or losses tendered under such Policies, which loss or losses are not excluded under this Contract.

D. All salvages, recoveries, payments and reversals or reductions of verdicts or judgments (net of the cost of obtaining such salvage, recovery, payment or reversal or reduction of a verdict or judgment) whether recovered, received or obtained prior or subsequent to loss settlement under this Contract, including amounts recoverable under other reinsurance whether collected or not, shall be applied as if recovered, received or obtained prior to the aforesaid settlement and shall be deducted from the actual losses sustained to arrive at the amount of the net loss. Nothing in this Article shall be construed to mean losses are not recoverable until the Net Loss to the Company finally has been ascertained,

E. The Reinsurers shall be subrogated, as respects any loss for which the Reinsurers shall actually pay or become liable, but only to the extent of the amount of payment by or the amount of liability to the Reinsurers, to all the rights of the Company against any person or other entity who may be legally responsible for damages as a result of said loss. Should the Company elect not to enforce such rights, the Reinsurers are hereby authorized and empowered to bring any appropriate action in the name of the Company or its policyholders, or otherwise to enforce such rights. The Reinsurers shall promptly remit to the Company the amount of any judgment awarded in such an action in excess of the amount of payment by, or the amount of liability to, the Reinsurers hereunder.

ARTICLE 11

EXTRA-CONTRACTUAL OBLIGATIONS/LOSS EXCESS OF POLICY

LIMITS

A. “Extra-Contractual Obligations” means those liabilities not covered under any other provision of this Contract, other than Loss Excess of Policy Limits, including but not limited to compensatory, consequential, punitive, or exemplary damages together with any legal costs and expenses incurred in connection therewith, paid as damages or in settlement by the Company arising from an allegation or claim of its insured, its insured’s assignee, or other third party, which alleges negligence, gross negligence, bad faith or other tortious conduct on the part of the Company in the handling, adjustment, rejection, defense or settlement of a claim under a Policy that is the Business Covered.

11.

B. “Loss Excess of Policy Limits” means any amount of loss, together with any legal costs and expenses incurred in connection therewith, paid as damages or in settlement by the Company in excess of its Policy Limits, but otherwise within the coverage terms of the Policy, arising from an allegation or claim of its insured, its insured’s assignee, or other third party, which alleges negligence, gross negligence, bad faith or other tortious conduct on the part of the Company in the handling of a claim under a Policy or bond that is the Business Covered, in rejecting a settlement within the Policy Limits, in discharging a duty to defend or prepare the defense in the trial of an action against its insured, or in discharging its duty to prepare or prosecute an appeal consequent upon such an action. For the avoidance of doubt, the decision by the Company to settle a claim for an amount within the coverage of the Policy but not within the Policy Limit when the Company has reasonable basis to believe that it may have legal liability to its insured or assignee or other third party on the claim will be deemed a Loss Excess of Policy Limits. The Company will provide Reinsurers an explanation relating to the Company’s motivation for settlement and use its best efforts to obtain the Reinsurers’ prior counsel and concurrence in the Company’s action. A reasonable basis shall mean it is more likely than not a trial would result in a verdict excess of the Policy Limits, in the opinion of counsel assigned to defend the insured or otherwise retained by the Company.

C. An Extra-Contractual Obligation or a Loss Excess of Policy Limits shall be deemed to have occurred on the same date as the loss covered under the Company’s original Policy and shall be considered part of the original loss (subject to other terms of this Contract.)

D. Neither an Extra-Contractual Obligation nor a Loss Excess of Policy Limits shall include a loss incurred by the Company as the result of any fraudulent or criminal act directed against the Company by any officer or director of the Company acting individually or collectively or in collusion with any other organization or party involved in the presentation, defense, or settlement of any claim under this Contract.

E. Recoveries, whether collectible or not, including any retentions and/or deductibles, from any other form of insurance or reinsurance which protect the Company against any loss or liability covered under this Article shall inure to the benefit of the Reinsurers and shall be deducted from the total amount of any Extra- Contractual Obligation and/or Loss Excess of Policy Limits in determining the amount of Extra-Contractual Obligation and/or Loss Excess of Policy Limits that shall be indemnified under this Article.

F. The Company shall be indemnified in accordance with this Article to the extent permitted by applicable law.

12.

ARTICLE 12

NOTICE OF LOSS AND LOSS SETTLEMENT

A. The Company shall advise the Reinsurers promptly of all Loss Occurrences which, in the opinion of the Company, may result in a claim hereunder and of all subsequent developments thereto which, in the opinion of the Company, may materially affect the position of the Reinsurers. Inadvertent omission or oversight in giving such notice shall in no way affect the liability of the Reinsurers. However, the Reinsurers shall be informed of such omission or oversight promptly upon its discovery.

B. Prompt notice shall be given to the Reinsurers by the Company on any Loss Occurrence wherein the Company’s reserve exceeds fifty percent (50%) of the Company’s loss retention.

C. The Company shall have the right to settle all claims under its Policies. All loss settlements made by the Company, whether under strict Policy conditions or by way of compromise, that are the Business Covered and that are not an Ex-gratia Settlement shall be final and binding subject to the liability of the Company and the terms and conditions of this Contract. The Reinsurer shall follow the liability of the Company (to the extent provided in this Contract) and shall pay or allow, as the case may be, its share of each such settlement in accordance with this Contract all amounts for which it is obligated as soon as possible, but not later than ten (10) business days, of being furnished by the Company with reasonable evidence of the amount due. Reasonable evidence of the amount due shall consist of a certification by the Company, accompanied by proof of loss documentation the Company customarily presents with its claims payment requests, that the amount requested to be paid and submitted by the certification, is, upon information and belief, due and payable to the Company by the Reinsurers under the terms and conditions of this Contract.

ARTICLE 13

ERRORS AND OMISSIONS

     Inadvertent delays, errors or omissions made by the Company in connection with this Contract shall not relieve the Reinsurer from any liability which would have attached had such error or omission not occurred, provided always that such error or omission shall be rectified as soon as possible, provided that the liability of the Reinsurer shall not extend beyond the coverage provided by this Contract nor to extend coverage to Policies that are not the Business Covered hereunder. This Article shall not apply to a sunset provision, if any in this Contract, nor to a commutation made in connection with this Contract.

13.

ARTICLE 14

OFFSET

     The Company and the Reinsurer shall have the right to offset any balance or amounts due from one party to the other under the terms of this Contract. The party asserting the right of offset may exercise such right any time whether the balances due are on account of premiums or losses or otherwise and immediately inform the Intermediary accordingly. In the event of the insolvency of any party, offset shall be as permitted by applicable law,

ARTICLE 15

CURRENCY

A. Whenever the word “Dollars” or the “$” sign appears in this Contract, they shall be construed to mean United States Dollars and all transactions under this Contract shall be in United States Dollars.

B. Amounts paid or received by the Company in any other currency shall be converted to United States Dollars at the rate of exchange at the date such transaction is entered on the books of the Company.

ARTICLE 16

FEDERAL EXCISE TAX AND OTHER TAXES

A. To the extent that any portion of the reinsurance premium for this Contract is subject to the Federal Excise Tax (as imposed under Section 4371 of the Internal Revenue Code) and the Reinsurer is not exempt therefrom, the Reinsurers shall allow for the purpose of paying the Federal Excise Tax, a deduction by the Company of the applicable percentage of the premium payable hereon. In the event of any return of premium becoming due hereunder, the Reinsurers shall deduct the applicable same percentage from the return premium payable hereon and the Company or its agent shall take steps to recover the tax from the United States Government. In the event of any uncertainty, upon the written request of the Company, the Reinsurer will immediately file a certificate signed by a senior corporate officer of the Reinsurer certifying to its entitlement to the exemption from the Federal Excise Tax with respect to one or more transactions.

B. In consideration of the terms under which this Contract is issued, the Company undertakes not to claim any deduction of the premium hereon when making Canadian Tax returns or when making tax returns, other than Income or Profits Tax returns, to any State or Territory of the United States of America or to the District of Columbia.

14.

ARTICLE 17

ACCESS TO RECORDS

A. The Company shall place at the disposal of the Reinsurer at all reasonable times, and the Reinsurer shall have the right to inspect (and make reasonable copies) through its designated representatives during the term of this Contract and thereafter, all non-privileged books, records and papers of the Company directly related to any reinsurance hereunder, or the subject matter hereof, provided that if the Reinsurer has ceased active market operations, this right of access shall be subject to that Reinsurer being current in all payments owed the Company that are not currently the subject of a formal dispute (such as the initiation of an Arbitration or Mediation). For the purposes of this Article, “non-privileged” refers to books, records and papers that are not subject to the Attorney-client privilege and Attorney-work product doctrine.

B. “Attorney-client privilege” and “Attorney-work product” shall have the meanings ascribed to each by statute and/or the court of final adjudication in the jurisdiction whose laws govern the substantive law of a claim arising under a Policy reinsured under this Contract.

C. Notwithstanding anything to the contrary in this Contract, for any claim or loss under a Policy reinsured under this Contract, should the Reinsurer assert, pursuant to the Common Interest Doctrine (“Doctrine”), that it has the right to examine any document that the Company alleges is subject to the Attorney-client privilege or the Attorney-work product privilege, upon the Reinsurer providing to the Company substantiation of any law which reasonably supports the basis for the Reinsurer’s conclusion that the Doctrine applies and the Doctrine will be upheld as applying between the Company and the Reinsurer as against third parties pursuant to the substantive law(s) which govern the claim or loss, the Company shall give the Reinsurer access to such document.

D. Notwithstanding any other provision to the contrary, once a claim and all directly related claims are finally settled by the Company, the Reinsurer shall be entitled to review all reasonable and applicable claims records that support a Company request for payment of a claim hereunder for Net Loss for Business Covered hereunder. In the event that the Reinsurer shall have paid an amount for Net Loss to the Company and the records do not support the obligation of the Reinsurer to have paid the claim, the Company shall promptly return any payment made in error.

15.

ARTICLE 18

SERVICE OF SUIT

A. This Article only applies to a Reinsurer domiciled outside of the United States and/or unauthorized in any state, territory or district of the United States having jurisdiction over the Company. Furthermore, this Article will not be read to conflict with or override any obligations of the parties to arbitrate their disputes under this Contract. This Article is intended as an aid to compelling arbitration if called for by this Contract or enforcing any such arbitration or arbitral award, not as an alternative to any Arbitration provision in this Contract that is applicable for resolving disputes arising out of this Contract.

B. In the event of any dispute, the Reinsurer, at the request of the Company, shall submit to the jurisdiction of a court of competent jurisdiction within the United States. Nothing in this Article constitutes or should be understood to constitute a waiver of any obligation to arbitrate disputes arising from this Contract or the Reinsurer’s rights to commence an action in any court of competent jurisdiction in the United States, to remove an action to a United States District Court, or to seek a transfer of a case to another court as permitted by the laws of the United States or of any state in the United States.

C. The Reinsurer, once the appropriate court is selected, whether such court is the one originally chosen by the Company and accepted by the Reinsurer or is determined by removal, transfer, or otherwise, as provided above, will comply with all requirements necessary to give said court jurisdiction and, in any suit instituted against any of them upon this Contract, will abide by the final decision of such court or any appellate court in the event of an appeal.

D. Service of process in any such suit against the Reinsurer may be made upon Mendes and Mount, 750 Seventh Avenue, New York, New York 10019-6829, — or in substitution therefore, the Firm identified by the Reinsurer on the Reinsurer’s signature page to this Contract, — (“Firm”) and in any suit instituted, the Reinsurer shall abide by the final decision of such court or of any Appellate Court in the event of an appeal.

E. The Firm is authorized and directed to accept service of process on behalf of the Reinsurer in any such suit and/or upon the request of the Company to give a written undertaking to the Company that they shall enter a general appearance upon the Reinsurer’s behalf in the event such a suit shall be instituted.

F. Further, as required by and pursuant to any statute of any state, territory or district of the United States which makes provision therefore, the Reinsurer hereby designates the Superintendent, Commissioner or Director of Insurance or other officer specified for that purpose in the statute, or his successor or successors in office, as their true and lawful Attorney upon whom may be served any lawful process in any action, suit or proceeding instituted by or on behalf of the Company

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or any beneficiary hereunder arising out of this Contract, and hereby designates the above-named as the person to whom the said officer is authorized to mail such process or a true copy thereof.

ARTICLE 19

CONFIDENTIALITY

A. The information, data, statements, representations and other materials provided by the Company or the Reinsurer to the other arising from consideration and participation in this Contract whether contained in the reinsurance submission, this Contract, or in materials or discussions arising from or related to this Contract, may contain confidential or proprietary information as expressly indicated by the disclosing party (“Disclosing Party”) in writing from time to time to the other party of the respective parties (“Confidential Information”). This Confidential Information is intended for the sole use of the parties to this Contract (and their affiliates involved in management or operation of assumed reinsurance business, retrocessionaires, prospective retrocessionaires, intermediaries involved in such placements, respective auditors and legal counsel) as may be necessary in analyzing and/or accepting a participation in and/or executing their respective responsibilities under or related to this Contract. Disclosing or using Confidential Information relating to this Contract, without the prior written consent of the Disclosing Party, for any purpose beyond (i) the scope of this Contract, (ii) the reasonable extent necessary to perform rights and responsibilities expressly provided for under this Contract, (iii) the reasonable extent necessary to administer, report to and effect recoveries from retrocessional Reinsurers, (iv) the reporting to regulatory or other governmental authorities as may be legally required or (v) persons with a need to know the information, (all of the preceding persons or entities who are legally obligated by either written agreement or otherwise to maintain the confidentiality of the Confidential Information) is expressly forbidden. Copying, duplicating, disclosing, or using Confidential Information for any purpose beyond this expressed purpose is forbidden without the prior written consent of the Disclosing Party.

B. Should a party (“Receiving Party”) receive a third party demand pursuant to subpoena, summons, or court or governmental order, to disclose Confidential Information that has been provided by another party to this Contract, the Receiving Party shall make commercially reasonable efforts to provide the Disclosing Party with written notice of any subpoena, summons, or court or governmental order, at least ten (10) days prior to such release or disclosure. Unless the Disclosing Party has given its prior permission to release or disclose the Confidential Information, the Receiving Party shall not comply with the subpoena prior to the actual date required by the subpoena. If a protective order or appropriate remedy is not obtained, the Receiving Party may disclose only that portion of the Confidential Information that it is legally obligated to disclose. However, notwithstanding anything to the contrary in this Contract, in no event, to the extent permitted by law, shall this Article require the Receiving Party not to comply with the subpoena, summons, or court or governmental order.

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ARTICLE 20

PRIVACY

A. Privacy Awareness. The Company and the Reinsurer are aware of and in compliance with their responsibilities and obligations under:

1. The Gramm-Leach-Bliley Act of 1999 (the “Act”) and applicable Federal and State laws and regulations implementing the Act. The Company and the Reinsurer will only use Non-Public Personal Information as permitted by law; and

2. The applicable provisions of the Health Insurance Portability and Accountability Act (“HIPAA”) and the related requirements of any regulations promulgated thereunder including without limitation the Federal Privacy Regulations as contained in 45 CFR Part 160 and 164 (the “Federal Privacy Regulations”). The Company and the Reinsurer will only use protected health information as permitted by law.

B. Non-Disclosure. To the extent required or prohibited by applicable law or regulation, the Reinsurer shall not disclose any (a) Non-Public Personal Information or (b) protected health information (as defined in 45 CFR 164.501) it receives from the Company to anyone other than:

1. The Reinsurer, the Reinsurers affiliates, legal counsel, auditors, consultants, regulators, rating agencies and any other persons or entities to whom such disclosure is required to effect, administer, or enforce a reinsurance contract; or any retrocessional reinsurance contract applicable to the losses that are the subject of this Contract, or

2. Persons or entities to whom disclosure is required by applicable law or regulation.

C. Non-Public Personal Information. “Non-Public Personal Information” shall for the purpose of this Contract mean financial or health information that personally identifies an individual, including claimants under Policies reinsured under this Contract, and which information is not otherwise available to the public.

ARTICLE 21

ARBITRATION

A. Any and all disputes between the Company and the Reinsurer arising out of, relating to, or concerning this Contract, whether sounding in contract or tort and whether arising during or after termination of this Contract, shall be submitted to the decision of a board of arbitration composed of two (2) arbitrators and an umpire

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(“Board”) meeting at a site in the city in which the principal headquarters of the Company are located. The arbitration shall be conducted under the Federal Arbitration Act and shall proceed as set forth below.

B. A notice requesting arbitration, or any other notice made in connection therewith, shall be in writing and be sent certified or registered mail, return receipt requested to the affected parties. The notice requesting arbitration shall state in particulars all issues to be resolved in the view of the claimant, shall appoint the arbitrator selected by the claimant and shall set a tentative date for the hearing, which date shall be no sooner than ninety (90) days and no later than one hundred fifty (150) days from the date that the notice requesting arbitration is mailed. Within thirty (30) days of receipt of claimant’s notice, the respondent shall notify claimant of any additional issues to be resolved in the arbitration and of the name of its appointed arbitrator.

C. The members of the Board shall be impartial, disinterested and not currently representing any party participating in the arbitration, and shall be current or former senior officers of insurance or reinsurance concerns, experienced in the line(s) of business that are the subject of this Contract. The Company and the Reinsurer as aforesaid shall each appoint an arbitrator and the two (2) arbitrators shall choose an umpire before instituting the hearing. As time is of the essence, if the respondent fails to appoint its arbitrator within thirty (30) days after having received claimant’s written request for arbitration, the claimant is authorized to and shall appoint the second arbitrator. If the two (2) arbitrators fail to agree upon the appointment of an umpire within thirty (30) days after notification of the appointment of the second arbitrator, within ten (10) days thereof, the two (2) arbitrators shall request ARIAS U.S. (“ARIAS”) to apply its procedures to appoint an umpire for the arbitration with the qualifications set forth above in this Article. If the use of ARIAS procedures fails to name an umpire, either party may apply to a court of competent jurisdiction to appoint an umpire with the above required qualifications. The umpire shall promptly notify in writing all parties to the arbitration of his selection and of the scheduled date for the hearing. Upon resignation or death of any member of the Board, a replacement shall be appointed in the same fashion as the resigning or deceased member was appointed.

D. The claimant and respondent shall each submit initial briefs to the Board outlining the facts, the issues in dispute and the basis, authority, and reasons for their respective positions within thirty (30) days of the date of notice of appointment of the umpire. The claimant and the respondent may submit a reply brief to the Board within ten (10) days after filing of the initial brief(s). Initial and reply briefs may be amended by the submitting party at any time, but not later than ten (10) days prior to the date of commencement of the arbitration hearing. Reasonable responses shall be allowed at the arbitration hearing to new material contained in any amendments filed to the briefs but not previously responded to.

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E. The Board shall make a decision and award with regard to the terms expressed in this Contract, the original intentions of the parties to the extent reasonably ascertainable, and the custom and usage of the insurance and reinsurance business that is the subject of this Contract. Notwithstanding any other provision of this Contract, the Board shall have the right and obligation to consider Underwriting and submission-related documents in any dispute between the parties.

F. The Board shall be relieved of all judicial formalities and the decision and award shall be based upon a hearing in which evidence shall be allowed though the formal rules of evidence shall not strictly apply. Cross examination and rebuttal shall be allowed. The Board may request a post-hearing brief to be submitted within twenty (20) days of the close of the hearing.

G. The Board shall render its decision and award in writing within thirty (30) days following the close of the hearing or the submission of post-hearing briefs, whichever is later, unless the parties consent to an extension. Every decision by the Board shall be by a majority of the members of the Board and each decision and award by the majority of the members of the Board shall be final and binding upon all parties to the proceeding. Such decision shall be a condition precedent to any right of legal action arising out of the arbitrated dispute which either party may have against the other. However, the Board is not authorized to award punitive, exemplary or enhanced compensatory damages.

H. The Board may award (i) interest at a rate not in excess of that set forth in the Article entitled LATE PAYMENTS, calculated from the date the Board determines that any amounts due the prevailing party should have been paid to the prevailing party, and (ii) applicable Attorneys’ fees and costs.

1. Either party may apply to a court of competent jurisdiction for an order confirming any decision and the award; a judgment of that Court shall thereupon be entered on any decision or award. If such an order is issued, the Attorneys’ fees of the party so applying and court costs will be paid by the party against whom confirmation is sought.

J. Except in the event of a consolidated arbitration, each party shall bear the expense of the one arbitrator appointed by or for it and shall jointly and equally bear with the other party the expense of any stenographer requested, and of the umpire. The remaining costs of the arbitration proceedings shall be finally allocated by the Board.

K. Subject to customary and recognized legal rules of privilege, each party participating in the arbitration shall have the obligation to produce those documents and as witnesses at the arbitration those of its employees, and those of its affiliates as any other participating party reasonably requests, providing always that the

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same witnesses and documents be obtainable and relevant to the issues before the arbitration and not be unduly burdensome or excessive in the opinion of the Board.

L. The parties may mutually agree as to pre-hearing discovery prior to the arbitration hearing and in the absence of agreement, upon the request of any party, pre-hearing discovery may be conducted as the Board shall determine in its sole discretion to be in the interest of fairness, full disclosure, and a prompt hearing, decision and award by the Board.

M. The Board shall be the final judge of the procedures of the Board, the conduct of the arbitration, of the rules of evidence, the rules of privilege, discovery and production and of excessiveness and relevancy of any witnesses and documents upon the petition of any participating party. To the extent permitted by law, the Board shall have the authority to issue subpoenas and other orders to enforce their decisions. The Board shall also have the authority to issue interim decisions or awards in the interest of fairness, full disclosure, and a prompt and orderly hearing and decision and award by the Board.

N. Upon request made to the Board not later than ten (10) days after the umpire’s appointment, the Board may order a consolidated hearing as respects common issues between the Company and all affected Reinsurers participating in this Contract if the Board is satisfied in its discretion that the issues in dispute affect more than one Reinsurer and a consolidated hearing would be in the interest of fairness, and a prompt and cost effective resolution of the issues in dispute.

0. If the parties mutually agree to or the Board orders a consolidated hearing, all other affected participating Reinsurers shall join and participate in the arbitration under time frames established by the Board and will be bound by the Board’s decision and award unless excused by the Board in its discretion. A consolidated hearing shall not result in any change or modification of any Reinsurer’s liability for its participation, that is several, but not joint shall remain the same.

P. Any Reinsurer may decline to actively participate in a consolidated arbitration if in advance of the hearing, that Reinsurer shall file with the Board a written agreement in form satisfactory to the Board to be bound by the decision and award of the Board in the same fashion and to the same degree as if it actively participated in the arbitration.

Q. In the event of an order of consolidation by the Board, the arbitrator appointed by the original Reinsurer shall be subject to being, and may be, replaced within thirty (30) days of the decision to have a consolidated arbitration by an arbitrator named collectively by the Reinsurers or in the absence of agreement, by the Lead Reinsurer, or if there is no Lead Reinsurer involved in the dispute, the Reinsurer with the largest participation in this Contract affected by the dispute. In the event two (2) or more Reinsurers affected by the dispute each have the same largest participation, they shall agree among themselves as to the replacement

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arbitrator, if any, to be appointed. The umpire shall be the final determiner in the event of any dispute over replacement of that arbitrator. All other aspects of the arbitration shall be conducted as provided for in this Article provided that (1) each party actively participating in the consolidated arbitration will have the right to its own attorney, position, and related claims and defenses; (2) each party will not, in presenting its position, be prevented from presenting its position by the position set forth by any other party; and (3) the cost and expense of the arbitration, exclusive of Attorneys’ fees (which will be borne exclusively by the respective retaining party unless otherwise determined by the Board) but including the expense of any stenographer which shall be borne by each party actively participating in the consolidated arbitration or as the Board shall determine to be fair and appropriate under the circumstances.

ARTICLE 22

INSOLVENCY

(This Article shall be deemed to read as required to meet the statutory insolvency clause requirements of the Company.)

A. In the event of insolvency or the appointment of a conservator, liquidator, or statutory successor of the Company, the portion of any risk or obligation assumed by the Reinsurer shall be payable to the conservator, liquidator, or statutory successor on the basis of claims allowed against the insolvent Company by any court of competent jurisdiction or by any conservator, liquidator, or statutory successor of the Company having authority to allow such claims, without diminution because of that insolvency, or because the conservator, liquidator, or statutory successor has failed to pay all or a portion of any claims.

B. Payments by the Reinsurer as above set forth shall be made directly to the Company or to its conservator, liquidator, or statutory successor, except where this Contract specifically provides another payee of such reinsurance or except as provided by applicable law and regulation (such as subsection (a) of section 4118 of the New York Insurance Laws) in the event of the insolvency of the Company.

C. In the event of the insolvency of the Company, the liquidator, receiver, conservator or statutory successor of the Company shall give written notice to the Reinsurer of the pendency of a claim against the insolvent Company on the Policy or Policies reinsured within a reasonable time after such claim is filed in the insolvency proceeding and during the pendency of such claim any Reinsurer may investigate such claim and interpose, at its own expense, in the proceeding where such claim is to be adjudicated any defense or defenses which it may deem available to the Company or its liquidator, receiver, conservator or statutory successor. The expense thus incurred by the Reinsurer shall be chargeable subject to court approval against the insolvent Company as part of the expense of liquidation to the extent of a proportionate share of the benefit which may accrue to the Company solely as a result of the defense undertaken by the Reinsurer.

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D. Where two (2) or more Reinsurers are involved in the same claim and a majority in interest elect to interpose defense to such claim, the expense shall be apportioned in accordance with the terms of this Contract as though such expense had been incurred by the Company.

ARTICLE 23

RESERVES

A. If, at any time during the period of this Contract and thereafter the reinsurance provided by a Reinsurer participating in this Contract does not qualify for full statutory accounting credit for reinsurance by regulatory authorities having jurisdiction over the Company (whether by reason of lack of license, accreditation or otherwise) such that a financial penalty to the Company would result on any statutory statement or report the Company is required to make or file with insurance regulatory authorities (or a court of law in the event of insolvency), the Reinsurer shall secure the Reinsurer’s share of Obligations for which such full statutory credit is not granted by those authorities in a manner, form, and amount acceptable to the Company and to all applicable insurance regulatory authorities in accordance with this Article.

B. The Reinsurer shall secure such Obligations, within thirty (30) days after the receipt of the Company’s written request regarding the Reinsurer’s share of Obligations under this Contract (but not later than December 31) of each year by either:

1. Clean, irrevocable, and unconditional evergreen letter(s) of credit issued and confirmed, if confirmation is required by the applicable insurance regulatory authorities, by a qualified United States financial institution as defined under the Insurance Law of the Company’s domiciliary state and acceptable to the Company and to insurance regulatory authorities;

2. A trust account meeting at least the standards of New York’s Insurance Regulation 114 and the Insurance Law of the Company’s domiciliary state; or

3. Cash advances or funds withheld or a combination of both, which will be under the exclusive control of the Company (“Funds Deposit”).

C. The “Obligations” referred to herein means, subject to the preceding paragraphs, the then current (as of the end of each calendar quarter) sum of any:

1. amount of the ceded unearned premium reserve for which the Reinsurer is responsible to the Company;

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2. amount of Net Losses and Loss Adjustment Expenses and other amounts paid by the Company for which the Reinsurer is responsible to the Company but has not yet paid;

3, amount of ceded reserves for Net Losses and Loss Adjustment Expenses for which the Reinsurer is responsible to the Company;

4. amount of return and refund premiums paid by the Company for which the Reinsurer is responsible to the Company but has not yet paid.

D. The Company, or its successors in interest, may draw, at any time and from time to time, upon the:

1. Established letter of credit (or subsequent cash deposit);

2. Established trust account (or subsequent cash deposit); or

3. Funds Deposit;

without diminution or restriction because of the insolvency of either the Company or the Reinsurer for one or more of the following purposes set forth below,

E. Draws shall be made only for the following purposes:

1. To make payment to and reimburse the Company for the Reinsurers share of Net Loss and Loss Adjustment Expense and other amounts paid by the Company under its Policies and for which the Reinsurer is responsible under this Contract that is due to the Company but unpaid by the Reinsurer including but not limited to the Reinsurers share of premium refunds and returns; and

2. To obtain a cash advance of the entire amount of the remaining balance under any letter of credit in the event that the Company:

a. has received notice of non-renewal or expiration of the letter of credit or trust account;

b. has not received assurances satisfactory to the Company of any required increase in the amount of the letter of credit or trust account, or its replacement or other continuation of the letter of credit or trust account at least thirty (30) days before its stated expiration date;

c. has been made aware that others may attempt to attach or otherwise place in jeopardy the security represented by the letter of credit or trust account; or

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d. has concluded that the trustee or issuing (or confirming) bank’s financial condition is such that the value of the security represented by the letter of credit or trust account may be in jeopardy;

and under any of those circumstances where the Reinsurer’s entire Obligations, or part thereof, under this Contract remain un-liquidated and undischarged at least thirty (30) days prior to the stated expiration date or at the time the Company learns of the possible jeopardy to the security represented by the letter of credit or trust account.

F. If the Company draws on the letter of credit or trust account to obtain a cash advance, the Company will hold the amount of the cash advance so obtained in the name of the Company in any qualified United States financial institution as defined under the Insurance Law of the Company’s domiciliary state in trust solely to secure the Obligations referred to above and for the use and purposes enumerated above and to return any balance thereof to the Reinsurer:

1. Upon the complete and final liquidation and discharge of all of the Reinsurer’s Obligations to the Company under this Contract; or

2. In the event the Reinsurer subsequently provides alternate or replacement security consistent with the terms hereof and acceptable to the Company.

G. The Company will prepare and forward at annual intervals or more frequently as determined by the Company, but not more frequently than quarterly to the Reinsurer a statement for the purposes of this Article, showing the Reinsurer’s share of Obligations as set forth above. If the Reinsurer’s share thereof exceeds the then existing balance of the security provided, the Reinsurer will, within fifteen (15) days of receipt of the Company’s statement, but never later than December 31 of any year, increase the amount of the letter of credit, (or subsequent cash deposit), trust account or Funds Deposit to the required amount of the Reinsurer’s share of Obligations set forth in the Company’s statement, but never later than December 31 of any year. If the Reinsurer’s share thereof is less than the then existing balance of the security provided, the Company will release the excess thereof to the Reinsurer upon the Reinsurer’s written request. The Reinsurer will not attempt to prevent the Company from holding the security provided or Funds Deposit so long as the Company is acting in accordance with this Article. The Company shall pay interest earned on the deposited amounts to the Reinsurers as the parties shall have agreed at the time of the deposit.

H. Any assets deposited to a trust account will be valued according to their current fair market value and will consist only of cash (U.S. legal tender), certificates of deposit issued by a qualified United States financial institution as defined under the Insurance Law of the Company’s domiciliary state and payable in cash, and investments of the types no less conservative than those specified in

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Section 1404 (a)(1)(2)(3)(8) and (10) of the New York Insurance Law and which are admitted assets under the Insurance Law of the Company’s domiciliary state. Investments issued by the parent, subsidiary, or affiliate of either the Company or the Reinsurer will not be eligible investments. All assets so deposited will be accompanied by all necessary assignments, endorsements in blank, or transfer of legal title to the trustee in order that the Company may negotiate any such assets without the requirement of consent or signature from the Reinsurer or any other entity.

I. All settlements of account between the Company and the Reinsurer will be made in cash or its equivalent. All income earned and received by the amount held in an established trust account will be added to the principal.

J. The Company’s “successors in interest” will include those by operation of law, including without limitation, any liquidator, rehabilitator, receiver, or conservator.

K. The Reinsurer will take any other reasonable steps that may be required for the Company to take full credit on its statutory financial statements for the reinsurance provided by this Contract.

ARTICLE 24

MODE OF EXECUTION

A. This Contract may be executed by:

1, an original written ink signature of paper documents;

2. an exchange of facsimile copies showing the original written ink signature of paper documents;

3. electronic signature technology employing computer software and a digital signature or digitizer pen pad to capture a person’s handwritten signature in such a manner that the signature is unique to the person signing, is under the sole control of the person signing, is capable of verification to authenticate the signature and is linked to the document signed in such a manner that if the data is changed, such signature is invalidated.

B. The use of any one or a combination of these methods of execution shall constitute a legally binding and valid signing of this Contract.

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ARTICLE 25

LATE PAYMENTS

A. Payments from the Reinsurer to the Company for coverage providing pro rata forms of reinsurance shall have a due date as expressed in the Article entitled NOTICE OF LOSS AND LOSS SETTLEMENTS. Payments from the Reinsurer to the Company for coverage providing excess of loss reinsurance shall have as a due date the date on which the proof of loss or demand for payment is received by the Reinsurer. Payment not received within sixty (60) days of the due date shall be deemed overdue (the “Overdue Date”). Payments due from the Reinsurer to the Company will not be considered overdue if the Reinsurer requests, in writing, that such payment be made by drawing on a letter of credit or other similar method of funding that has been established for this Contract, provided that there is an adequate balance in place, and further provided that such advice to draw is received by the Company within the sixty (60) day deadline set forth above. Payments from the Company to the Reinsurer will have a due date as the date specified in this Contract and will be overdue sixty (60) days thereafter. Premium adjustments will be overdue sixty (60) days from the Contract due date or one hundred twenty (120) days after the expiration or renewal date, whichever is greater.

B. In the event that this Contract provides excess of loss reinsurance, the Company will provide the Reinsurer with a reasonable proof of loss and a copy of the claim adjuster’s repots) or any other reasonable evidence of indemnification. if subsequent to receipt of this evidence, the information contained therein is unreasonably insufficient or not in substantial accordance with the contractual conditions of this Contract, then the payment due date as specified above will be deemed to be the date upon which the Reinsurer received the additional information necessary to approve payment of the claim and the claim is presented in a reasonably acceptable manner. This paragraph is only for the purpose of establishing when a claim payment is overdue, and will not alter the provisions of the Article entitled NOTICE OF LOSS AND LOSS SETTLEMENTS or other pertinent contractual stipulations of this Contract.

C. If payment is made of overdue amounts within thirty (30) days of the Overdue Date, overdue amounts will bear simple interest from the Overdue Date at a rate determined by the annualized one month London Interbank Offered Rate for the first business day of the calendar month in which the amount becomes overdue, as published in The Wall Street Journal, plus two hundred (200) basis points to be calculated weekly. If payment is made of overdue amounts more than thirty (30) days after the due date, overdue amounts will bear simple interest from the Overdue Date at a rate determined by the annualized one month London Interbank Offered Rate for the first business day of the calendar month in which the amount becomes overdue, as published in The Wall Street Journal, plus four hundred (400) basis points to be calculated on a weekly basis, but in no event less than eight percent (8%) simple interest. If the sum of the compensating additional

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amount computed in respect of any overdue payment is less than one quarter of one percent (0.25%) of the amount overdue, or one thousand dollars ($1,000), whichever is greater, and/or the overdue period is one week or less, then the interest amount shall be waived. The basis point standards referred to above shall be doubled if the late payment is due from a Reinsurer who is no longer an active reinsurance market. Interest shall cease to accrue upon the party’s payment of an overdue amount to the Intermediary.

ARTICLE 26

VARIOUS OTHER TERMS

A. This Contract shall be binding upon and inure to the benefit of the Company and Reinsurer and their respective successors and assigns provided, however, that this Contract may not be assigned by either party without the prior written consent of the other which consent may be withheld by either party in its sole unfettered discretion. This provision shall not be construed to preclude the assignment by the Company of reinsurance recoverables to another party for collection.

B. The territorial limits of this Contract shall be identical with those of the Company’s Policies.

C. This Contract shall constitute the entire agreement between the parties with respect to the Business Covered hereunder. There are no understandings between the parties other than as expressed in this Contract. Any change or modification of this Contract shall be null and void unless made by amendment to the Contract and signed by both parties.

D. Except as may be provided in the Article entitled ARBITRATION, this Contract shall be governed by and construed according to the laws of the Commonwealth of Pennsylvania, exclusive of that state’s rules with respect to conflicts of law.

E. The headings preceding the text of the Articles and paragraphs of this Contract are intended and inserted solely for the convenience of reference and shall not affect the meaning, interpretation, construction or effect of this Contract.

F. This Contract is solely between the Company and the Reinsurer, and in no instance shall any insured, claimant or other third party have any rights under this Contract.

G. If any provision of this Contract should be invalid under applicable laws, the latter shall control but only to the extent of the conflict without affecting the remaining provisions of this Contract.

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H. The failure of the Company or Reinsurer to insist on strict compliance with this Contract or to exercise any right or remedy shall not constitute a waiver of any rights contained in this Contract nor estop the parties from thereafter demanding full and complete compliance nor prevent the parties from exercising any remedy.

I. Each party shall be excused for any reasonable failure or delay in performing any of its respective obligations under this Contract, if such failure or delay is caused by Force Majeure. “Force Majeure” shall mean any act of God, strike, lockout, act of public enemy, any accident, explosion, fire, storm, earthquake, flood, drought, peril of sea, riot, embargo, war or foreign, federal, state or municipal order or directive issued by a court or other authorized official, seizure, requisition or allocation, any failure or delay of transportation, shortage of or inability to obtain supplies, equipment, fuel or labor or any other circumstance or event beyond the reasonable control of the party relying upon such circumstance or event; provided, however, that no such Force Majeure circumstance or event shall excuse any failure or delay beyond a period exceeding thirty (30) days from the date such performance would have been due but for such circumstance or event.

J. All Articles of this Contract shall survive the termination of this Contract until all obligations between the parties have been finally settled.

K. This Contract may be executed by the parties hereto in any number of counterparts, and by each of the parties hereto in separate counterparts, each of which counterparts, when so executed and delivered, shall be deemed to be an original, but all such counterparts shall together constitute but one and the same instrument.

L. Whenever the word “Company” is used in this Contract, such term shall mean each and all affiliated companies which are or may hereafter be under common control provided notice be given to the Reinsurers of any newly affiliated companies which may hereafter come under common control as soon as practicable, with full particulars as to how such affiliation is likely to affect this Contract. In the event that either party maintains that such affiliation calls for altering the terms of this Contract and an agreement for alteration not being arrived at, then the Business Covered of such newly affiliated company is covered at existing terms for a period not to exceed (90) ninety days after notice by either party that it does not wish to cover the business of the newly affiliated company at the existing terms.

M. The term “Reinsurer” shall refer to each Reinsurer participating severally and not jointly in this Contract. The subscribing (Re)insurers’ obligations under contracts of (re)insurance to which they subscribe are several and not joint and are limited solely to the extent of their individual subscriptions. The subscribing (Re)insurers are not responsible for the subscription of any co-subscribing (Re)insurer who for any reason does not satisfy all or part of its obligations.

29.

N. For purposes of sending and receiving notices and payments required by this Contract other than in respect of the Articles entitled SERVICE OF SUIT and RESERVES herein, the reinsured company that is set forth first in the definition of “Company” is deemed the agent of all other reinsured companies referenced herein. In no event, however, shall any reinsured company be deemed the agent of another with respect to the terms of the Article entitled INSOLVENCY.

0. Whenever the content of this Contract requires, the gender of all words shall include the masculine, feminine and neuter, and the number of all words shall include the singular and the plural. This Contract shall be construed without regard to any presumption or other rule requiring construction against the party causing this Contract to be drafted.

P. The Company shall furnish the Reinsurer, in accordance with regulatory requirements, periodic reporting of premiums and losses that relate to the Business Covered in this Contract as may be needed for Reinsurers’ completion of financial statements to regulatory authorities.

Q. When so requested in writing, the Company shall afford the Reinsurer or its representatives an opportunity to be associated with the Company, at the expense of the Reinsurer, in the defense of any claim, suit or proceeding involving this reinsurance, and the Company and the Reinsurer shall cooperate in every respect in the defense of such claim, suit or proceeding, provided the Company shall have the right to make any decision in the event of disagreement over any matter of defense or settlement.

ARTICLE 27

INTERMEDIARY

A. Towers Perrin Forster & Crosby, Inc. (“Towers Perrin”) is hereby recognized as the Intermediary negotiating this Contract for all business hereunder. All communications (including but not limited to notices, statements, premium, return premium, commissions, taxes, losses, loss adjustment expense, salvages and loss settlements) relating thereto shall be transmitted to the Company or the Reinsurers through Towers Perrin, Centre Square East, 1500 Market Street, Philadelphia, Pennsylvania, 19102-4790. Payments by the Company to the Intermediary shall be deemed to constitute payment to the Reinsurers. Payments by the Reinsurers to the Intermediary shall be deemed to constitute payment to the Company only to the extent that such payments are actually received by the Company.

B. Whenever notice is required within this Contract, such notice may be given by certified mail, registered mail, or overnight express mail. Notice shall be deemed to be given on the date received by the receiving party.

NUCLEAR INCIDENT EXCLUSION CLAUSE — PHYSICAL DAMAGE -
REINSURANCE (BRMA 35B)

1.	This reinsurance does not cover any loss or liability accruing to the Company, directly or indirectly, and whether as Insurer or Reinsurer, from any Pool of Insurers or Reinsurers formed for the purpose of covering Atomic or Nuclear Energy risks.
2.	Without in any way restricting the operation of paragraph (1) of this Clause, this reinsurance does not cover any loss or liability accruing to the Company, directly or indirectly, and whether as Insurer or Reinsurer, from any insurance against Physical Damage (including business interruption or consequential loss arising out of such Physical Damage) to:

I.	Nuclear reactor power plants including all auxiliary property on the site, or
ii.	Any other nuclear reactor installation, including laboratories handling radioactive materials in connection with reactor installations and “critical facilities” as such, or
Ill.	Installations for fabricating complete fuel elements or for processing substantial quantities of “special nuclear material” and for reprocessing, salvaging, chemically separating, storing or disposing of “spent” nuclear fuel or waste materials, or
IV.	installations other than those listed in paragraph (2) III above using substantial quantities of radioactive isotopes or other products of nuclear fission.

3. Without in any way restricting the operations of paragraphs (1) and (2) hereof, this reinsurance does not cover any loss or liability by radioactive contamination accruing to the Company, directly or indirectly, and whether as Insurer or Reinsurer, from any insurance on property which is on the same site as a nuclear reactor power plant or other nuclear installation and which normally would be insured therewith except that this paragraph (3) shall not operate:

(a)	where Company does not have knowledge of such nuclear reactor power plant or nuclear installation, or
(b)	where said insurance contains a provision excluding coverage for damage to property caused by or resulting from radioactive contamination, however caused. However, on and after 1st January 1960, this sub-paragraph (b) shall only apply provided the said radioactive contamination exclusion provision has been approved by the Governmental Authority having jurisdiction thereof.

4.	Without in any way restricting the operations of paragraphs (1), (2) and (3) hereof, this reinsurance does not cover any loss or liability by radioactive contamination accruing to the Company, directly or indirectly, and whether as Insurer or Reinsurer, when such radioactive contamination is a named hazard specifically insured against.
5.	It is understood and agreed that this Clause shall not extend to risks using radioactive isotopes in any form where the nuclear exposure is not considered by the Company to be the primary hazard.

2.

6.	The term “special nuclear material” shall have the meaning given it in the Atomic Energy Act of 1954 or by any law amendatory thereof.
7.	Company to be sole judge of what constitutes:

(a)	substantial quantities, and
(b)	the extent of installation, plant or site.

Notes: Without in any way restricting the operation of paragraph (1) hereof, it is understood and agreed that:

(a)	All Policies issued by the Company on or before 31st December 1957 shall be free from the application of the other provisions of this Clause until expiry date or 31st December 1960 whichever first occurs whereupon all the provisions of this Clause shall apply.
(b)	With respect to any risk located in Canada Policies issued by the Company on or before 31st December 1958 shall be free from the application of the other provisions of this Clause until expiry date or 31st December 1960 whichever first occurs whereupon all the provisions of this Clause shall apply.

POOLS, ASSOCIATIONS AND SYNDICATES EXCLUSION CLAUSE

A. It is agreed that the following is excluded hereunder:

(1)	All business derived directly or indirectly from any Pool, Association or Syndicate which maintains its own reinsurance facilities.
(2)	Any Pool or Scheme, (whether voluntary or mandatory) formed after 1st March, 1968 for the purpose of insuring property whether on a country-wide basis or in respect of designated areas. This exclusion shall not apply to so-called Automobile Insurance Plans or other Pools formed to provide coverage for Automobile Physical Damage.
(3)	Business written by the Company for the same perils, which is known at the time to be insured by, or in excess of underlying amounts placed in any Pool, Association or Syndicate formed for the purpose of writing oil, gas or petro-chemical plants and/or oil or gas drilling rigs.

Nevertheless, this exclusion does not apply:

(a)	where the Total Insured Value over all interests of the risk in question is less than $250,000,000.
(b)	to interests traditionally underwritten as Inland Marine or Stock and/or Contents written on a Blanket Basis.
(c)	to Contingent Business interruption, except when the Company is aware that the key location is known at the time to be insured in any Pool, Association or Syndicate named above, other than as provided for under (a), above.
(d)	Risks as follows: offices, hotels, apartments, hospitals, educational establishments, public utilities (other than railroad schedules) and builder’s risks on the classes of risks specified in this subsection (d) only.

B. Where this Clause attaches to Catastrophe Excess of Loss Reinsurance Agreements, the following
SECTIONS are added:

(1) Nevertheless the Reinsurers specifically agree that liability accruing to the Company from its participation in Residual Market Mechanisms including but not limited to:

(a)	“Coastal Pools”
(b)	All “Fair Plan” and “Rural Risk Plan” Business, and
(c)	California Earthquake Authority (“CEA”), and Citizens Property Insurance Corporation (Florida) (“CM”)

for all perils otherwise protected hereunder shall not be excluded, except that this reinsurance does not include any increase in such liability resulting from:

(i)	The inability of any other participant in such Residual Market Mechanisms to meet its liability.
(ii)	Any claim against such Residual Market Mechanisms or any participant therein, including the Company, whether by way of subrogation or otherwise, brought by or on behalf of any insolvency fund (as defined in the Insolvency Funds Exclusion Clause incorporated in this Contract).

2.

(2)	In respect of the CEA, where an assessment is made against the Company by the CEA, the Company may include in its Ultimate Net Loss only that assessment directly attributable to each separate loss occurrence covered hereunder. The Company’s initial capital contribution to the CEA shall not be included in the Ultimate Net Loss.
(3)	In respect of the Citizens Property Insurance Corporation (“CPIC”), where an assessment is made against the Company by the Citizens Property Insurance Corporation, (“CPIC”) the maximum loss that the Company may include in the Ultimate Net Loss in respect of any loss occurrence hereunder shall not exceed the lesser of:

(a)	The Company’s assessment from CPIC for the accounting year in which the loss occurrence commenced, or
(b)	The product of the following:

(i)	The Company’s percentage participation in CPIC for the accounting year in which the loss occurrence commenced; and
(ii)	CPIC’s total losses in such loss occurrence.

Assessments for accounting years other than the accounting year in which the Loss Occurrence commenced may not be included in the Company’s Ultimate Net Loss hereunder,

Moreover, in respect of the CPIC, Ultimate Net Loss hereunder shall not include any monies expended to purchase or retire bonds as a consequence of being a member of the CPIC or to meet any obligations arising from the deferment by CPIC of the collection of monies.

NOTES: Wherever used herein the terms:

“Company” shall be understood to mean “Company”, “Reinsured”, “Reassured” or whatever other term is used in the attached reinsurance document to designate the reinsured company or companies.

“Agreement” shall be understood to mean “Agreement”, “Contract”, “Policy” or whatever other term is used to designate the attached reinsurance document.

“Coastal Pools” means liability accruing to the Company from its participation in state Residual Market Mechanisms formed to protect property located in those states of the United States of America which border the Gulf of Mexico, Hawaii, Florida, Georgia, South Carolina and North Carolina.

“Pool”, “Syndicate” or “Association” refers to a mandatory or voluntary collection of unaffiliated insurers, reinsurers or both, who are associated together and using a common underwriting manager, whether as an employee or as a third party contractor, for the purposes of accepting risk and providing insurance or reinsurance either severally or jointly.

“Reinsurers” shall be understood to mean “Reinsurers”, “Underwriters” or whatever other term is used in the attached reinsurance document to designate the Reinsurer or Reinsurers.

“Ultimate Net Loss” shall be understood to mean “Loss”, “Net Loss” or whatever other term is used to designate the amount of loss to which this reinsurance coverage and the limit and retention of the attached reinsurance document apply.

TRANSMISSION AND DISTRIBUTION LINES EXCLUSION — ABOVE GROUND
(150M EXCLUSION)

All above ground transmission and distribution lines, including wire, cables, poles, pylons, standards, towers, other supporting structures and any equipment of any type which may be attendant to such installations of any description, for the purpose of transmission and distribution of electrical power, telephone or telegraph signals, and all communication signals whether audio or visual.

This exclusion applies to all equipment other than those on or within 150 meters (or 500 feet) from the insured structure.

This exclusion applies both to physical loss or damage to the equipment and all business interruption, consequential loss, and/or other contingent losses related to transmission and distribution lines, other than contingent property damage/business interruption losses (including expenses), arising from loss and/or damage to lines of third parties.

FUNGI COVERAGE LIMITATION (PROPERTY CATASTROPHE PROGRAM)

This reinsurance agreement excludes absolutely any loss, damage, cost expense, or liability arising from Fungi unless directly caused by or arising from one of the following listed perils:

Earthquake, Seaquake, Seismic and/or Volcanic Disturbance/Eruption, Hurricane, Rainstorm, Windstorm, Tornado, Cyclone, Typhoon, Tsunami, Flood, Hail, Freeze, Ice Storm, Weight of Snow or Ice, Avalanche, Meteor/Asteroid Impact, Landslip, Landslide, Mudslide, Bush Fire, Forest Fire, Lightning, Explosion, Fire, Aircraft and Vehicle Impact, Riots, Strikes and Civil Commotion.

Such losses arising from Fungi may only be included in the Company’s Ultimate Net Loss if they manifest themselves, and are reported to the Reinsured within twelve (12) months of the start of the event identified in relation to that Ultimate Net Loss.

Losses arising from Fungi shall not in and of themselves constitute an event for the purposes of recovery hereunder.

If this reinsurance contract includes cover for Extra Contractual Obligations or Excess of Policy Limit payments, then such losses which arise out of claims where Fungi are present or alleged to be present may be included in the Ultimate Net Loss but only up to a maximum of twenty five percent (25%) of the Ultimate Net Loss.

For the purposes of this reinsurance contract, Fungi shall be taken to include any type or form of fungus, mold or mildew and any mycotoxins, spores, scents or by products produced or released by fungi.

TERRORISM EXCLUSION
(Property Treaty Reinsurance)

Notwithstanding any provision to the contrary within this reinsurance contract or any endorsement thereto, it is agreed that this reinsurance contract excludes loss, damage, cost, or expense directly or indirectly caused by, contributed to by, resulting from, or arising out of or in connection with any act of terrorism, as defined herein, regardless of any other cause or event contributing concurrently or in any other sequence to the loss.

An act of terrorism includes any act, or preparation in respect of action, or threat of action designed to influence the government de jure or de facto of any nation or any political division thereof, or in pursuit of political, religious, ideological_., or similar purposes to intimidate the public or a section of the public of any nation by any person or group(s) of persons whether acting alone or on behalf of or in connection with any organization(s) or government(s) de jure or de facto, and which:

(i)	involves violence against one or more persons; or
(ii)	involves damage to property; or
(iii)	endangers life other than that of the person committing the action; or
(iv)	creates a risk to health or safety of the public or a section of the public; or
(v)	is designed to interfere with or to disrupt an electronic system.

This reinsurance contract also excludes loss, damage, cost, or expense directly or indirectly caused by, contributed to by, resulting from, or arising out of or in connection with any action in controlling, preventing, suppressing, retaliating against, or responding to any act of terrorism.

Notwithstanding the above and subject otherwise to the terms, conditions, and limitations of this reinsurance contract, in respect only of personal lines this reinsurance contract will pay actual loss or damage (but not related cost or expense) caused by any act of terrorism provided such act is not directly or indirectly caused by, contributed to by, resulting from, or arising out of or in connection with biological, chemical, radioactive, or nuclear pollution or contamination or explosion.

INFORMATION TECHNOLOGY HAZARDS CLARIFICATION CLAUSE

Losses arising directly or indirectly, out of:

(i)	loss of, alteration of, or damage to
or
(ii)	a reduction in the functionality, availability or operation of
	a computer system, hardware, program, software, data, information repository, microchip, integrated circuit or similar device in computer equipment or non-computer equipment, whether the property of the policyholder of the reinsured or not, do not in and of themselves constitute an event unless arising out of one or more of the following perils:

fire, lightning, explosion, aircraft or vehicle impact, falling objects, windstorm, hail, tornado, cyclone, hurricane, earthquake, volcano, tsunami, flood, freeze or weight of snow.

Exhibit I — Page 1.

EXHIBIT I

PROPERTY FIRST CATASTROPHE EXCESS OF LOSS
REINSURANCE CONTRACT

EFFECTIVE JANUARY 1, 2009

issued to

PENN MILLERS INSURANCE COMPANY

AMERICAN MILLERS INSURANCE COMPANY

WILKES-BARRE, PENNSYLVANIA

ARTICLE 5

RETENTION AND LIMIT

A. The Reinsurers shall be liable to, indemnify and reinsure the Company for each and every Loss Occurrence, for ninety five percent (95%) of the excess Net Loss above an initial Net Loss to the Company of two million dollars ($2,000,000) each and every Loss Occurrence; but the Reinsurers shall not be liable for more than nine hundred fifty thousand dollars ($950,000) of Net Loss for each and every such Loss Occurrence.

B. The Company agrees to carry at its own risk and not reinsured in any way the remaining five percent (5%) of each excess Net Loss for which claim is made hereunder.

C. It is warranted that this Contract shall respond only when two (2) or more risks are involved in a Loss Occurrence.

ARTICLE 6

REINSTATEMENT

A. Each claim hereunder shall reduce the amount of the Reinsurers’ liability from the time of the occurrence of the loss by the sum paid, but the sum so exhausted immediately shall be reinstated from the time of the occurrence of the loss.

B. For each amount so reinstated, the Company agrees to pay an additional premium calculated by multiplying one hundred percent (100%) of the annual premium hereon by the product of the percentage that the amount reinstated bears to the limit (i.e., nine hundred fifty thousand dollars ($950,000)) of this Contract.

Exhibit I — Page 2.

Nevertheless, the liability of the Reinsurers shall never be more than nine hundred fifty thousand dollars ($950,000) in respect of any one Loss Occurrence, nor more than one million nine hundred thousand dollars ($1,900,000) in all in respect of all losses occurring during the term of this Contract.

C. A provisional reinstatement premium shall be paid by the Company at the time the Reinsurers pay the loss giving rise to the reinstatement premium through an offset of the provisional reinstatement premium due the Reinsurers against the loss payment due the Company, with only the net amount due to be remitted by the debtor party. The amount of this provisional reinstatement premium shall be based on one hundred percent (100%) of the estimated annual reinsurance premium hereunder.

D. As promptly as possible after the loss has been paid by the Reinsurers and the annual reinsurance premium hereunder has been finally determined, the Company shall prepare and submit to the Reinsurers a final statement of reinstatement premium due. Any reinstatement premium shown to be due the Reinsurers (less prior payments, if any) shall be remitted by the Company with its statement. Any return reinstatement premium shown to be due the Company shall be remitted by the Reinsurers as promptly as possible after receipt of the Company’s final statement.

E. In the event there are any mid-term terminations in the participation of any Reinsurer in this Contract, payment of any such reinstatement premium in full shall be paid to the Reinsurer who incurred the loss that generates the reinstatement premium.

ARTICLE 7

PREMIUM

A. As premium for the reinsurance provided hereunder, the Company shall pay the Reinsurers point seven nine seven zero percent (.7970%) of its Net Subject Earned Premium for the Contract period.

B. The Company shall pay the Reinsurers a deposit premium of two hundred seventy five thousand three hundred ninety six dollars ($275,396) in equal quarterly installments of sixty eight thousand eight hundred forty nine dollars ($68,849) on January 1, April 1, July 1 and October 1, 2009. This Contract shall be subject to a minimum premium of two hundred twenty thousand three hundred sixteen dollars ($220,316).

C. As promptly as possible after the end of the Contract period, the Company shall provide a report to the Reinsurers setting forth the premium due hereunder, computed in accordance with the first paragraph, and any additional premium due the Reinsurers or return premium due the Company shall be remitted promptly.

Exhibit I — Page 3.

D. “Net Subject Earned Premium” as used in this Contract shall mean the gross earned premium of the Company for the classes of business reinsured hereunder, less the earned portion of premium for reinsurance that inures to the benefit of this Contract.

attaching to and forming part of the

PROPERTY CATASTROPHE EXCESS OF LOSS REINSURANCE CONTRACT

EFFECTIVE JANUARY 1, 2009

issued to

PENN MILLERS INSURANCE COMPANY

AMERICAN MILLERS INSURANCE COMPANY

Exhibit II — Page 1.

EXHIBIT II

PROPERTY SECOND CATASTROPHE EXCESS OF LOSS
REINSURANCE CONTRACT

EFFECTIVE JANUARY 1, 2009

issued to

PENN MILLERS INSURANCE COMPANY

AMERICAN MILLERS INSURANCE COMPANY

WILKES-BARRE, PENNSYLVANIA

ARTICLE 5

RETENTION AND LIMIT

A. The Reinsurers shall be liable to, indemnify and reinsure the Company for each and every Loss Occurrence, for ninety five percent (95%) of the excess Net Loss above an initial Net Loss to the Company of three million dollars ($3,000,000) each and every Loss Occurrence; but the Reinsurers shall not be liable for more than one million nine hundred thousand dollars ($1,900,000) of Net Loss for each and every such Loss Occurrence.

B. The Company agrees to carry at its own risk and not reinsured in any way the remaining five percent (5%) of each excess Net Loss for which claim is made hereunder.

C. It is warranted that this Contract shall respond only when two (2) or more risks are involved in a Loss Occurrence.

ARTICLE 6

REINSTATEMENT

A. Each claim hereunder shall reduce the amount of the Reinsurers’ liability from the time of the occurrence of the loss by the sum paid, but the sum so exhausted immediately shall be reinstated from the time of the occurrence of the loss.

B. For each amount so reinstated, the Company agrees to pay an additional premium calculated by multiplying one hundred percent (100%) of the annual premium hereon by the product of the percentage that the amount reinstated bears to the limit (i.e., one million nine hundred thousand dollars ($1,900,000)) of this

Exhibit II — Page 2.

Contract. Nevertheless, the liability of the Reinsurers shall never be more than one million nine hundred thousand dollars ($1,900,000) in respect of any one Loss Occurrence, nor more than three million eight hundred thousand dollars ($3,800,000) in all in respect of all losses occurring during the term of this Contract.

C. A provisional reinstatement premium shall be paid by the Company at the time the Reinsurers pay the loss giving rise to the reinstatement premium through an offset of the provisional reinstatement premium due the Reinsurers against the loss payment due the Company, with only the net amount due to be remitted by the debtor party. The amount of this provisional reinstatement premium shall be based on one hundred percent (100%) of the estimated annual reinsurance premium hereunder.

D. As promptly as possible after the loss has been paid by the Reinsurers and the annual reinsurance premium hereunder has been finally determined, the Company shall prepare and submit to the Reinsurers a final statement of reinstatement premium due. Any reinstatement premium shown to be due the Reinsurers (less prior payments, if any) shall be remitted by the Company with its statement. Any return reinstatement premium shown to be due the Company shall be remitted by the Reinsurers as promptly as possible after receipt of the Company’s final statement.

E. In the event there are any mid-term terminations in the participation of any Reinsurer in this Contract, payment of any such reinstatement premium in full shall be paid to the Reinsurer who incurred the loss that generates the reinstatement premium.

ARTICLE 7

PREMIUM

A. As premium for the reinsurance provided hereunder, the Company shall pay the Reinsurers point eight five two zero percent (.8520%) of its Net Subject Earned Premium for the Contract period.

B. The Company shall pay the Reinsurers a deposit premium of two hundred ninety four thousand four hundred dollars ($294,400) in equal quarterly installments of seventy three thousand six hundred dollars ($73,600) on January 1, April 1, July 1 and October 1, 2009. This Contract shall be subject to a minimum premium of two hundred thirty five thousand five hundred twenty dollars ($235,520).

C. As promptly as possible after the end of the Contract period, the Company shall provide a report to the Reinsurers setting forth the premium due hereunder, computed in accordance with the first paragraph, and any additional premium due the Reinsurers or return premium due the Company shall be remitted promptly.

Exhibit II — Page 3.

D. “Net Subject Earned Premium” as used in this Contract shall mean the gross earned premium of the Company for the classes of business reinsured hereunder, less the earned portion of premium for reinsurance that inures to the benefit of this Contract.

attaching to and forming part of the

PROPERTY CATASTROPHE EXCESS OF LOSS REINSURANCE CONTRACT

EFFECTIVE JANUARY 1, 2009

issued to

PENN MILLERS INSURANCE COMPANY

AMERICAN MILLERS INSURANCE COMPANY

Exhibit III — Page 1.

EXHIBIT III

PROPERTY THIRD CATASTROPHE EXCESS OF LOSS
REINSURANCE CONTRACT

EFFECTIVE JANUARY 1, 2009

issued to

PENN MILLERS INSURANCE COMPANY

AMERICAN MILLERS INSURANCE COMPANY

WILKES-BARRE, PENNSYLVANIA

ARTICLE 5

RETENTION AND LIMIT

A. The Reinsurers shall be liable to, indemnify and reinsure the Company for each and every Loss Occurrence, for ninety five percent (95%) of the excess Net Loss above an initial Net Loss to the Company of five million dollars ($5,000,000) each and every Loss Occurrence; but the Reinsurers shall not be liable for more than four million seven hundred fifty thousand dollars ($4,750,000) of Net Loss for each and every such Loss Occurrence.

B. The Company agrees to carry at its own risk and not reinsured in any way the remaining five percent (5%) of each excess Net Loss for which claim is made hereunder.

C. It is warranted that this Contract shall respond only when two (2) or more risks are involved in a Loss Occurrence.

ARTICLE 6

REINSTATEMENT

A. Each claim hereunder shall reduce the amount of the Reinsurers’ liability from the time of the occurrence of the loss by the sum paid, but the sum so exhausted immediately shall be reinstated from the time of the occurrence of the loss.

B. For each amount so reinstated, the Company agrees to pay an additional premium calculated by multiplying one hundred percent (100%) of the annual premium hereon by the product of the percentage that the amount reinstated bears to the limit (i.e., four million seven hundred fifty thousand dollars ($4,750,000)) of this

Exhibit III — Page 2.

Contract. Nevertheless, the liability of the Reinsurers shall never be more than four million seven hundred fifty thousand dollars ($4,750,000) in respect of any one Loss Occurrence, nor more than nine million five hundred thousand dollars ($9,500,000) in all in respect of all losses occurring during the term of this Contract.

C. A provisional reinstatement premium shall be paid by the Company at the time the Reinsurers pay the loss giving rise to the reinstatement premium through an offset of the provisional reinstatement premium due the Reinsurers against the loss payment due the Company, with only the net amount due to be remitted by the debtor party. The amount of this provisional reinstatement premium shall be based on one hundred percent (100%) of the estimated annual reinsurance premium hereunder.

D. As promptly as possible after the loss has been paid by the Reinsurers and the annual reinsurance premium hereunder has been finally determined, the Company shall prepare and submit to the Reinsurers a final statement of reinstatement premium due. Any reinstatement premium shown to be due the Reinsurers (less prior payments, if any) shall be remitted by the Company with its statement. Any return reinstatement premium shown to be due the Company shall be remitted by the Reinsurers as promptly as possible after receipt of the Company’s final statement.

E. In the event there are any mid-term terminations in the participation of any Reinsurer in this Contract, payment of any such reinstatement premium in full shall be paid to the Reinsurer who incurred the loss that generates the reinstatement premium.

ARTICLE 7

PREMIUM

A. As premium for the reinsurance provided hereunder, the Company shall pay the Reinsurers one point zero six five four percent (1.0654%) of its Net Subject Earned Premium for the Contract period.

B. The Company shall pay the Reinsurers a deposit premium three hundred sixty eight thousand one hundred thirty nine dollars ($368,139) in equal quarterly installments of ninety two thousand thirty four dollars and seventy five cents ($92,034.75) on January 1, April 1, July 1 and October 1, 2009. This Contract shall be subject to a minimum premium of two hundred ninety four thousand five hundred eleven dollars ($294,511).

C. As promptly as possible after the end of the Contract period, the Company shall provide a report to the Reinsurers setting forth the premium due hereunder, computed in accordance with the first paragraph, and any additional premium due the Reinsurers or return premium due the Company shall be remitted promptly.

Exhibit III — Page 3.

D. “Net Subject Earned Premium” as used in this Contract shall mean the gross earned premium of the Company for the classes of business reinsured hereunder, less the earned portion of premium for reinsurance that inures to the benefit of this Contract.

attaching to and forming part of the

PROPERTY CATASTROPHE EXCESS OF LOSS REINSURANCE CONTRACT

EFFECTIVE JANUARY 1, 2009

issued to

PENN MILLERS INSURANCE COMPANY

AMERICAN MILLERS INSURANCE COMPANY

Exhibit IV — Page 1.

EXHIBIT IV

PROPERTY FOURTH CATASTROPHE EXCESS OF LOSS
REINSURANCE CONTRACT

EFFECTIVE JANUARY 1, 2009

issued to

PENN MILLERS INSURANCE COMPANY

AMERICAN MILLERS INSURANCE COMPANY

WILKES-BARRE, PENNSYLVANIA

ARTICLE 5

RETENTION AND LIMIT

A. The Reinsurers shall be liable to, indemnify and reinsure the Company for each and every Loss Occurrence, for ninety five percent (95%) of the excess Net Loss above an initial Net Loss to the Company of ten million dollars ($10,000,000) each and every Loss Occurrence; but the Reinsurers shall not be liable for more than fourteen million two hundred fifty thousand dollars ($14,250,000) of Net Loss for each and every such Loss Occurrence.

B. The Company agrees to carry at its own risk and not reinsured in any way the remaining five percent (5%) of each excess Net Loss for which claim is made hereunder.

C. It is warranted that this Contract shall respond only when two (2) or more risks are involved in a Loss Occurrence.

ARTICLE 6

REINSTATEMENT

A. Each claim hereunder shall reduce the amount of the Reinsurers’ liability from the time of the occurrence of the loss by the sum paid, but the sum so exhausted immediately shall be reinstated from the time of the occurrence of the loss.

Exhibit IV — Page 2.

B. For each amount so reinstated, the Company agrees to pay an additional premium calculated by multiplying one hundred percent (100%) of the annual premium hereon by the product of the percentage that the amount reinstated bears to the limit (i.e., fourteen million two hundred fifty thousand dollars ($14,250,000)) of this Contract. Nevertheless, the liability of the Reinsurers shall never be more than fourteen million two hundred fifty thousand dollars ($14,250,000) in respect of any one Loss Occurrence, nor more than twenty eight million five hundred thousand dollars ($28,500,000) in all in respect of all losses occurring during the term of this Contract.

C. A provisional reinstatement premium shall be paid by the Company at the time the Reinsurers pay the loss giving rise to the reinstatement premium through an offset of the provisional reinstatement premium due the Reinsurers against the loss payment due the Company, with only the net amount due to be remitted by the debtor party. The amount of this provisional reinstatement premium shall be based on one hundred percent (100%) of the estimated annual reinsurance premium hereunder.

D. As promptly as possible after the loss has been paid by the Reinsurers and the annual reinsurance premium hereunder has been finally determined, the Company shall prepare and submit to the Reinsurers a final statement of reinstatement premium due. Any reinstatement premium shown to be due the Reinsurers (less prior payments, if any) shall be remitted by the Company with its statement. Any return reinstatement premium shown to be due the Company shall be remitted by the Reinsurers as promptly as possible after receipt of the Company’s final statement.

E. In the event there are any mid-term terminations in the participation of any Reinsurer in this Contract, payment of any such reinstatement premium in full shall be paid to the Reinsurer who incurred the loss that generates the reinstatement premium.

ARTICLE 7

PREMIUM

A. As premium for the reinsurance provided hereunder, the Company shall pay the Reinsurers one point six four nine six percent (1.6496%) of its Net Subject Earned Premium for the Contract period.

B. The Company shall pay the Reinsurers a deposit premium of five hundred seventy thousand three dollars ($570,003) in equal quarterly installments of one hundred forty two thousand five hundred dollars and seventy five cents ($142,500.75) on January 1, April 1, July 1 and October 1, 2009. This Contract shall be subject to a minimum premium of four hundred fifty six thousand three dollars ($456,003).

Exhibit IV — Page 3.

C. As promptly as possible after the end of the Contract period, the Company shall provide a report to the Reinsurers setting forth the premium due hereunder, computed in accordance with the first paragraph, and any additional premium due the Reinsurers or return premium due the Company shall be remitted promptly.

D. “Net Subject Earned Premium” as used in this Contract shall mean the gross earned premium of the Company for the classes of business reinsured hereunder, less the earned portion of premium for reinsurance that inures to the benefit of this Contract.

attaching to and forming part of the

PROPERTY CATASTROPHE EXCESS OF LOSS REINSURANCE CONTRACT

EFFECTIVE JANUARY 1, 2009

issued to

PENN MILLERS INSURANCE COMPANY

AMERICAN MILLERS INSURANCE COMPANY

Exhibit V — Page I.

EXHIBIT V

PROPERTY FIFTH CATASTROPHE EXCESS OF LOSS
REINSURANCE CONTRACT

EFFECTIVE JANUARY 1, 2009

issued to

PENN MILLERS INSURANCE COMPANY

AMERICAN MILLERS INSURANCE COMPANY

WILKES-BARRE, PENNSYLVANIA

ARTICLE 5

RETENTION AND LIMIT

A. The Reinsurers shall be liable to, indemnify and reinsure the Company for each and every Loss Occurrence, for ninety five percent (95%) of the excess Net Loss above an initial Net Loss to the Company of twenty five million dollars ($25,000,000) each and every Loss Occurrence; but the Reinsurers shall not be liable for more than nineteen million dollars ($19,000,000) of Net Loss for each and every such Loss Occurrence.

B. The Company agrees to carry at its own risk and not reinsured in any way the remaining five percent (5%) of each excess Net Loss for which claim is made hereunder.

C. It is warranted that this Contract shall respond only when two (2) or more risks are involved in a Loss Occurrence.

ARTICLE 6

REINSTATEMENT

A. Each claim hereunder shall reduce the amount of the Reinsurers’ liability from the time of the occurrence of the Loss by the sum paid, but the sum so exhausted immediately shall be reinstated from the time of the occurrence of the Loss.

Exhibit V — Page 2.

B. For each amount so reinstated, the Company agrees to pay an additional premium calculated by multiplying one hundred percent (100%) of the annual premium hereon by the product of the percentage that the amount reinstated bears to the limit (i.e., nineteen million dollars ($19,000,000)) of this Contract.

     Nevertheless, the liability of the Reinsurers shall never be more than nineteen million dollars ($19,000,000) in respect of any one Loss Occurrence, nor more than thirty eight million dollars ($38,000,000) in all in respect of all losses occurring during the term of this Contract.

C. A provisional reinstatement premium shall be paid by the Company at the time the Reinsurers pay the Loss giving rise to the reinstatement premium through an offset of the provisional reinstatement premium due the Reinsurers against the Loss payment due the Company, with only the net amount due to be remitted by the debtor party. The amount of this provisional reinstatement premium shall be based on one hundred percent (100%) of the estimated annual reinsurance premium hereunder.

D. As promptly as possible after the Loss has been paid by the Reinsurers and the annual reinsurance premium hereunder has been finally determined, the Company shall prepare and submit to the Reinsurers a final statement of reinstatement premium due. Any reinstatement premium shown to be due the Reinsurers (less prior payments, if any) shall be remitted by the Company with its statement. Any return reinstatement premium shown to be due the Company shall be remitted by the Reinsurers as promptly as possible after receipt of the Company’s final statement.

E. In the event there are any mid-term terminations in the participation of any Reinsurer in this Contract, payment of any such reinstatement premium in full shall be paid to the Reinsurer who incurred the Loss that generates the reinstatement premium.

ARTICLE 7

PREMIUM

A. As premium for the reinsurance provided hereunder, the Company shall pay the Reinsurers one point six two zero seven percent (1.6207%) of its Net Subject Earned Premium for the Contract period.

B. The Company shall pay the Reinsurers a deposit premium of five hundred sixty thousand seventeen dollars ($560,017) in equal quarterly installments of one hundred forty thousand four dollars and twenty five cents ($140,004.25) on January 1, April 1, July 1 and October 1, 2009. This Contract shall be subject to a minimum premium of four hundred forty eight thousand fourteen dollars ($448,014).

Exhibit V — Page 3.

C. As promptly as possible after the end of the Contract period, the Company shall provide a report to the Reinsurers setting forth the premium due hereunder, computed in accordance with the first paragraph, and any additional premium due the Reinsurers or return premium due the Company shall be remitted promptly.

D. “Net Subject Earned Premium” as used in this Contract shall mean the gross earned premium of the Company for the classes of business reinsured hereunder, less the earned portion of premium for reinsurance that inures to the benefit of this Contract.

attaching to and forming part of the

PROPERTY CATASTROPHE EXCESS OF LOSS REINSURANCE CONTRACT

EFFECTIVE JANUARY 1, 2009

issued to

PENN MILLERS INSURANCE COMPANY

AMERICAN MILLERS INSURANCE COMPANY

EX-10.12

Exhibit 10.12

PROPERTY & CASUALTY EXCESS OF LOSS REINSURANCE CONTRACT

EFFECTIVE JANUARY 1, 2009

issued to

PENN MILLERS INSURANCE COMPANY

AMERICAN MILLERS INSURANCE COMPANY

WILKES-BARRE, PENNSYLVANIA

(hereinafter called the “Company”)

by

EMPLOYERS MUTUAL INSURANCE COMPANY

IOWA

(hereinafter called, with other participants, the “Reinsurers”)

Under the terms of this Contract the above Reinsurer agrees to assume severally and not jointly with other participants

a 10.00% share

of the liability described in the attached Contract and, as consideration, the Reinsurer shall receive a 10.00% share of the premium named therein.

Signed in Des Moines, Iowa, this            day of                     , 2009,

EMPLOYERS MUTUAL INSURANCE COMPANY

BY

TITLE

PROPERTY & CASUALTY EXCESS OF LOSS REINSURANCE CONTRACT

EFFECTIVE JANUARY 1, 2009

issued to

PENN MILLERS INSURANCE COMPANY

AMERICAN MILLERS INSURANCE COMPANY

WILKES-BARRE, PENNSYLVANIA

(hereinafter called the “Company”)

by

HANNOVER RUCKVERISCHERUNG AG

HANNOVER, GERMANY

(hereinafter called, with other participants, the “Reinsurers”)

Under the terms of this Contract the above Reinsurer agrees to assume severally and not jointly with other participants

a 25.00% share

of the liability described in the attached Contract and, as consideration, the Reinsurer shall receive a 25.00% share of the premium named therein.

Signed in Hannover, Germany, this                 day of                     , 2009,

HANNOVER RUCKVERSICHERUNG AG

BY

TITLE

PROPERTY & CASUALTY EXCESS OF LOSS REINSURANCE CONTRACT

EFFECTIVE JANUARY 1, 2009

issued to

PENN MILLERS INSURANCE COMPANY

AMERICAN MILLERS INSURANCE COMPANY

WILKES-BARRE, PENNSYLVANIA

(hereinafter called the “Company”)

by

TRANSATLANTIC REINSURANCE COMPANY

NEW YORK

(hereinafter called, with other participants, the “Reinsurers”)

Under the terms of this Contract the above Reinsurer agrees to assume severally and not jointly with other participants

a 12.50% share

of the liability described in the attached Contract and, as consideration, the Reinsurer shall receive a 12.50% share of the premium named therein.

Signed in New York, New York, this day                of                     , 2009,

TRANSATLANTIC REINSURANCE COMPANY

BY

TITLE

and signed in Wilkes-Barre, Pennsylvania this                day of                          , 2009.

PENN MILLERS INSURANCE COMPANY
AMERICAN MILLERS INSURANCE COMPANY

BY

TITLE

 1. 

PENN MILLERS INSURANCE COMPANY

AMERICAN MILLERS INSURANCE COMPANY

PROPERTY & CASUALTY EXCESS OF LOSS REINSURANCE CONTRACT

EFFECTIVE JANUARY 1, 2009

INDEX

ARTICLE	SUBJECT	PAGE
ARTICLE 1	BUSINESS COVERED		1
ARTICLE 2	COMMENCEMENT AND TERMINATION		1
ARTICLE 3	SPECIAL TERMINATION		2
ARTICLE 4	EXCLUSIONS		6
ARTICLE 5	WARRANTY		13
ARTICLE 6	GENERAL CONDITIONS		14
ARTICLE 7	RETENTION AND LIMIT		14
ARTICLE 8	PREMIUM		17
ARTICLE 9	DEFINITION OF LOSS OCCURRENCE (PROPERTY)		17
ARTICLE 10	DEFINITION OF LOSS OCCURRENCE (CASUALTY)		19
ARTICLE 11	NET LOSS		21
ARTICLE 12	EXTRA-CONTRACTUAL OBLIGATIONS /LOSS EXCESS OF POLICY LIMITS		23
ARTICLE 13	TERRORISM RECOVERY		25
ARTICLE 14	NET RETAINED LINE		25
ARTICLE 15	NOTICE OF LOSS AND LOSS SETTLEMENT		26
ARTICLE 16	COMMUTATION (AS RESPECTS WORKERS’ COMPENSATION CLAIMS)		27
ARTICLE 17	ERRORS AND OMISSIONS		28
ARTICLE 18	OFFSET		29
ARTICLE 19	CURRENCY		29
ARTICLE 20	FEDERAL EXCISE TAX AND OTHER TAXES		30
ARTICLE 21	ACCESS TO RECORDS		30
ARTICLE 22	INSOLVENCY		31
ARTICLE 23	CONFIDENTIALITY		32
ARTICLE 24	PRIVACY		33
ARTICLE 25	ARBITRATION		34
ARTICLE 26	SERVICE OF SUIT		38
ARTICLE 27	RESERVES		39
ARTICLE 28	LATE PAYMENTS		42
ARTICLE 29	MODE OF EXECUTION		44
ARTICLE 30	VARIOUS OTHER TERMS		44
ARTICLE 31	INTERMEDIARY		47

2.

ATTACHMENTS:

NUCLEAR INCIDENT EXCLUSION CLAUSE — LIABILITY — REINSURANCE USA (BRMA 35A)

NUCLEAR INCIDENT EXCLUSION CLAUSE — PHYSICAL DAMAGE — REINSURANCE (BRMA 35B)

INFORMATION TECHNOLOGY HAZARDS CLARIFICATION CLAUSE

1.

PENN MILLERS INSURANCE COMPANY

AMERICAN MILLERS INSURANCE COMPANY

PROPERTY & CASUALTY EXCESS OF LOSS REINSURANCE CONTRACT

EFFECTIVE JANUARY 1, 2009

ARTICLE 1

BUSINESS COVERED

A. This Contract applies to all Loss Occurrences that occur with a date of Loss during the Term of this Contract and arising from those Policies, except as hereinafter excluded, classified by the Company as Property and Casualty, that are in force at the inception of, and written with a Policy period (new or renewal) effective during the term of this Contract (“Business Covered”).

B. For the purpose of this Contract, the term “Casualty Policies” shall mean the Company’s Policies covering General Liability (including Products), Automobile Liability (including Medical Payments, Uninsured Motorists and Underinsured Motorists, and statutory liability arising under Policies providing coverage in accordance with the laws of states taking jurisdiction over losses), Workers’ Compensation (including Employers’ Liability, Common Law Liability and Occupational Disease) Directors, Officers and Managers Liability/Directors and Officers Indemnity Business, Errors and Omissions, Crime, and Surety including Seedman Bonds, Employee Benefits Liability (covered on a claims-made basis) and the liability portion of Commercial Multi-Peril Policies.

C. The term “Policies”, whenever used herein, shall mean all binders, policies, contracts, certificates and other obligations, whether oral or written, of insurance or reinsurance that are Business Covered.

D. The reinsurance of all Business Covered hereunder shall be subject in all respects to the same risks, terms, clauses, conditions, interpretations, alterations, modifications, cancellations and waivers as the respective insurances (or reinsurances) of the Company’s Policies and the Reinsurer shall pay losses as may be paid thereon, subject to the liability of the Company and the terms and conditions of this Contract.

ARTICLE 2

COMMENCEMENT AND TERMINATION

A. This Contract shall incept at 12:01 a.m., Eastern Standard Time, January 1, 2009 and shall remain in force until 12:01 a.m., Eastern Standard Time, January 1, 2010.

2.

B. Should this Contract terminate while a Loss Occurrence is in progress, Reinsurers shall remain liable for all losses resulting from such Loss Occurrence as if the entire Loss had occurred during the term of this Contract.

ARTICLE 3

SPECIAL TERMINATION

A. The Company or the Reinsurer may terminate, or commute Obligations arising under this Contract in accordance with Paragraph C. below, upon the happening of any one of the following circumstances at any time by the giving of thirty (30) days prior written notice to the other party:

1. A party ceases active underwriting operations or a State Insurance Department or other legal authority orders the Reinsurer to cease writing business in all jurisdictions; or

2. The Reinsurer has filed a plan to enter into a Scheme of Arrangement or similar procedure. “Scheme of Arrangement” is defined as a legislative or regulatory process that provides a solvent Reinsurer the opportunity to settle its obligations with the Company either (i) without the Company’s unrestrained consent or (ii) prior to the Company having the ability to determine, with exact certainty, the actual amount of the obligations still outstanding and ultimately due to the Company; or

3. A party has: a) become insolvent, b) been placed under supervision (voluntarily or involuntarily), c) been placed into liquidation or receivership, or d) had instituted against it proceedings for the appointment of a supervisor, receiver, liquidator, rehabilitator, conservator or trustee in bankruptcy, or other agent known by whatever name, to take possession of its assets or control of its operations; or

4. A reduction in the Reinsurer’s surplus, risk based capital or financial strength rating occurs:

a. As respects Reinsurers domiciled in the United States of America, (i) the Reinsurer’s policyholders’ surplus (“PHS”) has been reduced by, whichever is greater, thirty percent (30%) of the amount of PHS at the inception of this Contract or thirty percent (30%) of the amount of PHS stated in its last filed quarterly or annual statutory statement with its state of domicile; or (ii) the Reinsurer’s total adjusted capital is less than two hundred percent (200%) of its authorized control level risk-based capital; or (iii) the Reinsurer’s AM Best’s insurer financial strength rating becomes less than “A-”.

3.

b. As respects Reinsurers domiciled outside the United States of

America, other than Lloyd’s Syndicates (i) the Reinsurer’s Capital & Surplus (“C&S”) has been involuntarily reduced by, whichever is greater, thirty percent (30%) of the published currency amount of C&S at the inception of this Contract or thirty percent (30%) of the published currency amount of C&S stated in its last filed financial statement with its local regulatory authority; or (ii) as respects Lloyd’s Syndicates, the Reinsurer’s total stamp capacity has been reduced by more than thirty percent (30%) of the amount of total stamp capacity which stood at the inception of this Contract. (This provision does not apply to any Lloyd’s Syndicate that voluntarily reduces its total stamp capacity.) or (iii) the Reinsurer’s AM Best’s insurer financial strength rating becomes less than “A-” or the Reinsurer’s Standard & Poor’s Insurance Rating becomes less than “BBB”. or

5. A party has entered into a definitive agreement to (a) become merged with, acquired or controlled by any company, corporation or individual(s) not controlling or affiliated with the party’s operations previously; or (b) directly or indirectly assign all or essentially all of its entire liability for obligations under this Contract to another party without the other party’s prior written consent; or

6. There is either:

a. a severance or obstruction of free and unfettered communication and/or normal commercial or financial intercourse between the United States of America and the country in which the Reinsurer is incorporated or has its principal office as a result of war, currency regulations or any circumstances arising out of political, financial or economic uncertainty; or

b. a severance (of any kind) of any two (2) or more of the following executives of the Reinsurer from active employment of the Reinsurer during the most recent forty five (45) day period: chief underwriting officer, chief actuary, chief executive officer or chief financial officer. This condition does not apply whenever the severance in employment is for the publicly announced purpose of the individual’s assuming within thirty (30) days a known position

4.

with another identified firm in the (re)insurance industry or related field.

5.

B. In the event the Company elects termination, the Company shall with the notice of termination specify that termination will be on a Run-Off basis or a Cut-Off basis. In the event that the Company elects to Cut-Off and thus relieve the Reinsurer for losses occurring subsequent to the Reinsurer’s specified termination date, the Reinsurer shall within thirty (30) days of the termination date return the liability for the unearned portion of any ceded premium paid hereunder, calculated as of the termination date, and cash in that amount (less any applicable ceding commission allowed thereon) and the minimum premium provisions, if any, shall be waived. If the Company elects “Run-Off’, the Reinsurer shall remain liable to the Company under this Contract with respect to losses arising from policies placed into effect and ceded hereunder with effective dates (new or renewal policy period) prior to the termination date until those policies naturally expire, are cancelled or non-renewed or their next annual anniversary, provided such period shall not exceed eighteen (18) months from the date of termination elected under this Article.

C. If both parties agree to commute, then within sixty (60) days after such agreement, the Company shall submit a statement of valuation of the total of the net present value (“capitalized”) of the ceded (1) Net Loss Reserves, (2) Loss Adjustment Expense Reserves, and (3) unearned premium reserve, after deduction for any ceding commission allowed thereon, (the “Valuation Statement”). If agreement cannot be reached, the effort can be abandoned or alternately the Company and the Reinsurers may mutually appoint an actuary or appraiser to investigate, determine the capitalized value of the reserves to be returned to the Company. Such actuary shall be an independent and neutral actuary, Casualty Actuarial Society, experienced in such matters and the mutually agreed actuary shall render a decision. In the event that the Company and the Reinsurer are unable to agree upon a single actuary within thirty (30) days, the parties shall ask the then current President of the Casualty Actuarial Society to appoint an actuary with those qualifications within another thirty (30) days. The decision of the actuary will be final and binding on both parties. The Company and the Reinsurer shall share equally the fees and expenses of the actuary. Upon payment of the amount so agreed or determined by the actuary to the Company, the Reinsurer and the Company shall each be completely released from all liability to each other under this Contract.

6.

ARTICLE 4

EXCLUSIONS

This Contract shall not cover:

A. As respects all classes of Business Covered hereunder:

1. Reinsurance treaty business, including pro rata and excess of Loss, assumed by the Company, but not to include business from affiliated companies;

2. Business written on a co-indemnity basis not controlled by the Company;

3. Loss or liability excluded by the provisions of the “Nuclear Incident Exclusion Clause — Liability — Reinsurance (BRMA 35A)” and “Nuclear Incident Exclusion Clause — Physical Damage — Reinsurance (BRMA 35B)” attached to and forming part of this Contract;

4. Liability assumed by the Company as a member of a Syndicate, Pool or Underwriting Association; however, this does not apply to participation in assigned risk plans;

5. Any liability of the Company arising, by contract, operation of law, or otherwise, from its participation or membership, whether voluntary or involuntary, in any insolvency fund. “Insolvency Fund” includes any guaranty fund, insolvency fund, plan, pool, association, fund or other arrangement, howsoever denominated, established or governed, which provides for any assessment of or payment or assumption by the Company of part or all of any claim, debt, charge, fee, or other obligation of an insurer, or its successors or assigns, which has been declared by any competent authority to be insolvent, or which is otherwise deemed unable to meet any claim, debt, charge, fee or other obligation in whole or in part;

6. Financial Guarantee and Insolvency;

7. Loss resulting from an act of certified or non-certified terrorism that involves the use, release, or escape of nuclear materials, or directly or indirectly results in nuclear reaction or radiation or radioactive contamination; or that is carried out by means of the dispersal or application of pathogenic or poisonous biological or chemical materials that are released;

7.

8. Regarding interests which at time of Loss or damage are on shore, any Loss or damage which is occasioned by war, invasion, hostilities, acts of foreign enemies, civil war, rebellion, insurrection, military or usurped power, or martial law or confiscation by order of any government or public authority.

     This War Exclusion Clause shall not however, apply to interest which at time of Loss or damage are within the territorial limits of the United States of America (comprising the fifty (50) states of the Union and the District of Columbia and including Bridges between the U.S.A. and Mexico, provided they are under United States ownership), Canada, St. Pierre and Miquelon, provided such interests are insured under Policies, endorsements, or binders containing a standard war or hostilities or warlike operations exclusion clause.

B. As respects all Property classes of Business Covered hereunder:

1. Damage to growing and standing crops, not to include nursery stock for wholesale or retail, and not to include crops, including mushrooms, growing in a building;

2. Policies of excess of Loss reinsurance;

3. Policies classified as Personal Accident, Health, Workers’ Compensation, Bodily Injury Liability (including Medical Payments), Property Damage Liability, Fidelity, Surety, Boiler and Machinery, Plate Glass and similar classes of insurance or reinsurance customarily written by casualty insurance companies, except for such perils as may be included under the Property Section of Multiple Peril Policies;

4. Flood, except under Transportation or other Inland Marine or Multiple Peril Policies or under Automobile Physical Damage Policies or written as a part of the General Property Form or the Special Property Form;

5. Seepage and/or Pollution as per original Policies;

     Furthermore, Reinsurers agree that this exclusion does not apply to over spraying of anhydrous ammonia, fertilizers

8.

and agriculture chemicals;

6. Information Technology Hazard Clarification (NMA 2912);

7. Transmission and Distribution Lines and their supporting structures other than those on or within one thousand (1,000) feet of the insured premises.

C. As respects all Casualty classes of Business Covered hereunder, (including Workers’ Compensation and Employers’ Liability):

1. Umbrella Liability business;

2. Public Utilities;

3. Manufacture, handling, transit or use of explosives; unless incidental to routine Agriculture operation;

4. Manufacture of liquid petroleum gas or petroleum;

5. All mining operations;

6. Buses other than buses used to transport employees of the Insured or property;

7. Pharmaceutical and Medical Device Manufacturers;

8. Loss or liability, whether direct or indirect, arising from the hazard of asbestos including the manufacturing, mining, storage, distribution, transportation, fabrication, installation or removal of asbestos or products containing asbestos;

9. Operation, navigation, or handling of ships, or vessels owned by the Insured other than:

a. Yachts, small pleasure crafts, sports fishing vessels, and

b. Vessels operating exclusively in inland and/or coastal waters where legal liability on such vessels is incidental to the coverage provided either under a general liability Policy or under a comprehensive form of Policy;

9.

10. Ownership, maintenance or use of aircraft and aircraft flight operations, but this exclusion does not apply to Workers’ Compensation/Employers’ Liability coverage;

11. Repair, cleaning or demolition of any vessel or barge used as

a petroleum tanker;

12. Loss or liability excluded by the Standard Pollution Exclusion(s) promulgated by the Insured Services Office for both Commercial General Liability and Commercial Automobile Liability Policies;

Notwithstanding the above, the Reinsurers agree that this exclusion shall not apply to original Policies written in any state where the Standard ISO Pollution Exclusion(s) have not been approved or are not permitted to be included in or attached to original Policies.

Further, the Reinsurers agree that this exclusion shall not apply in any case where the Company has attached the Standard ISO Pollution Exclusion(s) to an original Policy but has sustained a Loss as a result of that exclusion being deemed invalid or inapplicable by a court of law.

Notwithstanding all of the foregoing, Reinsurers agree that this exclusion does not apply to environmental restoration coverage provided under an MCS-90 Endorsement attached to a commercial automobile Policy written in accordance with the Motor Carrier Act of 1980.

Furthermore, Reinsurers agree that this exclusion does not apply to over spraying of anhydrous ammonia, fertilizers and agricultural chemicals, nor shall this exclusion apply to operations involving anhydrous ammonia, liquefied petroleum gas (LPG), or propane (including the transportation thereof) where the Company has attached the Solutions 2000 Liability PMAG-16 (01 05) Pollution Exclusion Amendment to an original Policy. Furthermore, this exclusion does not apply to pollutants from mobile equipment where the Company has attached the Solutions 2000 Liability PMAG-16 (01 05) Pollution Exclusion Amendment to an original Policy.

Furthermore, Reinsurers agree that this exclusion does not apply to operations meeting all standards of any statute, ordinance, regulation or license requirement of any federal, state or local government which apply to those operations, where the Company has attached the Solutions 2000 Liability PMAG — 04 (07 98) “Pesticide or Fertilizer Applicator Amended Exclusions with Amendment of Limits of Insurance”

10.

to an original policy. Furthermore, this exclusion does not apply to fields on which the insured, or any contractor or subcontractor working on the behalf of the insured, is performing operations, where the Company has attached the Solutions 2000 Liability PMAG — 04 (07 98) “Pesticide or Fertilizer Applicator Amended Exclusions with Amendment of Limits of Insurance” to an original Policy.

13. Products guarantee and/or recall and/or integrity impairment when written as such;

14. Nursing Homes;

15. All Workers’ Compensation business classified by the Company as Employee Leasing Corporations, Professional Employment Organizations (PEO’s), Temporary Agencies, Police, Firefighters and EMT Workers, whether professional or volunteer;

16. Blasting;

17. Policies issued as excess coverage, other than insurance or over a self-insured retention;

18. Manufacturing of fireworks, fuses, nitroglycerine, celluloid and pyroxylin;

19. Concerns when engaged in the demolition of buildings more than three (3) stories in height;

20. Operation of animal shows, riding academies, circuses, carnivals, amusement parks or amusement devices;

21. Municipalities, when written as such, but this exclusion does not apply as respects:

a. School districts;

b. Municipally-owned buildings or properties;

c. Municipalities named as an additional insured;

22. Auto Liability

a. As a taxicab, public livery or bus;

b. Public emergency vehicles such as fire trucks or police cars;

c. Ambulances;

d. Rent-a-car and leasing operations;

e. Vehicles carrying passengers for hire or reward;

11.

f. Automobiles used in organized speed contests including but not limited to racing, rallies, and speed trials;

g. As a long haul public freight carrier or common carrier, except for incidental hauling of goods of others;

h. However, if any risks falling within the scope of the above exclusions are assigned to the Company under an Assigned Risk Plan, the coverage afforded by this Contract shall apply to such risks, but only for the Policy limits prescribed by said Automobile Assigned Risk Plan;

23. Products Liability

a. The manufacture, sale or retail or wholesale distribution of aircraft, aircraft parts;

b. The manufacture of extracts drugs, medicines, cosmetics or hair, scalp or skin preparations;

c. The manufacture of automobiles, buses, trucks and trailers, recreational vehicles, motorcycles or the manufacture of components critical to vehicle safety;

d. Products liability written without an annual aggregate limit;

24. Malpractice or Professional Liability, except

a. Druggists’ Liability;

b. Printers’ Liability;

c. Barbers’ and Beauticians’ Liability; (including nail salons);

d. Agricultural Consultants’ Liability;

e. Funeral Directors’ or Morticians’ Professional Liability;

f. Pastoral Professional Liability written in conjunction with a liability risk;

g. Incidental malpractice written in conjunction with a liability risk;

h. Opticians;

i. Hearing Aid Providers;

j. Florists.

25. Bridge Construction—when over three stories, over navigable waters, or over one hundred (100) feet in length.

26. Construction or maintenance of tunnels or subways more

12.

than fifty (50) feet in length, dams, levees, cofferdams (except dams and levees constructed on farm premises which are incidental to farm operations), or with respect to business classified as commercial business, towers over two (2 )stories high.

27. Elevator construction and installation, except construction or installation of Grain Elevator facilities or related equipment.

28. Occupational Accident when written as such.

29. Applies to Workers Compensation, and not Commercial General Liability Coverage:

Risks having maritime exposures or exposures including but not limited to:

i. Risks subject to the U.S. Longshoremen’s and Harborworker’s Act (except incidental which is defined as less than ten percent (10%) of Workers Compensation policy premium);

ii. Operation of docks, quays, wharves, or drydocks;

iii. Operations subject to Jones Act;

iv. Operations subject to the Outer Continental Shelf Act work.

30. Roofing contractors

31. Scaffolding installations (except residential and commercial up to three stories).

32. Tower, steeple, chimney, or shaft construction and work.

33. Any exclusion listed above (other than A(3), A(4), A(5), A(6), A(8), B(3), B(4), B(5), C(7), C(8), C(12), C(14), C(15)), shall be automatically waived as respects a Policy issued by the Company on a risk with respect to which only a minor or incidental part of the operations covered involves the exclusion. An incidental part of an insured’s regular operations shall mean not greater than ten percent (10%) of the insured’s regular operations.

34. If the Company, without the knowledge and consent of its Home Office, is bound on a risk excluded above (other than Exclusions A(3) Nuclear Incident Exclusion Clause — Liability and Physical Damage — Reinsurance A(4) Syndicate, Pool or

13.

Underwriting Association, A(5) Insolvency Funds Exclusion, A(6) Financial Guarantee and Insolvency, A(8) War, B(3) Property Damage Seepage and/or Pollution Exclusion Clause, B(4) Flood, B(5) Seepage and/or Pollution, C(7) Pharmaceutical and Medical Device Manufacturers, C(8) Asbestos Exclusion Clause, C(12) Casualty Pollution Exclusion Clause, C(14) Nursing Homes, and C(15) Workers Compensation Business), such risk shall be covered hereunder until the Company receives knowledge thereof. The Company agrees to use due diligence in canceling such risk immediately after knowledge thereof is received by its Home Office. However, if any state regulatory authority or the laws or regulations of any state prohibit the Company from canceling a risk for any reason, such risk shall remain covered hereunder until the Company is permitted to cancel the risk by the regulatory authority or the applicable laws or regulations. However, not to exceed eighteen (18) months.

ARTICLE 5

WARRANTY

     For the purposes of this Contract, the Company warrants that the maximum Policy limits are as follows:

Commercial General Liability

Two million dollars ($2,000,000) each Loss Occurrence or so deemed.

Four million dollars ($4,000,000) Products-Completed Operation Aggregate Limit or so deemed.

Business Automobile Liability

One million dollars ($1,000,000) Combined Single Limit or so deemed.

Directors, Officers and Managers Liability

Directors and Officers Indemnity

One million dollars ($1,000,000)/one million dollars ($1,000,000)/one million dollars ($1,000,000) or so deemed.

Workers’ Compensation and Employers’ Liability

     For the purpose of determining the amount of Loss sustained by the Company for accidents under Workers’ Compensation and Employers’ Liability, it is deemed that the amount of Loss applicable to any one employee under this Contract

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shall not exceed seven million five hundred thousand dollars ($7,500,000).

ARTICLE 6

GENERAL CONDITIONS

A.	Property Business
	As respects to all Property business, the following general conditions shall apply:

— The Company shall be the sole judge of what constitutes “one risk” and the Probable Maximum Loss applicable to such risk.

B.	Casualty Business
	As respects to all Casualty business, the following general conditions shall apply:

— As respects Occupational Disease, retention and limit applies to each employee.

— Recoveries from the Minnesota Workers’ Compensation Reinsurance Association shall inure to the benefit of Reinsurers hereunder.

— Employee Benefits Liability and Directors, Officers and Managers business covered on a claims made basis.

ARTICLE 7

RETENTION AND LIMIT

A. Property Business

     As respects to all Property business, the Reinsurers shall be liable to, indemnify and reinsure the Company for each and every Loss Occurrence, for one hundred percent (100%) of the excess Net Loss above an initial Net Loss to the Company of five hundred thousand dollars ($500,000) but the Reinsurers shall not be liable for more than five hundred thousand dollars ($500,000) of Net Loss in each and every Risk in each and every Loss Occurrence, nor shall Reinsurers be liable for more

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	than one million five hundred thousand dollars ($1,500,000) of Net Loss in excess Loss from any one Loss Occurrence.
B.	Casualty Business

     As respects to all Casualty business, the Reinsurers shall be liable to, indemnify and reinsure the Company for each and every Loss Occurrence, for one hundred percent (100%) of the excess Net Loss above an initial Net Loss to the Company of five hundred thousand dollars ($500,000) but the Reinsurers shall not be liable for more than five hundred thousand dollars ($500,000) of Net Loss each and every Loss Occurrence.

C. Basket Retention

     As respects a combination Property and Casualty loss, the following additional coverage shall apply:

	Five hundred thousand ($500,000) Net Loss, each Loss Occurrence in excess of five hundred thousand ($500,000) Net Loss, each Loss Occurrence.
	It is agreed, however, that no more than one Property risk shall be included in any such combination accident or occurrence.
	Coverage under paragraphs A and B shall inure to coverage under Paragraph C.
	Notwithstanding the foregoing, it is further understood and agreed that as respects Property losses in no event shall the Reinsurers be liable for more than one million five hundred thousand dollars ($1,500,000) of Net Loss from any one Loss Occurrence.
D.	Terrorism

1. The Reinsurers shall be liable to, indemnify and reinsure the Company for one hundred percent (100%) of the Company’s Net Loss involving any Act of Terrorism, irrespective of the number and kinds of perils involved, for one hundred percent (100%) of the excess Net Loss above an initial Net Loss to the Company of five hundred thousand dollars ($500,000) each and every Loss Occurrence; but the Reinsurers shall not be liable for more than five hundred thousand dollars ($500,000) of Net Loss for each Loss Occurrence, and not more than five hundred thousand dollars ($500,000) of Net Loss during the term of this Contract.

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2. An “Act of Terrorism” shall mean any act, including both Certified Acts of Terrorism in accordance with the Terrorism Risk Insurance Act of 2002, the Terrorism Risk Insurance Extension Act of 2005 and the Terrorism Risk Insurance Program Reauthorization Act of 2007 (“TRIPRA”), and any subsequent extension and those not so certified, or preparation in respect of action, or threat of action designed to influence the government de jure or de facto of any nation or any political division thereof, or in pursuit of any political, religious, ideological, or similar purpose to intimidate the public or a section of the public of any nation by any person or group(s) of persons whether acting alone or on behalf of or in connection with any organization(s) or government(s) de jure or de facto, and which:

a. involves violence against one or more persons; or

b. involves damage to property; or

c. endangers life other than that of the person committing the action; or

d. creates a risk to health or safety of the public or a section of the public; or

e. is designed to interfere with or to disrupt an electronic system; or

f. involves Loss, damage, cost, or expense directly or indirectly caused by, contributed to by, resulting from, or arising out of or in connection with any action in controlling, preventing, suppressing, retaliating against, or responding to any Act of Terrorism.

     Loss or damage occasioned by riot, strikes, civil commotion, vandalism or malicious mischief as those terms have been interpreted by United States Courts to apply to insurance Policies shall not be construed to be an “Act of Terrorism”.

E. Mold

     As respects to all Net Loss arising from Mold, the Reinsurers shall be liable for one hundred percent (100%) of the Company’s excess Net Loss above an initial Net Loss to the Company of five hundred thousand dollars ($500,000) from Mold, as such term is defined in the Company’s Policy, but the Reinsurers shall not be liable for more than five hundred thousand dollars ($500,000) for all Net Loss arising from Mold during the term of the Contract.

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ARTICLE 8

PREMIUM

A. The premium payable to Reinsurers shall be calculated by applying a rate of seven point zero percent (7.0%) to the Company’s subject matter premium income.

B. The term “Subject Matter Premium Income” shall mean the Company’s gross net premiums earned on the Business Covered hereunder less premiums paid on reinsurance, if any, recoveries under which would reduce the Net Loss to this Contract.

C. The Company shall pay the Reinsurers a deposit premium of six million one hundred seventy six thousand four hundred fifty two dollars ($6,176,452), in four (4) equal installments of one million five hundred forty four thousand one hundred thirteen dollars ($1,544,113) each on January 1, April 1, July 1 and October 1, 2009. As promptly as possible, however no longer than sixty (60) days, after the termination of this Contract, the Company shall render a report to the Reinsurers showing the actual reinsurance premium due hereunder, calculated as provided in Paragraph A. of this Article; and, if the premium so calculated is greater than the previously paid deposit premium, the balance shall be remitted by the Company with its report. However, in no event shall the premium to the Reinsurers for the Contract be less four million nine hundred forty one thousand one hundred sixty one dollars ($4,941,161).

ARTICLE 9

DEFINITION OF LOSS OCCURRENCE (Property)

A. The term “Loss Occurrence” shall mean the sum of all individual losses directly occasioned by any one disaster, accident or Loss or series of disasters, accidents or losses arising out of one event which occurs within the area of one state of the United States or province of Canada and states or provinces contiguous thereto and to one another. However, the duration and extent of any one “Loss Occurrence” shall be limited to all individual losses sustained by the Company occurring during any period of one hundred sixty eight (168) consecutive hours arising out of and directly occasioned by the same event except that the term “Loss Occurrence” shall be further defined as follows:

1. As regards windstorm, hail, tornado, hurricane, cyclone, including ensuing collapse and water damage, all individual losses sustained by the Company occurring during any period of seventy two (72) consecutive hours arising out of and directly occasioned by the same event. However, the event need not be limited to one state or province or states or provinces

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contiguous thereto.

2. As regards riot, riot attending a strike, civil commotion, vandalism and malicious mischief, all individual losses sustained by the Company occurring during any period of seventy two (72) consecutive hours within the area of one municipality or county and the municipalities or counties contiguous thereto arising out of and directly occasioned by the same event. The maximum duration of seventy two (72) consecutive hours may be extended in respect of individual losses which occur beyond such seventy two (72) consecutive hours during the continued occupation of an insured’s premises by strikers, provided such occupation commenced during the aforesaid period.

3. As regards earthquake (the epicenter of which need not necessarily be within the territorial confines referred to in the opening paragraph of this Article) and fire following directly occasioned by the earthquake, only those individual fire losses which commence during the period of one hundred sixty eight (168) consecutive hours may be included in the Company’s “Loss Occurrence”.

4. As regards “Freeze”, only individual losses directly occasioned by collapse, breakage of glass and water damage (caused by bursting of frozen pipes and tanks) may be included in the Company’s “Loss Occurrence”.

5. As regards firestorms, brush fires and any other fires or series of fires, irrespective of origin (except as provided in A(2) and A(3) above), which spread through trees, grassland or other vegetation, all individual losses sustained by the Company which commence during any period of one hundred sixty eight (168) consecutive hours within a one hundred (100) mile radius of any fixed point selected by the Company where a claim has actually been made may be included in the Company’s “Loss Occurrence.” However, an individual Loss subject to this subparagraph cannot be included in more than one Loss Occurrence.

B. For all “Loss Occurrences”, other than those referred to in A(2) of this Article, the Company may choose the date and time when any such period of consecutive hours commences provided that it is not earlier than the date and time of the Occurrence of the first recorded individual Loss sustained by the Company arising out of that disaster, accident or Loss and provided that only one such period of one hundred sixty eight (168) consecutive hours shall apply with

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respect to one event except for any “Loss Occurrences” referred to in A(1) of this Article where only one such period of seventy two (72) consecutive hours shall apply with respect to one event.

C. As respects those “Loss Occurrences” referred to in A(2) of this Article, if the disaster, accident or Loss occasioned by the event is of greater duration than seventy two (72) consecutive hours, then the Company may divide that disaster, accident or Loss into two (2) or more “Loss Occurrences” provided no two (2) periods overlap and no individual Loss is included in more than one such period and provided that no period commences earlier than the date and time of the Occurrence of the first recorded individual Loss sustained by the Company arising out of that disaster, accident or Loss.

D. No individual losses occasioned by an event that would be covered by seventy two (72) hours clauses may be included in any “Loss Occurrence” claimed under the one hundred sixty eight (168) hours provision.

ARTICLE 10

DEFINITION OF LOSS OCCURRENCE (Casualty)

A. Except as otherwise provided herein, the term “Loss Occurrence” or “Occurrence” means an accident, incident, disaster, casualty, error, omission, wrongful act or happening, or series of accidents, incidents, disasters, casualties, errors, omissions, wrongful acts or happenings arising out of or following on one event. Except where specifically provided otherwise in this Contract, each Loss Occurrence shall be deemed to take place in its entirety as of the earliest date of Loss as determined by any Policy responding to the Loss Occurrence. Any claims made under an extended reporting period endorsement or any other extended reporting and/or discovery period shall for the purposes of this Contract be considered to be made on the last day of the Policy period immediately preceding the extended reporting and/or discovery period.

B. If only one Policy is involved in a Loss Occurrence, then the date of Loss shall be as determined under that Policy. However, for the purpose of this Contract when claims-made and/or losses discovered and/or Occurrence and/or accident Policies are involved in the same Loss Occurrence with other claims-made and/or losses discovered and/or Occurrence and/or accident Policies, the date of Loss for the Loss Occurrence shall be determined as follows:

1. If an Occurrence or accident Policy is identified as being involved, then the date of “Loss” shall be the date as determined under the Occurrence or accident Policy; or

2. If no Occurrence or accident Policy is identified as being involved,

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then the date of the “Loss Occurrence” shall be the date the first claim is made or discovered under a claims-made or losses discovered Policy. If the first claim from a Loss Occurrence is made under an extended reporting period endorsement, the date of Loss for the Loss Occurrence shall be the date the first claim is made. If after ten (10) years from the expiration date of this Contract, the Company identifies an Occurrence Policy, the date of Loss for all claims-made and losses discovered Policies shall remain as first established.

C. Continuous or Repeated Injurious Exposure. As respects liability (bodily injury and property damage) other than Automobile and Products, and at the option of the Company, the term “Loss Occurrence” as used in this Contract shall also mean the sum of all damages for bodily injury and property damage sustained by each insured during a Policy period arising out of a continuous or repeated injurious exposure to substantially the same general conditions. For purposes of this definition, the date of Loss shall be deemed to be the inception or renewal date of the Policy to which payment of the Loss is charged.

D. Products. As respects Products liability, and at the option of the Company, the term “Loss Occurrence” as used in this Contract shall also mean the sum of all damages for bodily injury and property damage sustained by each insured during a Policy period arising out of the use of the same kind of product made or produced by the same manufacturer or producer. For purposes of this definition, the date of Loss shall be deemed to be the inception or renewal date of the Policy to which payment of the Loss is charged.

E. Occupational Disease or Cumulative Injury. An Occupational Disease Or Cumulative Injury suffered by an employee shall also be deemed to be a “Loss Occurrence” within the meaning of this Contract, and each case of an employee contracting such disease or cumulative injury shall be considered as constituting a separate and distinct Occurrence.

F. The date of Loss on which the Company has sustained an Occupational Disease or Cumulative Injury Loss, as respects each employee, shall be deemed to be the date of Loss under the original Policy as determined by the Company.

G. As respects two (2) or more occupational disease losses of one specific kind or class or cumulative injury losses of one specific kind or class suffered by one or more employees of one insured during the same Policy period, the date of any Loss Occurrence shall be deemed to be the inception, anniversary or renewal date of the Policy under which such Loss or losses are covered (or if such losses arise under two (2) or more Policies, the inception, anniversary or renewal date of

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the Policy chosen by the Company).

H. “Occupational Disease” shall mean any bodily injury (including resulting death) or disease suffered by an employee which fulfills all of the following conditions:

1. It is not traceable to a definite compensable accident occurring during the employee’s present or past employment;

2. It is not traceable to an event of twenty four (24) hours or less in duration;

3. It has been caused by exposure to conditions present in the workers’ occupational environment;

4. It has resulted in a disability or death.

I. “Cumulative Injury” means any bodily injury (including resulting death) or disease suffered by an employee which fulfills all of the following conditions:

1. It is not traceable to a definite compensable accident occurring during the employee’s present or past employment;

2. It is not traceable to an event of twenty four (24) hours or less in duration;

3. It has occurred from, and has been aggravated by, a repetitive employment-related activity.

J. “Loss” means the amount of Loss or liability paid by the Company to or on behalf of its policyholder under the Policies.

K. For purposes of this Contract, the term “Policy Period” shall mean a separate Policy period of twelve (12) months or less commencing at the inception, anniversary or renewal date of a Policy.

ARTICLE 11

NET LOSS

A. The term “Net Loss” shall mean the actual Loss sustained by the Company from Business Covered hereunder including (i) sums paid in settlement of claims and suits and in satisfaction of judgments, (ii) prejudgment interest when

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added to a judgment, (iii) ninety percent (90%) of any Extra-Contractual Obligations (iv) ninety percent (90%) of any Losses Excess of Policy Limits, and (v) any interest on judgments other than prejudgment interest when added to a judgment. In the event that the Company’s original Policies and/or specific coverage parts of their original Policies are issued on a cost inclusive basis, such loss adjustment expenses shall be included within the Company’s Net Loss for the purposes of recovery hereunder.

B. All salvages, recoveries, payments and reversals or reductions of verdicts or judgments whether recovered, received or obtained prior or subsequent to loss settlement under this Contract, including amounts recoverable under other reinsurance whether collected or not, shall be applied as if recovered, received or obtained prior to the aforesaid settlement and shall be deducted from the actual losses sustained to arrive at the amount of the Net Loss. Nothing in this Article shall be construed to mean losses are not recoverable until the Net Loss to the Company finally has been ascertained.

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C. All Loss Adjustment Expenses paid by the Company as a result of Net Losses covered hereunder shall be divided between the Company and the Reinsurers, without regard to the limit of this Contract, in proportion to their share of the Net Loss. “Loss Adjustment Expenses” shall mean and include but not be limited to: (i) expenses sustained in connection with adjustment, defense, settlement and litigation of claims and suits, satisfaction of judgments, resistance to or negotiations concerning a Loss (which shall include the expenses and the pro rata share of the salaries of the Company’s field employees according to the time occupied in adjusting such Loss and the expenses of the Company’s employees while diverted from their normal duties to the service of field adjustment but shall not include any salaries of officers or normal overhead expenses of the Company), (ii) legal expenses and costs incurred in connection with coverage questions regarding specific claims and legal actions, including Declaratory Judgment Expenses, connected thereto, (iii) all interest on judgments other than prejudgment interest when added to a judgment except when included in Net Loss, and (iv) expenses sustained to obtain recoveries, salvages or other reimbursements, or to secure the reverse or reduction of a verdict or judgment.

D Notwithstanding the preceding paragraph (C), Loss Adjustment Expenses as defined are covered on a pro rata basis with the exception of Directors, Officers and Managers business, as classified by the Company as such, where Loss Adjustment Expenses will be included as part of the Net Loss, subject to a limit of the original Policy.

E. “Declaratory Judgment Expenses” as used in this Contract shall mean legal expenses paid by the Company in the investigation, analysis, evaluation, resolution or litigation of coverage issues between the Company and its insured(s), under Policies reinsured hereunder, for a specific Loss or losses tendered under such Policies, which Loss or losses are not excluded under this Contract.

F. In the event there are any recoveries, salvages, or reimbursements recovered subsequent to a loss settlement, or in the event a verdict or judgment is reversed or reduced, Loss Adjustment Expenses incurred in obtaining the recovery, salvage or reimbursement or in securing the reduction or reversal shall be divided between the Company and the Reinsurers in proportion to their share of the benefit therefrom, with the expenses incurred up to the time of the loss settlement or the original verdict or judgment being divided in proportion to the share of the Company and the Reinsurers in the original loss settlement or verdict or judgment.

ARTICLE 12

EXTRA-CONTRACTUAL OBLIGATIONS/LOSS EXCESS OF POLICY LIMITS

A. “Extra-Contractual Obligations” means those liabilities not covered under any other provision of this Contract, other than Loss Excess of Policy Limits, including but not limited to compensatory, consequential, punitive, or

24.

exemplary damages together with any legal costs and expenses incurred in connection therewith, paid as damages or in settlement by the Company arising from an allegation or claim of its insured, its insured’s assignee, or other third party, which alleges negligence, gross negligence, bad faith or other tortious conduct on the part of the Company in the handling, adjustment, rejection, defense or settlement of a claim under a Policy that is the Business Covered.

B. “Loss Excess of Policy Limits” means any amount of Loss, together with any legal costs and expenses incurred in connection therewith, paid as damages or in settlement by the Company in excess of its Policy Limits, but otherwise within the coverage terms of the Policy, arising from an allegation or claim of its insured, its insured’s assignee, or other third party, which alleges negligence, gross negligence, bad faith or other tortious conduct on the part of the Company in the handling of a claim under a Policy or bond that is the Business Covered, in rejecting a settlement within the Policy Limits, in discharging a duty to defend or prepare the defense in the trial of an action against its insured, or in discharging its duty to prepare or prosecute an appeal consequent upon such an action. For the avoidance of doubt, the decision by the Company to settle a claim for an amount within the coverage of the Policy but not within the Policy Limit when the Company has reasonable basis to believe that it may have legal liability to its insured or assignee or other third party on the claim will be deemed a Loss Excess of Policy Limits. The Company will provide Reinsurers an explanation relating to the Company’s motivation for settlement and use its best efforts to obtain the Reinsurers’ prior counsel and concurrence in the Company’s action. A reasonable basis shall mean it is more likely than not a trial would result in a verdict excess of the Policy Limits, in the opinion of counsel assigned to defend the insured or otherwise retained by the Company.

C. An Extra-Contractual Obligation or a Loss Excess of Policy Limits shall be deemed to have occurred on the same date as the Loss covered under the Company’s original Policy and shall be considered part of the original Loss (subject to other terms of this Contract.)

D. Neither an Extra-Contractual Obligation nor a Loss Excess of Policy Limits shall include a Loss incurred by the Company as the result of any fraudulent or criminal act directed against the Company by any officer or director of the Company acting individually or collectively or in collusion with any other organization or party involved in the presentation, defense, or settlement of any claim under this Contract.

E. Recoveries, whether collectible or not, including any retentions and/or deductibles, from any other form of insurance or reinsurance which protect the Company against any Loss or liability covered under this Article shall inure to the

25.

benefit of the Reinsurers and shall be deducted from the total amount of any Extra- Contractual Obligation and/or Loss Excess of Policy Limits in determining the amount of Extra-Contractual Obligation and/or Loss Excess of Policy Limits that shall be indemnified under this Article.

F. The Company shall be indemnified in accordance with this Article to the extent permitted by applicable law.

ARTICLE 13

TERRORISM RECOVERY

A. As respects the Insured Losses of the Company for each Program Year, to the extent the Company’s total reinsurance recoverables for Insured Losses, whether collected or not, when combined with the financial assistance available to the Company under the Act exceeds the aggregate amount of Insured Losses paid by the Company, less any other recoveries or reimbursements, (the “Excess Recovery”), a share of the Excess Recovery shall be allocated to the Company and the Reinsurer. The Company’s share of the Excess Recovery shall be deemed to be an amount equal to the proportion that the Company’s Insured Losses bear to the Insurer’s total Insured Losses for each Program Year. The Reinsurer’s share of the Excess Recovery shall be deemed to be an amount equal to the proportion that the Reinsurer’s payment of Insured Losses under this Contract bears to the Company’s total collected reinsurance recoverables for Insured Losses. The Company shall provide the Reinsurer with all necessary data respecting the transactions covered under this Article.

B. The method set forth herein for determining an Excess Recovery is intended to be consistent with the United States Treasury Department’s construction and application of Section 103 (g)(2) of the Act. To the extent it is inconsistent, it shall be amended to conform with such construction and application, nevertheless the Company shall be the sole judge as to the allocation of TRIA Recoveries to this or to other reinsurance Contracts.

C. “Act” as used herein shall mean the Terrorism Risk Insurance Act of 2002, the Terrorism Risk Insurance Extension Act of 2005 and the Terrorism Risk Insurance Program Reauthorization Act of 2007 (“TRIPRA”) and any subsequent amendment thereof or any regulations promulgated thereunder. “Company” shall have the same meaning as “Insurer” under the Act and “Insured Losses”, and “Program Year” shall follow the definitions as provided in the Act.

ARTICLE 14

NET RETAINED LINE

26.

A. This Contract applies only to that portion of any insurance or reinsurance which the Company retains net for its own account and, in calculating the amount of any Loss hereunder and also in computing the amount or amounts in excess of which this Contract attaches, only Loss or losses in respect of that portion of any insurance or reinsurance which the Company retains net for its own account shall be included.

B. It is agreed, however, that the amount of the Reinsurers’ liability hereunder in respect of any Loss or losses shall not be increased by reason of the inability of the Company to collect from any other Reinsurers, whether specific or general, any amounts which may have become due from them, whether such inability arises from the insolvency of such other Reinsurers or otherwise.

C. Intercompany reinsurance among the companies collectively called the “Company” shall be entirely disregarded for all purposes of this Contract.

D. Permission is hereby granted the Company to carry (i) underlying reinsurance and (ii) layers of catastrophe reinsurance both below and above this layer of coverage and recoveries made on the latter shall be disregarded for all purposes of this Contract and shall inure to the sole benefit of the Company.

ARTICLE 15

NOTICE OF LOSS AND LOSS SETTLEMENT

A. The Company shall advise the Reinsurers promptly of all losses which, in the opinion of the Company, may result in a claim hereunder and of all subsequent developments thereto which, in the opinion of the Company, may materially affect the position of the Reinsurers. Inadvertent omission or oversight in giving such notice shall in no way affect the liability of the Reinsurers. However, the Reinsurers shall be informed of such omission or oversight promptly upon its discovery.

B. Prompt notice shall be given to the Reinsurers by the Company on any Loss Occurrence wherein the Company’s reserve exceeds fifty percent (50%) of the Company’s Loss retention. In addition, the Company shall promptly advise the Reinsurer of all bodily injury losses involving the following major injuries:

1.	Fatality.
2.	Spinal Cord Injuries (quadriplegia, paraplegia).

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3.	Brain Damage (seizure, coma or physical/mental impairment).
4.	Severe Burn Injuries resulting in Disfigurement or Scarring.
5.	Total or Partial Blindness in one or both Eyes.
6.	Amputation of a Limb or Multiple Fractures.
7.	Major Organ (such as heart, lungs).
8.	Permanent disability.
9.	Sexual molestation or abuse.

C. The Company shall have the right to settle all claims under its Policies. All loss settlements made by the Company, whether under strict Policy conditions or by way of compromise, that are the Business Covered and that are not an Ex-gratia Settlement shall be final and binding subject to the liability of the Company and the terms and conditions of this Contract. The Reinsurer shall follow the liability of the Company (to the extent provided in this Contract) and shall pay or allow, as the case may be, its share of each such settlement in accordance with this Contract all amounts for which it is obligated as soon as possible, but not later than ten (10) business days, of being furnished by the Company with reasonable evidence of the amount due. Reasonable evidence of the amount due shall consist of a certification by the Company, accompanied by proof of Loss documentation the Company customarily presents with its claims payment requests, that the amount requested to be paid and submitted by the certification, is, upon information and belief, due and payable to the Company by the Reinsurers under the terms and conditions of this Contract.

ARTICLE 16

COMMUTATION (As respects Workers’ Compensation claims)

A. No later than eighty four (84) months following the termination of this Contract, the Company will submit a statement to the Reinsurers listing amounts paid, and reserves, in respect of the excess portion of all known Workers’ Compensation claims which occurred during the term of this Contract and which are not finally settled and are likely to result in claims under this Contract. This statement will form the basis of a final agreed present value for the excess portion of all such losses reinsured under this Contract should both parties mutually agree to commute the Workers’ Compensation coverage part of this Contract.

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B. In determining the present value of said losses in excess of the retention, the Company will first calculate the undiscounted value excess of the retention, subject to the maximum amount of liability as provided in the Contract. The Company will then calculate the present value of that portion of the undiscounted Loss that exceeds the retention for those losses in accordance with generally accepted actuarial practices.

C. If, upon receipt of such statement from the Company, there is mutual agreement between the Company and the Reinsurers as to the present value of said losses, the Reinsurers will pay the agreed amount in excess of the retention and subject to the maximum amount of liability as provided in each layer of coverage provided within this Contract. In the absence of mutual agreement as to the present value of said losses, the sole remedy to resolve disputes involving the determination of the present value of said losses will be as follows.

D. The Reinsurers, or the Company, will request in writing that any difference be settled by a panel of three (3) actuaries, one to be chosen by each party and the third by the two (2) so chosen.

E. If either party refuses or neglects to appoint an actuary within thirty (30) days after the Reinsurers’ or Company’s request in writing that the differences be settled by a panel of three (3) actuaries, the other party will appoint two (2) actuaries. All the actuaries will be regularly engaged in the evaluation of Workers’ Compensation claims and will be Fellows of the Casualty Actuarial Society or of the American Academy of Actuaries. None of the actuaries will be under the control of either party to this Contract.

F. Each party will submit its case to the actuary within thirty (30) days of the appointment of the third actuary. The decision in writing of any two (2) actuaries, when filed with the parties hereto, will be final and binding on both parties. The expense of the actuaries and of the commutation will be equally divided between the two (2) parties. Said commutation will take place in Wilkes Barre, Pennsylvania, unless some other place is mutually agreed upon by the Company and the Reinsurers.

G. The Reinsurers’ proportion of the amounts so determined will be considered the amount of Loss hereunder, and the payment thereof by the Reinsurers will constitute a complete release of the Reinsurers of their liability for such Loss or losses.

ARTICLE 17

ERRORS AND OMISSIONS

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     Inadvertent delays, errors or omissions made by the Company in connection with this Contract shall not relieve the Reinsurer from any liability which would have attached had such error or omission not occurred, provided always that such error or omission shall be rectified as soon as possible, provided that the liability of the Reinsurer shall not extend beyond the coverage provided by this Contract nor to extend coverage to Policies that are not the Business Covered hereunder. This Article shall not apply to a sunset provision, if any in this Contract, nor to a commutation made in connection with this Contract.

ARTICLE 18

OFFSET

     The Company and the Reinsurer shall have the right to offset any balance or amounts due from one party to the other under the terms of this Contract. The party asserting the right of offset may exercise such right any time whether the balances due are on account of premiums or losses or otherwise and immediately inform the Intermediary accordingly. In the event of the insolvency of any party, offset shall be as permitted by applicable law.

ARTICLE 19

CURRENCY

A. Whenever the word “Dollars” or the “$” sign appears in this Contract, they shall be construed to mean United States Dollars and all transactions under this Contract shall be in United States Dollars.

B. Amounts paid or received by the Company in any other currency shall be converted to United States Dollars at the rate of exchange at the date such transaction is entered on the books of the Company.

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ARTICLE 20

FEDERAL EXCISE TAX AND OTHER TAXES

A. To the extent that any portion of the reinsurance premium for this Contract is subject to the Federal Excise Tax (as imposed under Section 4371 of the Internal Revenue Code) and the Reinsurer is not exempt therefrom, the Reinsurers shall allow for the purpose of paying the Federal Excise Tax, a deduction by the Company of the applicable percentage of the premium payable hereon. In the event of any return of premium becoming due hereunder, the Reinsurers shall deduct the applicable same percentage from the return premium payable hereon and the Company or its agent shall take steps to recover the tax from the United States Government. In the event of any uncertainty, upon the written request of the Company, the Reinsurer will immediately file a certificate signed by a senior corporate officer of the Reinsurer certifying to its entitlement to the exemption from the Federal Excise Tax with respect to one or more transactions.

B. In consideration of the terms under which this Contract is issued, the Company undertakes not to claim any deduction of the premium hereon when making Canadian Tax returns or when making tax returns, other than Income or Profits Tax returns, to any State or Territory of the United States of America or to the District of Columbia.

ARTICLE 21

ACCESS TO RECORDS

A. The Company shall place at the disposal of the Reinsurer at all reasonable times, and the Reinsurer shall have the right to inspect (and make reasonable copies) through its designated representatives during the term of this Contract and thereafter, all non-privileged books, records and papers of the Company directly related to any reinsurance hereunder, or the subject matter hereof, provided that if the Reinsurer has ceased active market operations, this right of access shall be subject to that Reinsurer being current in all payments owed the Company that are not currently the subject of a formal dispute (such as the initiation of an Arbitration or Mediation). For the purposes of this Article, “non-privileged” refers to books, records and papers that are not subject to the Attorney-client privilege and Attorney-work product doctrine.

B. “Attorney-client privilege” and “Attorney-work product” shall have the meanings ascribed to each by statute and/or the court of final adjudication in the jurisdiction whose laws govern the substantive law of a claim arising under a Policy reinsured under this Contract.

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C. Notwithstanding anything to the contrary in this Contract, for any claim or Loss under a Policy reinsured under this Contract, should the Reinsurer assert, pursuant to the Common Interest Doctrine (“Doctrine”), that it has the right to examine any document that the Company alleges is subject to the Attorney-client privilege or the Attorney-work product privilege, upon the Reinsurer providing to the Company substantiation of any law which reasonably supports the basis for the Reinsurer’s conclusion that the Doctrine applies and the Doctrine will be upheld as applying between the Company and the Reinsurer as against third parties pursuant to the substantive law(s) which govern the claim or Loss, the Company shall give the Reinsurer access to such document.

D. Notwithstanding any other provision to the contrary, once a claim and all directly related claims are finally settled by the Company, the Reinsurer shall be entitled to review all reasonable and applicable claims records that support a Company request for payment of a claim hereunder for Net Loss for Business Covered hereunder. In the event that the Reinsurer shall have paid an amount for Net Loss to the Company and the records do not support the obligation of the Reinsurer to have paid the claim, the Company shall promptly return any payment made in error.

ARTICLE 22

INSOLVENCY

(This Article shall be deemed to read as required to meet the statutory insolvency clause requirements of the Company.)

A. In the event of insolvency or the appointment of a conservator, liquidator, or statutory successor of the Company, the portion of any risk or obligation assumed by the Reinsurer shall be payable to the conservator, liquidator, or statutory successor on the basis of claims allowed against the insolvent Company by any court of competent jurisdiction or by any conservator, liquidator, or statutory successor of the Company having authority to allow such claims, without diminution because of that insolvency, or because the conservator, liquidator, or statutory successor has failed to pay all or a portion of any claims.

B. Payments by the Reinsurer as above set forth shall be made directly to the Company or to its conservator, liquidator, or statutory successor, except where this Contract specifically provides another payee of such reinsurance or except as

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provided by applicable law and regulation (such as subsection (a) of section 4118 of the New York Insurance Laws) in the event of the insolvency of the Company.

C. In the event of the insolvency of the Company, the liquidator, receiver, conservator or statutory successor of the Company shall give written notice to the Reinsurer of the pendency of a claim against the insolvent Company on the Policy or Policies reinsured within a reasonable time after such claim is filed in the insolvency proceeding and during the pendency of such claim any Reinsurer may investigate such claim and interpose, at its own expense, in the proceeding where such claim is to be adjudicated any defense or defenses which it may deem available to the Company or its liquidator, receiver, conservator or statutory successor. The expense thus incurred by the Reinsurer shall be chargeable subject to court approval against the insolvent Company as part of the expense of liquidation to the extent of a proportionate share of the benefit which may accrue to the Company solely as a result of the defense undertaken by the Reinsurer.

D. Where two (2) or more Reinsurers are involved in the same claim and a majority in interest elect to interpose defense to such claim, the expense shall be apportioned in accordance with the terms of this Contract as though such expense had been incurred by the Company.

ARTICLE 23

CONFIDENTIALITY

A. The information, data, statements, representations and other materials provided by the Company or the Reinsurer to the other arising from consideration and participation in this Contract whether contained in the reinsurance submission, this Contract, or in materials or discussions arising from or related to this Contract, may contain confidential or proprietary information as expressly indicated by the disclosing party (“Disclosing Party”) in writing from time to time to the other party of the respective parties (“Confidential Information”). This Confidential Information is intended for the sole use of the parties to this Contract (and their affiliates involved in management or operation of assumed reinsurance business, retrocessionaires, prospective retrocessionaires, intermediaries involved in such placements, respective auditors and legal counsel) as may be necessary in analyzing and/or

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accepting a participation in and/or executing their respective responsibilities under or related to this Contract. Disclosing or using Confidential Information relating to this Contract, without the prior written consent of the Disclosing Party, for any purpose beyond (i) the scope of this Contract, (ii) the reasonable extent necessary to perform rights and responsibilities expressly provided for under this Contract, (iii) the reasonable extent necessary to administer, report to and effect recoveries from retrocessional Reinsurers, (iv) the reporting to regulatory or other governmental authorities as may be legally required or (v) persons with a need to know the information, (all of the preceding persons or entities who are legally obligated by either written agreement or otherwise to maintain the confidentiality of the Confidential Information) is expressly forbidden. Copying, duplicating, disclosing, or using Confidential Information for any purpose beyond this expressed purpose is forbidden without the prior written consent of the Disclosing Party.

B. Should a party (“Receiving Party”) receive a third party demand pursuant to subpoena, summons, or court or governmental order, to disclose Confidential Information that has been provided by another party to this Contract, the Receiving Party shall make commercially reasonable efforts to provide the Disclosing Party with written notice of any subpoena, summons, or court or governmental order, at least ten (10) days prior to such release or disclosure. Unless the Disclosing Party has given its prior permission to release or disclose the Confidential Information, the Receiving Party shall not comply with the subpoena prior to the actual date required by the subpoena. If a protective order or appropriate remedy is not obtained, the Receiving Party may disclose only that portion of the Confidential Information that it is legally obligated to disclose. However, notwithstanding anything to the contrary in this Contract, in no event, to the extent permitted by law, shall this Article require the Receiving Party not to comply with the subpoena, summons, or court or governmental order.

ARTICLE 24

PRIVACY

A. Privacy Awareness. The Company and the Reinsurer are aware of and in compliance with their responsibilities and obligations under:

1. The Gramm-Leach-Bliley Act of 1999 (the “Act”) and applicable Federal and State laws and regulations implementing the Act. The Company and the Reinsurer will only use non-public personal information as permitted by law; and

2. The applicable provisions of the Health Insurance Portability and

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Accountability Act (“HIPAA”) and the related requirements of any regulations promulgated thereunder including without limitation the Federal Privacy Regulations as contained in 45 CFR Part 160 and 164 (the “Federal Privacy Regulations”). The Company and the Reinsurer will only use protected health information as permitted by law.

B. Non-Disclosure. To the extent required or prohibited by applicable law or regulation, the Reinsurer shall not disclose any (a) non-public personal information or (b) protected health information (as defined in 45 CFR 164.501) it receives from the Company to anyone other than:

1. The Reinsurer, the Reinsurer’s affiliates, legal counsel, auditors, consultants, regulators, rating agencies and any other persons or entities to whom such disclosure is required to effect, administer, or enforce a reinsurance contract; or any retrocessional reinsurance contract applicable to the losses that are the subject of this Contract, or

2. Persons or entities to whom disclosure is required by applicable law or regulation.

C. Non-Public Personal Information. “Non-Public Personal Information” shall for the purpose of this Contract mean financial or health information that personally identifies an individual, including claimants under Policies reinsured under this Contract, and which information is not otherwise available to the public.

ARTICLE 25

ARBITRATION

A. Any and all disputes between the Company and the Reinsurer arising out of, relating to, or concerning this Contract, whether sounding in contract or tort and whether arising during or after termination of this Contract, shall be submitted to the decision of a Board of arbitration composed of two (2) arbitrators and an umpire (“Board”) meeting at a site in the city in which the principal headquarters of the Company are located. The arbitration shall be conducted under the Federal Arbitration Act and shall proceed as set forth below.

B. A notice requesting arbitration, or any other notice made in connection therewith, shall be in writing and be sent certified or registered mail, return receipt requested to the affected parties. The notice requesting arbitration shall state in particulars all issues to be resolved in the view of the claimant, shall appoint the arbitrator selected by the claimant and shall set a tentative date for the hearing, which date shall be no sooner than ninety (90) days and no later

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than one hundred fifty (150) days from the date that the notice requesting arbitration is mailed. Within thirty (30) days of receipt of claimant’s notice, the respondent shall notify claimant of any additional issues to be resolved in the arbitration and of the name of its appointed arbitrator.

C. The members of the Board shall be impartial, disinterested and not currently representing any party participating in the arbitration, and shall be current or former senior officers of insurance or reinsurance concerns, experienced in the line(s) of business that are the subject of this Contract. The Company and the Reinsurer as aforesaid shall each appoint an arbitrator and the two (2) arbitrators shall choose an umpire before instituting the hearing. As time is of the essence, if the respondent fails to appoint its arbitrator within thirty (30) days after having received claimant’s written request for arbitration, the claimant is authorized to and shall appoint the second arbitrator. If the two (2) arbitrators fail to agree upon the appointment of an umpire within thirty (30) days after notification of the appointment of the second arbitrator, within ten (10) days thereof, the two (2) arbitrators shall request ARIAS U.S. (“ARIAS”) to apply its procedures to appoint an umpire for the arbitration with the qualifications set forth above in this Article. If the use of ARIAS procedures fails to name an umpire, either party may apply to a court of competent jurisdiction to appoint an umpire with the above required qualifications. The umpire shall promptly notify in writing all parties to the arbitration of his selection and of the scheduled date for the hearing. Upon resignation or death of any member of the Board, a replacement shall be appointed in the same fashion as the resigning or deceased member was appointed.

D. The claimant and respondent shall each submit initial briefs to the Board outlining the facts, the issues in dispute and the basis, authority, and reasons for their respective positions within thirty (30) days of the date of notice of appointment of the umpire. The claimant and the respondent may submit a reply brief to the Board within ten (10) days after filing of the initial brief(s). Initial and reply briefs may be amended by the submitting party at any time, but not later than ten (10) days prior to the date of commencement of the arbitration hearing. Reasonable responses shall be allowed at the arbitration hearing to new material contained in any amendments filed to the briefs but not previously responded to.

E. The Board shall make a decision and award with regard to the terms expressed in this Contract, the original intentions of the parties to the extent reasonably ascertainable, and the custom and usage of the insurance and reinsurance business that is the subject of this Contract. Notwithstanding any other provision of this Contract, the Board shall have the right and obligation to consider Underwriting and submission-related documents in any dispute between the parties.

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F. The Board shall be relieved of all judicial formalities and the decision and award shall be based upon a hearing in which evidence shall be allowed though the formal rules of evidence shall not strictly apply. Cross examination and rebuttal shall be allowed. The Board may request a post-hearing brief to be submitted within twenty (20) days of the close of the hearing.

G. The Board shall render its decision and award in writing within thirty (30) days following the close of the hearing or the submission of post-hearing briefs, whichever is later, unless the parties consent to an extension. Every decision by the Board shall be by a majority of the members of the Board and each decision and award by the majority of the members of the Board shall be final and binding upon all parties to the proceeding. Such decision shall be a condition precedent to any right of legal action arising out of the arbitrated dispute which either party may have against the other. However, the Board is not authorized to award punitive, exemplary or enhanced compensatory damages.

H. The Board may award (i) interest at a rate not in excess of that set forth in the Article entitled LATE PAYMENTS, calculated from the date the Board determines that any amounts due the prevailing party should have been paid to the prevailing party, and (ii) applicable Attorneys’ fees and costs.

I. Either party may apply to a court of competent jurisdiction for an order confirming any decision and the award; a judgment of that Court shall thereupon be entered on any decision or award. If such an order is issued, the Attorneys’ fees of the party so applying and court costs will be paid by the party against whom confirmation is sought.

J. Except in the event of a consolidated arbitration, each party shall bear the expense of the one arbitrator appointed by or for it and shall jointly and equally bear with the other party the expense of any stenographer requested, and of the umpire. The remaining costs of the arbitration proceedings shall be finally allocated by the Board.

K. Subject to customary and recognized legal rules of privilege, each party participating in the arbitration shall have the obligation to produce those documents and as witnesses at the arbitration those of its employees, and those of its affiliates as any other participating party reasonably requests, providing always that the same witnesses and documents be obtainable and relevant to the issues before the arbitration and not be unduly burdensome or excessive in the opinion of the Board.

L. The parties may mutually agree as to pre-hearing discovery prior to the arbitration hearing and in the absence of agreement, upon the request of any party, pre-hearing discovery may be conducted as the Board shall determine in its sole

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discretion to be in the interest of fairness, full disclosure, and a prompt hearing, decision and award by the Board.

M. The Board shall be the final judge of the procedures of the Board, the conduct of the arbitration, of the rules of evidence, the rules of privilege, discovery and production and of excessiveness and relevancy of any witnesses and documents upon the petition of any participating party. To the extent permitted by law, the Board shall have the authority to issue subpoenas and other orders to enforce their decisions. The Board shall also have the authority to issue interim decisions or awards in the interest of fairness, full disclosure, and a prompt and orderly hearing and decision and award by the Board.

N. Upon request made to the Board not later than ten (10) days after the umpire’s appointment, the Board may order a consolidated hearing as respects common issues between the Company and all affected Reinsurers participating in this Contract if the Board is satisfied in its discretion that the issues in dispute affect more than one Reinsurer and a consolidated hearing would be in the interest of fairness, and a prompt and cost effective resolution of the issues in dispute.

O. If the parties mutually agree to or the Board orders a consolidated hearing, all other affected participating Reinsurers shall join and participate in the arbitration under time frames established by the Board and will be bound by the Board’s decision and award unless excused by the Board in its discretion. A consolidated hearing shall not result in any change or modification of any Reinsurer’s liability for its participation, that is several, but not joint shall remain the same.

P. Any Reinsurer may decline to actively participate in a consolidated arbitration if in advance of the hearing, that Reinsurer shall file with the Board a written agreement in form satisfactory to the Board to be bound by the decision and award of the Board in the same fashion and to the same degree as if it actively participated in the arbitration.

Q. In the event of an order of consolidation by the Board, the arbitrator appointed by the original Reinsurer shall be subject to being, and may be, replaced within thirty (30) days of the decision to have a consolidated arbitration by an arbitrator named collectively by the Reinsurers or in the absence of agreement, by the Lead Reinsurer, or if there is no Lead Reinsurer involved in the dispute, the Reinsurer with the largest participation in this Contract affected by the dispute. In the event two (2) or more Reinsurers affected by the dispute each have the same largest participation, they shall agree among themselves as to the replacement arbitrator, if any, to be appointed. The umpire shall be the final determiner in the event of any dispute over replacement of that arbitrator. All other aspects of the arbitration shall be conducted as provided for in this Article provided that (1) each

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party actively participating in the consolidated arbitration will have the right to its own attorney, position, and related claims and defenses; (2) each party will not, in presenting its position, be prevented from presenting its position by the position set forth by any other party; and (3) the cost and expense of the arbitration, exclusive of Attorneys’ fees (which will be borne exclusively by the respective retaining party unless otherwise determined by the Board) but including the expense of any stenographer which shall be borne by each party actively participating in the consolidated arbitration or as the Board shall determine to be fair and appropriate under the circumstances.

ARTICLE 26

SERVICE OF SUIT

A. This Article only applies to a Reinsurer domiciled outside of the United States and/or unauthorized in any state, territory or district of the United States having jurisdiction over the Company. Furthermore, this Article will not be read to conflict with or override any obligations of the parties to arbitrate their disputes under this Contract. This Article is intended as an aid to compelling arbitration if called for by this Contract or enforcing any such arbitration or arbitral award, not as an alternative to any arbitration provision in this Contract that is applicable for resolving disputes arising out of this Contract.

B. In the event of any dispute, the Reinsurer, at the request of the Company, shall submit to the jurisdiction of a court of competent jurisdiction within the United States. Nothing in this Article constitutes or should be understood to constitute a waiver of any obligation to arbitrate disputes arising from this Contract or the Reinsurer’s rights to commence an action in any court of competent jurisdiction in the United States, to remove an action to a United States District Court, or to seek a transfer of a case to another court as permitted by the laws of the United States or of any state in the United States.

C. The Reinsurer, once the appropriate court is selected, whether such court is the one originally chosen by the Company and accepted by the Reinsurer or is determined by removal, transfer, or otherwise, as provided above, will comply with all requirements necessary to give said court jurisdiction and, in any suit instituted against any of them upon this Contract, will abide by the final decision of such court or any Appellate Court in the event of an appeal.

D. Service of process in any such suit against the Reinsurer may be made upon Mendes and Mount, 750 Seventh Avenue, New York, New York 10019-6829, — or in substitution therefore, the Firm identified by the Reinsurer on the Reinsurer’s signature page to this Contract, — (“Firm”) and in any suit instituted, the Reinsurer shall abide by the final decision of such court or of any Appellate Court in the event of an appeal.

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E. The Firm is authorized and directed to accept service of process on behalf of the Reinsurer in any such suit and/or upon the request of the Company to give a written undertaking to the Company that they shall enter a general appearance upon the Reinsurer’s behalf in the event such a suit shall be instituted.

F. Further, as required by and pursuant to any statute of any state, territory or district of the United States which makes provision therefore, the Reinsurer hereby designates the Superintendent, Commissioner or Director of Insurance or other officer specified for that purpose in the statute, or his successor or successors in office, as their true and lawful Attorney upon whom may be served any lawful process in any action, suit or proceeding instituted by or on behalf of the Company or any beneficiary hereunder arising out of this Contract, and hereby designates the above-named as the person to whom the said officer is authorized to mail such process or a true copy thereof.

ARTICLE 27

RESERVES

A. If, at any time during the period of this Contract and thereafter the reinsurance provided by a Reinsurer participating in this Contract does not qualify for full statutory accounting credit for reinsurance by regulatory authorities having jurisdiction over the Company (whether by reason of lack of license, accreditation or otherwise) such that a financial penalty to the Company would result on any statutory statement or report the Company is required to make or file with insurance regulatory authorities (or a court of law in the event of insolvency), the Reinsurer shall secure the Reinsurer’s share of Obligations for which such full statutory credit is not granted by those authorities in a manner, form, and amount acceptable to the Company and to all applicable insurance regulatory authorities in accordance with this Article.

B. The Reinsurer shall secure such Obligations, within thirty (30) days after the receipt of the Company’s written request regarding the Reinsurer’s share of Obligations under this Contract (but not later than December 31) of each year by either:

1. Clean, irrevocable, and unconditional evergreen letter(s) of credit issued and confirmed, if confirmation is required by the applicable insurance regulatory authorities, by a qualified United States financial institution as defined under the Insurance Law of the Company’s domiciliary state and acceptable to the Company and to insurance regulatory authorities;

2. A trust account meeting at least the standards of New York’s Insurance Regulation 114 and the Insurance Law of the Company’s domiciliary state; or

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3. Cash advances or funds withheld or a combination of both, which will be under the exclusive control of the Company (“Funds Deposit”).

C. The “Obligations” referred to herein means, subject to the preceding paragraphs, the then current (as of the end of each calendar quarter) sum of any:

1. amount of the ceded unearned premium reserve for which the Reinsurer is responsible to the Company;

2. amount of Net Losses and Loss Adjustment Expenses and other amounts paid by the Company for which the Reinsurer is responsible to the Company but has not yet paid;

3. amount of ceded reserves for Net Losses and Loss Adjustment Expenses for which the Reinsurer is responsible to the Company;

4. amount of return and refund premiums paid by the Company for which the Reinsurer is responsible to the Company but has not yet paid.

D. The Company, or its successors in interest, may draw, at any time and from time to time, upon the:

1. Established letter of credit (or subsequent cash deposit);

2. Established trust account (or subsequent cash deposit); or

3. Funds Deposit;

     without diminution or restriction because of the insolvency of either the Company or the Reinsurer for one or more of the following purposes set forth below.

E. Draws shall be made only for the following purposes:

1. To make payment to and reimburse the Company for the Reinsurer’s share of Net Loss and Loss Adjustment Expense and other amounts paid by the Company under its Policies and for which the Reinsurer is responsible under this Contract that is due to the Company but unpaid by the Reinsurer including but not limited to the Reinsurer’s share of premium refunds and returns; and

2. To obtain a cash advance of the entire amount of the remaining balance under any letter of credit in the event that the Company:

a. has received notice of non-renewal or expiration of the letter of credit or trust account;

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b. has not received assurances satisfactory to the Company of any required increase in the amount of the letter of credit or trust account, or its replacement or other continuation of the letter of credit or trust account at least thirty (30) days before its stated expiration date;

c. has been made aware that others may attempt to attach or otherwise place in jeopardy the security represented by the letter of credit or trust account; or

d. has concluded that the trustee or issuing (or confirming) bank’s financial condition is such that the value of the security represented by the letter of credit or trust account may be in jeopardy;

and under any of those circumstances where the Reinsurer’s entire Obligations, or part thereof, under this Contract remain un-liquidated and un-discharged at least thirty (30) days prior to the stated expiration date or at the time the Company learns of the possible jeopardy to the security represented by the letter of credit or trust account.

F. If the Company draws on the letter of credit or trust account to obtain a cash advance, the Company will hold the amount of the cash advance so obtained in the name of the Company in any qualified United States financial institution as defined under the Insurance Law of the Company’s domiciliary state in trust solely to secure the Obligations referred to above and for the use and purposes enumerated above and to return any balance thereof to the Reinsurer:

1. Upon the complete and final liquidation and discharge of all of the Reinsurer’s Obligations to the Company under this Contract; or

2. In the event the Reinsurer subsequently provides alternate or replacement security consistent with the terms hereof and acceptable to the Company.

G. The Company will prepare and forward at annual intervals or more frequently as determined by the Company, but not more frequently than quarterly to the Reinsurer a statement for the purposes of this Article, showing the Reinsurer’s share of Obligations as set forth above. If the Reinsurer’s share thereof exceeds the then existing balance of the security provided, the Reinsurer will, within fifteen (15) days of receipt of the Company’s statement, but never later than December 31 of any year, increase the amount of the letter of credit, (or subsequent cash deposit), trust account or Funds Deposit to the required amount of the Reinsurer’s share of Obligations set forth in the Company’s statement, but never later than

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December 31 of any year. If the Reinsurer’s share thereof is less than the then existing balance of the security provided, the Company will release the excess thereof to the Reinsurer upon the Reinsurer’s written request. The Reinsurer will not attempt to prevent the Company from holding the security provided or Funds Deposit so long as the Company is acting in accordance with this Article. The Company shall pay interest earned on the deposited amounts to the Reinsurers as the parties shall have agreed at the time of the deposit.

H. Any assets deposited to a trust account will be valued according to their current fair market value and will consist only of cash (U.S. legal tender), certificates of deposit issued by a qualified United States financial institution as defined under the Insurance Law of the Company’s domiciliary state and payable in cash, and investments of the types no less conservative than those specified in Section 1404 (a)(1)(2)(3)(8) and (10) of the New York Insurance Law and which are admitted assets under the Insurance Law of the Company’s domiciliary state. Investments issued by the parent, subsidiary, or affiliate of either the Company or the Reinsurer will not be eligible investments. All assets so deposited will be accompanied by all necessary assignments, endorsements in blank, or transfer of legal title to the trustee in order that the Company may negotiate any such assets without the requirement of consent or signature from the Reinsurer or any other entity.

I. All settlements of account between the Company and the Reinsurer will be made in cash or its equivalent. All income earned and received by the amount held in an established trust account will be added to the principal.

J. The Company’s “successors in interest” will include those by operation of law, including without limitation, any liquidator, rehabilitator, receiver, or conservator.

K. The Reinsurer will take any other reasonable steps that may be required for the Company to take full credit on its statutory financial statements for the reinsurance provided by this Contract.

ARTICLE 28

LATE PAYMENTS

A. Payments from the Reinsurer to the Company for coverage providing pro rata forms of reinsurance shall have a due date as expressed in the Article entitled NOTICE OF LOSS AND LOSS SETTLEMENT. Payments from the Reinsurer to the Company for coverage providing excess of Loss reinsurance shall have as a

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due date the date on which the proof of Loss or demand for payment is received by the Reinsurer. Payment not received within sixty (60) days of the due date shall be deemed overdue (the “Overdue Date”). Payments due from the Reinsurer to the Company will not be considered overdue if the Reinsurer requests, in writing, that such payment be made by drawing on a letter of credit or other similar method of funding that has been established for this Contract, provided that there is an adequate balance in place, and further provided that such advice to draw is received by the Company within the sixty (60) day deadline set forth above. Payments from the Company to the Reinsurer will have a due date as the date specified in this Contract and will be overdue sixty (60) days thereafter. Premium adjustments will be overdue sixty (60) days from the Contract due date or one hundred twenty (120) days after the expiration or renewal date, whichever is greater.

B. In the event that this Contract provides excess of Loss reinsurance, the Company will provide the Reinsurer with a reasonable proof of Loss and a copy of the claim adjuster’s report(s) or any other reasonable evidence of indemnification. If subsequent to receipt of this evidence, the information contained therein is unreasonably insufficient or not in substantial accordance with the contractual conditions of this Contract, then the payment due date as specified above will be deemed to be the date upon which the Reinsurer received the additional information necessary to approve payment of the claim and the claim is presented in a reasonably acceptable manner. This paragraph is only for the purpose of establishing when a claim payment is overdue, and will not alter the provisions of the Article entitled NOTICE OF LOSS AND LOSS SETTLEMENT or other pertinent contractual stipulations of this Contract.

C. If payment is made of overdue amounts within thirty (30) days of the Overdue Date, overdue amounts will bear simple interest from the Overdue Date at a rate determined by the annualized one month London Interbank Offered Rate for the first business day of the calendar month in which the amount becomes overdue, as published in The Wall Street Journal, plus two hundred (200) basis points to be calculated weekly. If payment is made of overdue amounts more than thirty (30) days after the due date, overdue amounts will bear simple interest from the Overdue Date at a rate determined by the annualized one month London Interbank Offered Rate for the first business day of the calendar month in which the amount becomes overdue, as published in The Wall Street Journal, plus four hundred (400) basis points to be calculated on a weekly basis, but in no event less than eight percent (8%) simple interest. If the sum of the compensating additional amount computed in respect of any overdue payment is less than one quarter of one percent (0.25%) of the amount overdue, or one thousand dollars ($1,000), whichever is greater, and/or the overdue period is one week or less, then the interest amount shall be waived. The basis point

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standards referred to above shall be doubled if the late payment is due from a Reinsurer who is no longer an active reinsurance market. Interest shall cease to accrue upon the party’s payment of an overdue amount to the Intermediary.

ARTICLE 29

MODE OF EXECUTION

A. This Contract may be executed by:

1. an original written ink signature of paper documents;

2. an exchange of facsimile copies showing the original written ink signature of paper documents;

3. electronic signature technology employing computer software and a digital signature or digitizer pen pad to capture a person’s handwritten signature in such a manner that the signature is unique to the person signing, is under the sole control of the person signing, is capable of verification to authenticate the signature and is linked to the document signed in such a manner that if the data is changed, such signature is invalidated.

B. The use of any one or a combination of these methods of execution shall constitute a legally binding and valid signing of this Contract.

ARTICLE 30

VARIOUS OTHER TERMS

A. This Contract shall be binding upon and inure to the benefit of the Company and Reinsurer and their respective successors and assigns provided, however, that this Contract may not be assigned by either party without the prior written consent of the other which consent may be withheld by either party in its sole unfettered discretion. This provision shall not be construed to preclude the assignment by the Company of reinsurance recoverables to another party for collection.

B. The territorial limits of this Contract shall be identical with those of the Company’s Policies.

C. This Contract shall constitute the entire agreement between the parties with respect to the Business Covered hereunder. There are no understandings between the parties other than as expressed in this Contract. Any change or modification of

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this Contract shall be null and void unless made by amendment to the Contract and signed by both parties.

D. Except as may be provided in the Article entitled ARBITRATION, this Contract shall be governed by and construed according to the laws of the Commonwealth of Pennsylvania, exclusive of that state’s rules with respect to conflicts of law.

E. The headings preceding the text of the Articles and paragraphs of this Contract are intended and inserted solely for the convenience of reference and shall not affect the meaning, interpretation, construction or effect of this Contract.

F. This Contract is solely between the Company and the Reinsurer, and in no instance shall any insured, claimant or other third party have any rights under this Contract.

G. If any provision of this Contract should be invalid under applicable laws, the latter shall control but only to the extent of the conflict without affecting the remaining provisions of this Contract.

H. The failure of the Company or Reinsurer to insist on strict compliance with this Contract or to exercise any right or remedy shall not constitute a waiver of any rights contained in this Contract nor estop the parties from thereafter demanding full and complete compliance nor prevent the parties from exercising any remedy.

I. Each party shall be excused for any reasonable failure or delay in performing any of its respective obligations under this Contract, if such failure or delay is caused by Force Majeure. “Force Majeure” shall mean any act of God, strike, lockout, act of public enemy, any accident, explosion, fire, storm, earthquake, flood, drought, peril of sea, riot, embargo, war or foreign, federal, state or municipal order or directive issued by a court or other authorized official, seizure, requisition or allocation, any failure or delay of transportation, shortage of or inability to obtain supplies, equipment, fuel or labor or any other circumstance or event beyond the reasonable control of the party relying upon such circumstance or event; provided, however, that no such Force Majeure circumstance or event shall excuse any failure or delay beyond a period exceeding thirty (30) days from the date such performance would have been due but for such circumstance or event.

J. All Articles of this Contract shall survive the termination of this Contract until all obligations between the parties have been finally settled.

K. This Contract may be executed by the parties hereto in any number of

46.

counterparts, and by each of the parties hereto in separate counterparts, each of which counterparts, when so executed and delivered, shall be deemed to be an original, but all such counterparts shall together constitute but one and the same instrument.

L. Whenever the word “Company” is used in this Contract, such term shall mean each and all affiliated companies which are or may hereafter be under common control provided notice be given to the Reinsurers of any newly affiliated companies which may hereafter come under common control as soon as practicable, with full particulars as to how such affiliation is likely to affect this Contract. In the event that either party maintains that such affiliation calls for altering the terms of this Contract and an agreement for alteration not being arrived at, then the Business Covered of such newly affiliated company is covered at existing terms for a period not to exceed (90) ninety days after notice by either party that it does not wish to cover the business of the newly affiliated company at the existing terms.

M. The term “Reinsurer” shall refer to each Reinsurer participating severally and not jointly in this Contract. The subscribing (Re)insurers’ obligations under contracts of (re)insurance to which they subscribe are several and not joint and are limited solely to the extent of their individual subscriptions. The subscribing (Re)insurers are not responsible for the subscription of any co-subscribing (Re)insurer who for any reason does not satisfy all or part of its obligations.

N. For purposes of sending and receiving notices and payments required by this Contract other than in respect of the Articles entitled SERVICE OF SUIT and RESERVES herein, the reinsured company that is set forth first in the definition of “Company” is deemed the agent of all other reinsured companies referenced herein. In no event, however, shall any reinsured company be deemed the agent of another with respect to the terms of the Article entitled INSOLVENCY.

O. Whenever the content of this Contract requires, the gender of all words shall include the masculine, feminine and neuter, and the number of all words shall include the singular and the plural. This Contract shall be construed without regard to any presumption or other rule requiring construction against the party causing this Contract to be drafted.

P. The Company shall furnish the Reinsurer, in accordance with regulatory requirements, periodic reporting of premiums and losses that relate to the Business Covered in this Contract as may be needed for Reinsurers’ completion of financial statements to regulatory authorities.

47.

Q. When so requested in writing, the Company shall afford the Reinsurer or its representatives an opportunity to be associated with the Company, at the expense of the Reinsurer, in the defense of any claim, suit or proceeding involving this reinsurance, and the Company and the Reinsurer shall cooperate in every respect in the defense of such claim, suit or proceeding, provided the Company shall have the right to make any decision in the event of disagreement over any matter of defense or settlement.

ARTICLE 31

INTERMEDIARY

     A. Towers Perrin Forster & Crosby, Inc. (“Towers Perrin”) is hereby recognized as the Intermediary negotiating this Contract for all business hereunder. All communications (including but not limited to notices, statements, premium, return premium, commissions, taxes, losses, Loss Adjustment Expense, salvages and loss settlements) relating thereto shall be transmitted to the Company or the Reinsurers through Reinsurance a business of Towers Perrin, Centre Square East, 1500 Market Street, Philadelphia, Pennsylvania, 19102-4790. Payments by the Company to the Intermediary shall be deemed to constitute payment to the Reinsurers. Payments by the Reinsurers to the Intermediary shall be deemed to constitute payment to the Company only to the extent that such payments are actually received by the Company.

     B. Whenever notice is required within this Contract, such notice may be given by certified mail, registered mail, or overnight express mail. Notice shall be deemed to be given on the date received by the receiving party.

1.

NUCLEAR INCIDENT EXCLUSION CLAUSE — LIABILITY — REINSURANCE
U.S.A. (BRMA 35A)

1. This reinsurance does not cover any Loss or liability accruing to the Company as a member of, or subscriber to, any association of insurers or reinsurers formed for the purpose of covering nuclear energy risks or as a direct or indirect reinsurer of any such member, subscriber or association.

2. Without in any way restricting the operation of paragraph 1 of this Clause, it is understood and agreed that for all purposes of this reinsurance all the original policies of the Company (new, renewal and replacement) of the classes specified in Clause II of this paragraph 2 from the time specified in Clause III in this paragraph 2 shall be deemed to include the following provision (specified as the Limited Exclusion Provision).

     Limited Exclusion Provision*

I.	It is agreed that the policy does not apply under any liability coverage, to (injury, sickness, disease, death or destruction (bodily injury or property damage with respect to which an insured under the policy is also an insured under a nuclear energy liability policy issued by Nuclear Energy Liability Insurance Association, Mutual Atomic Energy Liability Underwriters or Nuclear Insurance Association of Canada, or would be an insured under any such policy but for its termination upon exhaustion of its limit of liability.
II.	Family Automobile Policies (liability only), Special Automobile Policies (private passenger automobiles, liability only), Farmers Comprehensive Personal Liability Policies (liability only), Comprehensive Personal Liability Policies (liability only) or policies of a similar nature; and the liability portion of combination forms related to the four classes of policies stated above, such as the Comprehensive Dwelling Policy and the applicable types of Homeowners Policies.
	The inception dates and thereafter of all original policies as described in II above, whether new, renewal or replacement, being policies which either

(a)	become effective on or after 1st May, 1960, or
(b)	become effective before that date and contain the Limited Exclusion Provision set out above;

provided this paragraph 2 shall not be applicable to Family Automobile Policies, Special Automobile Policies, or policies or combination policies of a similar nature, issued by the Company on New York risks, until 90 days following approval of the Limited Exclusion Provision by the Governmental Authority having jurisdiction thereof.

3. Except for those classes of policies specified in Clause II of paragraph 2 and without in any way restricting the operation of paragraph 1 of this Clause, it is understood and agreed that for all purposes of this reinsurance the original liability policies of the Company (new, renewal and replacement) affording the following coverages:

Owners, Landlords and Tenants Liability, Contractual Liability, Elevator Liability, Owners or Contractors (including railroad), Protective Liability, Manufacturers and Contractors Liability, Product Liability, Professional and Malpractice Liability, Storekeepers Liability, Garage Liability, Automobile Liability (including Massachusetts Motor Vehicle or Garage Liability)

shall be deemed to include, with respect to such coverages, from the time specified in Clause V of this paragraph 3, the following provision (specified as the Broad Exclusion Provision):

Broad Exclusion Provision*

I. It is agreed that the policy does not apply:

Under any Liability Coverage, to (injury, sickness, disease, death or destruction (bodily injury or property damage

(a)

with respect to which an insured under the policy is also an insured under a nuclear energy liability policy issued by Nuclear Energy Liability Insurance Association, Mutual Atomic Energy Liability Underwriters or Nuclear Insurance Association of Canada, or would be an insured under any such policy but for its termination upon exhaustion of its limit of liability; or

(b)

resulting from the hazardous properties of nuclear material and with respect to which (1) any person or organization is required to maintain financial protection pursuant to the Atomic Energy Act of 1954, or any law amendatory thereof, or (2) the insured is, or had this policy not been issued would be, entitled to indemnity from the United States of America, or any agency thereof, under any agreement entered into by the United States of America, or any agency thereof, with any person or organization.

II. Under any Medical Payments Coverage, or under any Supplementary Payments Provision relating to (immediate medical or surgical relief (first aid (bodily injury, sickness, disease or death to expenses incurred with respect to (bodily Injury resulting from the hazardous properties of nuclear material and arising out of the operation of a nuclear facility by any person or organization.

III. Under any Liability Coverage, to (injury, sickness, disease, death or destruction (bodily injury or property damage resulting from the hazardous properties of nuclear material, if

2.

(a) the nuclear material (1) is at any nuclear facility owned by, or operated by or on behalf of, an insured, or (2) has been discharged or dispersed therefrom;

(b)

the nuclear material is contained in spent fuel or waste at any time possessed, handled, used, processed, stored, transported or disposed of by or on behalf of an insured; or

(c)

the (injury, sickness, disease, death or destruction (bodily injury or property damage arises out of the furnishing by an insured of services, materials, parts or equipment in connection with the planning, construction, maintenance, operation or use of any nuclear facility, but if such facility is located within the United States of America, its territories, or possessions or Canada, this exclusion (c) applies only to (injury to or destruction of property at such nuclear facility (property damage to such nuclear facility and any property thereat.

IV. As used in this endorsement:

“Hazardous properties” include radioactive, toxic or explosive properties; “nuclear material” means source material, special nuclear material or byproduct material; “source material”, “special nuclear material”, and “byproduct material” have the meanings given them in the Atomic Energy Act of 1954 or in any law amendatory thereof; “spent fuel” means any fuel element or fuel component, solid or liquid, which has been used or exposed to radiation in a nuclear reactor; “waste” means any waste material (1) containing byproduct material other than tailings or wastes produced by the extraction or concentration of uranium or thorium from any ore processed primarily for its source material content, and (2) resulting from the operation by any person or organization of any nuclear facility included under the first two paragraphs of the definition of nuclear facility; “nuclear facility” means:

(a)	any nuclear reactor,
(b)	any equipment or device designed or used for (1) separating the isotopes of uranium or plutonium, (2) processing or utilizing spent fuel, or (3) handling, processing or packaging waste,
(c)	any equipment or device used for the processing, fabricating or alloying of special nuclear material if at any time the total amount of such material in the custody of the insured at the premises where such equipment or device is located consists of or contains more than 25 grams of plutonium or uranium 233 or any combination thereof, or more than 250 grams of uranium 235,
(d)	any structure, basin, excavation, premises or place prepared or used for the storage or disposal of waste,

and includes the site on which any of the foregoing is located, all operations conducted on such site and all premises used for such operations; “nuclear reactor” means any apparatus designed or used to sustain nuclear fission in a self-supporting chain reaction or to contain a critical mass of fissionable material;

(With respect to injury to or destruction of property, the word “injury” or “destruction” (“property damage” includes all forms of radioactive contamination of property. (includes all forms of radioactive contamination of pioperty.

V. The inception dates and thereafter of all original policies affording coverages specified in this paragraph 3, whether new, renewal or replacement, being policies which become effective on or after 1st May, 1960, provided this paragraph 3 shall not be applicable to:

(a)	Garage and Automobile Policies issued by the Company on New York risks, or
(b)	statutory liability insurance required under Chapter 90, General Laws of Massachusetts,

until 90 days following approval of the Broad Exclusion Provision by the Governmental Authority having jurisdiction thereof.

4. Without in any way restricting the operation of paragraph 1 of this Clause, it is understood and agreed that paragraphs 2 and 3 above are not applicable to original liability policies of the Company in Canada and that with respect to such policies this Clause shall be deemed to include the Nuclear Energy Liability Exclusion Provisions adopted by the Canadian Underwriters’ Association or the Independent Insurance Conference of Canada.

*NOTE: The words printed in italics in the Limited Exclusion Provision and in the Broad Exclusion Provision shall apply only in relation to original liability policies which include a Limited Exclusion Provision or a Broad Exclusion Provision containing those words.

1.

NUCLEAR INCIDENT EXCLUSION CLAUSE — PHYSICAL DAMAGE —

REINSURANCE (BRMA 35B)

1. This reinsurance does not cover any Loss or liability accruing to the Company, directly or indirectly, and whether as Insurer or Reinsurer, from any Pool of Insurers or Reinsurers formed for the purpose of covering Atomic or Nuclear Energy risks.

2. Without in any way restricting the operation of paragraph (1) of this Clause, this reinsurance does not cover any Loss or liability accruing to the Company, directly or indirectly, and whether as Insurer or Reinsurer, from any insurance against Physical Damage (including business interruption or consequential Loss arising out of such Physical Damage) to:

I.	Nuclear reactor power plants including all auxiliary property on the site, or
II.	Any other nuclear reactor installation, including laboratories handling radioactive materials in connection with reactor installations and “critical facilities” as such, or
III.	Installations for fabricating complete fuel elements or for processing substantial quantities of “special nuclear material” and for reprocessing, salvaging, chemically separating, storing or disposing of “spent” nuclear fuel or waste materials, or
IV.	Installations other than those listed in paragraph (2) III above using substantial quantities of radioactive isotopes or other products of nuclear fission.

3. Without in any way restricting the operations of paragraphs (1) and (2) hereof, this reinsurance does not cover any Loss or liability by radioactive contamination accruing to the Company, directly or indirectly, and whether as Insurer or Reinsurer, from any insurance on property which is on the same site as a nuclear reactor power plant or other nuclear installation and which normally would be insured therewith except that this paragraph (3) shall not operate:

(a)	where Company does not have knowledge of such nuclear reactor power plant or nuclear installation, or
(b)	where said insurance contains a provision excluding coverage for damage to property caused by or resulting from radioactive contamination, however caused. However, on and after 1st January 1960, this sub-paragraph (b) shall only apply provided the said radioactive contamination exclusion provision has been approved by the Governmental Authority having jurisdiction thereof.

2.

4. Without in any way restricting the operations of paragraphs (1), (2) and (3) hereof, this reinsurance does not cover any Loss or liability by radioactive contamination accruing to the Company, directly or indirectly, and whether as Insurer or Reinsurer, when such radioactive contamination is a named hazard specifically insured against.

5. It is understood and agreed that this Clause shall not extend to risks using radioactive isotopes in any form where the nuclear exposure is not considered by the Company to be the primary hazard.

6. The term “special nuclear material” shall have the meaning given it in the Atomic Energy Act of 1954 or by any law amendatory thereof.

7. Company to be sole judge of what constitutes:

(a)	substantial quantities, and
(b)	the extent of installation, plant or site.

Notes: Without in any way restricting the operation of paragraph (1) hereof, it is understood and agreed that:

(a)	All policies issued by the Company on or before 31st December 1957 shall be free from the application of the other provisions of this Clause until expiry date or 31st December 1960 whichever first occurs whereupon all the provisions of this Clause shall apply.
(b)	With respect to any risk located in Canada policies issued by the Company on or before 31st December 1958 shall be free from the application of the other provisions of this Clause until expiry date or 31st December 1960 whichever first occurs whereupon all the provisions of this Clause shall apply.

INFORMATION TECHNOLOGY HAZARDS CLARIFICATION CLAUSE

Losses arising directly or indirectly, out of:

(i) Loss of, alteration of, or damage to

or

(ii) a reduction in the functionality, availability or operation of a computer system, hardware, program, software, data, information repository, microchip, integrated circuit or similar device in computer equipment or non-computer equipment, whether the property of the policyholder of the reinsured or not, do not in and of themselves constitute an event unless arising out of one or more of the following perils:

fire, lightning, explosion, aircraft or vehicle impact, falling objects, windstorm, hail, tornado, cyclone, hurricane, earthquake, volcano, tsunami, flood, freeze or weight of snow.

EX-10.13

Exhibit 10.13

CASUALTY EXCESS OF LOSS REINSURANCE CONTRACT

EFFECTIVE JANUARY 1, 2009

between

PENN MILLERS INSURANCE COMPANY

AMERICAN MILLERS INSURANCE COMPANY

(hereinafter called the “Company”)

by
THE UNDERWRITERS AT LLOYD’S

who are signatories hereto, each for the

proportion underwritten and not one for another

(hereinafter called the “Reinsurers”)

Under the terms of this Contract the above Reinsurers agree to assume

EXHIBIT “I” — FIRST EXCESS:	a 15.00% share
EXHIBIT “II” — SECOND EXCESS:	a 25.00% share

of the liability described in the attached Contract and, as consideration, the above Reinsurers shall receive the same proportionate share of the premium named therein.

Signed in London, England, this            day of      , 2009.

The share attaching to this Contract is subscribed by the Underwriters, Members of the Syndicates the definitive numbers of which and the proportions reinsured are contained in the schedule attached.

CASUALTY EXCESS OF LOSS REINSURANCE CONTRACT

EFFECTIVE JANUARY 1, 2009

between

PENN MILLERS INSURANCE COMPANY

AMERICAN MILLERS INSURANCE COMPANY

(hereinafter called the “Company”)

by

ASPEN INSURANCE UK LTD.

CONNECTICUT

(hereinafter called, with other participants, the “Reinsurers”)

Under the terms of this Contract the above Reinsurers agree to assume to assume severally and not jointly with other participants

EXHIBIT “A” — FIRST EXCESS:	a 12.50% share
EXHIBIT “B” — SECOND EXCESS:	a 0.00% share

of the liability described in the attached Contract and, as consideration, the above Reinsurers shall receive the same proportionate share of the premium named therein.

Signed in Rocky Hill, Connecticut, this           day of      , 2009,

ASPEN RE AMERICA for and on behalf of

ASPEN INSURANCE UK LTD.

BY

TITLE

CASUALTY EXCESS OF LOSS REINSURANCE CONTRACT

EFFECTIVE JANUARY 1, 2009

between

PENN MILLERS INSURANCE COMPANY

AMERICAN MILLERS INSURANCE COMPANY

(hereinafter called the “Company”)

by

EMPLOYERS MUTUAL CASUALTY COMPANY

IOWA

(hereinafter called, with other participants, the “Reinsurers”)

Under the terms of this Contract the above Reinsurers agree to assume to assume severally and not jointly with other participants

EXHIBIT “A” — FIRST EXCESS:	a 05.00% share
EXHIBIT “B” — SECOND EXCESS:	a 05.00% share

of the liability described in the attached Contract and, as consideration, the above Reinsurers shall receive the same proportionate share of the premium named therein.

Signed in Des Moines, Iowa, this            day of      , 2009,

EMPLOYERS MUTUAL CASUALTY COMPANY

BY

TITLE

CASUALTY EXCESS OF LOSS REINSURANCE CONTRACT

EFFECTIVE JANUARY 1, 2009

between

PENN MILLERS INSURANCE COMPANY

AMERICAN MILLERS INSURANCE COMPANY

(hereinafter called the “Company”)

by

HANNOVER RUCKVERSICHERUNG AG

HANNOVER, GERMANY

(hereinafter called, with other participants, the “Reinsurers”)

Under the terms of this Contract the above Reinsurers agree to assume to assume severally and not jointly with other participants

EXHIBIT “A” — FIRST EXCESS:	a 25.00% share
EXHIBIT “B” — SECOND EXCESS:	a 20.00% share

of the liability described in the attached Contract and, as consideration, the above Reinsurers shall receive the same proportionate share of the premium named therein.

Signed in Hannover, Germany, this            day of      , 2009,

HANNOVER RUCKVERSICHERUNG AG

BY

TITLE

CASUALTY EXCESS OF LOSS REINSURANCE CONTRACT

EFFECTIVE JANUARY 1, 2009

between

PENN MILLERS INSURANCE COMPANY

AMERICAN MILLERS INSURANCE COMPANY

(hereinafter called the “Company”)

by

PARTNER REINSURANCE COMPANY OF THE U.S.

NEW YORK

(hereinafter called, with other participants, the “Reinsurers”)

Under the terms of this Contract the above Reinsurers agree to assume to assume severally and not jointly with other participants

EXHIBIT “A” — FIRST EXCESS:	a 17.50% share
EXHIBIT “B” — SECOND EXCESS:	a 25.00% share

of the liability described in the attached Contract and, as consideration, the above Reinsurers shall receive the same proportionate share of the premium named therein.

Signed in Greenwich, Connecticut, this           day of      , 2009,

PARTNER REINSURANCE COMPANY OF THE U.S.

BY

TITLE

CASUALTY EXCESS OF LOSS REINSURANCE CONTRACT

EFFECTIVE JANUARY 1, 2009

between

PENN MILLERS INSURANCE COMPANY

AMERICAN MILLERS INSURANCE COMPANY

(hereinafter called the “Company”)

by

SWISS REINSURANCE AMERICA CORPORATION

NEW YORK

(hereinafter called, with other participants, the “Reinsurers”)

Under the terms of this Contract the above Reinsurers agree to assume to assume severally and not jointly with other participants

EXHIBIT “A” — FIRST EXCESS:	a 12.50% share
EXHIBIT “B” — SECOND EXCESS:	a 12.50% share

of the liability described in the attached Contract and, as consideration, the above Reinsurers shall receive the same proportionate share of the premium named therein.

Signed in Schaumburg, Illinois, this           day of     , 2009,

SWISS REINSURANCE AMERICA CORPORATION BY:

Swiss Re

BY

TITLE

CASUALTY EXCESS OF LOSS REINSURANCE CONTRACT
EFFECTIVE JANUARY 1, 2009

between

PENN MILLERS INSURANCE COMPANY

AMERICAN MILLERS INSURANCE COMPANY

(hereinafter called the “Company”)

by

TRANSATLANTIC REINSURANCE COMPANY

NEW YORK

(hereinafter called, with other participants, the “Reinsurers”)

Under the terms of this Contract the above Reinsurers agree to assume to assume severally and not jointly with other participants

EXHIBIT “A” — FIRST EXCESS:	a 12.50% share
EXHIBIT “B” — SECOND EXCESS:	a 12.50% share

of the liability described in the attached Contract and, as consideration, the above Reinsurers shall receive the same proportionate share of the premium named therein.

Signed in New York, New York, this           day of      , 2009,

TRANSATLANTIC REINSURANCE COMPANY

BY

TITLE

and signed in Wilkes-Barre, Pennsylvania, this           day of      , 2009.

PENN MILLERS INSURANCE COMPANY
AMERICAN MILLERS INSURANCE COMPANY

BY

TITLE

1.

PENN MILLERS INSURANCE COMPANY

AMERICAN MILLERS INSURANCE COMPANY

CASUALTY EXCESS OF LOSS REINSURANCE CONTRACT

EFFECTIVE JANUARY 1, 2009

INDEX

ARTICLE SUBJECT PAGE

ARTICLE 1 BUSINESS COVERED	1
ARTICLE 2 COMMENCEMENT AND TERMINATION	1
ARTICLE 3 SPECIAL TERMINATION	2
ARTICLE 4 EXCLUSIONS	4
ARTICLE 5 WARRANTY	10
ARTICLE 6 GENERAL CONDITIONS	10
ARTICLE 7 RETENTION AND LIMIT	11
ARTICLE 8 DEFINITION OF TERRORISM	11
ARTICLE 9 REINSTATEMENT	12
ARTICLE 10 PREMIUM	12
ARTICLE 11 DEFINITION OF LOSS OCCURRENCE	12
ARTICLE 12 NET LOSS	14
ARTICLE 13 EXTRA-CONTRACTUAL OBLIGATIONS/LOSS EXCESS OF POLICY LIMITS	15
ARTICLE 14 TERRORISM RECOVERY	16
ARTICLE 15 NET RETAINED LINE	17
ARTICLE 16 NOTICE OF LOSS AND LOSS SETTLEMENT	18
ARTICLE 17 COMMUTATION (As respects Workers’ Compensation Claims)	19
ARTICLE 18 ERRORS AND OMISSIONS	20
ARTICLE 19 OFFSET	20
ARTICLE 20 CURRENCY	20
ARTICLE 21 FEDERAL EXCISE TAX AND OTHER TAXES	20
ARTICLE 22 ACCESS TO RECORDS	21
ARTICLE 23 INSOLVENCY	22
ARTICLE 24 ARBITRATION	23
ARTICLE 25 SERVICE OF SUIT	26
ARTICLE 26 CONFIDENTIALITY	27
ARTICLE 27 PRIVACY	28
ARTICLE 28 LATE PAYMENTS	29
ARTICLE 29 RESERVES	30
ARTICLE 30 MODE OF EXECUTION	33
ARTICLE 31 VARIOUS OTHER TERMS	33
ARTICLE 32 INTERMEDIARY	36

2.

ATTACHMENTS

NUCLEAR INCIDENT EXCLUSION CLAUSE — LIABILITY — REINSURANCE U.S.A.
(BRMA 35A)
EXHIBIT I — CASUALTY FIRST EXCESS OF LOSS REINSURANCE
EXHIBIT II — CASUALTY SECOND EXCESS OF LOSS REINSURANCE

1.

PENN MILLERS INSURANCE COMPANY

AMERICAN MILLERS INSURANCE COMPANY

CASUALTY EXCESS OF LOSS REINSURANCE CONTRACT

EFFECTIVE JANUARY 1, 2009

ARTICLE 1

BUSINESS COVERED

A. This Contract applies to all Loss Occurrences that occur with a date of loss during the term of this Contract and arising from those Policies, except as hereinafter excluded, classified by the Company as Casualty, that are in force at the inception of, and written with a Policy period (new or renewal) effective during the term of this Contract (“Business Covered”).

B. For the purpose of this Contract, the term “Casualty Policies” shall mean the Company’s Policies covering General Liability (including Products), Automobile Liability (including Medical Payments, Uninsured Motorists and Underinsured Motorists, and statutory liability arising under Policies providing coverage in accordance with the law of states taking jurisdiction over losses), Workers’ Compensation (including Employers’ Liability, Common Law Liability and Occupational Disease) Directors, Officers and Managers Liability/Directors and Officers Indemnity Business, Errors and Omissions, Crime, and Surety including Seedman Bonds, Employee Benefits Liability (covered on a claims-made basis) and the liability portion of Commercial Multi-Peril Policies.

C. The term “Policies”, whenever used herein, shall mean all binders, policies, contracts, certificates and other obligations, whether oral or written, of insurance or reinsurance that are Business Covered.

D. The reinsurance of all Business Covered hereunder shall be subject in all respects to the same risks, terms, clauses, conditions, interpretations, alterations, modifications, cancellations and waivers as the respective insurances (or reinsurances) of the Company’s Policies and the Reinsurer shall pay losses as may be paid thereon, subject to the liability of the Company and the terms and conditions of this Contract.

ARTICLE 2

COMMENCEMENT AND TERMINATION

A. This Contract shall incept at 12:01 a.m., Eastern Standard Time, January 1, 2009, and shall remain in force until 12:01 a.m., Eastern Standard Time, January 1, 2010.

2.

B. Should this Contract terminate while a Loss Occurrence is in progress, Reinsurers shall remain liable for all losses resulting from such Loss Occurrence as if the entire loss had occurred during the term of this Contract.

ARTICLE 3

SPECIAL TERMINATION

A. The Company or the Reinsurer may terminate, or commute obligations arising under this Contract in accordance with Paragraph C. below, upon the happening of any one of the following circumstances at any time by the giving of thirty (30) days prior written notice to the other party:

1. A party ceases active underwriting operations or a State Insurance Department or other legal authority orders the Reinsurer to cease writing business in all jurisdictions; or

2. The Reinsurer has filed a plan to enter into a Scheme of Arrangement or similar procedure. “Scheme of Arrangement” is defined as a legislative or regulatory process that provides a solvent Reinsurer the opportunity to settle its obligations with the Company either (i) without the Company’s consent or (ii) prior to the Company having the ability to determine, with exact certainty, the actual amount of the obligations still outstanding and ultimately due to the Company; or

3. A party has: a) become insolvent, b) been placed under supervision (voluntarily or involuntarily), c) been placed into liquidation or receivership, or d) had instituted against it proceedings for the appointment of a supervisor, receiver, liquidator, rehabilitator, conservator or trustee in bankruptcy, or other agent known by whatever name, to take possession of its assets or control of its operations; or

4. A reduction in the Reinsurer’s surplus, risk based capital or financial strength rating occurs:

a. As respects Reinsurers domiciled in the United States of America, (i) the Reinsurer’s policyholders’ surplus (“PHS”) has been reduced by, whichever is greater, thirty percent (30%) of the amount of PHS at the inception of this Contract or thirty percent (30%) of the amount of PHS stated in its last filed quarterly or annual statutory statement with its state of domicile; or (ii) the Reinsurer’s total adjusted capital is less than two hundred percent (200%) of its authorized control level risk-based capital; or (iii) the Reinsurer’s AM Best’s insurer financial strength rating becomes less than
“A-”.

b. As respects Reinsurers domiciled outside the United States of America, other than Lloyd’s Syndicates (i) the Reinsurer’s Capital & Surplus

3.

(“C&S”) has been involuntarily reduced by, whichever is greater, thirty percent (30%) of the published currency amount of C&S at the inception of this Contract or thirty percent (30%) of the published currency amount of C&S stated in its last filed financial statement with its local regulatory authority; or (ii) as respects Lloyd’s Syndicates, the Reinsurer’s total stamp capacity has been reduced by more than thirty percent (30%) of the amount of total stamp capacity which stood at the inception of this Contract. (This provision does not apply to any Lloyd’s Syndicate that voluntarily reduces its total stamp capacity.) or (iii) the Reinsurer’s AM Best’s insurer financial strength rating becomes less than “A-” or the Reinsurer’s Standard & Poor’s Insurance Rating becomes less than “BBB”; or

5. A party has entered into a definitive agreement to (a) become merged with, acquired or controlled by any company, corporation or individual(s) not controlling or affiliated with the party’s operations previously; or (b) directly or indirectly assign all or essentially all of its entire liability for obligations under this Contract to another party without the other party’s prior written consent; or

6. There is either:

a. a severance or obstruction of free and unfettered communication and/or normal commercial or financial intercourse between the United States of America and the country in which the Reinsurer is incorporated or has its principal office as a result of war, currency regulations or any circumstances arising out of political, financial or economic uncertainty; or

b. a severance (of any kind) of any two (2) or more of the following executives of the Reinsurer from active employment of the Reinsurer during the most recent forty five (45) day period: chief underwriting officer, chief actuary, chief executive officer or chief financial officer. This condition does not apply whenever the severance in employment is for the publicly announced purpose of the individual’s assuming within thirty (30) days a known position with another identified firm in the (re)insurance industry or related field.

B. In the event the Company elects termination, the Company shall with the notice of termination specify that termination will be on a Run-Off basis or a Cut-Off basis. In the event that the Company elects to Cut-Off and thus relieve the Reinsurer for losses occurring subsequent to the Reinsurer’s specified termination date, the Reinsurer shall within thirty (30) days of the termination date return the liability for the unearned portion of any ceded premium paid hereunder, calculated as of the termination date, and cash in that amount (less any applicable ceding commission allowed thereon) and the minimum premium provisions, if any, shall be waived. If the Company elects “Run-Off”, the Reinsurer shall remain liable to the Company under this Contract with respect to losses arising from Policies placed into effect and ceded hereunder with effective dates (new or renewal Policy

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period) prior to the termination date until those policies naturally expire, are cancelled or non-renewed or their next annual anniversary, provided such period shall not exceed eighteen (18) months from the date of termination elected under this Article.

C. If both parties agree to commute, then within sixty (60) days after such agreement, the Company shall submit a statement of valuation of the total of the net present value (“capitalized”) of the ceded (1) Net Loss Reserves, (2) Loss Adjustment Expense Reserves, and (3) unearned premium reserve, after deduction for any ceding commission allowed thereon, (the “Valuation Statement”). If agreement cannot be reached, the effort can be abandoned or alternately the Company and the Reinsurers may mutually appoint an actuary or appraiser to investigate, determine the capitalized value of the reserves to be returned to the Company. Such actuary shall be an independent and neutral actuary, Casualty Actuarial Society, experienced in such matters and the mutually agreed actuary shall render a decision. In the event that the Company and the Reinsurer are unable to agree upon a single actuary within thirty (30) days, the parties shall ask the then current President of the Casualty Actuarial Society to appoint an actuary with those qualifications within another thirty (30) days. The decision of the actuary will be final and binding on both parties. The Company and the Reinsurer shall share equally the fees and expenses of the actuary. Upon payment of the amount so agreed or determined by the actuary to the Company, the Reinsurer and the Company shall each be completely released from all liability to each other under this Contract.

ARTICLE 4

EXCLUSIONS

	This Contract shall not cover:
A.	1. Reinsurance treaty business, including pro rata and excess of loss, assumed by the Company, but not to include business from affiliated companies;

2. Business written on a co-indemnity basis not controlled by the Company;

3. Loss or liability excluded by the provisions of the “Nuclear Incident Exclusion Clause - Liability — Reinsurance (BRMA 35A)” attached to and forming part of this Contract;

4. Liability assumed by the Company as a member of a Syndicate, Pool or Underwriting Association; however, this does not apply to participation in assigned risk plans;

5. Any liability of the Company arising by contract, operation of law, or otherwise, from its participation or membership, whether voluntary or involuntary, in any insolvency fund. “Insolvency Fund” includes any guaranty fund, insolvency fund, plan, pool, association, fund or other arrangement, howsoever denominated,

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established or governed, which provides for any assessment of or payment of assumption by the Company of part or all of any claim, debt, charge, fee, or other obligation of an insurer, or its successors or assigns, which has been declared by any competent authority to be insolvent, or which is otherwise deemed unable to meet any claim, debt, charge, fee or other obligation in whole or in part;

6. Financial Guarantee and Insolvency;

7. Loss resulting from an act of Certified or Non-Certified Terrorism, as defined in the Article entitled DEFINITION OF TERRORISM of this Contract, that involves the use, release, or escape of nuclear materials, or directly or indirectly results in nuclear reaction or radiation or radioactive contamination; or that is carried out by means of the dispersal or application of pathogenic or poisonous biological or chemical materials that are released;

8. Regarding interests which at time of loss or damage are on shore, any loss or damage which is occasioned by war, invasion, hostilities, acts of foreign enemies, civil war, rebellion, insurrection, military or usurped power, or martial law or confiscation by order of any government or public authority.

     This War Exclusion Clause shall not however, apply to interests which at time of loss or damage are within the territorial limits of the United States of America (comprising the fifty states of the Union and the District of Columbia and including Bridges between the U.S.A. and Mexico, provided they are under United States ownership), Canada, St. Pierre and Miquelon, provided such interests are insured under Policies, endorsements, or binders containing a standard war or hostilities or warlike operations exclusion clause.

9. Umbrella Liability;

10. Public Utilities;

11. Pharmaceutical and Medical Device Manufacturers.

12. Operation, navigation, or handling of ships, or vessels owned by the Insured other than:

a. Yachts, small pleasure crafts, sports fishing vessels, and

b. Vessels operating exclusively in inland and/or coastal waters where legal liability on such vessels is incidental to the coverage provided either under general liability Policy or under a comprehensive form of Policy.

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13. Ownership, maintenance or use of aircraft and aircraft flight operations, but this exclusion does not apply to Workers’ Compensation/Employers’ Liability coverage;

14. Repair, cleaning or demolition of any vessel or barge used as petroleum tanker;

15. Loss or liability excluded by the Standard Pollution Exclusion(s) promulgated by the Insured Services Office for both Commercial General Liability and Commercial Automobile Liability Policies;

Notwithstanding the above, the Reinsurers agree that this exclusion shall not apply to original Policies written in any state where the Standard ISO Pollution Exclusion(s) have not been approved or are not permitted to be included in or attached to original Policies.

Further, the Reinsurers agree that this exclusion shall not apply in any case where the Company has attached the Standard ISO Pollution Exclusion(s) to an original Policy but has sustained a Loss as a result of that exclusion being deemed invalid or inapplicable by a court of law.

Notwithstanding all of the foregoing, Reinsurers agree that this exclusion does not apply to environmental restoration coverage provided under an MCS-90 Endorsement attached to a commercial automobile Policy written in accordance with the Motor Carrier Act of 1980.

Furthermore, Reinsurers agree that this exclusion does not apply to over spraying of anhydrous ammonia, fertilizers and agricultural chemicals, nor shall this exclusion apply to operations involving anhydrous ammonia, liquefied petroleum gas (LPG), or propane (including the transportation thereof) where the Company has attached the Solutions 2000 Liability PMAG-16 (01 05) Pollution Exclusion Amendment to an original Policy. Furthermore, this exclusion does not apply to pollutants from mobile equipment where the Company has attached the Solutions 2000 Liability PMAG-16 (01 05) Pollution Exclusion Amendment to an original Policy.

Furthermore, Reinsurers agree that this exclusion does not apply to operations meeting all standards of any statute, ordinance, regulation or license requirement of any federal, state or local government which apply to those operations, where the Company has attached the Solutions 2000 Liability PMAG — 04 (07 98) “Pesticide or Fertilizer Applicator Amended Exclusions with Amendment of Limits of Insurance” to an original policy. Furthermore, this exclusion does not apply to fields on which the insured, or any contractor or subcontractor working on the behalf of the insured, is performing operations, where the company has attached the Solutions 2000 Liability PMAG — 04 (07 98) “Pesticide or Fertilizer Applicator Amended Exclusions with Amendment of Limits of Insurance” to an original Policy.

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16. Manufacture, handling, transit or use of explosives; unless incidental to routine Agriculture operation;

17. Manufacture of liquid petroleum gas or petroleum;

18. Buses other than buses used to transport employees of the Insured or property;

19. Loss or liability, whether direct or indirect, arising from the hazard of asbestos including the manufacturing, mining, storage, distribution, transportation, fabrication, installation or removal of asbestos or products containing asbestos;

20. All mining operations;

21. Products guarantee and/or recall and/or integrity impairment when written as such;

22. Blasting;

23. Nursing Homes;

24. All Workers’ Compensation business classified by the Company as Employee Leasing Corporations, Professional Employment Organizations (PEO’s), Temporary Agencies, Police, Firefighters and EMT Workers, whether professional or volunteer;

25. Policies issued as excess coverage, other than insurance or over a self-insured retention;

26. Manufacturing of fireworks, fuses, nitroglycerine, celluloid and pyroxylin;

27. Concerns when engaged in the demolition of buildings more than three (3) stories in height;

28. Operation of animal shows, riding academies, circuses, carnivals, amusement parks or amusement devices;

29. Municipalities, when written as such, but this exclusion does not apply as respects:

a.	School districts;
b.	Municipally-owned buildings or properties;
c.	Municipalities named as an additional Insured;

30. Auto Liability;

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a. As a taxicab, public livery or bus;

b. Public emergency vehicles such as fire trucks or police cars;

c. Ambulances;

d. Rent-a-car and leasing operations;

e. Vehicles carrying passengers for hire or reward;

f. Automobiles used in organized speed contests including but not limited to racing, rallies, and speed trials;

g. As a long haul public freight carrier or common carrier, except for incidental hauling of goods of others;

     However, if any risks falling within the scope of the above exclusions are assigned to the Company under an Assigned Risk Plan, the coverage afforded by this Contract shall apply to such risks, but only for the Policy limits prescribed by said Automobile Assigned Risk Plan;

31. Products Liability:

a. The manufacture, sale or retail or wholesale distribution of aircraft, aircraft parts;

b. The manufacture of extracts drugs, medicines, cosmetics or hair, scalp or skin preparations;

c. The manufacture of automobiles, buses, trucks and trailers, recreational vehicles, motorcycles or the manufacture of components critical to vehicle safety;

d. Products liability written without an annual aggregate limit;

32. Malpractice or Professional Liability, except:

a.	Druggists’ Liability;
b.	Printers’ Liability;
c.	Barbers’ and Beauticians’ Liability (including nail salons);
d.	Agricultural Consultants’ Liability;
e.	Funeral Directors’ or Morticians’ Professional Liability;
f.	Pastoral Professional Liability written in conjunction with a liability risk;
g.	Incidental malpractice written in conjunction with a liability risk;
h.	Opticians;
i.	Hearing Aid Providers
j.	Florists.

33. Mold Exclusion – attached, applicable to Exhibit II only;

34. Bridge Construction—when over three stories, over navigable waters, or over one hundred (100) feet in length;

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35. Construction or maintenance of tunnels or subways more than fifty (50) feet in length, dams, levees, cofferdams (except dams and levees constructed on farm premises which are incidental to farm operations), or with respect to business classified as commercial business, towers over two (2) stories high;

36. Elevator construction and installation, except construction or installation of Grain Elevator facilities or related equipment;

37. Occupational Accident when written as such.

38. Applies to Workers’ Compensation, and not Commercial General Liability Coverage:

     Risks having maritime exposures or exposures including but not limited to:

a. Risks subject to the U.S. Longshoremen’s and Harborworker’s Act (except incidental which is defined as less than ten percent (10%) of Workers Compensation Policy premium);

b. Operation of docks, quays, wharves, or drydocks;

c. Operations subject to Jones Act;

d. Operations subject to the Outer Continental Shelf Act work.

39. Roofing Contractors;

40. Scaffolding installations (except residential and commercial up to three (3) stories);

41. Tower, steeple, chimney, or shaft construction and work.

B. If any business falling within the scope of one or more of the exclusions is assigned to the Company under an Assigned Risk Plan, such exclusion(s) shall not apply to the portion of the limits of liability prescribed by the Assigned Risk Plan which come within the Company’s retention and limits of liability of the Reinsurer.

C. If without the knowledge and contrary to the instructions of its supervisory underwriting personnel, insurance coverages are provided involving one or more of the above exclusions, except A(1), A(2), A(3), A(4), A(5), A(6), A(7), A(8), A(11), A(15), A(16), A(19), A(24), and A(25) either by an inadvertent acceptance or by an existing insured extending its operations, the reinsurance coverage provided hereunder shall apply from inception and for a period of thirty (30) days or longer if required by law, but not to exceed the lesser of eighteen (18) months or Policy anniversary, after said supervisory underwriting personnel receives knowledge thereof and promptly notifies the Reinsurers upon discovery.

D. Any exclusion listed above other than exclusions A(1), A(2), A(3), A(4), A(5), A(6), A(7), A(8), A(11), A(15), A(16), A(19), A(24), and A(25), shall be automatically waived as

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respects a Policy issued by the Company on a risk with respect to which only a minor or incidental part of the operations covered involves the exclusion. An incidental part of an insured’s regular operations shall mean not greater than ten percent (10%) of the insured’s regular operations.

E. Notwithstanding the exclusions set forth in the above paragraphs, the Reinsurers may grant a Special Acceptance on a risk or operation excluded above or waive the application or the exclusion to a specific insured for the term of the Policy covered, after receiving an oral or written request from the Company.

ARTICLE 5

WARRANTY

     For the purposes of this Contract, the Company warrants that the maximum Policy limits are as follows:

Commercial General Liability

Two million dollars ($2,000,000) each Loss Occurrence or so deemed.
Four million dollars ($4,000,000) Products-Completed Operation Aggregate Limit or so deemed.

Business Automobile Liability

One million dollars ($1,000,000) Combined Single Limit or so deemed.

Directors, Officers and Managers Liability
Directors and Officers Indemnity

One million dollars ($1,000,000)/one million dollars ($1,000,000)/one million dollars ($1,000,000) or so deemed.

Workers’ Compensation and Employers’ Liability

     For the purpose of determining the amount of loss sustained by the Company for accidents under Workers’ Compensation and Employers’ Liability, it is deemed that the amount of loss applicable to any one employee under this Contract shall not exceed seven million five hundred thousand dollars ($7,500,000).

ARTICLE 6

GENERAL CONDITIONS

     For the purposes of this Contract, the following general conditions shall apply:

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- As respects Occupational Disease, retention and limit applies to each employee.

- Recoveries from the Minnesota Workers’ Compensation Reinsurance Association shall inure to the benefit of Reinsurers hereunder.

- Employee Benefits Liability and Directors, Officers and Managers business covered on a claims-made basis.

ARTICLE 7

RETENTION AND LIMIT

     See Exhibits I and II attached to and forming part of this Contract.

ARTICLE 8

DEFINITION OF TERRORISM

A. An “Act of Terrorism” shall mean any act, including both Certified Acts of Terrorism in accordance with the Terrorism Risk Insurance Act of 2002, the Terrorism Risk Insurance Extension Act of 2005 and the Terrorism Risk Insurance Program Reauthorization Act of 2007 (“TRIPRA”) and any subsequent extension and those not so certified, or preparation in respect of action, or threat of action designed to influence the government de jure or de facto of any nation or any political division thereof, or in pursuit of any political, religious, ideological, or similar purpose to intimidate the public or a section of the public of any nation by any person or group(s) of persons whether acting alone or on behalf of or in connection with any organization(s) or government(s) de jure or de facto, and which:

1. involves violence against one or more persons; or

2. involves damage to property; or

3. endangers life other than that of the person committing the action; or

4. creates a risk to health or safety of the public or a section of the public; or

5. is designed to interfere with or to disrupt an electronic system; or

6. involves loss, damage, cost, or expense directly or indirectly caused by, contributed to by, resulting from, or arising out of or in connection with any action in controlling, preventing, suppressing, retaliating against, or responding to any Act of Terrorism.

B. Loss or damage occasioned by riot, strikes, civil commotion, vandalism or malicious mischief as those terms have been interpreted by United States Courts to apply to insurance Policies shall not be construed to be an “Act of Terrorism”.

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ARTICLE 9

REINSTATEMENT

     See Exhibits I and II attached to and forming part of this Contract.

ARTICLE 10

PREMIUM

     See Exhibits I and II attached to and forming part of this Contract.

ARTICLE 11

DEFINITION OF LOSS OCCURRENCE

A. Except as otherwise provided herein, the term “Loss Occurrence” or “Occurrence” means an accident, incident, disaster, casualty, error, omission, wrongful act or happening, or series of accidents, incidents, disasters, casualties, errors, omissions, wrongful acts or happenings arising out of or following on one event. Except where specifically provided otherwise in this Contract, each Loss Occurrence shall be deemed to take place in its entirety as of the earliest date of loss as determined by any Policy responding to the Loss Occurrence. Any claims-made under an extended reporting period endorsement or any other extended reporting and/or discovery period shall for the purposes of this Contract be considered to be made on the last day of the Policy period immediately preceding the extended reporting and/or discovery period.

B. If only one Policy is involved in a Loss Occurrence, then the date of Loss shall be as determined under that Policy. However, for the purpose of this Contract when claims-made and/or losses discovered and/or Occurrence and/or accident Policies are involved in the same Loss Occurrence with other claims-made and/or losses discovered and/or Occurrence and/or accident Policies, the date of Loss for the Loss Occurrence shall be determined as follows:

1. If an Occurrence or accident Policy is identified as being involved, then the date of “Loss” shall be the date as determined under the Occurrence or accident Policy; or

2. If no Occurrence or accident Policy is identified as being involved, then the date of the “Loss Occurrence” shall be the date the first claim is made or discovered under a claims-made or losses discovered Policy. If the first claim from a Loss Occurrence is made under an extended reporting period endorsement, the date of Loss for the Loss Occurrence shall be the date the first claim is made. If after ten (10) years from the expiration date of this Contract, the Company identifies an

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Occurrence Policy, the date of Loss for all claims-made and losses discovered Policies shall remain as first established.

C. Continuous or Repeated Injurious Exposure. As respects liability (bodily injury and property damage) other than Automobile and Products, and at the option of the Company, the term “Loss Occurrence” as used in this Contract shall also mean the sum of all damages for bodily injury and property damage sustained by each insured during a Policy period arising out of a continuous or repeated injurious exposure to substantially the same general conditions. For purposes of this definition, the date of Loss shall be deemed to be the inception or renewal date of the Policy to which payment of the Loss is charged.

D. Products. As respects Products liability, and at the option of the Company, the term “Loss Occurrence” as used in this Contract shall also mean the sum of all damages for bodily injury and property damage sustained by each insured during a Policy period arising out of the use of the same kind of product made or produced by the same manufacturer or producer. For purposes of this definition, the date of Loss shall be deemed to be the inception or renewal date of the Policy to which payment of the Loss is charged.

E. Occupational Disease or Cumulative Injury. An Occupational Disease or cumulative injury suffered by an employee shall also be deemed to be a “Loss Occurrence” within the meaning of this Contract, and each case of an employee contracting such disease or cumulative injury shall be considered as constituting a separate and distinct occurrence.

F. The date of Loss on which the Company has sustained an occupational disease or cumulative injury Loss, as respects each employee, shall be deemed to be the date of Loss under the original Policy as determined by the Company.

G. As respects two (2) or more occupational disease losses of one specific kind or class or cumulative injury losses of one specific kind or class suffered by one or more employees of one insured during the same Policy period, the date of any Loss Occurrence shall be deemed to be the inception, anniversary or renewal date of the Policy under which such Loss or losses are covered (or if such losses arise under two (2) or more Policies, the inception, anniversary or renewal date of the Policy chosen by the Company).

H. “Occupational Disease” shall mean any bodily injury (including resulting death) or disease suffered by an employee which fulfills all of the following conditions:

1. It is not traceable to a definite compensable accident occurring during the employee’s present or past employment;

2. It is not traceable to an event of twenty four (24) hours or less in duration;

3. It has been caused by exposure to conditions present in the workers’ occupational environment;

4. It has resulted in a disability or death.

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I. “Cumulative Injury” means any bodily injury (including resulting death) or disease suffered by an employee which fulfills all of the following conditions:

1. It is not traceable to a definite compensable accident occurring during the employee’s present or past employment;

2. It is not traceable to an event of twenty four (24) hours or less in duration;

3. It has occurred from, and has been aggravated by, a repetitive employment-related activity.

J. “Loss” means the amount of Loss or liability paid by the Company to or on behalf of its policyholder under the Policies.

K. For purposes of this Contract, the term “Policy Period” shall mean a separate Policy period of twelve (12) months or less commencing at the inception, anniversary or renewal date of a Policy.

ARTICLE 12

NET LOSS

A. The term “Net Loss” shall mean the actual Loss sustained by the Company from Business Covered hereunder including (i) sums paid in settlement of claims and suits and in satisfaction of judgments, (ii) prejudgment interest when added to a judgment, (iii) ninety percent (90%) of any Extra-Contractual Obligations (iv) ninety percent (90%) of any Losses Excess of Policy Limits, and (v) any interest on judgments other than prejudgment interest when added to a judgment. In the event that the Company’s original Policies and/or specific coverage parts of their original Policies are issued on a cost inclusive basis, such loss adjustment expenses shall be included within the Company’s Net Loss for the purposes of recovery hereunder.

B. All salvages, recoveries, payments and reversals or reductions of verdicts or judgments whether recovered, received or obtained prior or subsequent to loss settlement under this Contract, including amounts recoverable under other reinsurance whether collected or not, shall be applied as if recovered, received or obtained prior to the aforesaid settlement and shall be deducted from the actual losses sustained to arrive at the amount of the Net Loss. Nothing in this Article shall be construed to mean losses are not recoverable until the Net Loss to the Company finally has been ascertained.

C. All Loss Adjustment Expenses paid by the Company as a result of Net Losses covered hereunder shall be divided between the Company and the Reinsurers, without regard to the limit of this Contract, in proportion to their share of the Net Loss. “Loss Adjustment Expenses” shall mean and include but not be limited to: (i) expenses sustained in connection with adjustment, defense, settlement and litigation of claims and suits, satisfaction of judgments, resistance to or negotiations concerning a Loss (which shall include the expenses and the pro rata share of the salaries of the Company’s field

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employees according to the time occupied in adjusting such Loss and the expenses of the Company’s employees while diverted from their normal duties to the service of field adjustment but shall not include any salaries of officers or normal overhead expenses of the Company), (ii) legal expenses and costs incurred in connection with coverage questions regarding specific claims and legal actions, including Declaratory Judgment Expenses, connected thereto, (iii) all interest on judgments other than prejudgment interest when added to a judgment except when included in Net Loss, and (iv) expenses sustained to obtain recoveries, salvages or other reimbursements, or to secure the reverse or reduction of a verdict or judgment.

D. Notwithstanding the preceding Paragraph C., Loss Adjustment Expenses as defined are covered on a pro rata basis with the exception of Directors, Officers and Managers business, as classified by the Company as such, where Loss Adjustment Expenses will be included as part of the Net Loss, subject to a limit of the original Policy.

E. “Declaratory Judgment Expenses” as used in this Contract shall mean legal expenses paid by the Company in the investigation, analysis, evaluation, resolution or litigation of coverage issues between the Company and its insured(s), under Policies reinsured hereunder, for a specific Loss or losses tendered under such Policies, which Loss or losses are not excluded under this Contract.

F. In the event there are any recoveries, salvages, or reimbursements recovered subsequent to a loss settlement, or in the event a verdict or judgment is reversed or reduced, Loss Adjustment Expenses incurred in obtaining the recovery, salvage or reimbursement or in securing the reduction or reversal shall be divided between the Company and the Reinsurers in proportion to their share of the benefit therefrom, with the expenses incurred up to the time of the Loss settlement or the original verdict or judgment being divided in proportion to the share of the Company and the Reinsurers in the original Loss settlement or verdict or judgment.

ARTICLE 13

EXTRA-CONTRACTUAL OBLIGATIONS/LOSS EXCESS OF POLICY LIMITS

A. “Extra-Contractual Obligations” means those liabilities not covered under any other provision of this Contract, other than Loss Excess of Policy Limits, including but not limited to compensatory, consequential, punitive, or exemplary damages together with any legal costs and expenses incurred in connection therewith, paid as damages or in settlement by the Company arising from an allegation or claim of its insured, its insured’s assignee, or other third party, which alleges negligence, gross negligence, bad faith or other tortious conduct on the part of the Company in the handling, adjustment, rejection, defense or settlement of a claim under a Policy that is the Business Covered.

B. “Loss Excess of Policy Limits” means any amount of Loss, together with any legal costs and expenses incurred in connection therewith, paid as damages or in settlement by

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the Company in excess of its Policy Limits, but otherwise within the coverage terms of the Policy, arising from an allegation or claim of its insured, its insured’s assignee, or other third party, which alleges negligence, gross negligence, bad faith or other tortious conduct on the part of the Company in the handling of a claim under a Policy or bond that is the Business Covered, in rejecting a settlement within the Policy Limits, in discharging a duty to defend or prepare the defense in the trial of an action against its insured, or in discharging its duty to prepare or prosecute an appeal consequent upon such an action. For the avoidance of doubt, the decision by the Company to settle a claim for an amount within the coverage of the Policy but not within the Policy Limit when the Company has reasonable basis to believe that it may have legal liability to its insured or assignee or other third party on the claim will be deemed a Loss Excess of Policy Limits. The Company will provide Reinsurers an explanation relating to the Company’s motivation for settlement and use its best efforts to obtain the Reinsurers’ prior counsel and concurrence in the Company’s action. A reasonable basis shall mean it is more likely than not a trial would result in a verdict excess of the Policy Limits, in the opinion of counsel assigned to defend the insured or otherwise retained by the Company.

C. An Extra-Contractual Obligation or a Loss Excess of Policy Limits shall be deemed to have occurred on the same date as the Loss covered under the Company’s original Policy and shall be considered part of the original Loss (subject to other terms of this Contract.)

D. Neither an Extra-Contractual Obligation nor a Loss Excess of Policy Limits shall include a Loss incurred by the Company as the result of any fraudulent or criminal act directed against the Company by any officer or director of the Company acting individually or collectively or in collusion with any other organization or party involved in the presentation, defense, or settlement of any claim under this Contract.

E. Recoveries, whether collectible or not, including any retentions and/or deductibles, from any other form of insurance or reinsurance which protect the Company against any Loss or liability covered under this Article shall inure to the benefit of the Reinsurers and shall be deducted from the total amount of any Extra-Contractual Obligation and/or Loss Excess of Policy Limits in determining the amount of Extra-Contractual Obligation and/or Loss Excess of Policy Limits that shall be indemnified under this Article.

F. The Company shall be indemnified in accordance with this Article to the extent permitted by applicable law.

ARTICLE 14

TERRORISM RECOVERY

A. As respects the Insured Losses of the Company for each Program Year, to the extent the Company’s total reinsurance recoverables for Insured Losses, whether collected or not, when combined with the financial assistance available to the Company under the Act

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exceeds the aggregate amount of Insured Losses paid by the Company, less any other recoveries or reimbursements, (the “Excess Recovery”), a share of the Excess Recovery shall be allocated to the Company and the Reinsurer. The Company’s share of the Excess Recovery shall be deemed to be an amount equal to the proportion that the Company’s Insured Losses bear to the Insurer’s total Insured Losses for each Program Year. The Reinsurer’s share of the Excess Recovery shall be deemed to be an amount equal to the proportion that the Reinsurer’s payment of Insured Losses under this Contract bears to the Company’s total collected reinsurance recoverables for Insured Losses. The Company shall provide the Reinsurer with all necessary data respecting the transactions covered under this Article.

B. The method set forth herein for determining an Excess Recovery is intended to be consistent with the United States Treasury Department’s construction and application of Section 103 (g)(2) of the Act. To the extent it is inconsistent, it shall be amended to conform with such construction and application, nevertheless the Company shall be the sole judge as to the allocation of TRIA Recoveries to this or to other reinsurance Contracts.

C. “Act” as used herein shall mean the Terrorism Risk Insurance Act of 2002, the Terrorism Risk Insurance Extension Act of 2005 and the Terrorism Risk Insurance Program Reauthorization Act of 2007 (“TRIPRA”) and any subsequent amendment thereof or any regulations promulgated thereunder. “Company” shall have the same meaning as “Insurer” under the Act and “Insured Losses”, and “Program Year” shall follow the definitions as provided in the Act.

ARTICLE 15

NET RETAINED LINE

A. This Contract applies only to that portion of any insurance or reinsurance which the Company retains net for its own account and, in calculating the amount of any Loss hereunder and also in computing the amount or amounts in excess of which this Contract attaches, only Loss or losses in respect of that portion of any insurance or reinsurance which the Company retains net for its own account shall be included.

B. It is agreed, however, that the amount of the Reinsurers’ liability hereunder in respect of any Loss or losses shall not be increased by reason of the inability of the Company to collect from any other Reinsurers, whether specific or general, any amounts which may have become due from them, whether such inability arises from the insolvency of such other Reinsurers or otherwise.

C. Inter-company reinsurance among the companies collectively called the “Company” shall be entirely disregarded for all purposes of this Contract.

D. Permission is hereby granted the Company to carry (i) underlying reinsurance and (ii) layers of catastrophe reinsurance both below and above this layer of coverage and

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recoveries made on the latter shall be disregarded for all purposes of this Contract and shall inure to the sole benefit of the Company.

E. Recoveries from the Minnesota Workers’ Compensation Reinsurance Association shall inure to the benefit of Reinsurers hereunder.

ARTICLE 16

NOTICE OF LOSS AND LOSS SETTLEMENT

A. The Company shall advise the Reinsurers promptly of all losses which, in the opinion of the Company, may result in a claim hereunder and of all subsequent developments thereto which, in the opinion of the Company, may materially affect the position of the Reinsurers. Inadvertent omission or oversight in giving such notice shall in no way affect the liability of the Reinsurers. However, the Reinsurers shall be informed of such omission or oversight promptly upon its discovery.

B. Prompt notice shall be given to the Reinsurers by the Company on any Loss Occurrence wherein the Company’s reserve exceeds fifty percent (50%) of the Company’s Loss retention. In addition, the Company shall promptly advise the Reinsurer of all bodily injury losses involving the following major injuries:

1.	Fatality.
2.	Spinal Cord Injuries (quadriplegia, paraplegia).
3.	Brain Damage (seizure, coma or physical/mental impairment).
4.	Severe Burn Injuries resulting in Disfigurement or Scarring.
5.	Total or Partial Blindness in one or both Eyes.
6.	Amputation of a Limb or Multiple Fractures.
7.	Major Organ (such as heart, lungs).
8.	Permanent disability.
9.	Sexual molestation or abuse.

C. The Company shall have the right to settle all claims under its Policies. All Loss settlements made by the Company, whether under strict Policy conditions or by way of compromise, that are the Business Covered and that are not an Ex-gratia Settlement shall be final and binding subject to the liability of the Company and the terms and conditions of this Contract. The Reinsurer shall follow the liability of the Company (to the extent provided in this Contract) and shall pay or allow, as the case may be, its share of each such settlement in accordance with this Contract all amounts for which it is obligated as soon as possible, but not later than ten (10) business days, of being furnished by the Company with reasonable evidence of the amount due. Reasonable evidence of the amount due shall consist of a certification by the Company, accompanied by proof of Loss documentation the Company customarily presents with its claims payment requests, that the amount requested to be paid and submitted by the certification, is, upon information and belief, due and payable to the Company by the Reinsurers under the terms and conditions of this Contract.

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ARTICLE 17

COMMUTATION (As respects Workers’ Compensation Claims)

A. No later than eighty four (84) months following the termination of this Contract, the Company will submit a statement to the Reinsurers listing amounts paid, and reserves, in respect of the excess portion of all known Workers’ Compensation claims which occurred during the term of this Contract and which are not finally settled and are likely to result in claims under this Contract. This statement will form the basis of a final agreed present value for the excess portion of all such losses reinsured under this Contract should both parties mutually agree to commute the Workers’ Compensation coverage part of this Contract.

B. In determining the present value of said losses in excess of the retention, the Company will first calculate the undiscounted value excess of the retention, subject to the maximum amount of liability as provided in the Contract. The Company will then calculate the present value of that portion of the undiscounted Loss that exceeds the retention for those losses in accordance with generally accepted actuarial practices.

C. If, upon receipt of such statement from the Company, there is mutual agreement between the Company and the Reinsurers as to the present value of said losses, the Reinsurers will pay the agreed amount in excess of the retention and subject to the maximum amount of liability as provided in each layer of coverage provided within this Contract. In the absence of mutual agreement as to the present value of said losses, the sole remedy to resolve disputes involving the determination of the present value of said losses will be as follows.

D. The Reinsurers, or the Company, will request in writing that any difference be settled by a panel of three (3) actuaries, one to be chosen by each party and the third by the two (2) so chosen.

E. If either party refuses or neglects to appoint an actuary within thirty (30) days after the Reinsurers’ or Company’s request in writing that the differences be settled by a panel of three (3) actuaries, the other party will appoint two (2) actuaries. All the actuaries will be regularly engaged in the evaluation of Workers’ Compensation claims and will be Fellows of the Casualty Actuarial Society or of the American Academy of Actuaries. None of the actuaries will be under the control of either party to this Contract.

F. Each party will submit its case to the actuary within thirty (30) days of the appointment of the third actuary. The decision in writing of any two (2) actuaries, when filed with the parties hereto, will be final and binding on both parties. The expense of the actuaries and of the commutation will be equally divided between the two (2) parties. Said commutation will take place in Wilkes Barre, Pennsylvania, unless some other place is mutually agreed upon by the Company and the Reinsurers.

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G. The Reinsurers’ proportion of the amounts so determined will be considered the amount of Loss hereunder, and the payment thereof by the Reinsurers will constitute a complete release of the Reinsurers of their liability for such Loss or losses.

ARTICLE 18

ERRORS AND OMISSIONS

     Inadvertent delays, errors or omissions made by the Company in connection with this Contract shall not relieve the Reinsurer from any liability which would have attached had such error or omission not occurred, provided always that such error or omission shall be rectified as soon as possible, provided that the liability of the Reinsurer shall not extend beyond the coverage provided by this Contract nor to extend coverage to Policies that are not the Business Covered hereunder. This Article shall not apply to a sunset provision, if any in this Contract, nor to a commutation made in connection with this Contract.

ARTICLE 19

OFFSET

     The Company and the Reinsurer shall have the right to offset any balance or amounts due from one party to the other under the terms of this Contract. The party asserting the right of offset may exercise such right any time whether the balances due are on account of premiums or losses or otherwise and immediately inform the Intermediary accordingly. In the event of the insolvency of any party, offset shall be as permitted by applicable law.

ARTICLE 20

CURRENCY

A. Whenever the word “Dollars” or the “$” sign appears in this Contract, they shall be construed to mean United States Dollars and all transactions under this Contract shall be in United States Dollars.

B. Amounts paid or received by the Company in any other currency shall be converted to United States Dollars at the rate of exchange at the date such transaction is entered on the books of the Company.

ARTICLE 21

FEDERAL EXCISE TAX AND OTHER TAXES

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A. To the extent that any portion of the reinsurance premium for this Contract is subject to the Federal Excise Tax (as imposed under Section 4371 of the Internal Revenue Code) and the Reinsurer is not exempt therefrom, the Reinsurers shall allow for the purpose of paying the Federal Excise Tax, a deduction by the Company of the applicable percentage of the premium payable hereon. In the event of any return of premium becoming due hereunder, the Reinsurers shall deduct the applicable same percentage from the return premium payable hereon and the Company or its agent shall take steps to recover the tax from the United States Government. In the event of any uncertainty, upon the written request of the Company, the Reinsurer will immediately file a certificate signed by a senior corporate officer of the Reinsurer certifying to its entitlement to the exemption from the Federal Excise Tax with respect to one or more transactions.

B. In consideration of the terms under which this Contract is issued, the Company undertakes not to claim any deduction of the premium hereon when making Canadian Tax returns or when making tax returns, other than Income or Profits Tax returns, to any State or Territory of the United States of America or to the District of Columbia.

ARTICLE 22

ACCESS TO RECORDS

A. The Company shall place at the disposal of the Reinsurer at all reasonable times, and the Reinsurer shall have the right to inspect (and make reasonable copies) through its designated representatives during the term of this Contract and thereafter, all non-privileged books, records and papers of the Company directly related to any reinsurance hereunder, or the subject matter hereof, provided that if the Reinsurer has ceased active market operations, this right of access shall be subject to that Reinsurer being current in all payments owed the Company that are not currently the subject of a formal dispute (such as the initiation of an Arbitration or Mediation). For the purposes of this Article, “non-privileged” refers to books, records and papers that are not subject to the Attorney-client privilege and Attorney-work product doctrine.

B. “Attorney-client privilege” and “Attorney-work product” shall have the meanings ascribed to each by statute and/or the court of final adjudication in the jurisdiction whose laws govern the substantive law of a claim arising under a Policy reinsured under this Contract.

C. Notwithstanding anything to the contrary in this Contract, for any claim or Loss under a Policy reinsured under this Contract, should the Reinsurer assert, pursuant to the Common Interest Doctrine (“Doctrine”), that it has the right to examine any document that the Company alleges is subject to the Attorney-client privilege or the Attorney-work product privilege, upon the Reinsurer providing to the Company substantiation of any law which reasonably supports the basis for the Reinsurer’s conclusion that the Doctrine applies and the Doctrine will be upheld as applying between the Company and the Reinsurer as against third parties pursuant to the substantive law(s) which govern the claim or Loss, the

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Company shall give the Reinsurer access to such document.

D. Notwithstanding any other provision to the contrary, once a claim and all directly related claims are finally settled by the Company, the Reinsurer shall be entitled to review all reasonable and applicable claims records that support a Company request for payment of a claim hereunder for Net Loss for Business Covered hereunder. In the event that the Reinsurer shall have paid an amount for Net Loss to the Company and the records do not support the obligation of the Reinsurer to have paid the claim, the Company shall promptly return any payment made in error.

ARTICLE 23

INSOLVENCY

(This Article shall be deemed to read as required to meet the statutory insolvency clause requirements of the Company.)

A. In the event of insolvency or the appointment of a conservator, liquidator, or statutory successor of the Company, the portion of any risk or obligation assumed by the Reinsurer shall be payable to the conservator, liquidator, or statutory successor on the basis of claims allowed against the insolvent Company by any court of competent jurisdiction or by any conservator, liquidator, or statutory successor of the Company having authority to allow such claims, without diminution because of that insolvency, or because the conservator, liquidator, or statutory successor has failed to pay all or a portion of any claims.

B. Payments by the Reinsurer as above set forth shall be made directly to the Company or to its conservator, liquidator, or statutory successor, except where this Contract specifically provides another payee of such reinsurance or except as provided by applicable law and regulation (such as subsection (a) of section 4118 of the New York Insurance Laws) in the event of the insolvency of the Company.

C. In the event of the insolvency of the Company, the liquidator, receiver, conservator or statutory successor of the Company shall give written notice to the Reinsurer of the pendency of a claim against the insolvent Company on the Policy or Policies reinsured within a reasonable time after such claim is filed in the insolvency proceeding and during the pendency of such claim any Reinsurer may investigate such claim and interpose, at its own expense, in the proceeding where such claim is to be adjudicated any defense or defenses which it may deem available to the Company or its liquidator, receiver, conservator or statutory successor. The expense thus incurred by the Reinsurer shall be chargeable subject to court approval against the insolvent Company as part of the expense of liquidation to the extent of a proportionate share of the benefit which may accrue to the Company solely as a result of the defense undertaken by the Reinsurer.

D. Where two (2) or more Reinsurers are involved in the same claim and a majority in interest elect to interpose defense to such claim, the expense shall be apportioned in

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accordance with the terms of this Contract as though such expense had been incurred by the Company.

ARTICLE 24

ARBITRATION

A. Any and all disputes between the Company and the Reinsurer arising out of, relating to, or concerning this Contract, whether sounding in contract or tort and whether arising during or after termination of this Contract, shall be submitted to the decision of a Board of arbitration composed of two (2) arbitrators and an umpire (“Board”) meeting at a site in the city in which the principal headquarters of the Company are located. The arbitration shall be conducted under the Federal Arbitration Act and shall proceed as set forth below.

B. A notice requesting arbitration, or any other notice made in connection therewith, shall be in writing and be sent certified or registered mail, return receipt requested to the affected parties. The notice requesting arbitration shall state in particulars all issues to be resolved in the view of the claimant, shall appoint the arbitrator selected by the claimant and shall set a tentative date for the hearing, which date shall be no sooner than ninety (90) days and no later than one hundred fifty (150) days from the date that the notice requesting arbitration is mailed. Within thirty (30) days of receipt of claimant’s notice, the respondent shall notify claimant of any additional issues to be resolved in the arbitration and of the name of its appointed arbitrator.

C. The members of the Board shall be impartial, disinterested and not currently representing any party participating in the arbitration, and shall be current or former senior officers of insurance or reinsurance concerns, experienced in the line(s) of business that are the subject of this Contract. The Company and the Reinsurer as aforesaid shall each appoint an arbitrator and the two (2) arbitrators shall choose an umpire before instituting the hearing. As time is of the essence, if the respondent fails to appoint its arbitrator within thirty (30) days after having received claimant’s written request for arbitration, the claimant is authorized to and shall appoint the second arbitrator. If the two (2) arbitrators fail to agree upon the appointment of an umpire within thirty (30) days after notification of the appointment of the second arbitrator, within ten (10) days thereof, the two (2) arbitrators shall request ARIAS U.S. (“ARIAS”) to apply its procedures to appoint an umpire for the arbitration with the qualifications set forth above in this Article. If the use of ARIAS procedures fails to name an umpire, either party may apply to a court of competent jurisdiction to appoint an umpire with the above required qualifications. The umpire shall promptly notify in writing all parties to the arbitration of his selection and of the scheduled date for the hearing. Upon resignation or death of any member of the Board, a replacement shall be appointed in the same fashion as the resigning or deceased member was appointed.

D. The claimant and respondent shall each submit initial briefs to the Board outlining the facts, the issues in dispute and the basis, authority, and reasons for their respective

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positions within thirty (30) days of the date of notice of appointment of the umpire. The claimant and the respondent may submit a reply brief to the Board within ten (10) days after filing of the initial brief(s). Initial and reply briefs may be amended by the submitting party at any time, but not later than ten (10) days prior to the date of commencement of the arbitration hearing. Reasonable responses shall be allowed at the arbitration hearing to new material contained in any amendments filed to the briefs but not previously responded to.

E. The Board shall make a decision and award with regard to the terms expressed in this Contract, the original intentions of the parties to the extent reasonably ascertainable, and the custom and usage of the insurance and reinsurance business that is the subject of this Contract. Notwithstanding any other provision of this Contract, the Board shall have the right and obligation to consider Underwriting and submission-related documents in any dispute between the parties.

F. The Board shall be relieved of all judicial formalities and the decision and award shall be based upon a hearing in which evidence shall be allowed though the formal rules of evidence shall not strictly apply. Cross examination and rebuttal shall be allowed. The Board may request a post-hearing brief to be submitted within twenty (20) days of the close of the hearing.

G. The Board shall render its decision and award in writing within thirty (30) days following the close of the hearing or the submission of post-hearing briefs, whichever is later, unless the parties consent to an extension. Every decision by the Board shall be by a majority of the members of the Board and each decision and award by the majority of the members of the Board shall be final and binding upon all parties to the proceeding. Such decision shall be a condition precedent to any right of legal action arising out of the arbitrated dispute which either party may have against the other. However, the Board is not authorized to award punitive, exemplary or enhanced compensatory damages.

H. The Board may award (i) interest at a rate not in excess of that set forth in the Article entitled LATE PAYMENTS, calculated from the date the Board determines that any amounts due the prevailing party should have been paid to the prevailing party, and (ii) applicable Attorneys’ fees and costs.

I. Either party may apply to a court of competent jurisdiction for an order confirming any decision and the award; a judgment of that Court shall thereupon be entered on any decision or award. If such an order is issued, the Attorneys’ fees of the party so applying and court costs will be paid by the party against whom confirmation is sought.

J. Except in the event of a consolidated arbitration, each party shall bear the expense of the one arbitrator appointed by or for it and shall jointly and equally bear with the other party the expense of any stenographer requested, and of the umpire. The remaining costs of the arbitration proceedings shall be finally allocated by the Board.

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K. Subject to customary and recognized legal rules of privilege, each party participating in the arbitration shall have the obligation to produce those documents and as witnesses at the arbitration those of its employees, and those of its affiliates as any other participating party reasonably requests, providing always that the same witnesses and documents be obtainable and relevant to the issues before the arbitration and not be unduly burdensome or excessive in the opinion of the Board.

L. The parties may mutually agree as to pre-hearing discovery prior to the arbitration hearing and in the absence of agreement, upon the request of any party, pre-hearing discovery may be conducted as the Board shall determine in its sole discretion to be in the interest of fairness, full disclosure, and a prompt hearing, decision and award by the Board.

M. The Board shall be the final judge of the procedures of the Board, the conduct of the arbitration, of the rules of evidence, the rules of privilege, discovery and production and of excessiveness and relevancy of any witnesses and documents upon the petition of any participating party. To the extent permitted by law, the Board shall have the authority to issue subpoenas and other orders to enforce their decisions. The Board shall also have the authority to issue interim decisions or awards in the interest of fairness, full disclosure, and a prompt and orderly hearing and decision and award by the Board.

N. Upon request made to the Board not later than ten (10) days after the umpire’s appointment, the Board may order a consolidated hearing as respects common issues between the Company and all affected Reinsurers participating in this Contract if the Board is satisfied in its discretion that the issues in dispute affect more than one Reinsurer and a consolidated hearing would be in the interest of fairness, and a prompt and cost effective resolution of the issues in dispute.

O. If the parties mutually agree to or the Board orders a consolidated hearing, all other affected participating Reinsurers shall join and participate in the arbitration under time frames established by the Board and will be bound by the Board’s decision and award unless excused by the Board in its discretion. A consolidated hearing shall not result in any change or modification of any Reinsurer’s liability for its participation, that is several, but not joint shall remain the same.

P. Any Reinsurer may decline to actively participate in a consolidated arbitration if in advance of the hearing, that Reinsurer shall file with the Board a written agreement in form satisfactory to the Board to be bound by the decision and award of the Board in the same fashion and to the same degree as if it actively participated in the arbitration.

Q. In the event of an order of consolidation by the Board, the arbitrator appointed by the original Reinsurer shall be subject to being, and may be, replaced within thirty (30) days of the decision to have a consolidated arbitration by an arbitrator named collectively by the Reinsurers or in the absence of agreement, by the Lead Reinsurer, or if there is no Lead Reinsurer involved in the dispute, the Reinsurer with the largest participation in this Contract affected by the dispute. In the event two (2) or more Reinsurers affected by the dispute

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each have the same largest participation, they shall agree among themselves as to the replacement arbitrator, if any, to be appointed. The umpire shall be the final determiner in the event of any dispute over replacement of that arbitrator. All other aspects of the arbitration shall be conducted as provided for in this Article provided that (1) each party actively participating in the consolidated arbitration will have the right to its own attorney, position, and related claims and defenses; (2) each party will not, in presenting its position, be prevented from presenting its position by the position set forth by any other party; and (3) the cost and expense of the arbitration, exclusive of Attorneys’ fees (which will be borne exclusively by the respective retaining party unless otherwise determined by the Board) but including the expense of any stenographer which shall be borne by each party actively participating in the consolidated arbitration or as the Board shall determine to be fair and appropriate under the circumstances.

ARTICLE 25

SERVICE OF SUIT

A. This Article only applies to a Reinsurer domiciled outside of the United States and/or unauthorized in any state, territory or district of the United States having jurisdiction over the Company. Furthermore, this Article will not be read to conflict with or override any obligations of the parties to arbitrate their disputes under this Contract. This Article is intended as an aid to compelling arbitration if called for by this Contract or enforcing any such arbitration or arbitral award, not as an alternative to any Arbitration provision in this Contract that is applicable for resolving disputes arising out of this Contract.

B. In the event of any dispute, the Reinsurer, at the request of the Company, shall submit to the jurisdiction of a court of competent jurisdiction within the United States. Nothing in this Article constitutes or should be understood to constitute a waiver of any obligation to arbitrate disputes arising from this Contract or the Reinsurer’s rights to commence an action in any court of competent jurisdiction in the United States, to remove an action to a United States District Court, or to seek a transfer of a case to another court as permitted by the laws of the United States or of any state in the United States.

C. The Reinsurer, once the appropriate court is selected, whether such court is the one originally chosen by the Company and accepted by the Reinsurer or is determined by removal, transfer, or otherwise, as provided above, will comply with all requirements necessary to give said court jurisdiction and, in any suit instituted against any of them upon this Contract, will abide by the final decision of such court or any Appellate Court in the event of an appeal.

D. Service of process in any such suit against the Reinsurer may be made upon Mendes and Mount, 750 Seventh Avenue, New York, New York 10019-6829, — or in substitution therefore, the Firm identified by the Reinsurer on the Reinsurer’s signature page to this Contract, — (“Firm”) and in any suit instituted, the Reinsurer shall abide by the final decision of such court or of any Appellate Court in the event of an appeal.

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E. The Firm is authorized and directed to accept service of process on behalf of the Reinsurer in any such suit and/or upon the request of the Company to give a written undertaking to the Company that they shall enter a general appearance upon the Reinsurer’s behalf in the event such a suit shall be instituted.

F. Further, as required by and pursuant to any statute of any state, territory or district of the United States which makes provision therefore, the Reinsurer hereby designates the Superintendent, Commissioner or Director of Insurance or other officer specified for that purpose in the statute, or his successor or successors in office, as their true and lawful Attorney upon whom may be served any lawful process in any action, suit or proceeding instituted by or on behalf of the Company or any beneficiary hereunder arising out of this Contract, and hereby designates the above-named as the person to whom the said officer is authorized to mail such process or a true copy thereof.

ARTICLE 26

CONFIDENTIALITY

A. The information, data, statements, representations and other materials provided by the Company or the Reinsurer to the other arising from consideration and participation in this Contract whether contained in the reinsurance submission, this Contract, or in materials or discussions arising from or related to this Contract, may contain confidential or proprietary information as expressly indicated by the disclosing party (“Disclosing Party”) in writing from time to time to the other party of the respective parties (“Confidential Information”). This Confidential Information is intended for the sole use of the parties to this Contract (and their affiliates involved in management or operation of assumed reinsurance business, retrocessionaires, prospective retrocessionaires, intermediaries involved in such placements, respective auditors and legal counsel) as may be necessary in analyzing and/or accepting a participation in and/or executing their respective responsibilities under or related to this Contract. Disclosing or using Confidential Information relating to this Contract, without the prior written consent of the Disclosing Party, for any purpose beyond (i) the scope of this Contract, (ii) the reasonable extent necessary to perform rights and responsibilities expressly provided for under this Contract, (iii) the reasonable extent necessary to administer, report to and effect recoveries from retrocessional Reinsurers, (iv) the reporting to regulatory or other governmental authorities as may be legally required or (v) persons with a need to know the information, (all of the preceding persons or entities who are legally obligated by either written agreement or otherwise to maintain the confidentiality of the Confidential Information) is expressly forbidden. Copying, duplicating, disclosing, or using Confidential Information for any purpose beyond this expressed purpose is forbidden without the prior written consent of the Disclosing Party.

B. Should a party (“Receiving Party”) receive a third party demand pursuant to subpoena, summons, or court or governmental order, to disclose Confidential Information that has been provided by another party to this Contract, the Receiving Party shall make

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commercially reasonable efforts to provide the Disclosing Party with written notice of any subpoena, summons, or court or governmental order, at least ten (10) days prior to such release or disclosure. Unless the Disclosing Party has given its prior permission to release or disclose the Confidential Information, the Receiving Party shall not comply with the subpoena prior to the actual date required by the subpoena. If a protective order or appropriate remedy is not obtained, the Receiving Party may disclose only that portion of the Confidential Information that it is legally obligated to disclose. However, notwithstanding anything to the contrary in this Contract, in no event, to the extent permitted by law, shall this Article require the Receiving Party not to comply with the subpoena, summons, or court or governmental order.

ARTICLE 27

PRIVACY

A. Privacy Awareness. The Company and the Reinsurer are aware of and in compliance with their responsibilities and obligations under:

1. The Gramm-Leach-Bliley Act of 1999 (the “Act”) and applicable Federal and State laws and regulations implementing the Act. The Company and the Reinsurer will only use non-public personal information as permitted by law; and

2. The applicable provisions of the Health Insurance Portability and Accountability Act (“HIPAA”) and the related requirements of any regulations promulgated thereunder including without limitation the Federal Privacy Regulations as contained in 45 CFR Part 160 and 164 (the “Federal Privacy Regulations”). The Company and the Reinsurer will only use protected health information as permitted by law.

B. Non-Disclosure. To the extent required or prohibited by applicable law or regulation, the Reinsurer shall not disclose any (a) non-public personal information or (b) protected health information (as defined in 45 CFR 164.501) it receives from the Company to anyone other than:

1. The Reinsurer, the Reinsurer’s affiliates, legal counsel, auditors, consultants, regulators, rating agencies and any other persons or entities to whom such disclosure is required to effect, administer, or enforce a reinsurance contract; or any retrocessional reinsurance contract applicable to the losses that are the subject of this Contract, or

2. Persons or entities to whom disclosure is required by applicable law or regulation.

C. Non-Public Personal Information. “Non-Public Personal Information” shall for the purpose of this Contract mean financial or health information that personally identifies an

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individual, including claimants under Policies reinsured under this Contract, and which information is not otherwise available to the public.

ARTICLE 28

LATE PAYMENTS

A. Payments from the Reinsurer to the Company for coverage providing pro rata forms of reinsurance shall have a due date as expressed in the Article entitled NOTICE OF LOSS AND LOSS SETTLEMENTS. Payments from the Reinsurer to the Company for coverage providing excess of Loss reinsurance shall have as a due date the date on which the proof of Loss or demand for payment is received by the Reinsurer. Payment not received within sixty (60) days of the due date shall be deemed overdue (the “Overdue Date”). Payments due from the Reinsurer to the Company will not be considered overdue if the Reinsurer requests, in writing, that such payment be made by drawing on a letter of credit or other similar method of funding that has been established for this Contract, provided that there is an adequate balance in place, and further provided that such advice to draw is received by the Company within the sixty (60) day deadline set forth above. Payments from the Company to the Reinsurer will have a due date as the date specified in this Contract and will be overdue sixty (60) days thereafter. Premium adjustments will be overdue sixty (60) days from the Contract due date or one hundred twenty (120) days after the expiration or renewal date, whichever is greater.

B. In the event that this Contract provides excess of Loss reinsurance, the Company will provide the Reinsurer with a reasonable proof of Loss and a copy of the claim adjuster’s report(s) or any other reasonable evidence of indemnification. If subsequent to receipt of this evidence, the information contained therein is unreasonably insufficient or not in substantial accordance with the contractual conditions of this Contract, then the payment due date as specified above will be deemed to be the date upon which the Reinsurer received the additional information necessary to approve payment of the claim and the claim is presented in a reasonably acceptable manner. This paragraph is only for the purpose of establishing when a claim payment is overdue, and will not alter the provisions of the Article entitled NOTICE OF LOSS AND LOSS SETTLEMENTS or other pertinent contractual stipulations of this Contract.

C. If payment is made of overdue amounts within thirty (30) days of the Overdue Date, overdue amounts will bear simple interest from the Overdue Date at a rate determined by the annualized one month London Interbank Offered Rate for the first business day of the calendar month in which the amount becomes overdue, as published in The Wall Street Journal, plus two hundred (200) basis points to be calculated weekly. If payment is made of overdue amounts more than thirty (30) days after the Overdue Date, overdue amounts will bear simple interest from the overdue date at a rate determined by the annualized one month London Interbank Offered Rate for the first business day of the calendar month in which the amount becomes overdue, as published in The Wall Street Journal, plus four hundred (400) basis points to be calculated on a weekly basis, but in no event less than

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eight percent (8%) simple interest. If the sum of the compensating additional amount computed in respect of any overdue payment is less than one quarter of one percent (0.25%) of the amount overdue, or one thousand dollars ($1,000), whichever is greater, and/or the overdue period is one week or less, then the interest amount shall be waived. The basis point standards referred to above shall be doubled if the late payment is due from a Reinsurer who is no longer an active reinsurance market. Interest shall cease to accrue upon the party’s payment of an overdue amount to the Intermediary.

ARTICLE 29

RESERVES

A. If, at any time during the period of this Contract and thereafter the reinsurance provided by a Reinsurer participating in this Contract does not qualify for full statutory accounting credit for reinsurance by regulatory authorities having jurisdiction over the Company (whether by reason of lack of license, accreditation or otherwise) such that a financial penalty to the Company would result on any statutory statement or report the Company is required to make or file with insurance regulatory authorities (or a court of law in the event of insolvency), the Reinsurer shall secure the Reinsurer’s share of Obligations for which such full statutory credit is not granted by those authorities in a manner, form, and amount acceptable to the Company and to all applicable insurance regulatory authorities in accordance with this Article.

B. The Reinsurer shall secure such Obligations, within thirty (30) days after the receipt of the Company’s written request regarding the Reinsurer’s share of Obligations under this Contract (but not later than December 31) of each year by either:

1. Clean, irrevocable, and unconditional evergreen letter(s) of credit issued and confirmed, if confirmation is required by the applicable insurance regulatory authorities, by a qualified United States financial institution as defined under the Insurance Law of the Company’s domiciliary state and acceptable to the Company and to insurance regulatory authorities;

2. A trust account meeting at least the standards of New York’s Insurance Regulation 114 and the Insurance Law of the Company’s domiciliary state; or

3. Cash advances or funds withheld or a combination of both, which will be under the exclusive control of the Company (“Funds Deposit”).

C. The “Obligations” referred to herein means, subject to the preceding paragraphs, the then current (as of the end of each calendar quarter) sum of any:

1. amount of the ceded unearned premium reserve for which the Reinsurer is responsible to the Company;

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2. amount of Net Losses and Loss Adjustment Expenses and other amounts paid by the Company for which the Reinsurer is responsible to the Company but has not yet paid;

3. amount of ceded reserves for Net Losses and Loss Adjustment Expenses for which the Reinsurer is responsible to the Company;

4. amount of return and refund premiums paid by the Company for which the Reinsurer is responsible to the Company but has not yet paid.

D. The Company, or its successors in interest, may draw, at any time and from time to time, upon the:

1.	Established letter of credit (or subsequent cash deposit);
2.	Established trust account (or subsequent cash deposit); or
3.	Funds Deposit;

     without diminution or restriction because of the insolvency of either the Company or the Reinsurer for one or more of the following purposes set forth below.

E. Draws shall be made only for the following purposes:

1. To make payment to and reimburse the Company for the Reinsurer’s share of Net Loss and Loss Adjustment Expense and other amounts paid by the Company under its Policies and for which the Reinsurer is responsible under this Contract that is due to the Company but unpaid by the Reinsurer including but not limited to the Reinsurer’s share of premium refunds and returns; and

2. To obtain a cash advance of the entire amount of the remaining balance under any letter of credit in the event that the Company:

a. has received notice of non-renewal or expiration of the letter of credit or trust account;

b. has not received assurances satisfactory to the Company of any required increase in the amount of the letter of credit or trust account, or its replacement or other continuation of the letter of credit or trust account at least thirty (30) days before its stated expiration date;

c. has been made aware that others may attempt to attach or otherwise place in jeopardy the security represented by the letter of credit or trust account; or

32.

d. has concluded that the trustee or issuing (or confirming) bank’s financial condition is such that the value of the security represented by the letter of credit or trust account may be in jeopardy;

and under any of those circumstances where the Reinsurer’s entire Obligations, or part thereof, under this Contract remain unliquidated and undischarged at least thirty (30) days prior to the stated expiration date or at the time the Company learns of the possible jeopardy to the security represented by the letter of credit or trust account.

F. If the Company draws on the letter of credit or trust account to obtain a cash advance, the Company will hold the amount of the cash advance so obtained in the name of the Company in any qualified United States financial institution as defined under the Insurance Law of the Company’s domiciliary state in trust solely to secure the Obligations referred to above and for the use and purposes enumerated above and to return any balance thereof to the Reinsurer:

1. Upon the complete and final liquidation and discharge of all of the Reinsurer’s Obligations to the Company under this Contract; or

2. In the event the Reinsurer subsequently provides alternate or replacement security consistent with the terms hereof and acceptable to the Company.

G. The Company will prepare and forward at annual intervals or more frequently as determined by the Company, but not more frequently than quarterly to the Reinsurer a statement for the purposes of this Article, showing the Reinsurer’s share of Obligations as set forth above. If the Reinsurer’s share thereof exceeds the then existing balance of the security provided, the Reinsurer will, within fifteen (15) days of receipt of the Company’s statement, but never later than December 31 of any year, increase the amount of the letter of credit, (or subsequent cash deposit), trust account or Funds Deposit to the required amount of the Reinsurer’s share of Obligations set forth in the Company’s statement, but never later than December 31 of any year. If the Reinsurer’s share thereof is less than the then existing balance of the security provided, the Company will release the excess thereof to the Reinsurer upon the Reinsurer’s written request. The Reinsurer will not attempt to prevent the Company from holding the security provided or Funds Deposit so long as the Company is acting in accordance with this Article. The Company shall pay interest earned on the deposited amounts to the Reinsurers as the parties shall have agreed at the time of the deposit.

H. Any assets deposited to a trust account will be valued according to their current fair market value and will consist only of cash (U.S. legal tender), certificates of deposit issued by a qualified United States financial institution as defined under the Insurance Law of the Company’s domiciliary state and payable in cash, and investments of the types no less conservative than those specified in Section 1404 (a)(1)(2)(3)(8) and (10) of the New York Insurance Law and which are admitted assets under the Insurance Law of the Company’s domiciliary state. Investments issued by the parent, subsidiary, or affiliate of either the

33.

Company or the Reinsurer will not be eligible investments. All assets so deposited will be accompanied by all necessary assignments, endorsements in blank, or transfer of legal title to the trustee in order that the Company may negotiate any such assets without the requirement of consent or signature from the Reinsurer or any other entity.

I. All settlements of account between the Company and the Reinsurer will be made in cash or its equivalent. All income earned and received by the amount held in an established trust account will be added to the principal.

J. The Company’s “successors in interest” will include those by operation of law, including without limitation, any liquidator, rehabilitator, receiver, or conservator.

K. The Reinsurer will take any other reasonable steps that may be required for the Company to take full credit on its statutory financial statements for the reinsurance provided by this Contract.

ARTICLE 30

MODE OF EXECUTION

A. This Contract may be executed by:

1. an original written ink signature of paper documents;

2. an exchange of facsimile copies showing the original written ink signature of paper documents;

3. electronic signature technology employing computer software and a digital signature or digitizer pen pad to capture a person’s handwritten signature in such a manner that the signature is unique to the person signing, is under the sole control of the person signing, is capable of verification to authenticate the signature and is linked to the document signed in such a manner that if the data is changed, such signature is invalidated.

B. The use of any one or a combination of these methods of execution shall constitute a legally binding and valid signing of this Contract.

ARTICLE 31

VARIOUS OTHER TERMS

A. This Contract shall be binding upon and inure to the benefit of the Company and Reinsurer and their respective successors and assigns provided, however, that this Contract may not be assigned by either party without the prior written consent of the other which consent may be withheld by either party in its sole unfettered discretion. This

34.

provision shall not be construed to preclude the assignment by the Company of reinsurance recoverables to another party for collection.

B. The territorial limits of this Contract shall be identical with those of the Company’s Policies.

C. This Contract shall constitute the entire agreement between the parties with respect to the Business Covered hereunder. There are no understandings between the parties other than as expressed in this Contract. Any change or modification of this Contract shall be null and void unless made by amendment to the Contract and signed by both parties.

D. Except as may be provided in the Article entitled ARBITRATION, this Contract shall be governed by and construed according to the laws of the Commonwealth of Pennsylvania, exclusive of that state’s rules with respect to conflicts of law.

E. The headings preceding the text of the Articles and paragraphs of this Contract are intended and inserted solely for the convenience of reference and shall not affect the meaning, interpretation, construction or effect of this Contract.

F. This Contract is solely between the Company and the Reinsurer, and in no instance shall any insured, claimant or other third party have any rights under this Contract.

G. If any provision of this Contract should be invalid under applicable laws, the latter shall control but only to the extent of the conflict without affecting the remaining provisions of this Contract.

H. The failure of the Company or Reinsurer to insist on strict compliance with this Contract or to exercise any right or remedy shall not constitute a waiver of any rights contained in this Contract nor estop the parties from thereafter demanding full and complete compliance nor prevent the parties from exercising any remedy.

I. Each party shall be excused for any reasonable failure or delay in performing any of its respective Obligations under this Contract, if such failure or delay is caused by Force Majeure. “Force Majeure” shall mean any act of God, strike, lockout, act of public enemy, any accident, explosion, fire, storm, earthquake, flood, drought, peril of sea, riot, embargo, war or foreign, federal, state or municipal order or directive issued by a court or other authorized official, seizure, requisition or allocation, any failure or delay of transportation, shortage of or inability to obtain supplies, equipment, fuel or labor or any other circumstance or event beyond the reasonable control of the party relying upon such circumstance or event; provided, however, that no such Force Majeure circumstance or event shall excuse any failure or delay beyond a period exceeding thirty (30) days from the date such performance would have been due but for such circumstance or event.

J. All Articles of this Contract shall survive the termination of this Contract until all obligations between the parties have been finally settled.

35.

K. This Contract may be executed by the parties hereto in any number of counterparts, and by each of the parties hereto in separate counterparts, each of which counterparts, when so executed and delivered, shall be deemed to be an original, but all such counterparts shall together constitute but one and the same instrument.

L. Whenever the word “Company” is used in this Contract, such term shall mean each and all affiliated companies which are or may hereafter be under common control provided notice be given to the Reinsurers of any newly affiliated companies which may hereafter come under common control as soon as practicable, with full particulars as to how such affiliation is likely to affect this Contract. In the event that either party maintains that such affiliation calls for altering the terms of this Contract and an agreement for alteration not being arrived at, then the Business Covered of such newly affiliated company is covered at existing terms for a period not to exceed (90) ninety days after notice by either party that it does not wish to cover the business of the newly affiliated company at the existing terms.

M. The term “Reinsurer” shall refer to each Reinsurer participating severally and not jointly in this Contract. The subscribing (Re)insurers’ obligations under contracts of (re)insurance to which they subscribe are several and not joint and are limited solely to the extent of their individual subscriptions. The subscribing (Re)insurers are not responsible for the subscription of any co-subscribing (Re)insurer who for any reason does not satisfy all or part of its obligations.

N. For purposes of sending and receiving notices and payments required by this Contract other than in respect of the Articles entitled SERVICE OF SUIT and RESERVES herein, the reinsured company that is set forth first in the definition of “Company” is deemed the agent of all other reinsured companies referenced herein. In no event, however, shall any reinsured company be deemed the agent of another with respect to the terms of the Article entitled INSOLVENCY

O. Whenever the content of this Contract requires, the gender of all words shall include the masculine, feminine and neuter, and the number of all words shall include the singular and the plural. This Contract shall be construed without regard to any presumption or other rule requiring construction against the party causing this Contract to be drafted.

P. The Company shall furnish the Reinsurer, in accordance with regulatory requirements, periodic reporting of premiums and losses that relate to the Business Covered in this Contract as may be needed for Reinsurers’ completion of financial statements to regulatory authorities.

Q. When so requested in writing, the Company shall afford the Reinsurer or its representatives an opportunity to be associated with the Company, at the expense of the Reinsurer, in the defense of any claim, suit or proceeding involving this reinsurance, and the Company and the Reinsurer shall cooperate in every respect in the defense of such claim,

36.

suit or proceeding, provided the Company shall have the right to make any decision in the event of disagreement over any matter of defense or settlement.

ARTICLE 32

INTERMEDIARY

A. Towers Perrin Forster & Crosby, Inc. (“Towers Perrin”) is hereby recognized as the Intermediary negotiating this Contract for all business hereunder. All communications (including but not limited to notices, statements, premium, return premium, commissions, taxes, losses, Loss Adjustment Expense, salvages and loss settlements) relating thereto shall be transmitted to the Company or the Reinsurers through Towers Perrin, Centre Square East, 1500 Market Street, Philadelphia, Pennsylvania, 19102-4790. Payments by the Company to the Intermediary shall be deemed to constitute payment to the Reinsurers. Payments by the Reinsurers to the Intermediary shall be deemed to constitute payment to the Company only to the extent that such payments are actually received by the Company.

B. Whenever notice is required within this Contract, such notice may be given by certified mail, registered mail, or overnight express mail. Notice shall be deemed to be given on the date received by the receiving party.

1.  

NUCLEAR INCIDENT EXCLUSION CLAUSE — LIABILITY — REINSURANCE U.S.A. (BRMA 35A)

1. This reinsurance does not cover any loss or liability accruing to the Company as a member of, or subscriber to, any association of insurers or reinsurers formed for the purpose of covering nuclear energy risks or as a direct or indirect reinsurer of any such member, subscriber or association.

2. Without in any way restricting the operation of paragraph 1 of this Clause, it is understood and agreed that for all purposes of this reinsurance all the original policies of the Company (new, renewal and replacement) of the classes specified in Clause II of this paragraph 2 from the time specified in Clause III in this paragraph 2 shall be deemed to include the following provision (specified as the Limited Exclusion Provision):
Limited Exclusion Provision*

I.	It is agreed that the policy does not apply under any liability coverage, to (injury, sickness, disease, death or destruction bodily injury or property damage) with respect to which an insured under the policy is also an insured under a nuclear energy liability policy issued by Nuclear Energy Liability Insurance Association, Mutual Atomic Energy Liability Underwriters or Nuclear Insurance Association of Canada, or would be an insured under any such policy but for its termination upon exhaustion of its limit of liability.
II.	Family Automobile Policies (liability only), Special Automobile Policies (private passenger automobiles, liability only), Farmers Comprehensive Personal Liability Policies (liability only), Comprehensive Personal Liability Policies (liability only) or policies of a similar nature; and the liability portion of combination forms related to the four classes of policies stated above, such as the Comprehensive Dwelling Policy and the applicable types of Homeowners Policies.
III.	The inception dates and thereafter of all original policies as described in II above, whether new, renewal or replacement, being policies which either

(a)

become effective on or after 1st May, 1960, or

(b)

become effective before that date and contain the Limited Exclusion Provision set out above; provided this paragraph 2 shall not be applicable to Family Automobile Policies, Special Automobile Policies, or policies or combination policies of a similar nature, issued by the Company on New York risks, until 90 days following approval of the Limited Exclusion Provision by the Governmental Authority having jurisdiction thereof.

2.

3. Except for those classes of policies specified in Clause II of paragraph 2 and without in any way restricting the operation of paragraph 1 of this Clause, it is understood and agreed that for all purposes of this reinsurance the original liability policies of the Company (new, renewal and replacement) affording the following coverages:

Owners, Landlords and Tenants Liability, Contractual Liability, Elevator Liability, Owners or Contractors (including railroad), Protective Liability, Manufacturers and Contractors Liability, Product Liability, Professional and Malpractice Liability, Storekeepers Liability, Garage Liability, Automobile Liability (including Massachusetts Motor Vehicle or Garage Liability)

shall be deemed to include, with respect to such coverages, from the time specified in Clause V of this paragraph 3, the following provision (specified as the Broad Exclusion Provision):

Broad Exclusion Provision*

It is agreed that the policy does not apply:

I. Under any Liability Coverage, to (injury, sickness, disease, death or destruction) (bodily injury or property damage)

(a) with respect to which an insured under the policy is also an insured under a nuclear energy liability policy issued by Nuclear Energy Liability Insurance Association, Mutual Atomic Energy Liability Underwriters or Nuclear Insurance Association of Canada, or would be an insured under any such policy but for its termination upon exhaustion of its limit of liability; or

(b) resulting from the hazardous properties of nuclear material and with respect to which (1) any person or organization is required to maintain financial protection pursuant to the Atomic Energy Act of 1954, or any law amendatory thereof, or (2) the insured is, or had this policy not been issued would be, entitled to indemnity from the United States of America, or any agency thereof, under any agreement entered into by the United States of America, or any agency thereof, with any person or organization.

II. Under any Medical Payments Coverage, or under any Supplementary Payments Provision relating to (immediate medical or surgical relief (first aid to expenses incurred with respect to (bodily injury, sickness, disease or death (bodily injury resulting from the hazardous properties of nuclear material and arising out of the operation of a nuclear facility by any person or organization.

3.

III. Under any Liability Coverage, to (injury, sickness, disease, death or destruction (bodily injury or property damage resulting from the hazardous properties of nuclear material, if

(a) the nuclear material (1) is at any nuclear facility owned by, or operated by or on behalf of, an insured, or (2) has been discharged or dispersed therefrom;

(b) the nuclear material is contained in spent fuel or waste at any time possessed, handled, used, processed, stored, transported or disposed of by or on behalf of an insured; or

(c) the (injury, sickness, disease, death or destruction) (bodily injury or property damage arises out of the furnishing by an insured of services, materials, parts or equipment in connection with the planning, construction, maintenance, operation or use of any nuclear facility, but if such facility is located within the United States of America, its territories, or possessions or Canada, this exclusion (c) applies only to (injury to or destruction of property at such nuclear facility) (property damage to such nuclear facility and any property thereat.

IV.	As used in this endorsement:
	“Hazardous properties” include radioactive, toxic or explosive properties; “nuclear material” means source material, special nuclear material or byproduct material; “source material”, “special nuclear material”, and “byproduct material” have the meanings given them in the Atomic Energy Act of 1954 or in any law amendatory thereof; “spent fuel” means any fuel element or fuel component, solid or liquid, which has been used or exposed to radiation in a nuclear reactor; “waste” means any waste material (1) containing byproduct material other than tailings or wastes produced by the extraction or concentration of uranium or thorium from any ore processed primarily for its source material content, and (2) resulting from the operation by any person or organization of any nuclear facility included under the first two paragraphs of the definition of nuclear facility; “nuclear facility” means:
	(a) any nuclear reactor,
	(b) any equipment or device designed or used for (1) separating the isotopes of uranium or plutonium, (2) processing or utilizing spent fuel, or (3) handling, processing or packaging waste,
	(c) any equipment or device used for the processing, fabricating or alloying of special nuclear material if at any time the total amount of such material in the custody of the insured at the premises where such equipment or device is located

4.

consists of or contains more than 25 grams of plutonium or uranium 233 or any combination thereof, or more than 250 grams of uranium 235,

(d) any structure, basin, excavation, premises or place prepared or used for the storage or disposal of waste, and includes the site on which any of the foregoing is located, all operations conducted on such site and all premises used for such operations; “nuclear reactor” means any apparatus designed or used to sustain nuclear fission in a self-supporting chain reaction or to contain a critical mass of fissionable material;

	(With respect to injury to or destruction of property, the word “injury” or “destruction” (“property damage” includes all forms of radioactive contamination of property. (includes all forms of radioactive contamination of property.
V.	The inception dates and thereafter of all original policies affording coverages specified in this paragraph 3, whether new, renewal or replacement, being policies which become effective on or after 1st May, 1960, provided this paragraph 3 shall not be applicable to:
	(a) Garage and Automobile Policies issued by the Company on New York risks, or
	(b) statutory liability insurance required under Chapter 90, General Laws of Massachusetts, until 90 days following approval of the Broad Exclusion Provision by the Governmental Authority having jurisdiction thereof.

4. Without in any way restricting the operation of paragraph 1 of this Clause, it is understood and agreed that paragraphs 2 and 3 above are not applicable to original liability policies of the Company in Canada and that with respect to such policies this Clause shall be deemed to include the Nuclear Energy Liability Exclusion Provisions adopted by the Canadian Underwriters’ Association or the Independent Insurance Conference of Canada.

*NOTE: The words printed in italics in the Limited Exclusion Provision and in the Broad Exclusion Provision shall apply only in relation to original liability policies which include a Limited Exclusion Provision or a Broad Exclusion Provision containing those words.

EXHIBIT I — Page 1

EXHIBIT I

CASUALTY FIRST EXCESS OF LOSS REINSURANCE

EFFECTIVE JANUARY 1, 2009

issued to

PENN MILLERS INSURANCE COMPANY

AMERICAN MILLERS INSURANCE COMPANY

ARTICLE 7

RETENTION AND LIMIT

A. The Reinsurers shall be liable to, indemnify and reinsure the Company for each and every Loss Occurrence, for one hundred percent (100%) of the excess Net Loss above an initial Net Loss to the Company of one million dollars ($1,000,000) but the Reinsurers shall not be liable for more than four million dollars ($4,000,000) of Net Loss in each and every Loss Occurrence.

B. The Reinsurers shall be liable to, indemnify and reinsure the Company for each and every Loss Occurrence for one hundred percent (100%) of the Company’s Net Loss involving any Act of Terrorism, irrespective of the number and kinds of perils involved, but the Reinsurers shall not be liable for more than four million dollars ($4,000,000) for Net Loss arising from Acts of Terrorism during the term of this Contract, as defined in the Article entitled DEFINITION OF TERRORISM.

C. As respects to all Net Loss arising from Mold, the Reinsurers shall be liable to, indemnify and reinsure the Company for one hundred percent (100%) of the Company’s excess Net Loss above an initial Net Loss to the Company of one million dollars ($1,000,000) from Mold, as such term is defined in the Company’s Policy, but the Reinsurers shall not be liable for more than four million dollars ($4,000,000) for all Net Loss arising from Mold during the term of the Contract.

EXHIBIT I — Page 2

ARTICLE 9

REINSTATEMENT

A. Each claim hereunder shall reduce the amount of the Reinsurers’ liability from the time of the Occurrence of the Loss by the sum paid, but the sum so exhausted shall be reinstated immediately from the time of the Occurrence of the Loss.

B. For each amount so reinstated, the Company agrees to pay an additional premium. For the purposes of calculating the reinstatement premium, the Contract retention and limit specified in the Article entitled RETENTION AND LIMIT of this Contract shall be deemed to consist of two (2) sections:

      Section A – The Reinsurers’ limit for Net Loss of one million dollars ($1,000,000) in each and every Loss Occurrence, excess of the Company’s retention of one million dollars ($1,000,000) in each and every Loss Occurrence.

     Section B – The Reinsurers’ limit for Net Loss of three million dollars ($3,000,000) in each and every Loss Occurrence, excess of the Company’s retention of two million dollars ($2,000,000) in each and every Loss Occurrence.

C. 1. Under Section A., the Company shall pay an additional premium calculated by multiplying thirty five percent (35%) of the reinsurance premium for this Contract by the percentage that the amount reinstated under Section A. bears to the Section
A. limit (one million dollars ($1,000,000)). Nevertheless, the liability of the Reinsurers under Section A. shall never be more than one million dollars ($1,000,000) in respect of any one Loss Occurrence, nor more than three million dollars ($3,000,000) in respect of all losses occurring during the Contract term. It is further understood that reinstatement premium for Section A. only applies to Loss Occurrences that are recovered under Section A.

C.2. Under Section B., the Company shall pay an additional premium calculated by multiplying sixty five percent (65%) of the reinsurance premium for this Contract by the percentage that the amount reinstated under Section B. bears to the Section
B. limit (three million dollars ($3,000,000)). Nevertheless, the liability of the Reinsurers under Section B. shall never be more than three million dollars ($3,000,000) in respect of any one Loss Occurrence, nor more than nine million dollars ($9,000,000) in respect of all losses occurring during the Contract term. It is further understood that reinstatement premium for Section B. only applies to Loss Occurrences that are recovered under Section B.

D. Recoveries under Section A. shall be entirely disregarded for purposes of determining the Net Loss for purposes of Section B.

EXHIBIT I — Page 3

E. As promptly as possible after the reinsurance premium earned by the Reinsurer hereunder for the just completed coverage period has been finally determined, the Company shall prepare and submit to the Reinsurers a final statement of reinstatement premium due. Any reinstatement premium shown to be due the Reinsurers (less prior payments, if any) shall be remitted by the Company with its statement. Any return reinstatement premium shown to be due the Company shall be remitted by the Reinsurers as promptly as possible after receipt of the Company’s final statement.

F. In the event there are any mid-term terminations in the participation of any Reinsurer in this Contract, payment of any such reinstatement premium in full shall be paid to the Reinsurer who incurred the loss that generates the reinstatement premium.

ARTICLE 10

PREMIUM

A. The premium payable to Reinsurers shall be calculated by applying a rate of two point three nine percent (2.39%) to the Company’s Subject Matter Premium Income.

B. The term “Subject Matter Premium Income” shall mean the Company’s gross net premiums earned on the Business Covered hereunder less premiums paid on reinsurance, if any, recoveries under which would reduce the Net Loss to this Contract.

C. The Company shall pay the Reinsurers a deposit premium of one million one hundred fifty seven thousand five hundred forty eight dollars ($1,157,548), in four (4) equal installments of two hundred eighty nine thousand three hundred eighty seven dollars ($289,387) each on January 1, April 1, July 1 and October 1, 2009. As promptly as possible after the termination of this Contract, however no longer than sixty (60) days, the Company shall render a report to the Reinsurers showing the actual reinsurance premium due hereunder, calculated as provided in Paragraph A. of this Article; and, if the premium so calculated is greater than the previously paid deposit premium, the balance shall be remitted by the Company with its report. However, in no event shall the premium to the Reinsurers for the Contract be less than nine hundred twenty six thousand thirty eight dollars ($926,038).

EXHIBIT II — Page 1

EXHIBIT II

CASUALTY SECOND EXCESS OF LOSS REINSURANCE

EFFECTIVE JANUARY 1, 2009

issued to

PENN MILLERS INSURANCE COMPANY

AMERICAN MILLERS INSURANCE COMPANY

ARTICLE 7

RETENTION AND LIMIT

A. The Reinsurers shall be liable to, indemnify and reinsure the Company for each and every Loss Occurrence, for one hundred percent (100%) of the excess Net Loss above an initial Net Loss to the Company of five million dollars ($5,000,000) but the Reinsurers shall not be liable for more than five million dollars ($5,000,000) of Net Loss in each and every Loss Occurrence. Coverage as provided in this Exhibit II shall not cover the Company’s Net Loss involving any Act of Terrorism as defined in the Article entitled DEFINITION OF TERRORISM.

B. Coverage as provided in this Exhibit II of this Contract does not apply to any loss, damage, cost, claim or expense, of the Company or its insured(s) including but not limited to B(1) – B(4). below, whether preventative, remedial or otherwise, directly or indirectly arising out of, relating to, caused by or contributed to by any mold, mildew, spores, fungus, wet or dry rot, or any of their scent or by-products, or of any materials containing them, at any time even if there is any other cause or event contributing concurrently or in any other sequence to the loss:

1. Any claim relating to supervision, instructions, recommendations, warnings or advice given or which should have been given in connection with the above; or

2. Any claim if a failure to investigate, detect or remediate mold, mildew, spores, fungus, wet or dry rot or any of their scent or by products, or any of their materials containing them; or

3. Any alleged or actual obligation of the Company and/or its insured(s) to share damages with or repay someone else who must pay damages because of such injury or damage, either in equity or in tort; or

4. Any costs and/or expenses incurred by the Company and/or its insured(s) in investigating or defending any claim or suit seeking damages for, or determining Policy Obligations relating to, such loss, damage, cost, claim or expense.

ARTICLE 9

EXHIBIT II — Page 2

REINSTATEMENT

A. Each claim hereunder shall reduce the amount of the Reinsurers’ liability from the time of the Occurrence of the Loss by the sum paid, but the sum so exhausted shall be reinstated immediately from the time of the Occurrence of the Loss.

B. For each amount so reinstated, the Company agrees to pay an additional premium calculated by multiplying one hundred percent (100%) of the annual reinsurance premium hereon by the percentage that the amount reinstated bears to the limit (i.e., five million dollars ($5,000,000)) of this Contract. Nevertheless, the liability of the Reinsurers shall never be more than five million dollars ($5,000,000) in respect of any one Loss Occurrence, nor more than ten million dollars ($10,000,000) in all in respect of all losses occurring during the Contract period.

C. A provisional statement of reinstatement premium due the Reinsurers shall be prepared by the Company and submitted to the Reinsurers as soon as practicable after payment of a claim hereunder. The provisional reinstatement premium shall be based on one hundred percent (100%) of the estimated annual reinsurance premium hereunder. The amount of reinstatement premium due Reinsurers shall be offset against the loss payment due the Company with only the net amount due to be remitted by the debtor party.

D. As promptly as possible after the annual reinsurance premium hereunder has been finally determined, the Company shall prepare and submit to the Reinsurers a final statement of reinstatement premium due. Any reinstatement premium shown to be due the Reinsurers (less prior payments, if any) shall be remitted by the Company with its statement. Any return reinstatement premium shown to be due the Company shall be remitted by the Reinsurers as promptly as possible after receipt of the Company’s final statement.

E. In the event there are any mid-term terminations in the participation of any Reinsurer in this Contract, payment of any such reinstatement premium in full shall be paid to the Reinsurer who incurred the loss that generates the reinstatement premium.

ARTICLE 10

PREMIUM

A. The premium payable to Reinsurers shall be calculated by applying a rate of point seven eight six six percent (.7866%) to the Company’s Subject Matter Premium Income.

B. The term “Subject Matter Premium Income” shall mean the Company’s gross net premiums earned on the Business Covered hereunder less premiums paid on reinsurance, if any, recoveries under which would reduce the Net Loss to this Contract.

EXHIBIT II — Page 3

C. The Company shall pay the Reinsurers a deposit premium of three hundred eighty thousand nine hundred seventy four dollars ($380,974), in four (4) equal installments of ninety five thousand two hundred forty three dollars and fifty cents ($95,243.50) each on January 1, April 1, July 1 and October 1, 2009. As promptly as possible after the termination of this Contract, however no longer than sixty (60) days, the Company shall render a report to the Reinsurers showing the actual reinsurance premium due hereunder, calculated as provided in Paragraph A. of this Article; and, if the premium so calculated is greater than the previously paid deposit premium, the balance shall be remitted by the Company with its report. However, in no event shall the premium to the Reinsurers for the Contract be less than three hundred four thousand seven hundred eighty dollars ($304,780).

EX-10.14

Exhibit 10.14

UMBRELLA QUOTA SHARE REINSURANCE CONTRACT

EFFECTIVE JANUARY 1, 2009

issued to

PENN MILLERS INSURANCE COMPANY

AMERICAN MILLERS INSURANCE COMPANY

WILKES BARRE, PENNSYLVANIA

(hereinafter called the “Company”)

by

PARTNER REINSURANCE COMPANY OF THE U.S.

NEW YORK

(hereinafter called, with other participants, the “Reinsurers”)

Under the terms of this Contract the above Reinsurer agrees to assume severally and not jointly with other participants

a 25.00% share

of the liability described in the attached Contract and, as consideration, the Reinsurer shall receive a 25.00% share of the premium named therein.

Signed in Greenwich, Connecticut, this         day of                                         , 2009,

PARTNER REINSURANCE COMPANY OF THE U.S.
BY
	TITLE

UMBRELLA QUOTA SHARE REINSURANCE CONTRACT

EFFECTIVE JANUARY 1, 2009

issued to

PENN MILLERS INSURANCE COMPANY

AMERICAN MILLERS INSURANCE COMPANY

WILKES BARRE, PENNSYLVANIA

(hereinafter called the “Company”)

by

SWISS REINSURANCE AMERICA CORPORATION

NEW YORK

(hereinafter called, with other participants, the “Reinsurers”)

Under the terms of this Contract the above Reinsurer agrees to assume severally and not jointly with other participants

a 25.00% share

of the liability described in the attached Contract and, as consideration, the Reinsurer shall receive a 25.00% share of the premium named therein.

Signed in Schaumburg, Illinois, this        day of                                         , 2009,

SWISS REINSURANCE AMERICA CORPORATION BY: Swiss Re
BY
	TITLE

UMBRELLA QUOTA SHARE REINSURANCE CONTRACT

EFFECTIVE JANUARY 1, 2009

issued to

PENN MILLERS INSURANCE COMPANY

AMERICAN MILLERS INSURANCE COMPANY

WILKES BARRE, PENNSYLVANIA

(hereinafter called the “Company”)

by

ASPEN INSURANCE UK LTD.

CONNECTICUT

(hereinafter called, with other participants, the “Reinsurers”)

Under the terms of this Contract the above Reinsurer agrees to assume severally and not jointly with other participants

a 07.50% share

of the liability described in the attached Contract and, as consideration, the Reinsurer shall receive a 07.50% share of the premium named therein.

Signed in Rocky Hill, Connecticut, this         day of                                         , 2009,

ASPEN RE AMERICA on and behalf of ASPEN INSURANCE UK LTD.
BY
	TITLE

UMBRELLA QUOTA SHARE REINSURANCE CONTRACT

EFFECTIVE JANUARY 1, 2009

issued to

PENN MILLERS INSURANCE COMPANY

AMERICAN MILLERS INSURANCE COMPANY

WILKES BARRE, PENNSYLVANIA

(hereinafter called the “Company”)

by

HANNOVER RUCKVERSICHERUNG AG

HANNOVER, GERMANY

(hereinafter called, with other participants, the “Reinsurers”)

Under the terms of this Contract the above Reinsurer agrees to assume severally and not jointly with other participants

a 42.50% share

of the liability described in the attached Contract and, as consideration, the Reinsurer shall receive a 42.50% share of the premium named therein.

Signed in Hanover, Germany, this         day of                                         , 2009,

HANNOVER RUCKVERSICHERUNG AG
BY
	TITLE

and signed in Wilkes Barre, Pennsylvania, this day      of                     200_.

PENN MILLERS INSURANCE COMPANY AMERICAN MILLERS INSURANCE COMPANY
BY
	TITLE

UMBRELLA QUOTA SHARE REINSURANCE CONTRACT

EFFECTIVE JANUARY 1, 2009

issued to

PENN MILLER INSURANCE COMPANY

AMERICAN MILLERS INSURANCE COMPANY

PENN MILLERS INSURANCE COMPANY

AMERICAN MILLERS INSURANCE COMPANY

UMBRELLA QUOTA SHARE REINSURANCE CONTRACT

EFFECTIVE JANUARY 1, 2009

INDEX

ARTICLE	SUBJECT	PAGE
ARTICLE 1	BUSINESS COVERED		1
ARTICLE 2	COMMENCEMENT AND TERMINATION		2
ARTICLE 3	PORTFOLIO ASSUMPTION		3
ARTICLE 4	SPECIAL TERMINATION		3
ARTICLE 5	EXCLUSIONS		6
ARTICLE 6	REINSURANCE COVERAGE		8
ARTICLE 7	PREMIUM AND COMMISSION		10
ARTICLE 8	REPORTS AND REMITTANCES		10
ARTICLE 9	NET LOSS		12
ARTICLE 10	EXTRA-CONTRACTUAL OBLIGATIONS/LOSS EXCESS OF POLICY LIMITS		13
ARTICLE 11	TERRORISM RECOVERY		14
ARTICLE 12	NET RETAINED LINE		15
ARTICLE 13	ERRORS AND OMISSIONS		16
ARTICLE 14	OFFSET		16
ARTICLE 15	CURRENCY		16
ARTICLE 16	FEDERAL EXCISE TAX AND OTHER TAXES		16
ARTICLE 17	ACCESS TO RECORDS		17
ARTICLE 18	INSOLVENCY		18
ARTICLE 19	ARBITRATION		19
ARTICLE 20	SERVICE OF SUIT		22
ARTICLE 21	CONFIDENTIALITY		23
ARTICLE 22	PRIVACY		24
ARTICLE 23	RESERVES		25
ARTICLE 24	LATE PAYMENTS		28
ARTICLE 25	MODE OF EXECUTION		29
ARTICLE 26	VARIOUS OTHER TERMS		30
ARTICLE 27	INTERMEDIARY		32

ATTACHMENTS:

INSOLVENCY FUNDS EXCLUSION
NUCLEAR INCIDENT EXCLUSION CLAUSE-LIABILITY-REINSURANCE U.S.A.
(BRMA 35A)
NUCLEAR INCIDENT EXCLUSION CLAUSE-LIABILITY-REINSURANCE CANADA (BRMA 35D)

 1.

PENN MILLERS INSURANCE COMPANY

AMERICAN MILLERS INSURANCE COMPANY

UMBRELLA QUOTA SHARE REINSURANCE CONTRACT

EFFECTIVE JANUARY 1, 2009

ARTICLE 1

BUSINESS COVERED

A. This Contract applies to all Loss Occurrences that occur with a date of loss during the term of this Contract and arising from those Policies, except as hereinafter excluded, classified by the Company as excess/commercial umbrella liability that are in force at the inception of, and written with a Policy period (new or renewal) effective during the term of this Contract, including renewals (“Business Covered”).

B. As respects all Business Covered hereof, where the coverage has been agreed upon between the Company and the Reinsurer, this Contract shall cover self-insured obligations of the Company assumed by it as a self-insurer including self-insured obligations in excess of any valid and collectible insurance available to the Company to the same extent as if all types of insurance covered by this Contract were afforded under the broadest forms of Policies issued by the Company provided, such self-insured obligations are within the scope of underwriting criteria furnished by the Company to the Reinsurer.

C. The term “Policies”, whenever used herein, shall mean all binders, policies, contracts, certificates and other obligations, whether oral or written, of insurance or reinsurance that are Business Covered, underwritten and bound by the Company in accordance with the Company’s current Commercial Umbrella Underwriting and Rating guidelines (including amendments as agreed to by the Reinsurer) as part of their Corporate Information Catalogue, except as excluded under the Article entitled EXCLUSIONS.

D. The reinsurance of all Business Covered hereunder shall be subject in all respects to the same risks, terms, clauses, conditions, interpretations, alterations, modifications, cancellations and waivers as the respective insurances (or reinsurances) of the Company’s Policies and the Reinsurer shall pay losses as may be paid thereon, subject to the liability of the Company and the terms and conditions of this Contract.

2.

ARTICLE 2

COMMENCEMENT AND TERMINATION

A. This Contract shall incept at 12:01 a.m., Eastern Standard Time, January 1, 2009, and shall remain in force until 12:01 a.m., Eastern Standard Time, January 1, 2010.

B. At termination, at the Company’s option:

1. The Reinsurers shall remain liable for all Policies in force at termination of this Contract; however, the liability of the Reinsurers shall cease with respect to losses occurring subsequent to the first anniversary, natural expiration or cancellation of each Policy ceded, whichever first occurs, but in no event for any losses occurring more than eighteen (18) months after each such termination; (“Run-Off”) or

2. The Reinsurers shall be relieved of all liability hereunder for any losses occurring with a date of loss subsequent to termination of this Contract (“Cut-Off’).

     The Company shall notify the Reinsurer not more than thirty (30) days after termination whether such termination shall be on a Cut-Off or Run-Off basis.

C. The Company shall pay reinsurance premium for any Run-Off period in accordance with the Article entitled PREMIUM of this Contract. If the Company elects the Cut-Off option, the Reinsurers shall refund to the Company any unearned reinsurance premium applicable to the unexpired liability (calculated on a pro rata basis) less any commission allowed by the Reinsurers thereon at conclusion of the Run-Off if B(1) above is elected, or at termination if option B(2) above is elected. The Reinsurers shall continue to be liable for their proportionate share of the outstanding losses (reported or unreported) on Policies ceded hereunder with a date of loss prior to the conclusion of the Run-Off, or termination, as the case may be.

D. Should any subject Policy be extended, continued, or renewed due to regulatory or other legal restrictions, this Contract shall automatically provide extended coverage at the request of the Company until those Policies are actually terminated by the Company. The Reinsurer shall be entitled to reinsurance premium on such Policies as calculated by the Company in accordance with the terms of this Contract. This provision shall not apply and the Reinsurer will not be liable for longer than the Run-Off period elected above, in the event that the

3.

Company has secured reinsurance for the Business Covered that reinsures inforce Policies on substantially similar terms as to risk retained and ceded, or has advised the Reinsurer that the Company intends to hold the business net and for its own account.

E. Should this Contract terminate while a Loss Occurrence is in progress, the entire loss arising out of the Loss Occurrence shall be subject to this Contract and its terms and conditions.

ARTICLE 3

PORTFOLIO ASSUMPTION

A. If agreed by the Company and the Reinsurer, at the end of each underwriting year (i.e. January 1) all unexpired liability in respect of the business ceded hereunder and the unearned premium applicable thereto shall be transferred to the following underwriting year.

B. Furthermore, if agreed by the Company and the Reinsurer, the Reinsurer will accept a portfolio transfer from previous underwriting years on the basis described in the preceding paragraph.

ARTICLE 4

SPECIAL TERMINATION

A. The Company or the Reinsurer may terminate, or commute Obligations arising under this Contract in accordance with Paragraph C. below, upon the happening of any one of the following circumstances at any time by the giving of thirty (30) days prior written notice to the other party:

1. A party ceases active underwriting operations or a State Insurance Department or other legal authority orders the Reinsurer to cease writing business in all jurisdictions; or

2. The Reinsurer has filed a plan to enter into a Scheme of Arrangement or similar procedure. “Scheme of Arrangement” is defined as a legislative or regulatory process that provides a solvent Reinsurer the opportunity to settle its obligations with the Company either (i) without the Company’s unrestrained consent or (ii) prior to the Company having the ability to determine, with exact certainty, the actual amount of the obligations still outstanding and ultimately due to the Company. or

3. A party has: (a) become insolvent, (b) been placed under supervision (voluntarily or involuntarily), (c) been placed into liquidation or receivership, or (d) had instituted against it proceedings for the appointment of a

4.

supervisor, receiver, liquidator, rehabilitator, conservator or trustee in bankruptcy, or other agent known by whatever name, to take possession of its assets or control of its operations; or

4. A reduction in the Reinsurer’s surplus, risk based capital or financial strength rating occurs:

a. As respects Reinsurers domiciled in the United States of America, (i) the Reinsurer’s policyholders’ surplus (“PHS”) has been reduced by, whichever is greater, thirty percent (30%) of the amount of PHS at the inception of this Contract or thirty percent (30%) of the amount of PHS stated in its last filed quarterly or annual statutory statement with its state of domicile; or (ii) the Reinsurer’s total adjusted capital is less than two hundred percent (200%) of its authorized control level risk-based capital; or (iii) the Reinsurer’s AM Best’s insurer financial strength rating becomes less than “A-”.

b. As respects Reinsurers domiciled outside the United States of America, other than Lloyd’s Syndicates (i) the Reinsurer’s Capital & Surplus (“C&S”) has been involuntarily reduced by, whichever is greater, thirty percent (30%) of the published currency amount of C&S at the inception of this Contract or thirty percent (30%) of the published currency amount of C&S stated in its last filed financial statement with its local regulatory authority; or (ii) as respects Lloyd’s Syndicates, the Reinsurer’s total stamp capacity has been reduced by more than thirty percent (30%) of the amount of total stamp capacity which stood at the inception of this Contract. (This provision does not apply to any Lloyd’s Syndicate that voluntarily reduces its total stamp capacity.) or (iii) the Reinsurer’s AM Best’s insurer financial strength rating becomes less than “A-” or the Reinsurer’s Standard & Poor’s Insurance Rating becomes less than “BBB”. or

5. A party has entered into a definitive agreement to (a) become merged with, acquired or controlled by any company, corporation or individual(s) not controlling or affiliated with the party’s operations previously; or (b) directly or indirectly assign all or essentially all of its entire liability for obligations under this Contract to another party without the other party’s prior written consent; or

6. There is either:

a. a severance or obstruction of free and unfettered communication and/or normal commercial or financial intercourse between the United States of America and the country in which the Reinsurer is incorporated or has its principal office as a result of war, currency regulations or any circumstances arising out of political, financial or economic uncertainty; or

5.

b. a severance (of any kind) of any two (2) or more of the following executives of the Reinsurer from active employment of the Reinsurer during the most recent forty five (45) day period: chief underwriting officer, chief actuary, chief executive officer or chief financial officer. This condition does not apply whenever the severance in employment is for the publicly announced purpose of the individual’s assuming within thirty (30) days a known position with another identified firm in the (re)insurance industry or related field.

B. In the event the Company elects termination, the Company shall with the notice of termination specify that termination will be on a Run-Off basis or a Cut-Off basis. In the event that the Company elects to Cut-Off and thus relieve the Reinsurer for losses occurring subsequent to the Reinsurer’s specified termination date, the Reinsurer shall within thirty (30) days of the termination date return the liability for the unearned portion of any ceded premium paid hereunder, calculated as of the termination date, and cash in that amount (less any applicable ceding commission allowed thereon) and the minimum premium provisions, if any, shall be waived. If the Company elects “Run-Off”, the Reinsurer shall remain liable to the Company under this Contract with respect to losses arising from Policies placed into effect and ceded hereunder with effective dates (new or renewal Policy period) prior to the termination date until those Policies naturally expire, are cancelled or non-renewed or their next annual anniversary, provided such period shall not exceed eighteen (18) months from the date of termination elected under this Article.

C. If both parties agree to commute, then within sixty (60) days after such agreement, the Company shall submit a statement of valuation of the total of the net present value (“capitalized”) of the ceded (1) Net Loss Reserves, (2) Loss Adjustment Expense Reserves, and (3) unearned premium reserve, after deduction for any ceding commission allowed thereon, (the “Valuation Statement”). If agreement cannot be reached, the effort can be abandoned or alternately the Company and the Reinsurers may mutually appoint an actuary or appraiser to investigate, determine the capitalized value of the reserves to be returned to the Company. Such actuary shall be an independent and neutral actuary, Casualty Actuarial Society, experienced in such matters and the mutually agreed actuary shall render a decision. In the event that the Company and the Reinsurer are unable to agree upon a single actuary within thirty (30) days, the parties shall ask the then current President of the Casualty Actuarial Society to appoint an actuary with those qualifications within another thirty (30) days. The decision of the actuary will be final and binding on both parties. The Company and the Reinsurer shall share equally the fees and expenses of the actuary. Upon payment of the amount so agreed or determined by the actuary to the Company, the Reinsurer and the Company shall each be completely released from all liability to each other under this Contract.

6.

ARTICLE 5

EXCLUSIONS

     This Contract Shall Not Cover:

A. The following General Categories:

1. War, as excluded by the provisions of the Company’s original Policy(ies).

2. Liability as a member or subscriber of any Pool, Association or Syndicate.

3. Insolvency Funds as per the attached Insolvency Funds Exclusion Clause.

4. Nuclear Incident Exclusion Clauses which are attached and made part of this Contract:

a. Nuclear Incident Exclusion Clause — Liability — Reinsurance — U. S. A (BRMA 35A).

b. Nuclear Incident Exclusion Clause — Liability — Reinsurance — Canada (BRMA 35D).

5. Business accepted by the Company as reinsurance; except business accepted from intra-company transactions.

B. The following Insurance Coverages:

1. Terrorism as provided in the Company’s Umbrella Underwriting and Rating Guidelines as of January 1, 2003 and as revised by mutual agreement between the Company and Reinsurer, or as referred to and approved by the Reinsurer.

     This Contract shall not cover loss resulting from an act of Certified or Non-Certified terrorism, as defined in the Article entitled REINSURANCE COVERAGE of this Contract, that involves the use, release, or escape of nuclear materials, or directly or indirectly results in nuclear reaction or radiation or radioactive contamination; or that is carried out by means of the dispersal or application of pathogenic or poisonous biological or chemical materials that are released.

2. Loss or liability, whether direct or indirect, arising from the hazard of asbestos including the manufacturing, mining, storage, distribution, transportation, fabrication, installation or removal of asbestos or products containing asbestos.

7.

3. Loss or liability excluded by the Standard Pollution Exclusion(s) promulgated by the Insured Services Office for both Commercial General Liability and Commercial Automobile Liability Policies;

Notwithstanding the above, the Reinsurers agree that this exclusion shall not apply to original Policies written in any state where the Standard ISO Pollution Exclusion(s) have not been approved or are not permitted to be included in or attached to original Policies.

Further, the Reinsurers agree that this exclusion shall not apply in any case where the Company has attached the Standard ISO Pollution Exclusion(s) to an original Policy but has sustained a Loss as a result of that exclusion being deemed invalid or inapplicable by a court of law.

Notwithstanding all of the foregoing, Reinsurers agree that this exclusion does not apply to environmental restoration coverage provided under an MCS-90 Endorsement attached to a commercial automobile Policy written in accordance with the Motor Carrier Act of 1980.

Furthermore, Reinsurers agree that this exclusion does not apply to over spraying of anhydrous ammonia, fertilizers and agricultural chemicals, nor shall this exclusion apply to operations involving anhydrous ammonia, liquefied petroleum gas (LPG), or propane (including the transportation thereof) where the Company has attached the Solutions 2000 Liability PMAG-16 (01 05) Pollution Exclusion Amendment to an original Policy. Furthermore, this exclusion does not apply to pollutants from mobile equipment where the Company has attached the Solutions 2000 Liability PMAG-16 (01 05) Pollution Exclusion Amendment to an original Policy.

Furthermore, Reinsurers agree that this exclusion does not apply to operations meeting all standards of any statute, ordinance, regulation or license requirement of any federal, state or local government which apply to those operations, where the Company has attached the Solutions 2000 Liability PMAG — 04 (07 98) “Pesticide or Fertilizer Applicator Amended Exclusions with Amendment of Limits of Insurance” to an original Policy. Furthermore, this exclusion does not apply to fields on which the insured, or any contractor or subcontractor working on the behalf of the insured, is performing operations, where the company has attached the Solutions 2000 Liability PMAG — 04 (07 98) “Pesticide or Fertilizer Applicator Amended Exclusions with Amendment of Limits of Insurance” to an original Policy.

4. tobacco manufacturers/companies

8.

5. pharmaceutical and medical device manufacturers

C. If the Company is bound without knowledge of and contrary to the instructions of the Company’s supervisory underwriting personnel, on any business falling within the scope of one or more of the exclusions set forth in this Article these exclusions, except paragraphs A(1), A(2), A(3), A(4), A(5), B(1), B(2) and B(5) shall be suspended with respect to such business until sixty (60) days after any Home Office underwriting supervisor of the Company acquires knowledge of such business.

D. Upon receipt of such knowledge, the Company shall promptly advise the Reinsurer of the scope of the Insured’s activities and the Reinsurer shall have the right to:

     Reinstate the exclusion involved upon expiration of the aforementioned sixty (60) days waiting period, or waive such exclusion by Special Acceptance.

     The Reinsurer shall promptly advise the Company as to which of the above options set forth in this Paragraph shall apply.

     Any exclusion listed above shall be automatically waived as respects a Policy issued by the Company on a risk with respect to which only a minor or incidental part of the operations covered involves the exclusion. An incidental part of an insured’s regular operations shall mean not greater than ten percent (10%) of the insured’s regular operations.

ARTICLE 6

REINSURANCE COVERAGE

A. The Company shall cede and the Reinsurer shall accept and be liable to, indemnify and reinsure the Company for a quota share participation of the Company’s Net Loss for in force, new and renewal excess/commercial umbrella Policies:

     For the first one million dollars ($1,000,000) of the Company’s Net Loss as respects each Policy, each Loss Occurrence:

     The Reinsurers shall participate for seventy five percent (75%) of the Company’s Net Loss as respects each Policy, each Loss Occurrence.

9.

     For the next four million dollars ($4,000,000) of the Company’s Net Loss as respects each Policy, each Loss Occurrence:

     The Reinsurers shall participate for one hundred percent (100%) of the Company’s Net Loss as respects each Policy, each Loss Occurrence.

B. Terrorism:

1. Notwithstanding the foregoing paragraph A in this Article, the Reinsurers’ liability for a loss involving any Act of Terrorism, irrespective of the number and kinds of perils involved, shall be limited to one million dollars ($1,000,000) of Net Loss in the aggregate for all Loss Occurrences taking place during the term of this Contract.

2. An “Act of Terrorism” shall mean any act, including both Certified Acts of Terrorism in accordance with the Terrorism Risk Insurance Act of 2002, the Terrorism Risk Insurance Extension Act of 2005 and the Terrorism Risk Insurance Program Reauthorization Act of 2007 (“TRIPRA”) and any subsequent extension and those not so certified, or preparation in respect of action, or threat of action designed to influence the government de jure or de facto of any nation or any political division thereof, or in pursuit of any political, religious, ideological, or similar purpose to intimidate the public or a section of the public of any nation by any person or group(s) of persons whether acting alone or on behalf of or in connection with any organization(s) or government(s) de jure or de facto, and which:

a. involves violence against one or more persons; or

b. involves damage to property; or

c. endangers life other than that of the person committing the action; or

d. creates a risk to health or safety of the public or a section of the public; or

e. is designed to interfere with or to disrupt an electronic system; or

f. involves loss, damage, cost, or expense directly or indirectly caused by, contributed to by, resulting from, or arising out of or in connection with any action in controlling, preventing, suppressing, retaliating against, or responding to any act of terrorism.

     Loss or damage occasioned by riot, strikes, civil commotion, vandalism or malicious mischief as those terms have been interpreted by United States Courts to apply to insurance Policies shall not be construed to be an “Act of Terrorism”.

10.

ARTICLE 7

PREMIUM AND COMMISSION

A. As premium for the Reinsurance Coverage provided hereunder, the Company shall cede and pay to the Reinsurers their proportionate share of the unearned premium on the business in force at the inception of this Contract for the business described herein. Additionally, the Company shall cede to the Reinsurers their proportionate share of the net subject written premium on all Policies written or renewed with an effective date on or after the inception of this Contract.

B. The Reinsurers shall allow the Company a thirty two percent (32%) ceding commission on all premiums ceded to the Reinsurers hereunder. The Company shall allow the Reinsurers return commission on return premiums at the same rate.

C. “Net Subject Written Premium” as used in this Contract shall mean the gross written premium of the Company for the Business Covered, plus additions, less return premium for cancellations and reductions, and less premium for reinsurance that inures to the benefit of this Contract.

ARTICLE 8

REPORTS AND REMITTANCES

A. The Company shall furnish the Reinsurers with bordereaux due at the end of each ninety (90) day period, summarizing the ceded premium, net of any applicable return premium and ceding commission, such reports to include the following items:

1. Name of Insured

2. Policy Number

3. Policy Limits

4. Effective/expiration dates

5. Premium written for the first one million dollars ($1,000,000) of limits

6. Premium written for limits excess of one million dollars ($1,000,000) up to four million dollars ($4,000,000)

7. Ceding commission on premium written

8. Premium due Reinsurer

B. The Company shall promptly notify the Reinsurer of each claim which may involve the reinsurance provided hereunder and of all subsequent developments relating thereto, stating the amount claimed and estimate of the Company’s Net Loss and Loss Adjustment Expenses.

11.

C. The Company shall advise the Reinsurer of all claims which:

1. Are reserved by the Company for an amount in excess of fifty percent (50%) of the underlying Policy limit, or

2. Any loss involving the following injuries (regardless of incurred loss or reserve amount);

a. Originate from fatal injuries;

b. Originate from the following kinds of bodily injury:

Brain injuries resulting in impairment of physical function;

ii. Spinal injuries resulting in a partial or total paralysis of upper or lower extremities;

iii. Amputation or permanent loss of use of upper or lower extremities; Severe burn injuries;

iv. Loss of sight in one or both eyes;

v. Sexual molestation and/or rape.

     c. Claims involving Extra Contractual Obligations or Loss in Excess of Policy Limits

     d. Any Declaratory Judgment Action

D. The Company shall have the responsibility to investigate, defend or negotiate settlements of all claims and lawsuits related to Policies written by the Company and reinsured under this Contract. The Reinsurer, at its own expense, may associate with the Company in the defense of any claim, suit or other proceeding which involves or is likely to involve the reinsurance provided under this Contract, and the Company shall cooperate in every respect in the defense of any such claim, suit or proceeding.

E. The Company shall report at the end of each ninety (90) day period, Net Losses paid, Loss Adjustment Expense paid, monies recovered and net balance due either party. The net balance shall be paid within sixty (60) days after the close of the respective reporting period. Should payment due from the Reinsurers exceed one hundred thousand dollars ($100,000) as respects any one Net Loss, the Company may give the Reinsurers notice of payment made or its intention to make payment on a certain date. If the Company has paid the loss, payment shall be made by the Reinsurers immediately. If the Company intends to pay the loss by a certain date and has submitted a reasonably satisfactory proof of loss or similar document, payment shall be due from the Reinsurers twenty four (24) hours prior to that date, provided the Reinsurers have a period of five (5) working days after receipt of said notice to dispatch the payment. Cash loss amounts specifically remitted by the Reinsurers as set forth herein shall be credited to their next statement of account.

12.

     The Company shall have the right to settle all claims under its Policies. All loss settlements made by the Company, whether under strict Policy conditions or by way of compromise, that are the Business Covered and that are not an Ex-gratia Settlement shall be final and binding subject to the liability of the Company and the terms and conditions of this Contract. The Reinsurer shall follow the liability of the Company (to the extent provided in this Contract) and shall pay or allow, as the case may be, its share of each such settlement in accordance with this Contract all amounts for which it is obligated as soon as possible, but not later than ten (10) business days, of being furnished by the Company with reasonable evidence of the amount due. Reasonable evidence of the amount due shall consist of a certification by the Company, accompanied by proof of loss documentation the Company customarily presents with its claims payment requests, that the amount requested to be paid and submitted by the certification, is, upon information and belief, due and payable to the Company by the Reinsurers under the terms and conditions of this Contract.

F. In addition, the Company shall furnish the Reinsurers a periodic statement showing the unearned premium, the total reserves for outstanding Net Losses including Loss Adjustment Expense, and such other information as may be required by the Reinsurers for completion of their NAIC annual statements.

ARTICLE 9

NET LOSS

A. The term “Net Loss” shall mean the actual loss incurred by the Company from Business Covered hereunder including (i) sums paid in settlement of claims and suits and in satisfaction of judgments, (ii) prejudgment interest when added to a judgment, (iii) ninety percent (90%) of any Extra-Contractual Obligations (iv) ninety percent (90%) of any Losses Excess of Policy Limits, and (v) any interest on judgments other than prejudgment interest when added to a judgment. In the event that the Company’s original Policies and/or specific coverage parts of their original Policies are issued on a cost inclusive basis, such loss adjustment expenses shall be included within the Company’s Net Loss for the purposes of recovery hereunder.

B. All salvages, recoveries, payments and reversals or reductions of verdicts or judgments whether recovered, received or obtained prior or subsequent to loss settlement under this Contract, including amounts recoverable under other reinsurance whether collected or not, shall be applied as if recovered, received or obtained prior to the aforesaid settlement and shall be deducted from the actual losses sustained to arrive at the amount of the Net Loss. Nothing in this Article shall be construed to mean losses are not recoverable until the Net Loss to the Company finally has been ascertained.

C. All Loss Adjustment Expenses paid by the Company as a result of Net Losses covered hereunder shall be divided between the Company and the Reinsurers, without regard to the limit of this Contract, in proportion to their share of the Net Loss. “Loss Adjustment Expenses” shall mean and include but not be

13.

limited to: (i) expenses sustained in connection with adjustment, defense, settlement and litigation of claims and suits, satisfaction of judgments, resistance to or negotiations concerning a loss (which shall include the expenses and the pro rata share of the salaries of the Company’s field employees according to the time occupied in adjusting such loss and the expenses of the Company’s employees while diverted from their normal duties to the service of field adjustment but shall not include any salaries of officers or normal overhead expenses of the Company), (ii) legal expenses and costs incurred in connection with coverage questions regarding specific claims and legal actions, including Declaratory Judgment Expenses, connected thereto, (iii) all interest on judgments other than prejudgment interest when added to a judgment, and (iv) expenses sustained to obtain recoveries, salvages or other reimbursements, or to secure the reverse or reduction of a verdict or judgment.

D. “Declaratory Judgment Expenses” as used in this Contract shall mean legal expenses paid by the Company in the investigation, analysis, evaluation, resolution or litigation of coverage issues between the Company and its insured(s), under Policies reinsured hereunder, for a specific loss or losses tendered under such Policies, which loss or losses are not excluded under this Contract.

E. In the event there are any recoveries, salvages, or reimbursements recovered subsequent to a loss settlement, or in the event a verdict or judgment is reversed or reduced, the allocated Loss Adjustment Expenses incurred in obtaining the recovery, salvage or reimbursement or in securing the reduction or reversal shall be divided between the Company and the Reinsurers in proportion to their share of the benefit therefrom, with the expenses incurred up to the time of the loss settlement or the original verdict or judgment being divided in proportion to the share of the Company and the Reinsurers in the original loss settlement or verdict or judgment.

ARTICLE 10

EXTRA-CONTRACTUAL OBLIGATIONS/LOSS EXCESS OF POLICY LIMITS

A. “Extra-Contractual Obligations” means those liabilities not covered under any other provision of this Contract, other than Loss Excess of Policy Limits, including but not limited to compensatory, consequential, punitive, or exemplary damages together with any legal costs and expenses incurred in connection therewith, paid as damages or in settlement by the Company arising from an allegation or claim of its insured, its insured’s assignee, or other third party, which alleges negligence, gross negligence, bad faith or other tortious conduct on the part of the Company in the handling, adjustment, rejection, defense or settlement of a claim under a Policy that is the Business Covered.

B. “Loss Excess of Policy Limits” means any amount of loss, together with any legal costs and expenses incurred in connection therewith, paid as damages or in settlement by the Company in excess of its Policy Limits, but otherwise within the coverage terms of the Policy, arising from an allegation or claim of its insured, its

14.

insured’s assignee, or other third party, which alleges negligence, gross negligence, bad faith or other tortious conduct on the part of the Company in the handling of a claim under a Policy or bond that is the Business Covered, in rejecting a settlement within the Policy Limits, in discharging a duty to defend or prepare the defense in the trial of an action against its insured, or in discharging its duty to prepare or prosecute an appeal consequent upon such an action. For the avoidance of doubt, the decision by the Company to settle a claim for an amount within the coverage of the Policy but not within the Policy Limit when the Company has reasonable basis to believe that it may have legal liability to its insured or assignee or other third party on the claim will be deemed a Loss Excess of Policy Limits. The Company will provide Reinsurers an explanation relating to the Company’s motivation for settlement and use its best efforts to obtain the Reinsurers’ prior counsel and concurrence in the Company’s action. A reasonable basis shall mean it is more likely than not a trial would result in a verdict excess of the Policy Limits, in the opinion of counsel assigned to defend the insured or otherwise retained by the Company.

C. An Extra-Contractual Obligation or a Loss Excess of Policy Limits shall be deemed to have occurred on the same date as the loss covered under the Company’s original Policy and shall be considered part of the original loss (subject to other terms of this Contract.)

D. Neither an Extra-Contractual Obligation nor a Loss Excess of Policy Limits shall include a loss incurred by the Company as the result of any fraudulent or criminal act directed against the Company by any officer or director of the Company acting individually or collectively or in collusion with any other organization or party involved in the presentation, defense, or settlement of any claim under this Contract.

E. Recoveries, whether collectible or not, including any retentions and/or deductibles, from any other form of insurance or reinsurance which protect the Company against any loss or liability covered under this Article shall inure to the benefit of the Reinsurers and shall be deducted from the total amount of any Extra-Contractual Obligation and/or Loss Excess of Policy Limits in determining the amount of Extra-Contractual Obligation and/or Loss Excess of Policy Limits that shall be indemnified under this Article.

F. The Company shall be indemnified in accordance with this Article to the extent permitted by applicable law.

ARTICLE 11

TERRORISM RECOVERY

A. As respects the Insured Losses of the Company for each Program Year, to the extent the Company’s total reinsurance recoverables for Insured Losses, whether collected or not, when combined with the financial assistance available to the Company under the Act exceeds the aggregate amount of Insured Losses paid

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by the Company, less any other recoveries or reimbursements, (the “Excess Recovery”), a share of the Excess Recovery shall be allocated to the Company and the Reinsurer. The Company’s share of the Excess Recovery shall be deemed to be an amount equal to the proportion that the Company’s Insured Losses bear to the Insurer’s total Insured Losses for each Program equal to the proportion that the Reinsurer’s payment of Insured Losses under this Contract bears to the Company’s total collected reinsurance recoverables for Insured Losses. The Company shall provide the Reinsurer with all necessary data respecting the transactions covered under this Article.

B. The method set forth herein for determining an Excess Recovery is intended to be consistent with the United States Treasury Department’s construction and application of Section 103 (g)(2) of the Act. To the extent it is inconsistent, it shall be amended to conform with such construction and application, nevertheless the Company shall be the sole judge as to the allocation of TRIA Recoveries to this or to other reinsurance Contracts.

C. “Act” as used herein shall mean the Terrorism Risk Insurance Act of 2002, the Terrorism Risk Insurance Extension Act of 2005, and the Terrorism Risk Insurance Program Reauthorization Act of 2007 (“TRIPRA”) and any subsequent amendment thereof or any regulations promulgated thereunder. “Company” shall have the same meaning as “Insurer” under the Act and “Insured Losses”, and “Program Year” shall follow the definitions as provided in the Act.

ARTICLE 12

NET RETAINED LINE

A. This Contract applies only to that portion of any Policy which the Company retains net for its own account, and in calculating the amount of any loss hereunder and also in computing the amount or amounts in excess of which this Contract attaches, only loss or losses in respect of that portion of any Policy which the Company retains net for its own account shall be included.

B. The amount of the Reinsurers’ liability hereunder in respect of any loss or losses shall not be increased by reason of the inability of the Company to collect from any other Reinsurers, whether specific or general, any amounts which may have become due from such Reinsurers, whether such inability arises from the insolvency of such other Reinsurers or otherwise.

C. Inter-company reinsurance among the companies collectively called the “Company” shall be entirely disregarded for all purposes of this Contract.

D. Permission is hereby granted the Company to carry (i) underlying reinsurance and (ii) layers of catastrophe reinsurance both below and above this layer of coverage and recoveries made on the latter shall be disregarded for all purposes of this Contract and shall inure to the sole benefit of the Company.

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ARTICLE 13

ERRORS AND OMISSIONS

     Inadvertent delays, errors or omissions made by the Company in connection with this Contract shall not relieve the Reinsurer from any liability which would have attached had such error or omission not occurred, provided always that such error or omission shall be rectified as soon as possible, provided that the liability of the Reinsurer shall not extend beyond the coverage provided by this Contract nor to extend coverage to Policies that are not the Business Covered hereunder. This Article shall not apply to a sunset provision, if any in this Contract, nor to a commutation made in connection with this Contract.

ARTICLE 14

OFFSET

     The Company and the Reinsurer shall have the right to offset any balance or amounts due from one party to the other under the terms of this Contract. The party asserting the right of offset may exercise such right any time whether the balances due are on account of premiums or losses or otherwise and immediately inform the Intermediary accordingly. In the event of the insolvency of any party, offset shall be as permitted by applicable law.

ARTICLE 15

CURRENCY

A. Whenever the word “Dollars” or the “$” sign appears in this Contract, they shall be construed to mean United States Dollars and all transactions under this Contract shall be in United States Dollars.

B. Amounts paid or received by the Company in any other currency shall be converted to United States Dollars at the rate of exchange at the date such transaction is entered on the books of the Company.

ARTICLE 16

FEDERAL EXCISE TAX AND OTHER TAXES

A. To the extent that any portion of the reinsurance premium for this Contract is subject to the Federal Excise Tax (as imposed under Section 4371 of the Internal Revenue Code) and the Reinsurer is not exempt therefrom, the Reinsurers shall allow for the purpose of paying the Federal Excise Tax, a deduction by the Company of the applicable percentage of the premium payable hereon. In the event of any return of premium becoming due hereunder, the Reinsurers shall deduct the applicable same percentage from the return premium payable hereon and the Company or its agent shall take steps to recover the tax from the United

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States Government. In the event of any uncertainty, upon the written request of the Company, the Reinsurer will immediately file a certificate signed by a senior corporate officer of the Reinsurer certifying to its entitlement to the exemption from the Federal Excise Tax with respect to one or more transactions.

B. In consideration of the terms under which this Contract is issued, the Company undertakes not to claim any deduction of the premium hereon when making Canadian Tax returns or when making tax returns, other than Income or Profits Tax returns, to any State or Territory of the United States of America or to the District of Columbia.

ARTICLE 17

ACCESS TO RECORDS

A. The Company shall place at the disposal of the Reinsurer at all reasonable times, and the Reinsurer shall have the right to inspect (and make reasonable copies) through its designated representatives during the term of this Contract and thereafter, all non-privileged books, records and papers of the Company directly related to any reinsurance hereunder, or the subject matter hereof, provided that if the Reinsurer has ceased active market operations, this right of access shall be subject to that Reinsurer being current in all payments owed the Company that are not currently the subject of a formal dispute (such as the initiation of an Arbitration or Mediation). For the purposes of this Article, “non-privileged” refers to books, records and papers that are not subject to the Attorney-client privilege and Attorney-work product doctrine.

B. “Attorney-client privilege” and “Attorney-work product” shall have the meanings ascribed to each by statute and/or the court of final adjudication in the jurisdiction whose laws govern the substantive law of a claim arising under a Policy reinsured under this Contract.

C. Notwithstanding anything to the contrary in this Contract, for any claim or loss under a Policy reinsured under this Contract, should the Reinsurer assert, pursuant to the Common Interest Doctrine (“Doctrine”), that it has the right to examine any document that the Company alleges is subject to the Attorney-client privilege or the Attorney-work product privilege, upon the Reinsurer providing to the Company substantiation of any law which reasonably supports the basis for the Reinsurer’s conclusion that the Doctrine applies and the Doctrine will be upheld as applying between the Company and the Reinsurer as against third parties pursuant to the substantive law(s) which govern the claim or loss, the Company shall give the Reinsurer access to such document.

D. Notwithstanding any other provision to the contrary, once a claim and all directly related claims are finally settled by the Company, the Reinsurer shall be entitled to review all reasonable and applicable claims records that support a Company request for payment of a claim hereunder for Net Loss for Business Covered hereunder. In the event that the Reinsurer shall have paid an amount for

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Net Loss to the Company and the records do not support the obligation of the Reinsurer to have paid the claim, the Company shall promptly return any payment made in error.

ARTICLE 18

INSOLVENCY

(This Article shall be deemed to read as required to meet the statutory insolvency clause requirements of the Company.)

A. In the event of insolvency or the appointment of a conservator, liquidator, or statutory successor of the Company, the portion of any risk or obligation assumed by the Reinsurer shall be payable to the conservator, liquidator, or statutory successor on the basis of claims allowed against the insolvent Company by any court of competent jurisdiction or by any conservator, liquidator, or statutory successor of the Company having authority to allow such claims, without diminution because of that insolvency, or because the conservator, liquidator, or statutory successor has failed to pay all or a portion of any claims.

B. Payments by the Reinsurer as above set forth shall be made directly to the Company or to its conservator, liquidator, or statutory successor, except where this Contract specifically provides another payee of such reinsurance or except as provided by applicable law and regulation (such as subsection (a) of section 4118 of the New York Insurance Laws) in the event of the insolvency of the Company.

C. In the event of the insolvency of the Company, the liquidator, receiver, conservator or statutory successor of the Company shall give written notice to the Reinsurer of the pendency of a claim against the insolvent Company on the Policy or Policies reinsured within a reasonable time after such claim is filed in the insolvency proceeding and during the pendency of such claim any Reinsurer may investigate such claim and interpose, at its own expense, in the proceeding where such claim is to be adjudicated any defense or defenses which it may deem available to the Company or its liquidator, receiver, conservator or statutory successor. The expense thus incurred by the Reinsurer shall be chargeable subject to court approval against the insolvent Company as part of the expense of liquidation to the extent of a proportionate share of the benefit which may accrue to the Company solely as a result of the defense undertaken by the Reinsurer.

D. Where two (2) or more Reinsurers are involved in the same claim and a majority in interest elect to interpose defense to such claim, the expense shall be apportioned in accordance with the terms of this Contract as though such expense had been incurred by the Company.

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ARTICLE 19

ARBITRATION

A. Any and all disputes between the Company and the Reinsurer arising out of, relating to, or concerning this Contract, whether sounding in contract or tort and whether arising during or after termination of this Contract, shall be submitted to the decision of a board of arbitration composed of two (2) arbitrators and an umpire (“Board”) meeting at a site in the city in which the principal headquarters of the Company are located. The arbitration shall be conducted under the Federal Arbitration Act and shall proceed as set forth below.

B. A notice requesting arbitration, or any other notice made in connection therewith, shall be in writing and be sent certified or registered mail, return receipt requested to the affected parties. The notice requesting arbitration shall state in particulars all issues to be resolved in the view of the claimant, shall appoint the arbitrator selected by the claimant and shall set a tentative date for the hearing, which date shall be no sooner than ninety (90) days and no later than one hundred fifty (150) days from the date that the notice requesting arbitration is mailed. Within thirty (30) days of receipt of claimant’s notice, the respondent shall notify claimant of any additional issues to be resolved in the arbitration and of the name of its appointed arbitrator.

C. The members of the Board shall be impartial, disinterested and not currently representing any party participating in the arbitration, and shall be current or former senior officers of insurance or reinsurance concerns, experienced in the line(s) of business that are the subject of this Contract. The Company and the Reinsurer as aforesaid shall each appoint an arbitrator and the two (2) arbitrators shall choose an umpire before instituting the hearing. As time is of the essence, if the respondent fails to appoint its arbitrator within thirty (30) days after having received claimant’s written request for arbitration, the claimant is authorized to and shall appoint the second arbitrator. If the two (2) arbitrators fail to agree upon the appointment of an umpire within thirty (30) days after notification of the appointment of the second arbitrator, within ten (10) days thereof, the two (2) arbitrators shall request ARIAS U.S. (“ARIAS”) to apply its procedures to appoint an umpire for the arbitration with the qualifications set forth above in this Article. If the use of ARIAS procedures fails to name an umpire, either party may apply to a court of competent jurisdiction to appoint an umpire with the above required qualifications. The umpire shall promptly notify in writing all parties to the arbitration of his selection and of the scheduled date for the hearing. Upon resignation or death of any member of the Board, a replacement shall be appointed in the same fashion as the resigning or deceased member was appointed.

D. The claimant and respondent shall each submit initial briefs to the Board outlining the facts, the issues in dispute and the basis, authority, and reasons for their respective positions within thirty (30) days of the date of notice of appointment of the umpire. The claimant and the respondent may submit a reply brief to the

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Board within ten (10) days after filing of the initial brief(s). Initial and reply briefs may be amended by the submitting party at any time, but not later than ten (10) days prior to the date of commencement of the arbitration hearing. Reasonable responses shall be allowed at the arbitration hearing to new material contained in any amendments filed to the briefs but not previously responded to.

E. The Board shall make a decision and award with regard to the terms expressed in this Contract, the original intentions of the parties to the extent reasonably ascertainable, and the custom and usage of the insurance and reinsurance business that is the subject of this Contract. Notwithstanding any other provision of this Contract, the Board shall have the right and obligation to consider Underwriting and submission-related documents in any dispute between the parties.

F. The Board shall be relieved of all judicial formalities and the decision and award shall be based upon a hearing in which evidence shall be allowed though the formal rules of evidence shall not strictly apply. Cross examination and rebuttal shall be allowed. The Board may request a post-hearing brief to be submitted within twenty (20) days of the close of the hearing.

G. The Board shall render its decision and award in writing within thirty (30) days following the close of the hearing or the submission of post-hearing briefs, whichever is later, unless the parties consent to an extension. Every decision by the Board shall be by a majority of the members of the Board and each decision and award by the majority of the members of the Board shall be final and binding upon all parties to the proceeding. Such decision shall be a condition precedent to any right of legal action arising out of the arbitrated dispute which either party may have against the other. However, the Board is not authorized to award punitive, exemplary or enhanced compensatory damages.

H. The Board may award (i) interest at a rate not in excess of that set forth in the Article entitled LATE PAYMENTS, calculated from the date the Board determines that any amounts due the prevailing party should have been paid to the prevailing party, and (ii) applicable Attorneys’ fees and costs.

     Either party may apply to a court of competent jurisdiction for an order confirming any decision and the award; a judgment of that Court shall thereupon be entered on any decision or award. If such an order is issued, the Attorneys’ fees of the party so applying and court costs will be paid by the party against whom confirmation is sought.

J. Except in the event of a consolidated arbitration, each party shall bear the expense of the one arbitrator appointed by or for it and shall jointly and equally bear with the other party the expense of any stenographer requested, and of the umpire. The remaining costs of the arbitration proceedings shall be finally allocated by the Board.

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K. Subject to customary and recognized legal rules of privilege, each party participating in the arbitration shall have the obligation to produce those documents and as witnesses at the arbitration those of its employees, and those of its affiliates as any other participating party reasonably requests, providing always that the same witnesses and documents be obtainable and relevant to the issues before the arbitration and not be unduly burdensome or excessive in the opinion of the Board.

L. The parties may mutually agree as to pre-hearing discovery prior to the arbitration hearing and in the absence of agreement, upon the request of any party, pre-hearing discovery may be conducted as the Board shall determine in its sole discretion to be in the interest of fairness, full disclosure, and a prompt hearing, decision and award by the Board.

M. The Board shall be the final judge of the procedures of the Board, the conduct of the arbitration, of the rules of evidence, the rules of privilege, discovery and production and of excessiveness and relevancy of any witnesses and documents upon the petition of any participating party. To the extent permitted by law, the Board shall have the authority to issue subpoenas and other orders to enforce their decisions. The Board shall also have the authority to issue interim decisions or awards in the interest of fairness, full disclosure, and a prompt and orderly hearing and decision and award by the Board.

N. Upon request made to the Board not later than ten (10) days after the umpire’s appointment, the Board may order a consolidated hearing as respects common issues between the Company and all affected Reinsurers participating in this Contract if the Board is satisfied in its discretion that the issues in dispute affect more than one Reinsurer and a consolidated hearing would be in the interest of fairness, and a prompt and cost effective resolution of the issues in dispute.

O. If the parties mutually agree to or the Board orders a consolidated hearing, all other affected participating Reinsurers shall join and participate in the arbitration under time frames established by the Board and will be bound by the Board’s decision and award unless excused by the Board in its discretion. A consolidated hearing shall not result in any change or modification of any Reinsurer’s liability for its participation, that is several, but not joint shall remain the same.

P. Any Reinsurer may decline to actively participate in a consolidated arbitration if in advance of the hearing, that Reinsurer shall file with the Board a written agreement in form satisfactory to the Board to be bound by the decision and award of the Board in the same fashion and to the same degree as if it actively participated in the arbitration.

Q. In the event of an order of consolidation by the Board, the arbitrator appointed by the original Reinsurer shall be subject to being, and may be, replaced within thirty (30) days of the decision to have a consolidated arbitration by an arbitrator named collectively by the Reinsurers or in the absence of agreement, by the Lead Reinsurer, or if there is no Lead Reinsurer involved in the dispute, the

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Reinsurer with the largest participation in this Contract affected by the dispute. In the event two (2) or more Reinsurers affected by the dispute each have the same largest participation, they shall agree among themselves as to the replacement arbitrator, if any, to be appointed. The umpire shall be the final determiner in the event of any dispute over replacement of that arbitrator. All other aspects of the arbitration shall be conducted as provided for in this Article provided that (1) each party actively participating in the consolidated arbitration will have the right to its own attorney, position, and related claims and defenses; (2) each party will not, in presenting its position, be prevented from presenting its position by the position set forth by any other party; and (3) the cost and expense of the arbitration, exclusive of Attorneys’ fees (which will be borne exclusively by the respective retaining party unless otherwise determined by the Board) but including the expense of any stenographer which shall be borne by each party actively participating in the consolidated arbitration or as the Board shall determine to be fair and appropriate under the circumstances.

ARTICLE 20

SERVICE OF SUIT

A. This Article only applies to a Reinsurer domiciled outside of the United States and/or unauthorized in any state, territory or district of the United States having jurisdiction over the Company. Furthermore, this Article will not be read to conflict with or override any obligations of the parties to arbitrate their disputes under this Contract. This Article is intended as an aid to compelling arbitration if called for by this Contract or enforcing any such arbitration or arbitral award, not as an alternative to any Arbitration provision in this Contract that is applicable for resolving disputes arising out of this Contract.

B. In the event of any dispute, the Reinsurer, at the request of the Company, shall submit to the jurisdiction of a court of competent jurisdiction within the United States. Nothing in this Article constitutes or should be understood to constitute a waiver of any obligation to arbitrate disputes arising from this Contract or the Reinsurer’s rights to commence an action in any court of competent jurisdiction in the United States, to remove an action to a United States District Court, or to seek a transfer of a case to another court as permitted by the laws of the United States or of any state in the United States.

C. The Reinsurer, once the appropriate court is selected, whether such court is the one originally chosen by the Company and accepted by the Reinsurer or is determined by removal, transfer, or otherwise, as provided above, will comply with all requirements necessary to give said court jurisdiction and, in any suit instituted against any of them upon this Contract, will abide by the final decision of such court or any Appellate Court in the event of an appeal.

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D. Service of process in any such suit against the Reinsurer may be made upon Mendes and Mount, 750 Seventh Avenue, New York, New York 10019-6829, — or in substitution therefore, the Firm identified by the Reinsurer on the Reinsurer’s signature page to this Contract, — (“Firm”) and in any suit instituted, the Reinsurer shall abide by the final decision of such court or of any Appellate Court in the event of an appeal.

E. The Firm is authorized and directed to accept service of process on behalf of the Reinsurer in any such suit and/or upon the request of the Company to give a written undertaking to the Company that they shall enter a general appearance upon the Reinsurer’s behalf in the event such a suit shall be instituted.

F. Further, as required by and pursuant to any statute of any state, territory or district of the United States which makes provision therefore, the Reinsurer hereby designates the Superintendent, Commissioner or Director of Insurance or other officer specified for that purpose in the statute, or his successor or successors in office, as their true and lawful attorney upon whom may be served any lawful process in any action, suit or proceeding instituted by or on behalf of the Company or any beneficiary hereunder arising out of this Contract, and hereby designates the above-named as the person to whom the said officer is authorized to mail such process or a true copy thereof.

ARTICLE 21

CONFIDENTIALITY

A. The information, data, statements, representations and other materials provided by the Company or the Reinsurer to the other arising from consideration and participation in this Contract whether contained in the reinsurance submission, this Contract, or in materials or discussions arising from or related to this Contract, may contain confidential or proprietary information as expressly indicated by the disclosing party (“Disclosing Party”) in writing from time to time to the other party of the respective parties (“Confidential Information”). This Confidential Information is intended for the sole use of the parties to this Contract (and their affiliates involved in management or operation of assumed reinsurance business, retrocessionaires, prospective retrocessionaires, intermediaries involved in such placements, respective auditors and legal counsel) as may be necessary in analyzing and/or accepting a participation in and/or executing their respective responsibilities under or related to this Contract. Disclosing or using Confidential Information relating to this Contract, without the prior written consent of the Disclosing Party, for any purpose beyond (i) the scope of this Contract, (ii) the reasonable extent necessary to perform rights and responsibilities expressly provided for under this Contract, (iii) the reasonable extent necessary to administer, report to and effect recoveries from retrocessional Reinsurers, (iv) the reporting to regulatory or other governmental authorities as may be legally required or (v) persons with a need to know the

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information, (all of the preceding persons or entities who are legally obligated by either written agreement or otherwise to maintain the confidentiality of the Confidential Information) is expressly forbidden. Copying, duplicating, disclosing, or using Confidential Information for any purpose beyond this expressed purpose is forbidden without the prior written consent of the Disclosing Party.

B. Should a party (“Receiving Party”) receive a third party demand pursuant to subpoena, summons, or court or governmental order, to disclose Confidential Information that has been provided by another party to this Contract, the Receiving Party shall make commercially reasonable efforts to provide the Disclosing Party with written notice of any subpoena, summons, or court or governmental order, at least ten (10) days prior to such release or disclosure. Unless the Disclosing Party has given its prior permission to release or disclose the Confidential Information, the Receiving Party shall not comply with the subpoena prior to the actual date required by the subpoena. If a protective order or appropriate remedy is not obtained, the Receiving Party may disclose only that portion of the Confidential Information that it is legally obligated to disclose. However, notwithstanding anything to the contrary in this Contract, in no event, to the extent permitted by law, shall this Article require the Receiving Party not to comply with the subpoena, summons, or court or governmental order.

ARTICLE 22

PRIVACY

A. Privacy Awareness. The Company and the Reinsurer are aware of and in compliance with their responsibilities and obligations under:

1. The Gramm-Leach-Bliley Act of 1999 (the “Act”) and applicable Federal and State laws and regulations implementing the Act. The Company and the Reinsurer will only use non-public personal information as permitted by law; and

2. The applicable provisions of the Health Insurance Portability and Accountability Act (“HIPAA”) and the related requirements of any regulations promulgated thereunder including without limitation the Federal Privacy Regulations as contained in 45 CFR Part 160 and 164 (the “Federal Privacy Regulations”). The Company and the Reinsurer will only use protected health information as permitted by law.

B. Non-Disclosure. To the extent required or prohibited by applicable law or regulation, the Reinsurer shall not disclose any (a) Non-Public Personal Information or (b) protected health information (as defined in 45 CFR 164.501) it receives from the Company to anyone other than:

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1. The Reinsurer, the Reinsurer’s affiliates, legal counsel, auditors, consultants, regulators, rating agencies and any other persons or entities to whom such disclosure is required to effect, administer, or enforce a reinsurance contract; or any retrocessional reinsurance contract applicable to the losses that are the subject of this Contract, or

2. Persons or entities to whom disclosure is required by applicable law or regulation.

C. Non-Public Personal Information. “Non-Public Personal Information” shall for the purpose of this Contract mean financial or health information that personally identifies an individual, including claimants under Policies reinsured under this Contract, and which information is not otherwise available to the public.

ARTICLE 23

RESERVES

A. If, at any time during the period of this Contract and thereafter the reinsurance provided by a Reinsurer participating in this Contract does not qualify for full statutory accounting credit for reinsurance by regulatory authorities having jurisdiction over the Company (whether by reason of lack of license, accreditation or otherwise) such that a financial penalty to the Company would result on any statutory statement or report the Company is required to make or file with insurance regulatory authorities (or a court of law in the event of insolvency), the Reinsurer shall secure the Reinsurer’s share of Obligations for which such full statutory credit is not granted by those authorities in a manner, form, and amount acceptable to the Company and to all applicable insurance regulatory authorities in accordance with this Article.

B. The Reinsurer shall secure such Obligations, within thirty (30) days after the receipt of the Company’s written request regarding the Reinsurer’s share of Obligations under this Contract (but not later than December 31) of each year by either:

1. Clean, irrevocable, and unconditional evergreen letter(s) of credit issued and confirmed, if confirmation is required by the applicable insurance regulatory authorities, by a qualified United States financial institution as defined under the Insurance Law of the Company’s domiciliary state and acceptable to the Company and to insurance regulatory authorities;

2. A trust account meeting at least the standards of New York’s Insurance Regulation 114 and the Insurance Law of the Company’s domiciliary state; or

3. Cash advances or funds withheld or a combination of both, which will be under the exclusive control of the Company (“Funds Deposit”).

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C. The “Obligations” referred to herein means, subject to the preceding paragraphs, the then current (as of the end of each calendar quarter) sum of any:

1. amount of the ceded unearned premium reserve for which the Reinsurer is responsible to the Company;

2. amount of Net Losses and Loss Adjustment Expenses and other amounts paid by the Company for which the Reinsurer is responsible to the Company but has not yet paid;

3. amount of ceded reserves for Net Losses and Loss Adjustment Expenses for which the Reinsurer is responsible to the Company;

4. amount of return and refund premiums paid by the Company for which the Reinsurer is responsible to the Company but has not yet paid.

D. The Company, or its successors in interest, may draw, at any time and from time to time, upon the:

1. Established letter of credit (or subsequent cash deposit);

2. Established trust account (or subsequent cash deposit); or

3. Funds Deposit;

     without diminution or restriction because of the insolvency of either the Company or the Reinsurer for one or more of the following purposes set forth below.

E. Draws shall be made only for the following purposes:

1. To make payment to and reimburse the Company for the Reinsurer’s share of Net Loss and Loss Adjustment Expense and other amounts paid by the Company under its Policies and for which the Reinsurer is responsible under this Contract that is due to the Company but unpaid by the Reinsurer including but not limited to the Reinsurer’s share of premium refunds and returns; and

2. To obtain a cash advance of the entire amount of the remaining balance under any letter of credit in the event that the Company:

a. has received notice of non-renewal or expiration of the letter of credit or trust account;

b. has not received assurances satisfactory to the Company of any required increase in the amount of the letter of credit or trust account, or its replacement or other continuation of the letter of credit or trust account at least thirty (30) days before its stated expiration date;

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c. has been made aware that others may attempt to attach or otherwise place in jeopardy the security represented by the letter of credit or trust account; or

d. has concluded that the trustee or issuing (or confirming) bank’s financial condition is such that the value of the security represented by the letter of credit or trust account may be in jeopardy;

and under any of those circumstances where the Reinsurer’s entire Obligations, or part thereof, under this Contract remain unliquidated and undischarged at least thirty (30) days prior to the stated expiration date or at the time the Company learns of the possible jeopardy to the security represented by the letter of credit or trust account.

F. If the Company draws on the letter of credit or trust account to obtain a cash advance, the Company will hold the amount of the cash advance so obtained in the name of the Company in any qualified United States financial institution as defined under the Insurance Law of the Company’s domiciliary state in trust solely to secure the Obligations referred to above and for the use and purposes enumerated above and to return any balance thereof to the Reinsurer:

1. Upon the complete and final liquidation and discharge of all of the Reinsurer’s Obligations to the Company under this Contract; or

2. In the event the Reinsurer subsequently provides alternate or replacement security consistent with the terms hereof and acceptable to the Company.

G. The Company will prepare and forward at annual intervals or more frequently as determined by the Company, but not more frequently than quarterly to the Reinsurer a statement for the purposes of this Article, showing the Reinsurer’s share of Obligations as set forth above. If the Reinsurer’s share thereof exceeds the then existing balance of the security provided, the Reinsurer will, within fifteen (15) days of receipt of the Company’s statement, but never later than December 31 of any year, increase the amount of the letter of credit, (or subsequent cash deposit), trust account or Funds Deposit to the required amount of the Reinsurer’s share of Obligations set forth in the Company’s statement, but never later than December 31 of any year. If the Reinsurer’s share thereof is less than the then existing balance of the security provided, the Company will release the excess thereof to the Reinsurer upon the Reinsurer’s written request. The Reinsurer will not attempt to prevent the Company from holding the security provided or Funds Deposit so long as the Company is acting in accordance with this Article. The Company shall pay interest earned on the deposited amounts to the Reinsurers as the parties shall have agreed at the time of the deposit.

28.

H. Any assets deposited to a trust account will be valued according to their current fair market value and will consist only of cash (U.S. legal tender), certificates of deposit issued by a qualified United States financial institution as defined under the Insurance Law of the Company’s domiciliary state and payable in cash, and investments of the types no less conservative than those specified in Section 1404 (a)(1)(2)(3)(8) and (10) of the New York Insurance Law and which are admitted assets under the Insurance Law of the Company’s domiciliary state. Investments issued by the parent, subsidiary, or affiliate of either the Company or the Reinsurer will not be eligible investments. All assets so deposited will be accompanied by all necessary assignments, endorsements in blank, or transfer of legal title to the trustee in order that the Company may negotiate any such assets without the requirement of consent or signature from the Reinsurer or any other entity.

I. All settlements of account between the Company and the Reinsurer will be made in cash or its equivalent. All income earned and received by the amount held in an established trust account will be added to the principal.

J. The Company’s “successors in interest” will include those by operation of law, including without limitation, any liquidator, rehabilitator, receiver, or conservator.

K. The Reinsurer will take any other reasonable steps that may be required for the Company to take full credit on its statutory financial statements for the reinsurance provided by this Contract.

ARTICLE 24

LATE PAYMENTS

A. Payments from the Reinsurer to the Company for coverage providing pro rata forms of reinsurance shall have a due date as expressed in the Article entitled REPORTS AND REMITTANCES. Payments from the Reinsurer to the Company for coverage providing excess of loss reinsurance shall have as a due date the date on which the proof of loss or demand for payment is received by the Reinsurer. Payment not received within sixty (60) days of the due date shall be deemed overdue (the “Overdue Date”). Payments due from the Reinsurer to the Company will not be considered overdue if the Reinsurer requests, in writing, that such payment be made by drawing on a letter of credit or other similar method of funding that has been established for this Contract, provided that there is an adequate balance in place, and further provided that such advice to draw is received by the Company within the sixty (60) day deadline set forth above. Payments from the Company to the Reinsurer will have a due date as the date specified in this Contract and will be overdue sixty (60) days thereafter. Premium adjustments will be overdue sixty (60) days from the Contract due date or one hundred twenty (120) days after the expiration or renewal date, whichever is greater.

29.

B. In the event that this Contract provides excess of loss reinsurance, the Company will provide the Reinsurer with a reasonable proof of loss and a copy of the claim adjuster’s report(s) or any other reasonable evidence of indemnification. If subsequent to receipt of this evidence, the information contained therein is unreasonably insufficient or not in substantial accordance with the contractual conditions of this Contract, then the payment due date as specified above will be deemed to be the date upon which the Reinsurer received the additional information necessary to approve payment of the claim and the claim is presented in a reasonably acceptable manner. This paragraph is only for the purpose of establishing when a claim payment is overdue, and will not alter the provisions of the Article entitled REPORTS AND REMITTANCES_, or other pertinent contractual stipulations of this Contract.

C. If payment is made of overdue amounts within thirty (30) days of the Overdue Date, overdue amounts will bear simple interest from the overdue date at a rate determined by the annualized one month London Interbank Offered Rate for the first business day of the calendar month in which the amount becomes overdue, as published in The Wall Street Journal, plus two hundred (200) basis points to be calculated weekly. If payment is made of overdue amounts more than thirty (30) days after the Overdue Date, overdue amounts will bear simple interest from the Overdue Date at a rate determined by the annualized one month London Interbank Offered Rate for the first business day of the calendar month in which the amount becomes overdue, as published in The Wall Street Journal, plus four hundred (400) basis points to be calculated on a weekly basis, but in no event less than eight percent (8%) simple interest. If the sum of the compensating additional amount computed in respect of any overdue payment is less than one quarter of one percent (0.25%) of the amount overdue, or one thousand dollars ($1,000), whichever is greater, and/or the overdue period is one week or less, then the interest amount shall be waived. The basis point standards referred to above shall be doubled if the late payment is due from a Reinsurer who is no longer an active reinsurance market. Interest shall cease to accrue upon the party’s payment of an overdue amount to the Intermediary.

ARTICLE 25

MODE OF EXECUTION

A. This Contract may be executed by:

1. an original written ink signature of paper documents;

2. an exchange of facsimile copies showing the original written ink signature of paper documents;

3. electronic signature technology employing computer software and a digital signature or digitizer pen pad to capture a person’s handwritten signature in such a manner that the signature is unique to the person signing, is under the sole control of the person signing, is capable of

30.

verification to authenticate the signature and is linked to the document signed in such a manner that if the data is changed, such signature is invalidated.

B. The use of any one or a combination of these methods of execution shall constitute a legally binding and valid signing of this Contract.

ARTICLE 26

VARIOUS OTHER TERMS

A. This Contract shall be binding upon and inure to the benefit of the Company and Reinsurer and their respective successors and assigns provided, however, that this Contract may not be assigned by either party without the prior written consent of the other which consent may be withheld by either party in its sole unfettered discretion. This provision shall not be construed to preclude the assignment by the Company of reinsurance recoverables to another party for collection.

B. The territorial limits of this Contract shall be identical with those of the Company’s Policies.

C. This Contract shall constitute the entire agreement between the parties with respect to the Business Covered hereunder. There are no understandings between the parties other than as expressed in this Contract. Any change or modification of this Contract shall be null and void unless made by amendment to the Contract and signed by both parties.

D. Except as may be provided in the Article entitled ARBITRATION, this Contract shall be governed by and construed according to the laws of the Commonwealth of Pennsylvania, exclusive of that state’s rules with respect to conflicts of law.

E. The headings preceding the text of the Articles and paragraphs of this Contract are intended and inserted solely for the convenience of reference and shall not affect the meaning, interpretation, construction or effect of this Contract.

F. This Contract is solely between the Company and the Reinsurer, and in no instance shall any insured, claimant or other third party have any rights under this Contract.

G. If any provision of this Contract should be invalid under applicable laws, the latter shall control but only to the extent of the conflict without affecting the remaining provisions of this Contract.

H. The failure of the Company or Reinsurer to insist on strict compliance with this Contract or to exercise any right or remedy shall not constitute a waiver of any rights contained in this Contract nor estop the parties from thereafter demanding full and complete compliance nor prevent the parties from exercising any remedy.

31.

I. Each party shall be excused for any reasonable failure or delay in performing any of its respective obligations under this Contract, if such failure or delay is caused by Force Majeure. “Force Majeure” shall mean any act of God, strike, lockout, act of public enemy, any accident, explosion, fire, storm, earthquake, flood, drought, peril of sea, riot, embargo, war or foreign, federal, state or municipal order or directive issued by a court or other authorized official, seizure, requisition or allocation, any failure or delay of transportation, shortage of or inability to obtain supplies, equipment, fuel or labor or any other circumstance or event beyond the reasonable control of the party relying upon such circumstance or event; provided, however, that no such Force Majeure circumstance or event shall excuse any failure or delay beyond a period exceeding thirty (30) days from the date such performance would have been due but for such circumstance or event.

J. All Articles of this Contract shall survive the termination of this Contract until all obligations between the parties have been finally settled.

K. This Contract may be executed by the parties hereto in any number of counterparts, and by each of the parties hereto in separate counterparts, each of which counterparts, when so executed and delivered, shall be deemed to be an original, but all such counterparts shall together constitute but one and the same instrument.

L. Whenever the word “Company” is used in this Contract, such term shall mean each and all affiliated companies which are or may hereafter be under common control provided notice be given to the Reinsurers of any newly affiliated companies which may hereafter come under common control as soon as practicable, with full particulars as to how such affiliation is likely to affect this Contract. In the event that either party maintains that such affiliation calls for altering the terms of this Contract and an agreement for alteration not being arrived at, then the Business Covered of such newly affiliated company is covered at existing terms for a period not to exceed (90) ninety days after notice by either party that it does not wish to cover the business of the newly affiliated company at the existing terms.

M. The term “Reinsurer” shall refer to each Reinsurer participating severally and not jointly in this Contract. The subscribing (Re)insurers’ obligations under contracts of (re)insurance to which they subscribe are several and not joint and are limited solely to the extent of their individual subscriptions. The subscribing (Re)insurers are not responsible for the subscription of any co-subscribing (Re) insurer who for any reason does not satisfy all or part of its obligations.

N. For purposes of sending and receiving notices and payments required by this Contract other than in respect of the Articles entitled SERVICE OF SUIT and RESERVES herein, the reinsured company that is set forth first in the definition of “Company” is deemed the agent of all other reinsured companies referenced herein. In no event, however, shall any reinsured company be deemed the agent of another with respect to the terms of the Article entitled INSOLVENCY.

32.

O. Whenever the content of this Contract requires, the gender of all words shall include the masculine, feminine and neuter, and the number of all words shall include the singular and the plural. This Contract shall be construed without regard to any presumption or other rule requiring construction against the party causing this Contract to be drafted.

P. The Company shall furnish the Reinsurer, in accordance with regulatory requirements, periodic reporting of premiums and losses that relate to the Business Covered in this Contract as may be needed for Reinsurers’ completion of financial statements to regulatory authorities.

Q. When so requested in writing, the Company shall afford the Reinsurer or its representatives an opportunity to be associated with the Company, at the expense of the Reinsurer, in the defense of any claim, suit or proceeding involving this reinsurance, and the Company and the Reinsurer shall cooperate in every respect in the defense of such claim, suit or proceeding, provided the Company shall have the right to make any decision in the event of disagreement over any matter of defense or settlement.

ARTICLE 27

INTERMEDIARY

     Towers Perrin Forster & Crosby, Inc. (“Towers Perrin”) is hereby recognized as the Intermediary negotiating this Contract for all business hereunder. All communications (including but not limited to notices, statements, premium, return premium, commissions, taxes, losses, loss adjustment expense, salvages and loss settlements) relating thereto shall be transmitted to the Company or the Reinsurers through Towers Perrin, Centre Square East, 1500 Market Street, Philadelphia, Pennsylvania, 19102-4790. Payments by the Company to the Intermediary shall be deemed to constitute payment to the Reinsurers. Payments by the Reinsurers to the Intermediary shall be deemed to constitute payment to the Company only to the extent that such payments are actually received by the Company.

INSOLVENCY FUNDS EXCLUSION

All liability of the Company arising, by contract, operation of law, or otherwise, from its participation or membership, whether voluntary or involuntary, in any insolvency fund. “Insolvency fund” includes any guaranty fund, insolvency fund, plan, pool, association, fund or other arrangement, howsoever denominated, established or governed; which provides for any assessment of or payment or assumption by the Company of part or all of any claim, debt, charge, fee or other obligation of an insurer, or its successors or assigns, which has been declared by any competent authority to be insolvent, or which is otherwise deemed unable to meet any claim, debt, charge, fee or other obligation in whole or in part.

1.

NUCLEAR INCIDENT EXCLUSION CLAUSE — LIABILITY — REINSURANCE U.S.A.
(BRMA 35A)

1. This reinsurance does not cover any loss or liability accruing to the Company as a member of, or subscriber to, any association of insurers or reinsurers formed for the purpose of covering nuclear energy risks or as a direct or indirect reinsurer of any such member, subscriber or association.

2. Without in any way restricting the operation of paragraph 1 of this Clause, it is understood and agreed that for all purposes of this reinsurance all the original Policies of the Company (new, renewal and replacement) of the classes specified in Clause II of this paragraph 2 from the time specified in Clause III in this paragraph 2 shall be deemed to include the following provision (specified as the Limited Exclusion Provision):

     Limited Exclusion Provision*

I.	It is agreed that the policy does not apply under any liability coverage, to (injury, sickness, disease, death or destruction (bodily injury or property damage with respect to which an insured under the policy is also an insured under a nuclear energy liability policy issued by Nuclear Energy Liability Insurance Association, Mutual Atomic Energy Liability Underwriters or Nuclear Insurance Association of Canada, or would be an insured under any such policy but for its termination upon exhaustion of its limit of liability.
II.	Family Automobile Policies (liability only), Special Automobile Policies (private passenger automobiles, liability only), Farmers Comprehensive Personal Liability Policies (liability only), Comprehensive Personal Liability Policies (liability only) or Policies of a similar nature; and the liability portion of combination forms related to the four classes of Policies stated above, such as the Comprehensive Dwelling Policy and the applicable types of Homeowners Policies.
III.	The inception dates and thereafter of all original Policies as described in II above, whether new, renewal or replacement, being Policies which either

(a)	become effective on or after 1st May, 1960, or
(b)	become effective before that date and contain the Limited Exclusion Provision set out above;

provided this paragraph 2 shall not be applicable to Family Automobile Policies, Special Automobile Policies, or Policies or combination Policies of a similar nature, issued by the Company on New York risks, until 90 days following approval of the Limited Exclusion Provision by the Governmental Authority having jurisdiction thereof.

3. Except for those classes of Policies specified in Clause II of paragraph 2 and without in any way restricting the operation of paragraph 1 of this Clause, it is understood and agreed that for all purposes of this reinsurance the original liability Policies of the Company (new, renewal and replacement) affording the following coverages:

Owners, Landlords and Tenants Liability, Contractual Liability, Elevator Liability, Owners or Contractors (including railroad), Protective Liability, Manufacturers and Contractors Liability, Product Liability, Professional and Malpractice Liability, Storekeepers Liability, Garage Liability, Automobile Liability (including Massachusetts Motor Vehicle or Garage Liability)

shall be deemed to include, with respect to such coverages, from the time specified in Clause V of this paragraph 3, the following provision (specified as the Broad Exclusion Provision):

2.

     Broad Exclusion Provision*

     It is agreed that the policy does not apply:

Under any Liability Coverage, to (injury , sickness, disease, death or destruction (bodily injury or property damage

(a)

with respect to which an insured under the policy is also an insured under a nuclear energy liability policy issued by Nuclear Energy Liability Insurance Association, Mutual Atomic Energy Liability Underwriters or Nuclear Insurance Association of Canada, or would be an insured under any such policy but for its termination upon exhaustion of its limit of liability; or

(b)

resulting from the hazardous properties of nuclear material and with respect to which (1) any person or organization is required to maintain financial protection pursuant to the Atomic Energy Act of 1954, or any law amendatory thereof, or (2) the insured is, or had this policy not been issued would be, entitled to indemnity from the United States of America, or any agency thereof, under any agreement entered into by the United States of America, or any agency thereof, with any person or organization.

II.	Under any Medical Payments Coverage, or under any Supplementary Payments Provision relating to immediate medical or surgical re lief (first aid to expenses incurred with respect to (bodily injury, sickness, disease or death (bodily injury resulting from the hazardous properties of nuclear material and arising out of the operation of a nuclear facility by any person or organization.
III.	Under any Liability Coverage, to (injury, sickness, disease, death or destruction (bodily injury or property damage resulting from the hazardous properties of nuclear material, if

(a)	the nuclear material (1) is at any nuclear facility owned by, or operated by or on behalf of, an insured, or (2) has been discharged or dispersed therefrom;
(b)	the nuclear material is contained in spent fuel or waste at any time possessed, handled, used, processed, stored, transported or disposed of by or on behalf of an insured; or
(c)	the (injury, sickness, disease, death or destruction

     (bodily injury or property damage arises out of the furnishing by an insured of services, materials, parts or equipment in connection with the planning, construction, maintenance, operation or use of any nuclear facility, but if such facility is located within the United States of America, its territories, or possessions or Canada, this exclusion (c) applies only to (injury to or destruction of properly at such nuclear facility (property damage to such nuclear facility and any property thereat.

IV.

As used in this endorsement:

“Hazardous properties” include radioactive, toxic or explosive properties; “nuclear material” means source material, special nuclear material or byproduct material; “source material”, “special nuclear material”, and “byproduct material” have the meanings given them in the Atomic Energy Act of 1954 or in any law amendatory thereof; “spent fuel” means any fuel element or fuel component, solid or liquid, which has been used or exposed to radiation in a nuclear reactor; “waste” means any waste material (1) containing byproduct material other than tailings or wastes produced by the extraction or concentration of uranium or thorium from any ore processed primarily for its source material content, and (2) resulting from the operation by any person or organization of any nuclear facility included under the first two paragraphs of the definition of nuclear facility; “nuclear facility” means:

3.

(a)	any nuclear reactor,
(b)	any equipment or device designed or used for (1) separating the isotopes of uranium or plutonium, (2) processing or utilizing spent fuel, or (3) handling, processing or packaging waste,
(c)	any equipment or device used for the processing, fabricating or alloying of special nuclear material if at any time the total amount of such material in the custody of the insured at the premises where such equipment or device is located consists of or contains more than 25 grams of plutonium or uranium 233 or any combination thereof, or more than 250 grams of uranium 235,
(d)	any structure, basin, excavation, premises or place prepared or used for the storage or disposal of waste,

and includes the site on which any of the foregoing is located, all operations conducted on such site and all premises used for such operations; “nuclear reactor’ means any apparatus designed or used to sustain nuclear fission in a self-supporting chain reaction or to contain a critical mass of fissionable material;

(With respect to injury to or destruction of property, the word “injury” or “destruction” (“property damage” includes all forms of radioactive contamination of property. (includes all forms of radioactive contamination of property

V. The inception dates and thereafter of all original Policies affording coverages specified in this paragraph 3, whether new, renewal or replacement, being Policies which become effective on or after 1st May, 1960, provided this paragraph 3 shall not be applicable to:

(a)	Garage and Automobile Policies issued by the Company on New York risks, or
(b)	statutory liability insurance required under Chapter 90, General Laws of Massachusetts,
	until 90 days following approval of the Broad Exclusion Provision by the Governmental Authority having jurisdiction thereof.

4. Without in any way restricting the operation of paragraph 1 of this Clause, it is understood and agreed that paragraphs 2 and 3 above are not applicable to original liability Policies of the Company in Canada and that with respect to such Policies this Clause shall be deemed to include the Nuclear Energy Liability Exclusion Provisions adopted by the Canadian Underwriters’ Association or the Independent Insurance Conference of Canada.

*NOTE:     The words printed in italics in the Limited Exclusion Provision and in the Broad Exclusion Provision shall apply only in relation to original liability Policies which include a Limited Exclusion Provision or a Broad Exclusion Provision containing those words.

1.

NUCLEAR INCIDENT EXCLUSION CLAUSE — LIABILITY — REINSURANCE
CANADA (BRMA 35D)

1. This Agreement does not cover any loss or liability accruing to the Company as a member of, or subscriber to, any association of insurers or reinsurers formed for the purpose of covering nuclear energy risks or as a direct or indirect reinsurer of any such member, subscriber or association.

2. Without in any way restricting the operation of paragraph 1 of this clause, it is agreed that for all purposes of this Agreement all the original liability contracts of the Company, whether new, renewal or replacement, of the following classes, namely:

     Personal Liability

     Farmers’ Liability

     Storekeepers’ Liability

which become effective on or after 31st December 1984, shall be deemed to include, from their inception dates and thereafter, the following provision:

Limited Exclusion Provision

This Policy does not apply to bodily injury or property damage with respect to which the Insured is also insured under a contract of nuclear energy liability insurance (whether the Insured is unnamed in such contract and whether or not it is legally enforceable by the Insured) issued by the Nuclear Insurance Association of Canada or any other group or pool of insurers or would be an Insured under any such Policy but for its termination upon exhaustion of its limits of liability.

With respect to property, loss of use of such property shall be deemed to be property damage.

3. Without in any way restricting the operation of paragraph 1 of this clause, it is agreed that for all purposes of this Agreement all the original liability contracts of the Company, whether new, renewal or replacement, of any class whatsoever (other than Personal Liability, Farmers’ Liability, Storekeepers’ Liability or Automobile Liability contracts), which become effective on or after 31st December 1984, shall be deemed to include from their inception dates and thereafter, the following provision:

     Broad Exclusion Provision

     It is agreed that this Policy does not apply:

(a)	To liability imposed by or arising under the Nuclear Liability Act; nor
(b)	To bodily injury or property damage with respect to which an Insured under this Policy is also insured under a contract of nuclear energy liability insurance (whether the Insured is unnamed in such contract and whether or not it is legally enforceable by the Insured) issued by the Nuclear Insurance Association of Canada or any other insurer or group or pool of insurers or would be an Insured under any such Policy but for its termination upon exhaustion of its limit of liability; nor
(c)	To bodily injury or property damage resulting directly or indirectly from the nuclear energy hazard arising from:

i)	the ownership, maintenance, operation or use of a nuclear facility by or on behalf of an Insured.
ii)	the furnishing by an Insured of services, materials, parts or equipment in connection with the planning, construction, maintenance, operation or use of any nuclear facility; and

2.

iii) the possession, consumption, use, handling, disposal or transportation of fissionable substances, or of other radioactive material (except radioactive isotopes, away from a nuclear facility, which have reached the final stage of fabrication so as to be useable for any scientific, medical, agricultural, commercial or industrial purpose) used, distributed, handled or sold by an Insured.

As used in this Policy:

1. The term “nuclear energy hazard” means the radioactive, toxic, explosive or other hazardous properties of radioactive material.

2. The term “radioactive material^" means uranium, thorium, plutonium, neptunium, their respective derivatives and compounds, radioactive isotopes of other elements and any other substances that the Atomic Energy Control Board may, by regulation, designate as being prescribed substances capable of releasing atomic energy, or as being requisite for the production, use or application of atomic energy.

3. The term “nuclear facility” means:

(a)	Any apparatus designed or used to sustain nuclear fission in a self-supporting chain reaction or to contain a critical mass of plutonium, thorium and uranium or any one or more of them;
(b)	Any equipment or device designed or used for (1) separating the isotopes of plutonium, thorium and uranium or any one or more of them, (2) processing or utilizing spent fuel, or (3) handling, processing or packaging waste;
(c)	Any equipment or device used for the processing, fabricating or alloying of plutonium, thorium or uranium enriched in the isotope uranium 233 or in the isotope uranium 235, or any one or more of them if at any time the total amount of such material in the custody of the Insured at the premises where such equipment or device is located consists of or contains more than 25 grams of plutonium or uranium 233 or any combination thereof, or more than 250 grams of uranium 235;
(d)	Any structure, basin, excavation, premises or place prepared or used for the storage or disposal of waste radioactive material;

and includes the site on which any of the foregoing is located, together with all operations conducted thereon and all premises used for such operations.

4. The term “fissionable substance” means any prescribed substance that is, or from which can be obtained, a substance capable of releasing atomic energy by nuclear fission.

5. With respect to property, loss of use of such property shall be deemed to be property damage.

EX-10.15

Exhibit 10.15

PROPERTY EXCESS OF LOSS REINSURANCE CONTRACT

EFFECTIVE JANUARY 1, 2009

between

PENN MILLERS INSURANCE COMPANY

AMERICAN MILLERS INSURANCE COMPANY

WILKES-BARRE, PENNSYLVANIA
(hereinafter called the “Company”)

by

THE UNDERWRITERS AT LLOYD’S
who are signatories hereto, each for the
proportion underwritten and not one for another

(hereinafter called the “Reinsurers”)

Under the terms of this Contract the above Reinsurers agree to assume

EXHIBIT “I” — FIRST EXCESS:	a 00.00% share
EXHIBIT “II” — SECOND EXCESS:	a 40.00% share
EXHIBIT “III” – THIRD EXCESS	a 30.00% share

of the liability described in the attached Contract and, as consideration, the above Reinsurers shall receive the same proportionate share of the premium named therein.

Signed in London, England, this           day of           , 2009.

The share attaching to this Contract is subscribed by the Underwriters, Members of the Syndicates the definitive numbers of which and the proportions reinsured are contained in the schedule attached.

PROPERTY EXCESS OF LOSS REINSURANCE CONTRACT

EFFECTIVE JANUARY 1, 2009

between

PENN MILLERS INSURANCE COMPANY

AMERICAN MILLERS INSURANCE COMPANY

WILKES-BARRE, PENNSYLVANIA

by

ARCH REINSURANCE COMPANY

NEBRASKA

(hereinafter called, with other participants, the “Reinsurers”)

Under the terms of this Contract the above Reinsurers agree to assume severally and not jointly with other participants

EXHIBIT “I” — FIRST EXCESS:	a 00.00% share
EXHIBIT “II” — SECOND EXCESS:	a 00.00% share
EXHIBIT “II” — THIRD EXCESS	a 10.00% share

of the liability described in the attached Contract and, as consideration, the above Reinsurers shall receive the same proportionate share of the premium named therein.

Signed in Philadelphia, Pennsylvania, this           day of           , 2009,

ARCH REINSURANCE COMPANY

BY

TITLE

PROPERTY EXCESS OF LOSS REINSURANCE CONTRACT

EFFECTIVE JANUARY 1, 2009

between

PENN MILLERS INSURANCE COMPANY

AMERICAN MILLERS INSURANCE COMPANY

WILKES-BARRE, PENNSYLVANIA

by

EMPLOYERS MUTUAL CASUALTY COMPANY

IOWA

(hereinafter called, with other participants, the “Reinsurers”)

Under the terms of this Contract the above Reinsurers agree to assume severally and not jointly with other participants

EXHIBIT “I” — FIRST EXCESS:	a 07.50% share
EXHIBIT “II” — SECOND EXCESS:	a 07.50% share
EXHIBIT “II” — THIRD EXCESS	a 07.50% share

of the liability described in the attached Contract and, as consideration, the above Reinsurers shall receive the same proportionate share of the premium named therein.

Signed in Des Moines, Iowa, this      day of      , 2009,

EMPLOYERS MUTUAL CASUALTY COMPANY

BY

TITLE

PROPERTY EXCESS OF LOSS REINSURANCE CONTRACT

EFFECTIVE JANUARY 1, 2009

between

PENN MILLERS INSURANCE COMPANY

AMERICAN MILLERS INSURANCE COMPANY

WILKES-BARRE, PENNSYLVANIA

by

PARTNER REINSURANCE COMPANY OF THE U.S.

NEW YORK

(hereinafter called, with other participants, the “Reinsurers”)

Under the terms of this Contract the above Reinsurers agree to assume severally and not jointly with other participants

EXHIBIT “I” — FIRST EXCESS:	a 12.50% share
EXHIBIT “II” — SECOND EXCESS:	a 07.50% share
EXHIBIT “II” — THIRD EXCESS	a 00.00% share

of the liability described in the attached Contract and, as consideration, the above Reinsurers shall receive the same proportionate share of the premium named therein.

Signed in Greenwich, Connecticut, this      day of      , 2009,

PARTNER REINSURANCE COMPANY OF THE U.S.

BY

TITLE

PROPERTY EXCESS OF LOSS REINSURANCE CONTRACT

EFFECTIVE JANUARY 1, 2009

between

PENN MILLERS INSURANCE COMPANY

AMERICAN MILLERS INSURANCE COMPANY

WILKES-BARRE, PENNSYLVANIA

by

SWISS REINSURANCE AMERICA CORPORATION

NEW YORK

(hereinafter called, with other participants, the “Reinsurers”)

Under the terms of this Contract the above Reinsurers agree to assume severally and not jointly with other participants

EXHIBIT “I” — FIRST EXCESS:	a 05.00% share
EXHIBIT “II” — SECOND EXCESS:	a 00.00% share
EXHIBIT “II” — THIRD EXCESS	a 00.00% share

of the liability described in the attached Contract and, as consideration, the above Reinsurers shall receive the same proportionate share of the premium named therein.

Signed in Schaumburg, Illinois, this      day of      , 2009,

SWISS REINSURANCE AMERICA

CORPORATION BY: Swiss Re

BY

TITLE

PROPERTY EXCESS OF LOSS REINSURANCE CONTRACT

EFFECTIVE JANUARY 1, 2009

between

PENN MILLERS INSURANCE COMPANY

AMERICAN MILLERS INSURANCE COMPANY

WILKES-BARRE, PENNSYLVANIA

by

TRANSATLANTIC REINSURANCE COMPANY

NEW YORK

(hereinafter called, with other participants, the “Reinsurers”)

Under the terms of this Contract the above Reinsurers agree to assume severally and not jointly with other participants

EXHIBIT “I” — FIRST EXCESS:	a 05.00% share
EXHIBIT “II” — SECOND EXCESS:	a 05.00% share
EXHIBIT “II” — THIRD EXCESS	a 07.50% share

of the liability described in the attached Contract and, as consideration, the above Reinsurers shall receive the same proportionate share of the premium named therein.

Signed in New York, New York, this      day of      , 2009,

TRANSATLANTIC REINSURANCE COMPANY

BY

TITLE

PROPERTY EXCESS OF LOSS REINSURANCE CONTRACT

EFFECTIVE JANUARY 1, 2009

between

PENN MILLERS INSURANCE COMPANY

AMERICAN MILLERS INSURANCE COMPANY

WILKES-BARRE, PENNSYLVANIA

by

HANNOVER RUCKVERSICHERUNG AG

HANNOVER, GERMANY

(hereinafter called, with other participants, the “Reinsurers”)

Under the terms of this Contract the above Reinsurers agree to assume severally and not jointly with other participants

EXHIBIT “I” — FIRST EXCESS:	a 40.00% share
EXHIBIT “II” — SECOND EXCESS:	a 20.00% share
EXHIBIT “II” — THIRD EXCESS	a 25.00% share

of the liability described in the attached Contract and, as consideration, the above Reinsurers shall receive the same proportionate share of the premium named therein.

Signed in Hannover, Germany, this      day of      , 2009,

HANNOVER RUCKVERSICHERUNG AG

BY

TITLE

PROPERTY EXCESS OF LOSS REINSURANCE CONTRACT

EFFECTIVE JANUARY 1, 2009

between

PENN MILLERS INSURANCE COMPANY

AMERICAN MILLERS INSURANCE COMPANY

WILKES-BARRE, PENNSYLVANIA

by

R + V VERSICHERUNG AG

WIESBADEN, GERMANY

(hereinafter called, with other participants, the “Reinsurers”)

Under the terms of this Contract the above Reinsurers agree to assume severally and not jointly with other participants

EXHIBIT “I” — FIRST EXCESS:	a 30.00% share
EXHIBIT “II” — SECOND EXCESS:	a 20.00% share
EXHIBIT “II” — THIRD EXCESS	a 20.00% share

of the liability described in the attached Contract and, as consideration, the above Reinsurers shall receive the same proportionate share of the premium named therein.

Signed in Wiesbaden, Germany, this      day of     , 2009,

R + V VERSICHERUNG AG

BY

TITLE

      and signed in Wilkes-Barre, Pennsylvania, this      day of      ,2009.

PENN MILLERS INSURANCE COMPANY

AMERICAN MILLERS INSURANCE COMPANY

BY

TITLE

PROPERTY EXCESS OF LOSS REINSURANCE CONTRACT

EFFECTIVE JANUARY 1, 2009

issued to

PENN MILLER INSURANCE COMPANY

AMERICAN MILLERS INSURANCE COMPANY

PENN MILLERS INSURANCE COMPANY

AMERICAN MILLERS INSURANCE COMPANY

PROPERTY EXCESS OF LOSS REINSURANCE CONTRACT

EFFECTIVE JANUARY 1, 2009

INDEX

ARTICLE	SUBJECT	PAGE
ARTICLE 1	BUSINESS COVERED		1
ARTICLE 2	COMMENCEMENT AND TERMINATION		1
ARTICLE 3	SPECIAL TERMINATION		2
ARTICLE 4	EXCLUSIONS		4
ARTICLE 5	RETENTION AND LIMIT		7
ARTICLE 6	REINSTATEMENT		7
ARTICLE 7	PREMIUM		7
ARTICLE 8	DEFINITION OF LOSS OCCURRENCE		7
ARTICLE 9	NET LOSS		9
ARTICLE 10	EXTRA CONTRACTUAL OBLIGATIONS/      LOSS EXCESS OF POLICY LIMITS		10
ARTICLE 11	TERRORISM RECOVERY		11
ARTICLE 12	NET RETAINED LINE		12
ARTICLE 13	NOTICE OF LOSS AND LOSS SETTLEMENT		13
ARTICLE 14	ERRORS AND OMISSIONS		13
ARTICLE 15	OFFSET		14
ARTICLE 16	CURRENCY		14
ARTICLE 17	FEDERAL EXCISE TAX AND OTHER TAXES		14
ARTICLE 18	ACCESS TO RECORDS		15
ARTICLE 19	INSOLVENCY		16
ARTICLE 20	ARBITRATION		17
ARTICLE 21	SERVICE OF SUIT		20
ARTICLE 22	CONFIDENTIALITY		21
ARTICLE 23	PRIVACY		22
ARTICLE 24	RESERVES		23
ARTICLE 25	LATE PAYMENTS		26
ARTICLE 26	MODE OF EXECUTION		28
ARTICLE 27	VARIOUS OTHER TERMS		28
ARTICLE 28	INTERMEDIARY		31

ATTACHMENTS:

NUCLEAR INCIDENT EXCLUSION CLAUSE — PHYSICAL DAMAGE —

REINSURANCE (BRMA 35B)
INFORMATION TECHNOLOGY HAZARDS CLARIFICATION CLAUSE (NMA2912)
EXHIBIT I — PROPERTY FIRST EXCESS OF LOSS REINSURANCE
EXHIBIT II — PROPERTY SECOND EXCESS OF LOSS REINSURANCE
EXHIBIT III — PROPERTY THIRD
EXCESS OF LOSS REINSURANCE

1.

PENN MILLERS INSURANCE COMPANY

AMERICAN MILLERS INSURANCE COMPANY

PROPERTY EXCESS OF LOSS REINSURANCE CONTRACT

EFFECTIVE JANUARY 1, 2009

ARTICLE 1

BUSINESS COVERED

A. This Contract applies to all Loss Occurrences that occur with a date of loss during the term of this Contract and arising from those Policies, except as hereinafter excluded, classified by the Company as Property, that are in force at the inception of the term of this Contract or written with a Policy period (new or renewal) effective during the term of this Contract, including renewals (“Business Covered”).

B. The term “Policies”, whenever used herein, shall mean all binders, policies, contracts, certificates and other obligations, whether oral or written, of insurance or reinsurance that are Business Covered.

C. The reinsurance of all Business Covered hereunder shall be subject in all respects to the same risks, terms, clauses, conditions, interpretations, alterations, modifications, cancellations and waivers as the respective insurances (or reinsurances) of the Company’s Policies and the Reinsurer shall pay losses as may be paid thereon, subject to the liability of the Company and the terms and conditions of this Contract.

ARTICLE 2

COMMENCEMENT AND TERMINATION

A. This Contract shall incept at 12:01 a.m., Eastern Standard Time, January 1, 2009, and shall remain in force until 12:01 a.m., Eastern Standard Time, January 1, 2010.

B. Should this Contract terminate while a Loss Occurrence is in progress, Reinsurers shall remain liable for all losses resulting from such Loss Occurrence as if the entire loss had occurred during the term of this Contract

2.

ARTICLE 3

SPECIAL TERMINATION

A. The Company or the Reinsurer may terminate, or commute obligations arising under this Contract in accordance with Paragraph C. below, upon the happening of any one of the following circumstances at any time by the giving of thirty (30) days prior written notice to the other party:

1. A party ceases active underwriting operations or a State Insurance Department or other legal authority orders the Reinsurer to cease writing business in all jurisdictions; or

2. The Reinsurer has filed a plan to enter into a Scheme of Arrangement or similar procedure. “Scheme of Arrangement” is defined as a legislative or regulatory process that provides a solvent Reinsurer the opportunity to settle its obligations with the Company either (i) without the Company’s unrestrained consent or (ii) prior to the Company having the ability to determine, with exact certainty, the actual amount of the obligations still outstanding and ultimately due to the Company. or

3. A party has: a) become insolvent, b) been placed under supervision (voluntarily or involuntarily), c) been placed into liquidation or receivership, or d) had instituted against it proceedings for the appointment of a supervisor, receiver, liquidator, rehabilitator, conservator or trustee in bankruptcy, or other agent known by whatever name, to take possession of its assets or control of its operations; or

4. A reduction in the Reinsurer’s surplus, risk based capital or financial strength rating occurs:

a. As respects Reinsurers domiciled in the United States of America, (i) the Reinsurer’s policyholders’ surplus (“PHS”) has been reduced by, whichever is greater, thirty percent (30%) of the amount of PHS at the inception of this Contract or thirty percent (30%) of the amount of PHS stated in its last filed quarterly or annual statutory statement with its state of domicile; or (ii) the Reinsurer’s total adjusted capital is less than two hundred percent (200%) of its authorized control level risk-based capital; or (iii) the Reinsurer’s AM Best’s Insurer financial strength rating becomes less than “A-”.

b. As respects Reinsurers domiciled outside the United States of America, other than Lloyd’s Syndicates (i) the Reinsurer’s Capital & Surplus (“C&S”) has been involuntarily reduced by, whichever is

3.

greater, thirty percent (30%) of the published currency amount of C&S at the inception of this Contract or thirty percent (30%) of the published currency amount of C&S stated in its last filed financial statement with its local regulatory authority; or (ii) as respects Lloyd’s Syndicates, the Reinsurer’s total stamp capacity has been reduced by more than thirty percent (30%) of the amount of total stamp capacity which stood at the inception of this Contract. (This provision does not apply to any Lloyd’s Syndicate that voluntarily reduces its total stamp capacity.) or (iii) the Reinsurer’s AM Best’s insurer financial strength rating becomes less than “A-” or the Reinsurer’s Standard & Poor’s Insurance Rating becomes less than “BBB”. or

5. A party has entered into a definitive agreement to (a) become merged with, acquired or controlled by any company, corporation or individual(s) not controlling or affiliated with the party’s operations previously; or (b) directly or indirectly assign all or essentially all of its entire liability for obligations under this Contract to another party without the other party’s prior written consent; or

6. There is either:

a. a severance or obstruction of free and unfettered communication and/or normal commercial or financial intercourse between the United States of America and the country in which the Reinsurer is incorporated or has its principal office as a result of war, currency regulations or any circumstances arising out of political, financial or economic uncertainty; or

b. a severance (of any kind) of any two (2) or more of the following executives of the Reinsurer from active employment of the Reinsurer during the most recent forty five (45) day period: chief underwriting officer, chief actuary, chief executive officer or chief financial officer. This condition does not apply whenever the severance in employment is for the publicly announced purpose of the individual’s assuming within thirty (30) days a known position with another identified firm in the (re)insurance industry or related field.

B. In the event the Company elects to terminate, the Company shall, with the notice of termination, specify that termination will be on a Cut-Off basis, in which event the Company shall relieve the Reinsurer for losses occurring subsequent to the specified Termination Date, and that Reinsurer shall not receive deposit premium installments beyond the date at which termination of the Reinsurer is effected. The Reinsurer shall within fifteen (15) days of the Termination Date return a

4.

pro-rata portion of any ceded deposit premium paid hereunder, calculated as of the Termination Date, and cash in that amount (less applicable ceding commission, if any, allowed thereon) and the minimum premium provisions, if any, shall be waived. (The fraction of the deposit premium to be returned to the Company shall equal the number of days from the Termination Date until the original expiration date of the Contract period divided by the number of days in the original Contract period) Upon final determination of the adjusted premium for the Contract period, the Reinsurer shall be credited with a portion of premium for this Contract, in the amount equal to the fraction of the number of days the terminated Reinsurer participated in the Contract period divided by the number of days in the Contract period multiplied by the reinsurance premium for the Contract period.

C. If both parties agree to commute, then within sixty (60) days after such agreement, the Company shall submit a statement of valuation of the total of the net present value (“capitalized”) of the ceded (1) Net Loss Reserves, (2) Loss Adjustment Expense Reserves, and (3) unearned premium reserve, after deduction for any ceding commission allowed thereon, (the “Valuation Statement”). If agreement cannot be reached, the effort can be abandoned or alternately the Company and the Reinsurers may mutually appoint an actuary or appraiser to investigate, determine the capitalized value of the reserves to be returned to the Company. Such actuary shall be an independent and neutral actuary, Casualty Actuarial Society, experienced in such matters and the mutually agreed actuary shall render a decision. In the event that the Company and the Reinsurer are unable to agree upon a single actuary within thirty (30) days, the parties shall ask the then current President of the Casualty Actuarial Society to appoint an actuary with those qualifications within another thirty (30) days. The decision of the actuary will be final and binding on both parties. The Company and the Reinsurer shall share equally the fees and expenses of the actuary. Upon payment of the amount so agreed or determined by the actuary to the Company, the Reinsurer and the Company shall each be completely released from all liability to each other under this Contract.

ARTICLE 4

EXCLUSIONS

A. This Contract shall not cover:

1. Reinsurance treaty business, including pro rata and excess of loss, assumed by the Company but not to include business from affiliated companies.

2. Business written on a co-indemnity basis not controlled by the Company.

5.

3. Damage to growing and standing crops, not to include nursery stock for wholesale or retail, and not to include crops, including mushrooms, growing in a building.

4. Policies of Excess of Loss Reinsurance.

5. Financial Guarantee and Insolvency.

6. Liability assumed by the Company as a member of a Syndicate, Pool or Underwriting Association; however, this does not apply to participation in assigned risk plans;

7. Any liability of the Company arising, by contract, operation of law, or otherwise, from its participation or membership, whether voluntary or involuntary, in any insolvency fund. “Insolvency Fund” includes any guaranty fund, insolvency fund, plan, pool, association, fund or other arrangement, howsoever denominated, established or governed, which provides for any assessment of or payment or assumption by the Company of part or all of any claim, debt, charge, fee or other obligation of an insurer, or its successors or assigns, which has been declared by any competent authority to be insolvent, or which is otherwise deemed unable to meet any claim, debt, charge, fee or other obligation in whole or in part.

8. Policies classified as Personal Accident, Health, Workers’ Compensation, Bodily Injury Liability (including Medical Payments), Property Damage Liability, Fidelity, Surety, Boiler and Machinery, Plate Glass and similar classes of insurance or reinsurance customarily written by casualty insurance companies, except for such perils as may be included under the Property Section of Multiple Peril Policies.

9. Flood, except under Transportation or other Inland Marine or Multiple Peril Policies or under Automobile Physical Damage Policies or written as a part of the General Property Form or the Special Property Form.

10. Loss or liability excluded by the provisions of the “Nuclear Incident Exclusion Clause — Physical Damage — Reinsurance (BRMA 35A)” attached to and forming part of this Contract.

11. Seepage and/or Pollution as per original Policies. Furthermore, Reinsurers agree that this exclusion does not apply to overspraying of anhydrous ammonia, fertilizers and agricultural chemicals.

12. Transmission and Distribution Lines and their supporting structures other than those on or within one thousand (1,000) feet of the insured premises.

6.

13. Information Technology Hazards Clarification Clause (NMA 2912).

14. Loss resulting from an act of certified or non-certified terrorism, as defined in the Article entitled RETENTION AND LIMIT of this Contract, that involves the use, release, or escape of nuclear materials, or directly or indirectly results in nuclear reaction or radiation or radioactive contamination; or that is carried out by means of the dispersal or application of pathogenic or poisonous biological or chemical materials that are released.

15. Regarding interests which at time of loss or damage are on shore, any loss or damage which is occasioned by war, invasion, hostilities, acts of foreign enemies, civil war, rebellion, insurrection, military or usurped power, or martial law or confiscation by order of any government or public authority.

     This War Exclusion Clause shall not, however, apply to interests which at time of loss or damage are within the territorial limits of the United States of America (comprising the fifty States of the Union and the District of Columbia and including Bridges between the U.S.A. and Mexico, provided they are under United States ownership), Canada, St. Pierre and Miquelon, provided such interests are insured under Policies, endorsements, or binders containing a standard war or hostilities or warlike operations exclusion clause.

B. As respects Paragraph A. above, if the Company, without the knowledge and consent of its Home Office, is bound on a risk excluded above (other than Exclusions A(5) Financial Guarantee and Insolvency, A(6) Syndicates, Pools or Underwriting Associations, A(7) Insolvency Funds Exclusion, A(9) Flood, A(10) Nuclear Incident Exclusion Clause, A(11) Seepage and/or Pollution Exclusion Clause, A(13) Transmission and Distribution Lines, A(14) Information Technology Hazards Clarification Clause (NMA 2912) A(15) NBC Terrorism, and A(16) War) such risk shall be covered hereunder until the Company receives knowledge thereof.

     The Company agrees to use due diligence in canceling such risk immediately after knowledge thereof is received by its Home Office. However, if any state regulatory authority or the laws or regulations of any state prohibit the Company from canceling a risk for any reason, such risk shall remain covered hereunder until the Company is permitted to cancel the risk by the regulatory authority or the applicable laws or regulations. However, not to exceed eighteen (18) months.

C. Any exclusion listed above (other than exclusions A(5), A(6), A(7), A(9), A(10), A(11), A(13), A(14), A(15) and A(16)), shall be automatically waived as respects a Policy issued by the Company on a risk with respect to which only a minor or incidental part of the operations covered involves the exclusion. An incidental part

7.

of an insured’s regular operations shall mean not greater than ten percent (10%) of the insured’s regular operations.

ARTICLE 5

RETENTION AND LIMIT

See Exhibits I, II and III attached to and forming part of this Contract.

ARTICLE 6

REINSTATEMENT

See Exhibits I, II and III attached to and forming part of this Contract.

ARTICLE 7

PREMIUM

See Exhibits I, II and III attached to and forming part of this Contract.

ARTICLE 8

DEFINITION OF LOSS OCCURRENCE

A. The term “Loss Occurrence” shall mean the sum of all individual losses directly occasioned by any one disaster, accident or loss or series of disasters, accidents or losses arising out of one event which occurs within the area of one state of the United States or province of Canada and states or provinces contiguous thereto and to one another. However, the duration and extent of any one “Loss Occurrence” shall be limited to all individual losses sustained by the Company occurring during any period of one hundred sixty-eight (168) consecutive hours arising out of and directly occasioned by the same event except that the term “Loss Occurrence” shall be further defined as follows:

1. As regards windstorm, hail, tornado, hurricane, cyclone, including ensuing collapse and water damage, all individual losses sustained by the Company occurring during any period of seventy two (72) consecutive hours arising out of and directly occasioned by the same event. However, the event need not be limited to one state or province or states or provinces contiguous thereto.

2. As regards riot, riot attending a strike, civil commotion, vandalism and malicious mischief, all individual losses sustained by the Company

8.

occurring during any period of seventy two (72) consecutive hours within the area of one municipality or county and the municipalities or counties contiguous thereto arising out of and directly occasioned by the same event. The maximum duration of seventy two (72) consecutive hours may be extended in respect of individual losses which occur beyond such seventy two (72) consecutive hours during the continued occupation of an insured’s premises by strikers, provided such occupation commenced during the aforesaid period.

3. As regards earthquake (the epicenter of which need not necessarily be within the territorial confines referred to in the opening paragraph of this Article) and fire following directly occasioned by the earthquake, only those individual fire losses which commence during the period of one hundred sixty eight (168) consecutive hours may be included in the Company’s “Loss Occurrence”.

4. As regards “Freeze”, only individual losses directly occasioned by collapse, breakage of glass and water damage (caused by bursting of frozen pipes and tanks) may be included in the Company’s “Loss Occurrence”.

5. As regards firestorms, brush fires and any other fires or series of fires, irrespective of origin (except as provided in A(2) and A(3) above), which spread through trees, grassland or other vegetation, all individual losses sustained by the Company which commence during any period of one hundred sixty eight (168) consecutive hours within a one hundred (100) mile radius of any fixed point selected by the Company where a claim has actually been made may be included in the Company’s “Loss Occurrence.” However, an individual loss subject to this subparagraph cannot be included in more than one Loss Occurrence.

B. For all “Loss Occurrences”, other than those referred to in A(2) of this Article, the Company may choose the date and time when any such period of consecutive hours commences provided that it is not earlier than the date and time of the occurrence of the first recorded individual loss sustained by the Company arising out of that disaster, accident or loss and provided that only one such period of one hundred sixty eight (168) consecutive hours shall apply with respect to one event except for any “Loss Occurrences” referred to in A(1) of this Article where only one such period of seventy two (72) consecutive hours shall apply with respect to one event.

C. As respects those “Loss Occurrences” referred to in A(2) of this Article, if the disaster, accident or loss occasioned by the event is of greater duration than seventy two (72) consecutive hours, then the Company may divide that disaster,

9.

accident or loss into two (2) or more “Loss Occurrences” provided no two (2) periods overlap and no individual loss is included in more than one such period and provided that no period commences earlier than the date and time of the occurrence of the first recorded individual loss sustained by the Company arising out of that disaster, accident or loss.

D. No individual losses occasioned by an event that would be covered by seventy two (72) hours clauses may be included in any “Loss Occurrence” claimed under the one hundred sixty eight (168) hours provision.

ARTICLE 9

NET LOSS

A. The term “Net Loss” shall mean the actual loss incurred by the Company from Business Covered hereunder including (i) sums paid in settlement of claims and suits and in satisfaction of judgments, (ii) prejudgment interest when added to a judgment, (iii) ninety percent (90%) of any Extra-Contractual Obligations (iv) ninety percent (90%) of any Losses Excess of Policy Limits, and (v) any interest on judgments other than prejudgment interest when added to a judgment. In the event that the Company’s original policies and/or specific coverage parts of their original policies are issued on a cost inclusive basis, such loss adjustment expenses shall be included within the Company’s Net Loss for the purposes of recovery hereunder.

B. All salvages, recoveries, payments and reversals or reductions of verdicts or judgments whether recovered, received or obtained prior or subsequent to loss settlement under this Contract, including amounts recoverable under other reinsurance whether collected or not, shall be applied as if recovered, received or obtained prior to the aforesaid settlement and shall be deducted from the actual losses sustained to arrive at the amount of the Net Loss. Nothing in this Article shall be construed to mean losses are not recoverable until the Net Loss to the Company finally has been ascertained.

C. All Loss Adjustment Expenses paid by the Company as a result of Net Losses covered hereunder shall be divided between the Company and the Reinsurers, without regard to the limit of this Contract, in proportion to their share of the Net Loss. “Loss Adjustment Expenses” shall mean and include but not be limited to: (i) expenses sustained in connection with adjustment, defense, settlement and litigation of claims and suits, satisfaction of judgments, resistance to or negotiations concerning a loss (which shall include the expenses and the pro rata share of the salaries of the Company’s field employees according to the time occupied in adjusting such loss and the expenses of the Company’s employees while diverted from their normal duties to the service of field adjustment but shall not include any salaries of officers or normal overhead expenses of the Company), (ii) legal expenses and costs incurred in connection with coverage questions regarding

10.

specific claims and legal actions, including Declaratory Judgment Expenses, connected thereto, (iii) all interest on judgments other than prejudgment interest when added to a judgment except when included in Net Loss, and (iv) expenses sustained to obtain recoveries, salvages or other reimbursements, or to secure the reverse or reduction of a verdict or judgment.

D. “Declaratory Judgment Expenses” as used in this Contract shall mean legal expenses paid by the Company in the investigation, analysis, evaluation, resolution or litigation of coverage issues between the Company and its insured(s), under Policies reinsured hereunder, for a specific loss or losses tendered under such Policies, which loss or losses are not excluded under this Contract.

E. In the event there are any recoveries, salvages, or reimbursements recovered subsequent to a loss settlement, or in the event a verdict or judgment is reversed or reduced, Loss Adjustment Expenses incurred in obtaining the recovery, salvage or reimbursement or in securing the reduction or reversal shall be divided between the Company and the Reinsurers in proportion to their share of the benefit therefrom, with the expenses incurred up to the time of the loss settlement or the original verdict or judgment being divided in proportion to the share of the Company and the Reinsurers in the original loss settlement or verdict or judgment.

ARTICLE 10

EXTRA CONTRACTUAL OBLIGATIONS/LOSS EXCESS OF POLICY LIMITS

A. “Extra-Contractual Obligations” means those liabilities not covered under any other provision of this Contract, other than Loss Excess of Policy Limits, including but not limited to compensatory, consequential, punitive, or exemplary damages together with any legal costs and expenses incurred in connection therewith, paid as damages or in settlement by the Company arising from an allegation or claim of its insured, its insured’s assignee, or other third party, which alleges negligence, gross negligence, bad faith or other tortious conduct on the part of the Company in the handling, adjustment, rejection, defense or settlement of a claim under a Policy that is the Business Covered.

B. “Loss Excess of Policy Limits” means any amount of loss, together with any legal costs and expenses incurred in connection therewith, paid as damages or in settlement by the Company in excess of its Policy Limits, but otherwise within the coverage terms of the Policy, arising from an allegation or claim of its insured, its insured’s assignee, or other third party, which alleges negligence, gross negligence, bad faith or other tortious conduct on the part of the Company in the handling of a claim under a Policy or bond that is the Business Covered, in rejecting a settlement within the Policy Limits, in discharging a duty to defend or prepare the defense in the trial of an action against its insured, or in discharging its

11.

duty to prepare or prosecute an appeal consequent upon such an action. For the avoidance of doubt, the decision by the Company to settle a claim for an amount within the coverage of the Policy but not within the Policy Limit when the Company has reasonable basis to believe that it may have legal liability to its insured or assignee or other third party on the claim will be deemed a Loss Excess of Policy Limits. The Company will provide Reinsurers an explanation relating to the Company’s motivation for settlement and use its best efforts to obtain the Reinsurers’ prior counsel and concurrence in the Company’s action. A reasonable basis shall mean it is more likely than not a trial would result in a verdict excess of the Policy Limits, in the opinion of counsel assigned to defend the insured or otherwise retained by the Company.

C. An Extra-Contractual Obligation or a Loss Excess of Policy Limits shall be deemed to have occurred on the same date as the loss covered under the Company’s original Policy and shall be considered part of the original loss (subject to other terms of this Contract.)

D. Neither an Extra-Contractual Obligation nor a Loss Excess of Policy Limits shall include a loss incurred by the Company as the result of any fraudulent or criminal act directed against the Company by any officer or director of the Company acting individually or collectively or in collusion with any other organization or party involved in the presentation, defense, or settlement of any claim under this Contract.

E. Recoveries, whether collectible or not, including any retentions and/or deductibles, from any other form of insurance or reinsurance which protect the Company against any loss or liability covered under this Article shall inure to the benefit of the Reinsurers and shall be deducted from the total amount of any Extra- Contractual Obligation and/or Loss Excess of Policy Limits in determining the amount of Extra-Contractual Obligation and/or Loss Excess of Policy Limits that shall be indemnified under this Article.

F. The Company shall be indemnified in accordance with this Article to the extent permitted by applicable law.

ARTICLE 11

TERRORISM RECOVERY

A. As respects the Insured Losses of the Company for each Program Year, to the extent the Company’s total reinsurance recoverables for Insured Losses, whether collected or not, when combined with the financial assistance available to the Company under the Act exceeds the aggregate amount of Insured Losses paid by the Company, less any other recoveries or reimbursements, (the “Excess

12.

Recovery”), a share of the Excess Recovery shall be allocated to the Company and the Reinsurer. The Company’s share of the Excess Recovery shall be deemed to be an amount equal to the proportion that the Company’s Insured Losses bear to the Insurer’s total Insured Losses for each Program Year. The Reinsurer’s share of the Excess Recovery shall be deemed to be an amount equal to the proportion that the Reinsurer’s payment of Insured Losses under this Contract bears to the Company’s total collected reinsurance recoverables for Insured Losses. The Company shall provide the Reinsurer with all necessary data respecting the transactions covered under this Article.

B. The method set forth herein for determining an Excess Recovery is intended to be consistent with the United States Treasury Department’s construction and application of Section 103 (g)(2) of the Act. To the extent it is inconsistent, it shall be amended to conform with such construction and application, nevertheless the Company shall be the sole judge as to the allocation of TRIA Recoveries to this or to other reinsurance Contracts.

C. “Act” as used herein shall mean the Terrorism Risk Insurance Act of 2002, the Terrorism Risk Insurance Extension Act of 2005, and the Terrorism Risk Insurance Program Reauthorization Act of 2007 (“TRIPRA”) and any subsequent amendment thereof or any regulations promulgated thereunder. “Company” shall have the same meaning as “Insurer” under the Act and “Insured Losses”, and “Program Year” shall follow the definitions as provided in the Act.

ARTICLE 12

NET RETAINED LINE

A. This Contract applies only to that portion of any insurance or reinsurance which the Company retains net for its own account and, in calculating the amount of any loss hereunder and also in computing the amount or amounts in excess of which this Contract attaches, only loss or losses in respect of that portion of any insurance or reinsurance which the Company retains net for its own account shall be included.

B. It is agreed, however, that the amount of the Reinsurers’ liability hereunder in respect of any loss or losses shall not be increased by reason of the inability of the Company to collect from any other Reinsurers, whether specific or general, any amounts which may have become due from them, whether such inability arises from the insolvency of such other Reinsurers or otherwise.

C. Inter-company reinsurance among the companies collectively called the “Company” shall be entirely disregarded for all purposes of this Contract.

D. Permission is hereby granted the Company to carry (i) underlying

13.

reinsurance and (ii) layers of catastrophe reinsurance both below and above this layer of coverage and recoveries made on the latter shall be disregarded for all purposes of this Contract and shall inure to the sole benefit of the Company.

ARTICLE 13

NOTICE OF LOSS AND LOSS SETTLEMENT

A. The Company shall advise the Reinsurers promptly of all Loss Occurrences which, in the opinion of the Company, may result in a claim hereunder and of all subsequent developments thereto which, in the opinion of the Company, may materially affect the position of the Reinsurers. Inadvertent omission or oversight in giving such notice shall in no way affect the liability of the Reinsurers. However, the Reinsurers shall be informed of such omission or oversight promptly upon its discovery.

B. Prompt notice shall be given to the Reinsurers by the Company on any Loss Occurrence wherein the Company’s reserve exceeds fifty percent (50%) of the Company’s loss retention.

C. The Company shall have the right to settle all claims under its Policies. All loss settlements made by the Company, whether under strict policy conditions or by way of compromise, that are the Business Covered and that are not an ex-gratia settlement shall be final and binding subject to the liability of the Company and the terms and conditions of this Contract. The Reinsurer shall follow the liability of the Company (to the extent provided in this Contract) and shall pay or allow, as the case may be, its share of each such settlement in accordance with this Contract all amounts for which it is obligated as soon as possible, but not later than ten (10) business days, of being furnished by the Company with reasonable evidence of the amount due. Reasonable evidence of the amount due shall consist of a certification by the Company, accompanied by proof of loss documentation the Company customarily presents with its claims payment requests, that the amount requested to be paid and submitted by the certification, is, upon information and belief, due and payable to the Company by the Reinsurers under the terms and conditions of this Contract.

ARTICLE 14

ERRORS AND OMISSIONS

     Inadvertent delays, errors or omissions made by the Company in connection with this Contract shall not relieve the Reinsurer from any liability which would have attached had such error or omission not occurred, provided always that such error or omission shall be rectified as soon as possible, provided that the liability of the

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Reinsurer shall not extend beyond the coverage provided by this Contract nor to extend coverage to Policies that are not the Business Covered hereunder. This Article shall not apply to a sunset provision, if any in this Contract, nor to a commutation made in connection with this Contract.

ARTICLE 15

OFFSET

     The Company and the Reinsurer shall have the right to offset any balance or amounts due from one party to the other under the terms of this Contract. The party asserting the right of offset may exercise such right any time whether the balances due are on account of premiums or losses or otherwise and immediately inform the Intermediary accordingly. In the event of the insolvency of any party, offset shall be as permitted by applicable law.

ARTICLE 16

CURRENCY

A. Whenever the word “Dollars” or the “$” sign appears in this Contract, they shall be construed to mean United States Dollars and all transactions under this Contract shall be in United States Dollars.

B. Amounts paid or received by the Company in any other currency shall be converted to United States Dollars at the rate of exchange at the date such transaction is entered on the books of the Company.

ARTICLE 17

FEDERAL EXCISE TAX AND OTHER TAXES

A. To the extent that any portion of the reinsurance premium for this Contract is subject to the Federal Excise Tax (as imposed under Section 4371 of the Internal Revenue Code) and the Reinsurer is not exempt therefrom, the Reinsurers shall allow for the purpose of paying the Federal Excise Tax, a deduction by the Company of the applicable percentage of the premium payable hereon. In the event of any return of premium becoming due hereunder, the Reinsurers shall deduct the applicable same percentage from the return premium payable hereon and the Company or its agent shall take steps to recover the tax from the United States Government. In the event of any uncertainty, upon the written request of the Company, the Reinsurer will immediately file a certificate signed by a senior corporate officer of the Reinsurer certifying to its entitlement to the exemption from the Federal Excise Tax with respect to one or more transactions.

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B. In consideration of the terms under which this Contract is issued, the Company undertakes not to claim any deduction of the premium hereon when making Canadian Tax returns or when making tax returns, other than Income or Profits Tax returns, to any State or Territory of the United States of America or to the District of Columbia.

ARTICLE 18

ACCESS TO RECORDS

A. The Company shall place at the disposal of the Reinsurer at all reasonable times, and the Reinsurer shall have the right to inspect (and make reasonable copies) through its designated representatives during the term of this Contract and thereafter, all non-privileged books, records and papers of the Company directly related to any reinsurance hereunder, or the subject matter hereof, provided that if the Reinsurer has ceased active market operations, this right of access shall be subject to that Reinsurer being current in all payments owed the Company that are not currently the subject of a formal dispute (such as the initiation of an Arbitration or Mediation). For the purposes of this Article, “non-privileged” refers to books, records and papers that are not subject to the Attorney-client privilege and Attorney-work product doctrine.

B. “Attorney-client privilege” and “Attorney-work product” shall have the meanings ascribed to each by statute and/or the court of final adjudication in the jurisdiction whose laws govern the substantive law of a claim arising under a Policy reinsured under this Contract.

C. Notwithstanding anything to the contrary in this Contract, for any claim or loss under a Policy reinsured under this Contract, should the Reinsurer assert, pursuant to the Common Interest Doctrine (“Doctrine”), that it has the right to examine any document that the Company alleges is subject to the Attorney-client privilege or the Attorney-work product privilege, upon the Reinsurer providing to the Company substantiation of any law which reasonably supports the basis for the Reinsurer’s conclusion that the Doctrine applies and the Doctrine will be upheld as applying between the Company and the Reinsurer as against third parties pursuant to the substantive law(s) which govern the claim or loss, the Company shall give the Reinsurer access to such document.

D. Notwithstanding any other provision to the contrary, once a claim and all directly related claims are finally settled by the Company, the Reinsurer shall be entitled to review all reasonable and applicable claims records that support a Company request for payment of a claim hereunder for Net Loss for Business Covered hereunder. In the event that the Reinsurer shall have paid an amount for

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Net Loss to the Company and the records do not support the obligation of the Reinsurer to have paid the claim, the Company shall promptly return any payment made in error.

ARTICLE 19

INSOLVENCY

(This Article shall be deemed to read as required to meet the statutory insolvency clause requirements of the Company.)

A. In the event of insolvency or the appointment of a conservator, liquidator, or statutory successor of the Company, the portion of any risk or obligation assumed by the Reinsurer shall be payable to the conservator, liquidator, or statutory successor on the basis of claims allowed against the insolvent Company by any court of competent jurisdiction or by any conservator, liquidator, or statutory successor of the Company having authority to allow such claims, without diminution because of that insolvency, or because the conservator, liquidator, or statutory successor has failed to pay all or a portion of any claims.

B. Payments by the Reinsurer as above set forth shall be made directly to the Company or to its conservator, liquidator, or statutory successor, except where this Contract specifically provides another payee of such reinsurance or except as provided by applicable law and regulation (such as subsection (a) of section 4118 of the New York Insurance Laws) in the event of the insolvency of the Company.

C. In the event of the insolvency of the Company, the liquidator, receiver, conservator or statutory successor of the Company shall give written notice to the Reinsurer of the pendency of a claim against the insolvent Company on the Policy or Policies reinsured within a reasonable time after such claim is filed in the insolvency proceeding and during the pendency of such claim any Reinsurer may investigate such claim and interpose, at its own expense, in the proceeding where such claim is to be adjudicated any defense or defenses which it may deem available to the Company or its liquidator, receiver, conservator or statutory successor. The expense thus incurred by the Reinsurer shall be chargeable subject to court approval against the insolvent Company as part of the expense of liquidation to the extent of a proportionate share of the benefit which may accrue to the Company solely as a result of the defense undertaken by the Reinsurer.

D. Where two (2) or more Reinsurers are involved in the same claim and a majority in interest elect to interpose defense to such claim, the expense shall be apportioned in accordance with the terms of this Contract as though such expense had been incurred by the Company.

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ARTICLE 20

ARBITRATION

A. Any and all disputes between the Company and the Reinsurer arising out of, relating to, or concerning this Contract, whether sounding in contract or tort and whether arising during or after termination of this Contract, shall be submitted to the decision of a Board of arbitration composed of two (2) arbitrators and an umpire (“Board”) meeting at a site in the city in which the principal headquarters of the Company are located. The arbitration shall be conducted under the Federal Arbitration Act and shall proceed as set forth below.

B. A notice requesting arbitration, or any other notice made in connection therewith, shall be in writing and be sent certified or registered mail, return receipt requested to the affected parties. The notice requesting arbitration shall state in particulars all issues to be resolved in the view of the claimant, shall appoint the arbitrator selected by the claimant and shall set a tentative date for the hearing, which date shall be no sooner than ninety (90) days and no later than one hundred fifty (150) days from the date that the notice requesting arbitration is mailed. Within thirty (30) days of receipt of claimant’s notice, the respondent shall notify claimant of any additional issues to be resolved in the arbitration and of the name of its appointed arbitrator.

C. The members of the Board shall be impartial, disinterested and not currently representing any party participating in the arbitration, and shall be current or former senior officers of insurance or reinsurance concerns, experienced in the line(s) of business that are the subject of this Contract. The Company and the Reinsurer as aforesaid shall each appoint an arbitrator and the two (2) arbitrators shall choose an umpire before instituting the hearing. As time is of the essence, if the respondent fails to appoint its arbitrator within thirty (30) days after having received claimant’s written request for arbitration, the claimant is authorized to and shall appoint the second arbitrator. If the two (2) arbitrators fail to agree upon the appointment of an umpire within thirty (30) days after notification of the appointment of the second arbitrator, within ten (10) days thereof, the two (2) arbitrators shall request ARIAS U.S. (“ARIAS”) to apply its procedures to appoint an umpire for the arbitration with the qualifications set forth above in this Article. If the use of ARIAS procedures fails to name an umpire, either party may apply to a court of competent jurisdiction to appoint an umpire with the above required qualifications. The umpire shall promptly notify in writing all parties to the arbitration of his selection and of the scheduled date for the hearing. Upon resignation or death of any member of the Board, a replacement shall be appointed in the same fashion as the resigning or deceased member was appointed.

D. The claimant and respondent shall each submit initial briefs to the Board outlining the facts, the issues in dispute and the basis, authority, and reasons for

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their respective positions within thirty (30) days of the date of notice of appointment of the umpire. The claimant and the respondent may submit a reply brief to the Board within ten (10) days after filing of the initial brief(s). Initial and reply briefs may be amended by the submitting party at any time, but not later than ten (10) days prior to the date of commencement of the arbitration hearing. Reasonable responses shall be allowed at the arbitration hearing to new material contained in any amendments filed to the briefs but not previously responded to.

E. The Board shall make a decision and award with regard to the terms expressed in this Contract, the original intentions of the parties to the extent reasonably ascertainable, and the custom and usage of the insurance and reinsurance business that is the subject of this Contract. Notwithstanding any other provision of this Contract, the Board shall have the right and obligation to consider Underwriting and submission-related documents in any dispute between the parties.

F. The Board shall be relieved of all judicial formalities and the decision and award shall be based upon a hearing in which evidence shall be allowed though the formal rules of evidence shall not strictly apply. Cross examination and rebuttal shall be allowed. The Board may request a post-hearing brief to be submitted within twenty (20) days of the close of the hearing.

G. The Board shall render its decision and award in writing within thirty (30) days following the close of the hearing or the submission of post-hearing briefs, whichever is later, unless the parties consent to an extension. Every decision by the Board shall be by a majority of the members of the Board and each decision and award by the majority of the members of the Board shall be final and binding upon all parties to the proceeding. Such decision shall be a condition precedent to any right of legal action arising out of the arbitrated dispute which either party may have against the other. However, the Board is not authorized to award punitive, exemplary or enhanced compensatory damages.

H. The Board may award (i) interest at a rate not in excess of that set forth in the Article entitled LATE PAYMENTS, calculated from the date the Board determines that any amounts due the prevailing party should have been paid to the prevailing party, and (ii) applicable Attorneys’ fees and costs.

I. Either party may apply to a court of competent jurisdiction for an order confirming any decision and the award; a judgment of that Court shall thereupon be entered on any decision or award. If such an order is issued, the Attorneys’ fees of the party so applying and court costs will be paid by the party against whom confirmation is sought.

J. Except in the event of a consolidated arbitration, each party shall bear the

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expense of the one arbitrator appointed by or for it and shall jointly and equally bear with the other party the expense of any stenographer requested, and of the umpire. The remaining costs of the arbitration proceedings shall be finally allocated by the Board.

K. Subject to customary and recognized legal rules of privilege, each party participating in the arbitration shall have the obligation to produce those documents and as witnesses at the arbitration those of its employees, and those of its affiliates as any other participating party reasonably requests, providing always that the same witnesses and documents be obtainable and relevant to the issues before the arbitration and not be unduly burdensome or excessive in the opinion of the Board.

L. The parties may mutually agree as to pre-hearing discovery prior to the arbitration hearing and in the absence of agreement, upon the request of any party, pre-hearing discovery may be conducted as the Board shall determine in its sole discretion to be in the interest of fairness, full disclosure, and a prompt hearing, decision and award by the Board.

M. The Board shall be the final judge of the procedures of the Board, the conduct of the arbitration, of the rules of evidence, the rules of privilege, discovery and production and of excessiveness and relevancy of any witnesses and documents upon the petition of any participating party. To the extent permitted by law, the Board shall have the authority to issue subpoenas and other orders to enforce their decisions. The Board shall also have the authority to issue interim decisions or awards in the interest of fairness, full disclosure, and a prompt and orderly hearing and decision and award by the Board.

N. Upon request made to the Board not later than ten (10) days after the umpire’s appointment, the Board may order a consolidated hearing as respects common issues between the Company and all affected Reinsurers participating in this Contract if the Board is satisfied in its discretion that the issues in dispute affect more than one Reinsurer and a consolidated hearing would be in the interest of fairness, and a prompt and cost effective resolution of the issues in dispute.

O. If the parties mutually agree to or the Board orders a consolidated hearing, all other affected participating Reinsurers shall join and participate in the arbitration under time frames established by the Board and will be bound by the Board’s decision and award unless excused by the Board in its discretion. A consolidated hearing shall not result in any change or modification of any Reinsurer’s liability for its participation, that is several, but not joint shall remain the same.

P. Any Reinsurer may decline to actively participate in a consolidated arbitration if in advance of the hearing, that Reinsurer shall file with the Board a written agreement in form satisfactory to the Board to be bound by the decision and

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award of the Board in the same fashion and to the same degree as if it actively participated in the arbitration.

Q. In the event of an order of consolidation by the Board, the arbitrator appointed by the original Reinsurer shall be subject to being, and may be, replaced within thirty (30) days of the decision to have a consolidated arbitration by an arbitrator named collectively by the Reinsurers or in the absence of agreement, by the Lead Reinsurer, or if there is no Lead Reinsurer involved in the dispute, the Reinsurer with the largest participation in this Contract affected by the dispute. In the event two (2) or more Reinsurers affected by the dispute each have the same largest participation, they shall agree among themselves as to the replacement arbitrator, if any, to be appointed. The umpire shall be the final determiner in the event of any dispute over replacement of that arbitrator. All other aspects of the arbitration shall be conducted as provided for in this Article provided that (1) each party actively participating in the consolidated arbitration will have the right to its own attorney, position, and related claims and defenses; (2) each party will not, in presenting its position, be prevented from presenting its position by the position set forth by any other party; and (3) the cost and expense of the arbitration, exclusive of Attorneys’ fees (which will be borne exclusively by the respective retaining party unless otherwise determined by the Board) but including the expense of any stenographer which shall be borne by each party actively participating in the consolidated arbitration or as the Board shall determine to be fair and appropriate under the circumstances.

ARTICLE 21

SERVICE OF SUIT

A. This Article only applies to a Reinsurer domiciled outside of the United States and/or unauthorized in any state, territory or district of the United States having jurisdiction over the Company. Furthermore, this Article will not be read to conflict with or override any obligations of the parties to arbitrate their disputes under this Contract. This Article is intended as an aid to compelling arbitration if called for by this Contract or enforcing any such arbitration or arbitral award, not as an alternative to any Arbitration provision in this Contract that is applicable for resolving disputes arising out of this Contract.

B. In the event of any dispute, the Reinsurer, at the request of the Company, shall submit to the jurisdiction of a court of competent jurisdiction within the United States. Nothing in this Article constitutes or should be understood to constitute a waiver of any obligation to arbitrate disputes arising from this Contract or the Reinsurer’s rights to commence an action in any court of competent jurisdiction in the United States, to remove an action to a United States District Court, or to seek a transfer of a case to another court as permitted by the laws of the United States or of any state in the United States.

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C. The Reinsurer, once the appropriate court is selected, whether such court is the one originally chosen by the Company and accepted by the Reinsurer or is determined by removal, transfer, or otherwise, as provided above, will comply with all requirements necessary to give said court jurisdiction and, in any suit instituted against any of them upon this Contract, will abide by the final decision of such court or any Appellate Court in the event of an appeal.

D. Service of process in any such suit against the Reinsurer may be made upon Mendes and Mount, 750 Seventh Avenue, New York, New York 10019-6829, — or in substitution therefore, the Firm identified by the Reinsurer on the Reinsurer’s signature page to this Contract, — (“Firm”) and in any suit instituted, the Reinsurer shall abide by the final decision of such court or of any Appellate Court in the event of an appeal.

E. The Firm is authorized and directed to accept service of process on behalf of the Reinsurer in any such suit and/or upon the request of the Company to give a written undertaking to the Company that they shall enter a general appearance upon the Reinsurer’s behalf in the event such a suit shall be instituted.

F. Further, as required by and pursuant to any statute of any state, territory or district of the United States which makes provision therefore, the Reinsurer hereby designates the Superintendent, Commissioner or Director of Insurance or other officer specified for that purpose in the statute, or his successor or successors in office, as their true and lawful attorney upon whom may be served any lawful process in any action, suit or proceeding instituted by or on behalf of the Company or any beneficiary hereunder arising out of this Contract, and hereby designates the above-named as the person to whom the said officer is authorized to mail such process or a true copy thereof.

ARTICLE 22

CONFIDENTIALITY

A. The information, data, statements, representations and other materials provided by the Company or the Reinsurer to the other arising from consideration and participation in this Contract whether contained in the reinsurance submission, this Contract, or in materials or discussions arising from or related to this Contract, may contain confidential or proprietary information as expressly indicated by the disclosing party (“Disclosing Party”) in writing from time to time to the other party of the respective parties (“Confidential Information”). This Confidential Information is intended for the sole use of the parties to this Contract (and their affiliates involved in management or operation of assumed reinsurance business, retrocessionaires, prospective retrocessionaires, intermediaries involved in such placements, respective auditors and legal counsel) as may be necessary in analyzing and/or accepting a

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participation in and/or executing their respective responsibilities under or related to this Contract. Disclosing or using Confidential Information relating to this Contract, without the prior written consent of the Disclosing Party, for any purpose beyond (i) the scope of this Contract, (ii) the reasonable extent necessary to perform rights and responsibilities expressly provided for under this Contract, (iii) the reasonable extent necessary to administer, report to and effect recoveries from retrocessional Reinsurers, (iv) the reporting to regulatory or other governmental authorities as may be legally required or (v) persons with a need to know the information, (all of the preceding persons or entities who are legally obligated by either written agreement or otherwise to maintain the confidentiality of the Confidential Information) is expressly forbidden. Copying, duplicating, disclosing, or using Confidential Information for any purpose beyond this expressed purpose is forbidden without the prior written consent of the Disclosing Party.

B. Should a party (“Receiving Party”) receive a third party demand pursuant to subpoena, summons, or court or governmental order, to disclose Confidential Information that has been provided by another party to this Contract, the Receiving Party shall make commercially reasonable efforts to provide the Disclosing Party with written notice of any subpoena, summons, or court or governmental order, at least ten (10) days prior to such release or disclosure. Unless the Disclosing Party has given its prior permission to release or disclose the Confidential Information, the Receiving Party shall not comply with the subpoena prior to the actual date required by the subpoena. If a protective order or appropriate remedy is not obtained, the Receiving Party may disclose only that portion of the Confidential Information that it is legally obligated to disclose. However, notwithstanding anything to the contrary in this Contract, in no event, to the extent permitted by law, shall this Article require the Receiving Party not to comply with the subpoena, summons, or court or governmental order.

ARTICLE 23

PRIVACY

A. Privacy Awareness. The Company and the Reinsurer are aware of and in compliance with their responsibilities and obligations under:

1. The Gramm-Leach-Bliley Act of 1999 (the “Act”) and applicable Federal and State laws and regulations implementing the Act. The Company and the Reinsurer will only use Non-Public Personal Information as permitted by law; and

2. The applicable provisions of the Health Insurance Portability and Accountability Act (“HIPAA”) and the related requirements of any regulations promulgated thereunder including without limitation the Federal Privacy Regulations as contained in 45 CFR Part 160 and 164 (the “Federal Privacy

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Regulations”). The Company and the Reinsurer will only use protected health information as permitted by law.

B. Non-Disclosure. To the extent required or prohibited by applicable law or regulation, the Reinsurer shall not disclose any (a) Non-Public Personal Information or (b) protected health information (as defined in 45 CFR 164.501) it receives from the Company to anyone other than:

1. The Reinsurer, the Reinsurer’s affiliates, legal counsel, auditors, consultants, regulators, rating agencies and any other persons or entities to whom such disclosure is required to effect, administer, or enforce a reinsurance contract; or any retrocessional reinsurance contract applicable to the losses that are the subject of this Contract, or

2. Persons or entities to whom disclosure is required by applicable law or regulation.

C. Non-Public Personal Information. “Non-Public Personal Information” shall for the purpose of this Contract mean financial or health information that personally identifies an individual, including claimants under Policies reinsured under this Contract, and which information is not otherwise available to the public.

ARTICLE 24

RESERVES

A. If, at any time during the period of this Contract and thereafter the reinsurance provided by a Reinsurer participating in this Contract does not qualify for full statutory accounting credit for reinsurance by regulatory authorities having jurisdiction over the Company (whether by reason of lack of license, accreditation or otherwise) such that a financial penalty to the Company would result on any statutory statement or report the Company is required to make or file with insurance regulatory authorities (or a court of law in the event of insolvency), the Reinsurer shall secure the Reinsurer’s share of Obligations for which such full statutory credit is not granted by those authorities in a manner, form, and amount acceptable to the Company and to all applicable insurance regulatory authorities in accordance with this Article.

B. The Reinsurer shall secure such Obligations, within thirty (30) days after the receipt of the Company’s written request regarding the Reinsurer’s share of Obligations under this Contract (but not later than December 31) of each year by either:

1. Clean, irrevocable, and unconditional evergreen letter(s) of credit

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issued and confirmed, if confirmation is required by the applicable insurance regulatory authorities, by a qualified United States financial institution as defined under the Insurance Law of the Company’s domiciliary state and acceptable to the Company and to insurance regulatory authorities;

2. A trust account meeting at least the standards of New York’s Insurance Regulation 114 and the Insurance Law of the Company’s domiciliary state; or

3. Cash advances or funds withheld or a combination of both, which will be under the exclusive control of the Company (“Funds Deposit”).

C. The “Obligations” referred to herein means, subject to the preceding paragraphs, the then current (as of the end of each calendar quarter) sum of any:

1. amount of the ceded unearned premium reserve for which the Reinsurer is responsible to the Company;

2. amount of Net Losses and Loss Adjustment Expenses and other amounts paid by the Company for which the Reinsurer is responsible to the Company but has not yet paid;

3. amount of ceded reserves for Net Losses and Loss Adjustment Expenses for which the Reinsurer is responsible to the Company;

4. amount of return and refund premiums paid by the Company for which the Reinsurer is responsible to the Company but has not yet paid.

D. The Company, or its successors in interest, may draw, at any time and from time to time, upon the:

1. Established letter of credit (or subsequent cash deposit);

2. Established trust account (or subsequent cash deposit); or

3. Funds Deposit;

     without diminution or restriction because of the insolvency of either the Company or the Reinsurer for one or more of the following purposes set forth below.

E. Draws shall be made only for the following purposes:

1. To make payment to and reimburse the Company for the Reinsurer’s share of Net Loss and Loss Adjustment Expense and other amounts paid by the Company under its Policies and for which the Reinsurer is responsible under this Contract that is due to the Company but unpaid by the Reinsurer

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including but not limited to the Reinsurer’s share of premium refunds and returns; and

2. To obtain a cash advance of the entire amount of the remaining balance under any letter of credit in the event that the Company:

a. has received notice of non-renewal or expiration of the letter of credit or trust account;

b. has not received assurances satisfactory to the Company of any required increase in the amount of the letter of credit or trust account, or its replacement or other continuation of the letter of credit or trust account at least thirty (30) days before its stated expiration date;

c. has been made aware that others may attempt to attach or otherwise place in jeopardy the security represented by the letter of credit or trust account; or

d. has concluded that the trustee or issuing (or confirming) bank’s financial condition is such that the value of the security represented by the letter of credit or trust account may be in jeopardy; and under any of those circumstances where the Reinsurer’s entire Obligations, or part thereof, under this Contract remain unliquidated and undischarged at least thirty (30) days prior to the stated expiration date or at the time the Company learns of the possible jeopardy to the security represented by the letter of credit or trust account.

F. If the Company draws on the letter of credit or trust account to obtain a cash advance, the Company will hold the amount of the cash advance so obtained in the name of the Company in any qualified United States financial institution as defined under the Insurance Law of the Company’s domiciliary state in trust solely to secure the Obligations referred to above and for the use and purposes enumerated above and to return any balance thereof to the Reinsurer:

1. Upon the complete and final liquidation and discharge of all of the Reinsurer’s Obligations to the Company under this Contract; or

2. In the event the Reinsurer subsequently provides alternate or replacement security consistent with the terms hereof and acceptable to the Company.

G. The Company will prepare and forward at annual intervals or more frequently as determined by the Company, but not more frequently than quarterly to

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the Reinsurer a statement for the purposes of this Article, showing the Reinsurer’s share of Obligations as set forth above. If the Reinsurer’s share thereof exceeds the then existing balance of the security provided, the Reinsurer will, within fifteen (15) days of receipt of the Company’s statement, but never later than December 31 of any year, increase the amount of the letter of credit, (or subsequent cash deposit), trust account or Funds Deposit to the required amount of the Reinsurer’s share of Obligations set forth in the Company’s statement, but never later than December 31 of any year. If the Reinsurer’s share thereof is less than the then existing balance of the security provided, the Company will release the excess thereof to the Reinsurer upon the Reinsurer’s written request. The Reinsurer will not attempt to prevent the Company from holding the security provided or Funds Deposit so long as the Company is acting in accordance with this Article. The Company shall pay interest earned on the deposited amounts to the Reinsurers as the parties shall have agreed at the time of the deposit.

H. Any assets deposited to a trust account will be valued according to their current fair market value and will consist only of cash (U.S. legal tender), certificates of deposit issued by a qualified United States financial institution as defined under the Insurance Law of the Company’s domiciliary state and payable in cash, and investments of the types no less conservative than those specified in Section 1404 (a)(1)(2)(3)(8) and (10) of the New York Insurance Law and which are admitted assets under the Insurance Law of the Company’s domiciliary state. Investments issued by the parent, subsidiary, or affiliate of either the Company or the Reinsurer will not be eligible investments. All assets so deposited will be accompanied by all necessary assignments, endorsements in blank, or transfer of legal title to the trustee in order that the Company may negotiate any such assets without the requirement of consent or signature from the Reinsurer or any other entity.

I. All settlements of account between the Company and the Reinsurer will be made in cash or its equivalent. All income earned and received by the amount held in an established trust account will be added to the principal.

J. The Company’s “successors in interest” will include those by operation of law, including without limitation, any liquidator, rehabilitator, receiver, or conservator.

K. The Reinsurer will take any other reasonable steps that may be required for the Company to take full credit on its statutory financial statements for the reinsurance provided by this Contract.

ARTICLE 25

LATE PAYMENTS

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A. Payments from the Reinsurer to the Company for coverage providing pro rata forms of reinsurance shall have a due date as expressed in the Article entitled NOTICE OF LOSS AND LOSS SETTLEMENT. Payments from the Reinsurer to the Company for coverage providing excess of loss reinsurance shall have as a due date the date on which the proof of loss or demand for payment is received by the Reinsurer. Payment not received within sixty (60) days of the due date shall be deemed overdue (the “Overdue Date”). Payments due from the Reinsurer to the Company will not be considered overdue if the Reinsurer requests, in writing, that such payment be made by drawing on a letter of credit or other similar method of funding that has been established for this Contract, provided that there is an adequate balance in place, and further provided that such advice to draw is received by the Company within the sixty (60) day deadline set forth above. Payments from the Company to the Reinsurer will have a due date as the date specified in this Contract and will be overdue sixty (60) days thereafter. Premium adjustments will be overdue sixty (60) days from the Contract due date or one hundred twenty (120) days after the expiration or renewal date, whichever is greater.

B. In the event that this Contract provides excess of loss reinsurance, the Company will provide the Reinsurer with a reasonable proof of loss and a copy of the claim adjuster’s report(s) or any other reasonable evidence of indemnification. If subsequent to receipt of this evidence, the information contained therein is unreasonably insufficient or not in substantial accordance with the contractual conditions of this Contract, then the payment due date as specified above will be deemed to be the date upon which the Reinsurer received the additional information necessary to approve payment of the claim and the claim is presented in a reasonably acceptable manner. This paragraph is only for the purpose of establishing when a claim payment is overdue, and will not alter the provisions of the Article entitled NOTICE OF LOSS AND LOSS SETTLEMENT or other pertinent contractual stipulations of this Contract.

C. If payment is made of overdue amounts within thirty (30) days of the Overdue Date, overdue amounts will bear simple interest from the Overdue Date at a rate determined by the annualized one month London Interbank Offered Rate for the first business day of the calendar month in which the amount becomes overdue, as published in The Wall Street Journal, plus two hundred (200) basis points to be calculated weekly. If payment is made of overdue amounts more than thirty (30) days after the Overdue Date, overdue amounts will bear simple interest from the Overdue Date at a rate determined by the annualized one month London Interbank Offered Rate for the first business day of the calendar month in which the amount becomes overdue, as published in The Wall Street Journal, plus four hundred (400) basis points to be calculated on a weekly basis, but in no event less than eight percent (8%) simple interest. If the sum of the compensating additional amount computed in respect of any overdue payment is less than one quarter of one percent (0.25%) of the amount

28.

overdue, or one thousand dollars ($1,000), whichever is greater, and/or the overdue period is one week or less, then the interest amount shall be waived. The basis point standards referred to above shall be doubled if the late payment is due from a Reinsurer who is no longer an active reinsurance market. Interest shall cease to accrue upon the party’s payment of an overdue amount to the Intermediary.

ARTICLE 26

MODE OF EXECUTION

A. This Contract may be executed by:

1. an original written ink signature of paper documents;

2. an exchange of facsimile copies showing the original written ink signature of paper documents;

3. electronic signature technology employing computer software and a digital signature or digitizer pen pad to capture a person’s handwritten signature in such a manner that the signature is unique to the person signing, is under the sole control of the person signing, is capable of verification to authenticate the signature and is linked to the document signed in such a manner that if the data is changed, such signature is invalidated.

B. The use of any one or a combination of these methods of execution shall constitute a legally binding and valid signing of this Contract.

ARTICLE 27

VARIOUS OTHER TERMS

A. This Contract shall be binding upon and inure to the benefit of the Company and Reinsurer and their respective successors and assigns provided, however, that this Contract may not be assigned by either party without the prior written consent of the other which consent may be withheld by either party in its sole unfettered discretion. This provision shall not be construed to preclude the assignment by the Company of reinsurance recoverables to another party for collection.

B. The territorial limits of this Contract shall be identical with those of the Company’s Policies.

C. This Contract shall constitute the entire agreement between the parties with respect to the Business Covered hereunder. There are no understandings between

29.

the parties other than as expressed in this Contract. Any change or modification of this Contract shall be null and void unless made by amendment to the Contract and signed by both parties.

D. Except as may be provided in the Article entitled ARBITRATION, this Contract shall be governed by and construed according to the laws of the Commonwealth of Pennsylvania, exclusive of that state’s rules with respect to conflicts of law.

E. The headings preceding the text of the Articles and paragraphs of this Contract are intended and inserted solely for the convenience of reference and shall not affect the meaning, interpretation, construction or effect of this Contract.

F. This Contract is solely between the Company and the Reinsurer, and in no instance shall any insured, claimant or other third party have any rights under this Contract.

G. If any provision of this Contract should be invalid under applicable laws, the latter shall control but only to the extent of the conflict without affecting the remaining provisions of this Contract.

H. The failure of the Company or Reinsurer to insist on strict compliance with this Contract or to exercise any right or remedy shall not constitute a waiver of any rights contained in this Contract nor estop the parties from thereafter demanding full and complete compliance nor prevent the parties from exercising any remedy.

I. Each party shall be excused for any reasonable failure or delay in performing any of its respective obligations under this Contract, if such failure or delay is caused by Force Majeure. “Force Majeure” shall mean any act of God, strike, lockout, act of public enemy, any accident, explosion, fire, storm, earthquake, flood, drought, peril of sea, riot, embargo, war or foreign, federal, state or municipal order or directive issued by a court or other authorized official, seizure, requisition or allocation, any failure or delay of transportation, shortage of or inability to obtain supplies, equipment, fuel or labor or any other circumstance or event beyond the reasonable control of the party relying upon such circumstance or event; provided, however, that no such Force Majeure circumstance or event shall excuse any failure or delay beyond a period exceeding thirty (30) days from the date such performance would have been due but for such circumstance or event.

J. All Articles of this Contract shall survive the termination of this Contract until all obligations between the parties have been finally settled.

K. This Contract may be executed by the parties hereto in any number of counterparts, and by each of the parties hereto in separate counterparts, each of

30.

which counterparts, when so executed and delivered, shall be deemed to be an original, but all such counterparts shall together constitute but one and the same instrument.

L. Whenever the word “Company” is used in this Contract, such term shall mean each and all affiliated companies which are or may hereafter be under common control provided notice be given to the Reinsurers of any newly affiliated companies which may hereafter come under common control as soon as practicable, with full particulars as to how such affiliation is likely to affect this Contract. In the event that either party maintains that such affiliation calls for altering the terms of this Contract and an agreement for alteration not being arrived at, then the Business Covered of such newly affiliated company is covered at existing terms for a period not to exceed (90) ninety days after notice by either party that it does not wish to cover the business of the newly affiliated company at the existing terms.

M. The term “Reinsurer” shall refer to each Reinsurer participating severally and not jointly in this Contract. The subscribing (Re)insurers’ obligations under contracts of (re)insurance to which they subscribe are several and not joint and are limited solely to the extent of their individual subscriptions. The subscribing (Re)insurers are not responsible for the subscription of any co-subscribing (Re)insurer who for any reason does not satisfy all or part of its obligations.

N. For purposes of sending and receiving notices and payments required by this Contract other than in respect of the Articles entitled SERVICE OF SUIT and RESERVES herein, the reinsured company that is set forth first in the definition of “Company” is deemed the agent of all other reinsured companies referenced herein. In no event, however, shall any reinsured company be deemed the agent of another with respect to the terms of the Article entitled INSOLVENCY.

O. Whenever the content of this Contract requires, the gender of all words shall include the masculine, feminine and neuter, and the number of all words shall include the singular and the plural. This Contract shall be construed without regard to any presumption or other rule requiring construction against the party causing this Contract to be drafted.

P. The Company shall furnish the Reinsurer, in accordance with regulatory requirements, periodic reporting of premiums and losses that relate to the Business Covered in this Contract as may be needed for Reinsurers’ completion of financial statements to regulatory authorities.

Q. When so requested in writing, the Company shall afford the Reinsurer or its representatives an opportunity to be associated with the Company, at the expense of the Reinsurer, in the defense of any claim, suit or proceeding involving this

31.

reinsurance, and the Company and the Reinsurer shall cooperate in every respect in the defense of such claim, suit or proceeding, provided the Company shall have the right to make any decision in the event of disagreement over any matter of defense or settlement.

ARTICLE 28

INTERMEDIARY

     A. Towers Perrin Forster & Crosby, Inc. (“Towers Perrin”) is hereby recognized as the Intermediary negotiating this Contract for all business hereunder. All communications (including but not limited to notices, statements, premium, return premium, commissions, taxes, losses, loss adjustment expense, salvages and loss settlements) relating thereto shall be transmitted to the Company or the Reinsurers through Towers Perrin, Centre Square East, 1500 Market Street, Philadelphia, Pennsylvania, 19102-4790. Payments by the Company to the Intermediary shall be deemed to constitute payment to the Reinsurers. Payments by the Reinsurers to the Intermediary shall be deemed to constitute payment to the Company only to the extent that such payments are actually received by the Company.

     B. Whenever notice is required within this Contract, such notice may be given by certified mail, registered mail, or overnight express mail. Notice shall be deemed to be given on the date received by the receiving party.

NUCLEAR INCIDENT EXCLUSION CLAUSE — PHYSICAL DAMAGE —
REINSURANCE
(BRMA 35B)

1. This reinsurance does not cover any loss or liability accruing to the Company, directly or indirectly, and whether as Insurer or Reinsurer, from any Pool of Insurers or Reinsurers formed for the purpose of covering Atomic or Nuclear Energy risks.

2. Without in any way restricting the operation of paragraph (1) of this Clause, this reinsurance does not cover any loss or liability accruing to the Company, directly or indirectly, and whether as Insurer or Reinsurer, from any insurance against Physical Damage (including business interruption or consequential loss arising out of such Physical Damage) to:

I.	Nuclear reactor power plants including all auxiliary property on the site, or
II.	Any other nuclear reactor installation, including laboratories handling radioactive materials in connection with reactor installations and “critical facilities” as such, or
III.	Installations for fabricating complete fuel elements or for processing substantial quantities of “special nuclear material” and for reprocessing, salvaging, chemically separating, storing or disposing of “spent” nuclear fuel or waste materials, or
IV.	Installations other than those listed in paragraph (2) III above using substantial quantities of radioactive isotopes or other products of nuclear fission.

3. Without in any way restricting the operations of paragraphs (1) and (2) hereof, this reinsurance does not cover any loss or liability by radioactive contamination accruing to the Company, directly or indirectly, and whether as Insurer or Reinsurer, from any insurance on property which is on the same site as a nuclear reactor power plant or other nuclear installation and which normally would be insured therewith except that this paragraph (3) shall not operate:

(a)	where Company does not have knowledge of such nuclear reactor power plant or nuclear installation, or
(b)	where said insurance contains a provision excluding coverage for damage to property caused by or resulting from radioactive contamination, however caused. However, on and after 1st January 1960, this sub-paragraph (b) shall only apply provided the said radioactive contamination exclusion provision has been approved by the Governmental Authority having jurisdiction thereof.

4. Without in any way restricting the operations of paragraphs (1), (2) and

(3) hereof, this

5. reinsurance does not cover any loss or liability by radioactive contamination accruing to the Company, directly or indirectly, and whether as Insurer or Reinsurer, when such radioactive contamination is a named hazard specifically insured against.

5. It is understood and agreed that this Clause shall not extend to risks using radioactive isotopes in any form where the nuclear exposure is not considered by the Company to be the primary hazard.

6. The term “special nuclear material” shall have the meaning given it in the Atomic Energy Act of 1954 or by any law amendatory thereof.

7. Company to be sole judge of what constitutes:

(a)	substantial quantities, and
(b)	the extent of installation, plant or site.

Notes: Without in any way restricting the operation of paragraph (1) hereof, it is understood and agreed that:

(a)	All Policies issued by the Company on or before 31st December 1957 shall be free from the application of the other provisions of this Clause until expiry date or 31st December 1960 whichever first occurs whereupon all the provisions of this Clause shall apply.
(b)	With respect to any risk located in Canada Policies issued by the Company on or before 31st December 1958 shall be free from the application of the other provisions of this Clause until expiry date or 31st December 1960 whichever first occurs whereupon all the provisions of this Clause shall apply.

INFORMATION TECHNOLOGY HAZARDS CLARIFICATION CLAUSE

Losses arising directly or indirectly, out of:

(i) loss of, alteration of, or damage to

or

(ii) a reduction in the functionality, availability or operation of a computer system, hardware, program, software, data, information repository, microchip, integrated circuit or similar device in computer equipment or non-computer equipment, whether the property of the policyholder of the reinsured or not, do not in and of themselves constitute an event unless arising out of one or more of the following perils:

fire, lightning, explosion, aircraft or vehicle impact, falling objects, windstorm, hail, tornado, cyclone, hurricane, earthquake, volcano, tsunami, flood, freeze or weight of snow.

EXHIBIT I — Page 1.

EXHIBIT I

PROPERTY FIRST EXCESS OF LOSS REINSURANCE CONTRACT

EFFECTIVE JANUARY 1, 2009

issued to

PENN MILLERS INSURANCE COMPANY

AMERICAN MILLERS INSURANCE COMPANY

ARTICLE 5

RETENTION AND LIMIT

A. The Reinsurers shall be liable to, indemnify and reinsure the Company for each and every Risk, in each and every Loss Occurrence for one hundred percent (100%) of the excess Net Loss above an initial Net Loss to the Company of one million dollars ($1,000,000) but the Reinsurers shall not be liable for more than four million dollars ($4,000,000) of Net Loss in each and every Risk, in each and every Loss Occurrence, nor shall Reinsurers be liable for more than eight million dollars ($8,000,000) of Net Loss in excess loss from any one Loss Occurrence.

B. The Reinsurers shall be liable to, indemnify and reinsure the Company for each and every Risk, each and every Loss Occurrence, involving a certified or non certified Act of Terrorism, irrespective of the number and kinds of perils involved, for one hundred percent (100%) of the excess Net Loss above an initial Net Loss to the Company of one million dollars ($1,000,000) each and every Risk; but the Reinsurers shall not be liable for more than four million dollars ($4,000,000) of Net Loss for each and every Risk, and not more than four million dollars ($4,000,000) of Net Loss during the term of this Contract.

C. Coverage for loss caused by Mold, as defined within the terms of the Company’s Policy, shall be limited to an annual amount not to exceed eight hundred thousand dollars ($800,000), namely twenty percent (20%) of the layer limit.

D. The Company shall be the sole judge of what constitutes “one risk” and the Probable Maximum Loss applicable to such risk.

E. An “Act of Terrorism” shall mean any act, including both Certified Acts of Terrorism in accordance with the Terrorism Risk Insurance Act of 2002 (“TRIA” ), the Terrorism Risk Insurance Extension Act of 2005 (“TRIEA”) and the Terrorism Risk Insurance Program Reauthorization Act of 2007 (“TRIPRA”) and any

EXHIBIT I — Page 2.

subsequent extension and those not so certified, or preparation in respect of action, or threat of action designed to influence the government de jure or de facto of any nation or any political division thereof, or in pursuit of any political, religious, ideological, or similar purpose to intimidate the public or a section of the public of any nation by any person or group(s) of persons whether acting alone or on behalf of or in connection with any organization(s) or government(s) de jure or de facto, and which:

1. involves violence against one or more persons; or

2. involves damage to property; or

3. endangers life other than that of the person committing the action; or

4. creates a risk to health or safety of the public or a section of the public;

5. is designed to interfere with or to disrupt an electronic system; or

6. involves loss, damage, cost, or expense directly or indirectly caused by, contributed to by, resulting from, or arising out of or in connection with any action in controlling, preventing, suppressing, retaliating against, or responding to any Act of Terrorism.

Loss or damage occasioned by riot, strikes, civil commotion, vandalism or malicious mischief as those terms have been interpreted by United States Courts to apply to insurance Policies shall not be construed to be an “Act of Terrorism”.

ARTICLE 6

REINSTATEMENT

A. Each claim hereunder shall reduce the amount of the Reinsurers’ limit of liability from the time of the occurrence of the loss by the sum paid, but the sum so exhausted shall be reinstated immediately from the time of the occurrence of the Loss.

B. For the first four million dollars ($4,000,000) so reinstated, there shall be no additional premium. For the next four million dollars ($4,000,000) so reinstated thereafter, there shall be no additional premium. For the next four million dollars ($4,000,000) so reinstated thereafter, the Company agrees to pay an additional premium calculated by multiplying 100% of the annual reinsurance premium hereon by the product of the percentage that the amount reinstated bears to the limit (i.e., four million dollars ($4,000,000)) of this Contract. Nevertheless, the liability of the Reinsurers shall never be more than four million dollars ($4,000,000) in respect of any one Loss, eight million dollars ($8,000,000) in respect of any one Loss Occurrence, nor more than sixteen million dollars ($16,000,000) in all in respect of all losses occurring during the Contract period.

C. A provisional statement of reinstatement premium due the Reinsurers shall be

EXHIBIT I — Page 3.

prepared by the Company and submitted to the Reinsurers as soon as practicable after payment of a claim hereunder. The provisional reinstatement premium shall be based on one hundred percent (100%) of the estimated annual reinsurance premium hereunder. The amount of reinstatement premium due Reinsurers shall be offset against the loss payment due the Company with only the net amount due to be remitted by the debtor party.

D. As promptly as possible after the annual reinsurance premium hereunder has been finally determined, the Company shall prepare and submit to the Reinsurers a final statement of reinstatement premium due. Any reinstatement premium shown to be due the Reinsurers (less prior payments, if any) shall be remitted by the Company with its statement. Any return reinstatement premium shown to be due the Company shall be remitted by the Reinsurers as promptly as possible after receipt of the Company’s final statement.

E. In the event there are any mid-term terminations in the participation of any Reinsurer in this Contract, payment of any such reinstatement premium in full shall be paid to the Reinsurer who incurred the loss that generates the reinstatement premium.

ARTICLE 7

PREMIUM

A. The premium payable to Reinsurers shall be calculated by applying a rate of eight point five zero percent (8.50%) to the Company’s Subject Matter Premium Income.

B. The term “Subject Matter Premium Income” shall mean the Company’s gross net premiums earned on the Business Covered hereunder less premiums paid on reinsurance, if any, recoveries under which would reduce the Net Loss to this Contract.

C. The Company shall pay the Reinsurers a deposit premium of three million three hundred eighty three thousand one hundred seventy five dollars ($3,383,175) shall be paid to Reinsurers in four (4) equal installments of eight hundred forty five thousand seven hundred ninety three dollars and seventy five cents ($845,793.75) each on January 1, April 1, July 1 and October 1, 2009. As promptly as possible after the termination of this Contract, however no longer than sixty (60) days, the Company shall render a report to the Reinsurers showing the actual reinsurance premium due hereunder, calculated as provided in Paragraph A. of this Article; and, if the premium so calculated is greater than the previously paid deposit premium, the balance shall be remitted by the Company with its report. However, in no event shall the premium to the Reinsurers for the Contract be less than two million seven hundred six

EXHIBIT I — Page 4.

thousand five hundred forty dollars ($2,706,540).

EXHIBIT II — Page 1.

EXHIBIT II

PROPERTY SECOND EXCESS OF LOSS REINSURANCE CONTRACT

EFFECTIVE JANUARY 1, 2009

issued to

PENN MILLERS INSURANCE COMPANY

AMERICAN MILLERS INSURANCE COMPANY

ARTICLE 5

RETENTION AND LIMIT

A. The Reinsurers shall be liable to, indemnify and reinsure the Company for each and every Risk, in each and every Loss Occurrence for one hundred percent (100%) of the excess Net Loss above an initial Net Loss to the Company of five million dollars ($5,000,000) but the Reinsurers shall not be liable for more than five million dollars ($5,000,000) of Net Loss in each and every Risk in each and every Loss Occurrence, nor shall Reinsurers be liable for more than ten million dollars ($10,000,000) of Net Loss in excess loss from any one Loss Occurrence.

B. The Reinsurers shall be liable to, indemnify and reinsure the Company for the Company’s Net Loss, each and every Risk, involving a certified or non certified Act of Terrorism, irrespective of the number and kinds of perils involved, for one hundred percent (100%) of the excess Net Loss above an initial Net Loss to the Company of five million dollars ($5,000,000) of Net Loss each and every Risk; but the Reinsurers shall not be liable for more than five million dollars ($5,000,000) of Net Loss for each and every Risk, and not more than five million dollars ($5,000,000) of Net Loss during the term of this Contract.

C. Coverage for loss caused by Mold, as defined within the terms of the Company’s Policy, shall be limited to an annual amount not to exceed one million dollars ($1,000,000), namely twenty percent (20%) of the layer limit.

D. The Company shall be the sole judge of what constitutes “one risk” and the Probable Maximum Loss applicable to such risk.

E. An “Act of Terrorism” shall mean any act, including both Certified Acts of Terrorism in accordance with the Terrorism Risk Insurance Act of 2002 (“TRIA” ), the Terrorism Risk Insurance Extension Act of 2005 (“TRIEA”) and Terrorism Risk Insurance Program Reauthorization Act of 2007 (“TRIPRA”) and the and any subsequent extension and those not so certified, or preparation in respect of action, or

EXHIBIT II — Page 2.

threat of action designed to influence the government de jure or de facto of any nation or any political division thereof, or in pursuit of any political, religious, ideological, or similar purpose to intimidate the public or a section of the public of any nation by any person or group(s) of persons whether acting alone or on behalf of or in connection with any organization(s) or government(s) de jure or de facto, and which:

1. involves violence against one or more persons; or

2. involves damage to property; or

3. endangers life other than that of the person committing the action; or

4. creates a risk to health or safety of the public or a section of the public;

5. is designed to interfere with or to disrupt an electronic system; or

6. involves loss, damage, cost, or expense directly or indirectly caused by, contributed to by, resulting from, or arising out of or in connection with any action in controlling, preventing, suppressing, retaliating against, or responding to any Act of Terrorism.

Loss or damage occasioned by riot, strikes, civil commotion, vandalism or malicious mischief as those terms have been interpreted by United States Courts to apply to insurance Policies shall not be construed to be an “Act of Terrorism”.

ARTICLE 6

REINSTATEMENT

A. Each claim hereunder shall reduce the amount of the Reinsurers’ limit of liability from the time of the Occurrence of the loss by the sum paid, but the sum so exhausted shall immediately be reinstated from the time of the occurrence of the loss.

B. For the first five million dollars ($5,000,000) so reinstated, the Company agrees to pay an additional premium calculated by multiplying fifty percent (50%) of the annual reinsurance premium hereon by the product of the percentage that the amount reinstated bears to the limit (i.e., five million dollars ($5,000,000)) of this Contract. For the next five million dollars ($5,000,000) so reinstated thereafter, the Company agrees to pay an additional premium calculated by multiplying one hundred percent (100%) of the annual reinsurance premium hereon by the product of the percentage that the amount reinstated bears to the limit (i.e., five million dollars ($5,000,000)) of this Contract. Nevertheless, the liability of the Reinsurers shall never be more than five million dollars ($5,000,000) in respect of any one loss, ten million dollars ($10,000,000) in respect of any one Loss Occurrence, nor more than fifteen million dollars ($15,000,000) in all in respect of all losses occurring during the Contract period.

C. A provisional reinstatement premium shall be paid by the Company at the time the Reinsurers pay the loss giving rise to the reinstatement premium through an

EXHIBIT II — Page 3.

offset of the provisional reinstatement premium due the Reinsurers against the loss payment due the Company, with only the net amount due to be remitted by the debtor party. The amount of this provisional reinstatement premium shall be based on one hundred percent (100%) of the estimated annual reinsurance premium hereunder.

D. As promptly as possible after the loss has been paid by the Reinsurers and the annual reinsurance premium hereunder has been finally determined, the Company shall prepare and submit to the Reinsurers a final statement of reinstatement premium due. Any reinstatement premium shown to be due the Reinsurers (less prior payments, if any) shall be remitted by the Company with its statement. Any return reinstatement premium shown to be due the Company shall be remitted by the Reinsurers as promptly as possible after receipt of the Company’s final statement.

E. In the event there are any mid-term terminations in the participation of any Reinsurer in this Contract, payment of any such reinstatement premium in full shall be paid to the Reinsurer who incurred the loss that generates the reinstatement premium.

ARTICLE 7

PREMIUM

A. The premium payable to Reinsurers shall be calculated by applying a rate of one point seven zero percent (1.70%) to the Company’s Subject Matter Premium Income.

B. The term “Subject Matter Premium Income” shall mean the Company’s gross net premiums earned on the business covered hereunder less premiums paid on reinsurance, if any, recoveries under which would reduce the Net Loss to this Contract.

C. The Company shall pay the Reinsurers a deposit premium of six hundred seventy six thousand six hundred thirty five dollars ($676,635) shall be paid to Reinsurers in four (4) equal installments of one hundred sixty nine thousand one hundred fifty eight dollars and seventy five cents ($169,158.75) each on January 1, April 1, July 1 and October 1, 2009. As promptly as possible after the termination of this Contract, however no longer than sixty (60) days, the Company shall render a report to the Reinsurers showing the actual reinsurance premium due hereunder, calculated as provided in Paragraph A. of this Article; and, if the premium so calculated is greater than the previously paid deposit premium, the balance shall be remitted by the Company with its report. However, in no event shall the premium to the Reinsurers for the Contract be less than five hundred forty one thousand three hundred dollars ($541,300).

EXHIBIT III — Page 1.

EXHIBIT III

PROPERTY THIRD EXCESS OF LOSS REINSURANCE CONTRACT

EFFECTIVE JANUARY 1, 2009

issued to

PENN MILLERS INSURANCE COMPANY

AMERICAN MILLERS INSURANCE COMPANY

ARTICLE 5

RETENTION AND LIMIT

A. The Reinsurers shall be liable to, indemnify and reinsure the Company for each and every risk, in each and every Loss Occurrence, for one hundred percent (100%) of the excess Net Loss above an initial Net Loss to the Company of ten million dollars ($10,000,000) each and every risk, each and every Loss Occurrence; but the Reinsurers shall not be liable for more than ten million dollars ($10,000,000) of Net Loss for each and every risk, for each and every such Loss Occurrence, nor shall Reinsurers be liable for more than ten million dollars ($10,000,000) in all as respects all Net Loss on Business Covered hereunder as a result of all Loss Occurrences taking place during the Contract period.

B. The Reinsurers shall be liable to, indemnify and reinsure the Company for each and every Risk, each and every Loss Occurrence, involving a Certified or Non Certified Act of Terrorism, irrespective of the number of kinds of perils involved, for one hundred percent (100%) of the excess Net Loss above an initial Net Loss to the Company of ten million dollars ($10,000,000) of Net Loss each and every Risk; but the Reinsurers shall not be liable for more than ten million dollars ($10,000,000) of Net Loss for each and every Risk, and not more than ten million dollars ($10,000,000) of Net Loss during the term of this Contract.

C. Coverage for loss caused by Mold, as defined within the terms of the Company’s Policy, shall be limited to an annual amount not to exceed two million dollars ($2,000,000), namely twenty percent (20%) of the layer limit.

D. The Company shall be the sole judge of what constitutes “one risk” and the Probable Maximum Loss applicable to such risk.

E. An “Act of Terrorism” shall mean any act, including both Certified Acts of Terrorism in accordance with the Terrorism Risk Insurance Act of 2002 (“TRIA” ),

EXHIBIT III — Page 2.

the Terrorism Risk Insurance Extension Act of 2005 (“TRIEA”) and the Terrorism Risk Insurance Program Reauthorization Act of 2007 (“TRIPRA”) and any subsequent extension and those not so certified, or preparation in respect of action, or threat of action designed to influence the government de jure or de facto of any nation or any political division thereof, or in pursuit of any political, religious, ideological, or similar purpose to intimidate the public or a section of the public of any nation by any person or group(s) of persons whether acting alone or on behalf of or in connection with any organization(s) or government(s) de jure or de facto, and which:

1. involves violence against one or more persons; or

2. involves damage to property; or

3. endangers life other than that of the person committing the action; or

4. creates a risk to health or safety of the public or a section of the public; or

5. is designed to interfere with or to disrupt an electronic system; or

6. involves loss, damage, cost, or expense directly or indirectly caused by, contributed to by, resulting from, or arising out of or in connection with any action in controlling, preventing, suppressing, retaliating against, or responding to any Act of Terrorism.

Loss or damage occasioned by riot, strikes, civil commotion, vandalism or malicious mischief as those terms have been interpreted by United States Courts to apply to insurance Policies shall not be construed to be an “Act of Terrorism”.

ARTICLE 6

REINSTATEMENT

A. Each claim hereunder shall reduce the amount of the Reinsurers’ limit of liability from the time of the occurrence of the loss by the sum paid, but the sum so exhausted shall be reinstated immediately from the time of the occurrence of the loss.

B. For each amount so reinstated, the Company shall pay an additional premium calculated by multiplying one hundred percent (100%) of the reinsurance premium earned by the Reinsurer hereon by the percentage that the amount reinstated bears to the limit (i.e., ten million dollars ($10,000,000)) of this Contract. Nevertheless, the liability of the Reinsurers shall never be more than ten million dollars ($10,000,000) of Net Loss in respect of any one Loss Occurrence, nor more than twenty million dollars ($20,000,000) in Net Loss in all in respect of all losses occurring during the Contract period.

C. A provisional statement of reinstatement premium due the Reinsurers shall be prepared by the Company and submitted to the Reinsurers as soon as practicable after

EXHIBIT III — Page 3.

payment of a claim hereunder. The provisional reinstatement premium shall be based on one hundred percent (100%) of the estimated annual reinsurance premium earned by the Reinsurer hereunder. The amount of reinstatement premium due Reinsurers shall be offset against the loss payment due the Company with only the net amount due to be remitted by the debtor party.

D. As promptly as possible after the annual reinsurance premium earned hereunder has been finally determined, the Company shall prepare and submit to the Reinsurers a final statement of reinstatement premium due. Any reinstatement premium shown to be due the Reinsurers (less prior payments, if any) shall be remitted by the Company with its statement. Any return reinstatement premium shown to be due the Company shall be remitted by the Reinsurers as promptly as possible after receipt of the Company’s final statement.

E. In the event there are any mid-term terminations in the participation of any Reinsurer in this Contract, payment of any such reinstatement premium in full shall be paid to the Reinsurer who incurred the loss that generates the reinstatement premium.

ARTICLE 7

PREMIUM

A. The premium payable to Reinsurers shall be calculated by applying a rate of one point three eight two percent (1.382%) to the Company’s Subject Matter Premium Income.

B. The term “Subject Matter Premium Income” shall mean the Company’s gross net premiums earned on the Business Covered hereunder less premiums paid on reinsurance, if any, recoveries under which would reduce the Net Loss to this Contract.

C. The Company shall pay the Reinsurers a deposit premium of five hundred fifty thousand dollars ($550,000) shall be paid to Reinsurers in four (4) equal installments of one hundred thirty seven thousand five hundred dollars ($137,500) each on January 1, April 1, July 1 and October 1, 2009. As promptly as possible after the termination of this Contract, however no longer than sixty (60) days, the Company shall render a report to the Reinsurers showing the actual reinsurance premium due hereunder, calculated as provided in Paragraph A. of this Article; and, if the premium so calculated is greater than the previously paid deposit premium, the balance shall be remitted by the Company with its report. However, in no event shall the premium to the Reinsurers for the Contract be less than five hundred fifty thousand dollars ($550,000).

EX-21.1

Exhibit 21.1

Subsidiaries of Penn Millers Holding Corporation

     Immediately following the conversion of Penn Millers Mutual Holding Company, Penn Millers Holding Corporation will have the following subsidiaries:

— PMMHC Corp. (formally known as Penn Millers Mutual Holding Company)

— PMHC Corp.

— Penn Software and Technology Services, Inc.

— Eastern Insurance Group

— Penn Millers Insurance Company

— Penn Millers Agency, Inc.

— American Millers Insurance Company

EX-23.1

Exhibit 23.1

Consent of Independent Registered Public Accounting Firm

The Board of Directors
Penn Millers Mutual Holding Company:

We consent to the use of our report included herein and to the reference to our firm under the heading “Experts” in the prospectus.

Our report dated April 22, 2009, with respect to the consolidated balance sheets of Penn Millers Mutual Holding Company and subsidiary as of December 31, 2008 and 2007, and the related consolidated statements of operations, equity, and cash flows for each of the years in the three-year period ended December 31, 2008, contains an explanatory paragraph that describes Penn Millers Mutual Holding Company and subsidiary’s adoption of the provisions of Statement of Financial Accounting Standards No. 158, Employers’ Accounting for Defined Benefit Pension and Other Postretirement Plans, as of December 31, 2007, and Securities and Exchange Commission Staff Accounting Bulletin No. 108, Quantifying Financial Statement Misstatements, in 2008.

/s/ KPMG LLP

Philadelphia, Pennsylvania
April 22, 2009

EX-23.2

Exhibit 23.2

April 24, 2009

Board of Directors
Penn Millers Mutual Holding Company
72 North Franklin Street
Wilkes-Barre, Pennsylvania 18773

Members of the Board:

We hereby consent to the use of our firm’s name in the Registration Statement on Form S-1 and related amendments thereto (the “Form S-1”) of Penn Millers Holding Corporation as filed with the Securities and Exchange Commission (the “SEC”). We also consent to the inclusion of, summary of, and reference to our Pro Forma Valuation Appraisal Report as of April 1, 2009 in the Form S-1 included in the Prospectus of Penn Millers Holding Corporation.

We further consent to the inclusion of, summary of, and reference to in the Form S-1 of our opinion letter as to the value of subscription rights to be received by eligible PMMHC policyholders pursuant to the Plan of Conversion (the “Plan”) adopted by the Board of Directors of PMMHC on April 22, 2009.

In giving our consent, we do not admit that we come within the category of persons whose consent is required under Section 7 of the Securities Act of 1933, as amended (the “Act”), or the rules and regulations of the SEC thereunder (the “Regulations”), nor do we admit that we are experts with respect to any part of the Registration Statement on Form S-1 within the meaning of the term “experts” as used in the Act or the Regulations.

Sincerely,

Curtis Financial Group, LLC

EX-99.1

Exhibit 99.1

Pro Forma Valuation Appraisal Report

of

Penn Millers Mutual Holding Company

Wilkes-Barre, Pennsylvania

As of April 1, 2009

One Liberty Place
1650 Market Street, Suite 4400
Philadelphia, PA 19103
www.curtisfinancial.com

April 22, 2009

Board of Directors
Penn Millers Mutual Holding Company
72 North Franklin Street
Wilkes-Barre, Pennsylvania 18773

Members of the Board:

At your request, Curtis Financial Group, LLC (“Curtis”) completed and hereby provides an independent appraisal (the “Appraisal”) of the estimated consolidated pro forma market value of Penn Millers Mutual Holding Company (“PMMHC”) as of April 1, 2009, which is conducting a public offering in connection with the Plan of Conversion, as of April 22, 2009 (the “Plan” or “Offering”) transaction described below. PMHC Corp. (“PMHC”) is the wholly-owned subsidiary of PMMHC and the holding company for Penn Millers Insurance Company (“PMIC”, and together with PMHC and PMMHC, “Penn Millers” or the “Company”).

Because the Plan involves the conversion of PMMHC from mutual to stock form, the Plan must be approved by the Pennsylvania Insurance Commissioner pursuant to the Commissioner’s 1998 order approving the conversion transaction by which the Company’s current mutual holding company structure was created. Accordingly, and in order to ensure that this Plan is fair to members of PMMHC, the Company has discussed this Plan with senior staff at the Pennsylvania Insurance Department (“PID”), and, as a condition to the Offering, will obtain from the Insurance Commissioner an approval of the Offering or, as applicable, will obtain written confirmation from the Commissioner that such approval is not required and that the Company may proceed with the Offering. In accordance with the Plan, the estimated consolidated pro forma market value of the Company shall be determined by an independent valuation expert and shall represent the aggregate price of common stock (the “Estimated Pro Forma Market Value”). Furthermore, the pro forma market value may be expressed as a range of value and may be that value that is estimated to be necessary to attract a full subscription for the shares of common stock offered for sale in the Offering.

THE PLAN OF CONVERSION

The Board of Directors of the Company has adopted the Plan. As part of the Plan, PMMHC will convert from mutual to stock form and issue its common stock to its newly formed holding company, Penn Millers Holding Corporation, which will offer shares of its common stock (“Common Stock”) for sale in a subscription offering to the following potential subscribers: the Company’s policyholders, the Company’s employee stock ownership plan (“ESOP”), and directors, officers and employees of the Company in accordance with the terms and conditions of the Plan. To the extent that shares remain available for purchase after satisfaction of all subscriptions received in the subscription offering, the shares may be offered for sale in a community offering and a syndicated community offering, if needed.

Board of Directors
Penn Millers Mutual Holding Company
Page 2 of 4

CURTIS FINANCIAL GROUP, LLC

Curtis is an investment banking firm specializing in business valuations, mergers and acquisitions, and raising private capital. The professional staff has a diverse background in investment banking, securities analysis, banking, insurance, engineering, accounting and tax. The expertise of the staff includes valuing, originating, structuring, negotiating and closing a wide variety of investment banking transactions. The background of Curtis is presented in Exhibit III. We believe that, except for the fee we will receive for our appraisal, we are independent of the Company and the other parties engaged by the Company to assist in the corporate reorganization and stock issuance process.

VALUATION METHODOLOGY

In preparing the Appraisal, we conducted an analysis of PMMHC that included discussions with the Company’s management and an onsite visit to the Company’s headquarters. We reviewed the audited GAAP and statutory financial statements of the Company as of and for the years ended December 31, 2003 through December 31, 2008. In addition, where appropriate, we considered information based on other available published sources that we believe are reliable; however, we cannot guarantee the accuracy and completeness of such information.

In preparing the Appraisal, we also reviewed and analyzed: (i) financial and operating information with respect to the business, operations, and prospects of the Company furnished to us by the Company; (ii) publicly available information concerning the Company that we believe to be relevant to our analysis; (iii) a comparison of the historical financial results and present financial condition of the Company with those of selected, publicly-traded insurance companies that we deemed relevant; and (iv) financial performance and market valuation data of certain publicly-traded insurance industry aggregates as provided by industry sources.

The Appraisal is based on the Company’s representation that the information contained in the Plan and additional evidence furnished to us by the Company and its independent auditor are truthful, accurate, and complete. We did not independently verify the financial statements and other information provided by the Company and its independent auditor, nor did we independently value the assets or liabilities of the Company. The Appraisal considers the Company only as a going concern on a stand-alone basis and should not be considered as an indication of the liquidation value of the Company.

We have investigated the competitive environment within which the Company operates and have assessed the Company’s strengths and weaknesses relative to comparable companies. We have monitored material regulatory and legislative actions affecting financial institutions generally and analyzed the potential impact of such developments on the Company and the industry as a whole, to the extent we were aware of such matters. We have analyzed the potential effects of the Offering on the Company’s operating characteristics and financial performance as they relate to the Estimated Pro Forma Market Value of PMMHC. We have reviewed the economy and demographic characteristics of the primary market area in which the Company currently operates. We have compared the Company’s financial performance and condition with publicly-traded insurance institutions evaluated and selected in accordance with the valuation guidelines.

Board of Directors
Penn Millers Mutual Holding Company
Page 3 of 4

We have reviewed conditions in the securities markets in general and the markets for insurance companies, and insurance holding companies.

Our appraised value is predicated on a continuation of the current operating environment for PMHC, PMMHC, and for all insurance companies and their holding companies. Changes in the local and national economy, the federal and state legislative and regulatory environments for insurance companies, the stock market, interest rates, and other external forces (such as natural disasters or significant world events) may occur from time to time, often with great unpredictability, and may materially impact the value of insurance stocks as a whole or the Company’s value alone. To the extent that such factors can be foreseen, they have been factored into our analysis.

VALUATION CONCLUSION

It is our opinion that, as of April 1, 2009, the Estimated Pro Forma Market Value of the aggregate common shares outstanding immediately following the Offering, was within a range (the “Valuation Range”) of $45.05 million to $60.95 million with a midpoint of $53.0 million. The Valuation Range was based upon a fifteen percent decrease from the midpoint to determine the minimum and a fifteen percent increase from the midpoint to determine the maximum. Exhibit VI shows the assumptions and calculations utilized in determining the Company’s Valuation Range.

LIMITING FACTORS AND CONSIDERATIONS

Our Appraisal is not intended, and must not be construed, to be a recommendation of any kind as to the advisability of purchasing shares of Common Stock. Moreover, because the Appraisal is necessarily based upon estimates and projections of a number of matters, all of which are subject to change from time to time, no assurance can be given that persons who purchase shares of stock in the conversion will thereafter be able to sell such shares at prices related to the foregoing Estimated Pro Forma Market Value. The Appraisal reflects only a valuation range as of this date for the Estimated Pro Forma Market Value of PMMHC immediately upon issuance of the stock and does not take into account any trading actively with respect to the purchase and sale of common stock in the secondary market on the date of issuance of such securities or at anytime thereafter following the completion of the Offering. Any report prepared by Curtis shall not be used as an offer or solicitation with respect to the purchase or sale of any securities.

Curtis has made no recommendation regarding the merits of the decision to proceed or not to proceed with the Offering. The results of our appraisal are but one of the many factors the Company’s Board of Directors should consider in making its decision. The Company has assured Curtis that it has relied on its own counsel, accountants and other experts for legal, accounting, tax and similar professional advice.

The Valuation Range reported herein will be updated as appropriate. These updates will consider, among other factors, any developments or changes in the Company’s operating performance, financial condition, or management policies, and current conditions in the securities markets for insurance company common stocks. Should any such new developments

Board of Directors
Penn Millers Mutual Holding Company
Page 4 of 4

or changes be material, in our opinion, to the Estimated Pro Forma Market Value of PMMHC, appropriate adjustments will be made to the Valuation Range. The reasons for any such adjustments will be explained in detail at that time.

Respectfully submitted, 

Curtis Financial Group, LLC  

PRO FORMA VALUATION APPRAISAL

TABLE OF CONTENTS

I. INTRODUCTION	1
II. BUSINESS OF PENN MILLERS	5
General Overview	5
Corporate History	6
Reasons for the Conversion Offering	7
Agribusiness Segment	8
Commercial Lines Segment	9
Reinsurance	9
Marketing and Distribution	11
Underwriting, Risk Assessment, and Pricing	12
Claims Management	12
Financial Strength Ratings by A.M. Best	13
Financial Condition	14
Income and Expense Trends	18
III. INDUSTRY FUNDAMENTALS	27
IV. COMPARISONS WITH PUBLICLY-TRADED COMPANIES	31
General Overview	31
Selection Criteria	32
Summary Profiles of the Comparable Group Companies	36
Recent Financial Comparisons	45
V. MARKET VALUE ADJUSTMENTS	48
General Overview	48
Profitability and Earnings Prospects	49
Management	51
Liquidity of the Issue	52
Subscription Interest	53
Stock Market Conditions	54
Dividend Outlook	56
New Issue Discount	57
Summary of Adjustments	57
Valuation Approach	58
Valuation Conclusion	60

PRO FORMA VALUATION APPRAISAL

TABLE OF EXHIBITS

I.	Statement of General Assumptions and Limiting Conditions
II.	Certification
III.	Overview of Curtis and Qualifications of Appraisers
IV-1.	Balance Sheets — GAAP Basis
IV-2.	Income Statements — GAAP Basis
IV-3.	Investment Portfolio — GAAP Basis
V-1.	Balance Sheets — Statutory Basis
V-2	Income Statements — Statutory Basis
VI-1.	Financial Performance Data for Public P&C Insurance Companies
VI-2.	Market Valuation Data for Public P&C Insurance Companies
VII-1.	Pro Forma Assumptions for Conversion Valuation
VII-2.	Pro Forma Conversion Valuation Range

PRO FORMA VALUATION APPRAISAL

I. INTRODUCTION

     As requested, Curtis Financial Group, LLC (“Curtis”) has prepared an independent appraisal (the “Appraisal”) of the estimated consolidated pro forma market value of the common stock (the “Estimated Pro Forma Market Value”) of Penn Millers Mutual Holding Company (“PMMHC”), as of April 1, 2009, which is to offer the stock of its newly formed holding company in connection with the Plan of Conversion, as of April 22, 2009 (the “Plan” or “Offering”) transaction described below. PMHC Corp. (“PMHC”) is the wholly-owned subsidiary of PMMHC, and the holding company for Penn Millers Insurance Company (“PMIC”, and together with PMHC and PMMHC, “Penn Millers” or the “Company”).

     Pursuant to the Plan adopted by the Board of Directors of the Company on April 22, 2009, PMMHC will convert from mutual to stock form and issue its common stock to its newly formed holding company, Penn Millers Holding Corporation, which will offer its common stock (the “Common Stock”) for sale in a subscription offering in the following order of priority: policyholders insured under policies of insurance issued by Penn Millers as of April 22, 2009 (the “Eligibility Record Date”); the Company’s employee stock ownership plan (“ESOP”); and directors, officers, and employees of Penn Millers. Any shares not subscribed for in the subscription offering may be offered to members of the general public in a community offering with preference given to licensed insurance agencies and brokers that market and distribute insurance policies issued by the Company, policyholders insured under policies of insurance issued by Penn Millers after the Eligibility Record Date, and residents of Lackawanna or Luzerne Counties in Pennsylvania. If there are any shares of Common Stock not purchased in the subscription or community offerings, they may be offered for sale to the public in a syndicated community offering.

     Because the Plan involves the conversion of PMMHC from mutual to stock form the Plan must be approved by the Pennsylvania Insurance Commissioner pursuant to the Commissioner’s 1998

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PRO FORMA VALUATION APPRAISAL

order approving the conversion transaction by which the Company’s current mutual holding company structure was created. Accordingly, and in order to ensure that this Plan is fair to members of PMMHC, the Company has discussed this Plan with senior staff at the Pennsylvania Insurance Department (“PID”), and, as a condition to the Offering, will obtain from the Insurance Commissioner an approval of the Offering or, as applicable, will obtain written confirmation from the Commissioner that such approval is not required and that the Company may proceed with the Offering. In accordance with the Plan, the Estimated Pro Forma Market Value of the Company shall be determined by an independent valuation expert and shall represent the aggregate price of Common Stock sold. Furthermore, the Estimated Pro Forma Market Value may be expressed as a range of value and may be that value that is estimated to be necessary to attract a full subscription for the shares of Common Stock offered for sale in the Offering.

     Curtis is an investment banking firm specializing in business valuations, mergers and acquisitions, and raising private capital. The background of Curtis is presented in Exhibit III. In preparing the Appraisal, we conducted an analysis of PMMHC that included discussions with the Company’s management and an onsite visit to the Company’s headquarters. We also reviewed the audited GAAP and statutory financial statements of the Company as of and for the years ended December 31, 2003 through December 31, 2008. In addition, where appropriate, we considered information based on other available published sources that we believe are reliable; however, we cannot guarantee the accuracy and completeness of such information.

     In preparing the Appraisal, we also reviewed and analyzed: (i) financial and operating information with respect to the business, operations, and prospects of the Company furnished to us by the Company; (ii) publicly available information concerning the Company that we believe

2

PRO FORMA VALUATION APPRAISAL

to be relevant to our analysis; (iii) a comparison of the historical financial results and present financial condition of the Company with those of selected publicly-traded insurance companies that we deemed relevant; and (iv) financial performance and market valuation data of certain publicly-traded insurance industry aggregates as provided by industry sources.

     The Appraisal is based on the Company’s representation that the information contained in its Form S-1 Registration Statement and additional evidence furnished to us by the Company and its independent auditor are truthful, accurate, and complete. We did not independently verify the financial statements and other information provided by the Company and its independent auditor, nor did we independently value the assets or liabilities of the Company. The Appraisal considers PMMHC only as a going concern on a stand-alone basis and should not be considered as an indication of the liquidation value of PMMHC. The attached Statement of Limiting Conditions in Exhibit I is an integral part of this Appraisal.

     In determining our estimate of the Estimated Pro Forma Market Value of PMMHC, we utilized the comparable market valuation approach. The comparable market valuation approach arrives at a market value by reviewing the relevant market pricing characteristics of common stocks of comparable companies that are publicly-traded. In utilizing this valuation approach, we selected a group of insurance companies based on criteria discussed later in the Appraisal that we believe investors potentially would compare to the Company. We also considered relative market value adjustments to derive the Estimated Pro Forma Market Value based on the quantitative and qualitative comparisons of Penn Millers with the selected group of publicly-traded companies.

     Our Appraisal is not intended, and must not be construed, to be a recommendation of any kind as to the advisability of purchasing shares of Common Stock in the Offering. Moreover,

3

PRO FORMA VALUATION APPRAISAL

because the Appraisal is necessarily based upon estimates and projections of a number of matters, all of which are subject to change from time to time, no assurance can be given that persons who purchase shares of stock in the Offering will thereafter be able to sell such shares at prices related to the foregoing estimate of PMMHC’s Estimated Pro Forma Market Value. Any report prepared by Curtis shall not be used as an offer or solicitation with respect to the purchase or sale of any securities. Curtis has made no recommendation regarding the merits of the decision to proceed or not to proceed with the Offering. The results of our appraisal are but one of the many factors the Company’s Board of Directors should consider in making its decision. The Company has assured Curtis that it has relied on its own counsel, accountants and other experts for legal, accounting, tax and similar professional advice.

     The valuation range reported herein, which is calculated as 15% above the midpoint and 15% below the midpoint (the “Valuation Range”), will be updated as appropriate. These updates will consider, among other factors, any developments or changes in the Company’s operating performance, financial condition, or management policies, and current conditions in the securities markets for insurance company common stocks. Should any such new developments or changes be material, in our opinion, to the Estimated Pro Forma Market Value of the Company, appropriate adjustments will be made to the Valuation Range. The reasons for any such adjustments will be explained in detail at that time.

4

PRO FORMA VALUATION APPRAISAL

II. BUSINESS OF PENN MILLERS

General Overview

     Penn Millers is a Pennsylvania-domiciled, mutual holding company that offers general commercial insurance policies to small and medium-sized businesses and agricultural businesses primarily located in the Mid-Atlantic States, and also in the northeastern, southern and midwestern regions of the United States (the “U.S.”). The Company, which is located in Wilkes-Barre, Pennsylvania, is licensed in 39 U.S. states, but currently limits its agricultural insurance product sales to 33 states and commercial insurance product sales to 8 states. The Company markets its products directly and through a network of more than 450 licensed, independent insurance brokers and agents.

     Penn Millers is subject to examination and comprehensive regulation by the PID. Primary business is written through PMIC with its subsidiary, American Millers Insurance Company (“American Millers”), providing excess-of-loss reinsurance to PMIC for property losses between $450,000 and $500,000. American Millers, which was formed in 1987 to write business in states other than Pennsylvania, was inactive for a number of years. At the request of the PID, the Company began writing reinsurance through American Millers. Penn Millers also relies on reinsurance from other providers such as Swiss Reinsurance, Arch Reinsurance, Hanover Ruckverischerung AG, the Underwriters at Lloyd’s, and Partner Reinsurance Company of the U.S. As of December 31, 2008, Penn Millers had total assets of $220.5 million, total equity of $50.8 million, and approximately 8,900 property and casualty (“P&C”) policies in force. For the fiscal year ended December 31, 2008, Penn Millers had net premiums earned of $78.7 million, total revenue of $78.7 million and a net loss of $4.5 million, which excludes discontinued operations.

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PRO FORMA VALUATION APPRAISAL

     Penn Millers is managed by an experienced group of executives led by Mr. Doug Gaudet, the President and Chief Executive Officer. Mr. Gaudet has served with Penn Millers since 2005, and has been in the insurance industry for over 30 years. Michael O. Banks, the Company’s Chief Financial Officer, has served in his current position since 2002 and in various other positions in the insurance industry since 1989. On average, each of the Company’s executive officers has more than 20 years of experience in the P&C insurance industry. Other members of the Company’s management team include Harold Roberts (Senior Vice-President, Director of Agribusiness, and Chief Underwriting Officer), William Dine (Vice-President of Commercial Lines Segment), Kevin Higgins (Senior Vice-President, Director of Claims), and Jonathan Couch (Vice-President and Controller).

Corporate History

     Penn Millers was established in 1887 as Pennsylvania Millers Mutual Fire Insurance Company in Huntington, Pennsylvania and wrote insurance for grist mill owners. The Company moved to Wilkes-Barre, Pennsylvania in 1904, and changed its name to Pennsylvania Millers Mutual Insurance Company in 1960. In 1999, Penn Millers demutualized and became a stock insurance company (Penn Millers Insurance Company) within a mutual holding company structure in accordance with a plan approved by the Commonwealth of Pennsylvania and Penn Millers’ policyholders. A “mid-tier” stock holding company was formed (PMHC), and the rights of the policyholders were transferred to the mutual holding company, which became the parent of the reorganized holding company system.

     In 2008, the Company sold substantially all the assets of its non-insurance subsidiary, Penn Software & Technology Services, Inc. and in February, 2009 sold substantially all the assets of its Eastern Insurance Group (“EIG”) subsidiary.

6

PRO FORMA VALUATION APPRAISAL

Below is an organizational chart of the Company and subsidiaries discussed above:

Chart 1
Penn Millers Corporate Organizational Chart

Reasons for the Conversion Offering

     According to the Company’s 2009 Plan (the “PMIC 2009 Plan”), the Company will use the capital generated by the Offering to strengthen its agribusiness and commercial lines business. Specifically, the Company’s goals are to increase writings by enhancing existing products and by adding new agents and brokers and products, such as PennEdge, as discussed later. PMIC’s 2009 Plan indicates that it requires additional capital to support its long-term growth plans during the next “hard market” and the additional capital will enable the Company to maintain its A.M. Best rating as it grows.

     The Company explored many capital raising options including, bank debt, private debt and equity placement, preferred stock and convertible debt, public equity, reinsurance and trust preferred securities. After careful review, the Company determined that its best and most flexible option was to raise the necessary amount of capital through a mutual to stock form

7

PRO FORMA VALUATION APPRAISAL

conversion. The Company is pursuing a mutual to stock form conversion so that it can obtain the appropriate amount of capital enabling it to achieve its strategic growth plan. Additional advantages include:

• value for the policyholders who invest;

• attracting, retaining and motivating personnel and agents; and

• enhancing company image and visibility.

Agribusiness Segment

     The Company’s specialty agribusiness segment writes coverage for agricultural enterprises such as manufacturers, processors, and distributors of products for the agricultural industry. Penn Millers does not write property or liability insurance for farms or farming operations unless written in conjunction with an eligible agribusiness operation and does not write any crop insurance or livestock insurance. Based on gross premiums written for the year ended December 31, 2008, the Company’s most significant agribusiness product offerings included fire and allied (32.3% of direct premiums written), automobile (22.6%), general liability (17.5%), workers compensation (14.1%), and product liability (7.9%). There were approximately 1,750 agribusiness policies in force as of December 31, 2008. Penn Millers believes its agribusiness is the third largest policy writer of such business in the U.S. behind Nationwide Agribusiness Insurance Company and Michigan Millers Mutual Insurance Company. Other competitors include Continental Western Insurance Company and Westfield Insurance Company.

8

PRO FORMA VALUATION APPRAISAL

Commercial Lines Segment

     The Company’s commercial lines segment includes product offerings for small- and medium-sized business owners, including workers’ compensation, commercial multi-peril, fire and allied, commercial automobile and general liability. The Company targets retail and service establishments such as dry cleaners, shoe stores, furniture stores, restaurants and apartment buildings. Based on gross premiums written for the year ended December 31, 2008, the Company’s most significant commercial product offerings included commercial multi-peril (31.5% of direct premiums written), workers’ compensation (21.4% of direct premiums written), general liability (15.9% of direct premiums written), fire and allied (13.6% of direct premiums written), and commercial automobile (13.5% of direct premiums written). As of December 31, 2008, there were approximately 7,150 commercial policies in force. Penn Millers commercial segment competes with national insurance companies such as Travelers Companies, Inc. and Hartford Financial Services as well as regional players such as Harleysville Group Inc., Donegal Group Inc. and Cincinnati Financial Corporation.

     In the first quarter of 2009, the Company introduced a new product line within its commercial lines segment (“PennEdge”). PennEdge is a highly customized product designed for larger, more sophisticated business owners, such as wholesale, light manufacturers, hospitality, commercial laundries and dry cleaning, and printers. Management expects PennEdge to increase direct premiums written and increase profitability due to the risk profiles of PennEdge’s customer base.

Reinsurance

     In accordance with insurance industry practice, Penn Millers reinsures a portion of its loss exposure and pays reinsurers a portion of the gross premiums received on all policies

9

PRO FORMA VALUATION APPRAISAL

reinsured. Insurance policies written by the Company are reinsured with other insurance companies principally to: (i) reduce net liability on individual risks; (ii) mitigate the effect of individual loss occurrences (including catastrophic losses); (iii) stabilize underwriting results; (iv) decrease leverage; and (v) increase underwriting capacity. The Company’s reinsurance arrangements are placed with America Millers and other non-affiliated reinsurers including Swiss Reinsurance, Arch Reinsurance, Hanover Ruckverischerung AG, the Underwriters at Lloyd’s, and Partner Reinsurance Company of the U.S. Reinsurance arrangements are generally renegotiated annually. Each of Penn Millers’ non-affiliated reinsurance providers have an A.M. Best rating of “A-” or better. Prior to 2008, the Company’s maximum retention per risk was $500,000. In 2008, the Company chose to retain additional premiums, increasing their retention per risk to the first $500,000 of losses, plus 75.0% of all property and liability losses between $500,000 and $1.0 million, and 25.0% of all losses between $1.0 million and $5.0 million. Their maximum risk retention per loss is $1.875 million, excluding catastrophe. Due to the increased per risk retention in 2008, the Company added an aggregate stop loss reinsurance cover which provides 20 points of loss ratio protection in excess of a 72% loss and LAE ratio. For their catastrophe program, the maximum retention is $3.65 million. The net probable maximum catastrophe loss (including reinstatement premium from a one hundred year event) is approximately $4.6 million.

     Due to industry conditions, in 2009 the Company purchased additional catastrophe reinsurance, for a total of $45 million catastrophe protection. The Company also chose to decrease retention levels. In 2009, the Company retained 52.5% of all losses between $500,000 and $1.0 million. In 2009, the Company’s maximum retention per loss decreased from $1.875 million to $762,500, excluding catastrophe.

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PRO FORMA VALUATION APPRAISAL

Marketing and Distribution

     Penn Millers markets its insurance products directly and through a network of more than 450 independent brokers and agents. Penn Millers actively recruits new agents and brokers through referrals, marketing representative relationships and recruiting campaigns. Independent agents and brokers seek to establish relationships with the Company because of its coverage leadership and the responsive service that it provides to its producers and policyholders. The Company believes it has strong producer relationship management processes in place.

     For 2008, the Company’s largest commercial agent accounted for approximately 4.0% of its direct commercial premiums written and the Company’s top ten commercial agents accounted for approximately 27.9% of direct commercial premiums written. The Company’s top ten commercial lines agents in 2008 included brokers from Creative Coverage, Brown & Brown of Lehigh Valley, John M. Glover Agency, E.A. Boniakowski Agency, Inc., Smith Insurance Inc., Association Benefits Insurance Agency, Masters Coverage Corp., Beskin & Associates, Diversified Insurance and Iroquois Services, Corp.

     In 2008, the Company’s largest agribusiness broker accounted for approximately 19.2% of its direct agribusiness premiums written. The Company’s top ten agribusiness brokers accounted for approximately 51.5% of its direct agribusiness premiums written in 2008. The Company’s top ten agribusiness brokers in 2008 included Arthur J. Gallagher Risk Management, Lamair-Mulock Condon, Carlton Insurance, Grace / Mayer Insurance Agency, Southgroup of Cleveland, Brownlee Agency Inc., Kansas Farmers Service Association, Agri Insurance Business South East, LLC, AG States Group, and IMA of Kansas, Inc.

     The Company’s producers are compensated through a fixed base commission with an opportunity for profit-sharing depending on the producers relative premium volume and

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profitability. According to Company management, the profit-sharing plan is comparable to other market plans. The Company is currently in the process of terminating its relationships with unprofitable and low volume agents.

Underwriting, Risk Assessment, and Pricing

     Penn Millers underwrites its commercial and agribusiness lines by evaluating each risk under consistent standards. The Company’s centralized underwriting operations include manager review of new business quotes and renewal business, as well as senior management review of significant new business quotes above $150,000 in premiums for agribusiness and above $70,000 in premiums for commercial lines. The Company maintains a continuous, standardized rate review process by reporting pricing, profitability, loss ratios by class, and premium trends. The Company’s management represented that its new PennEdge product will create more accurate pricing as it relates to risk selection and mitigating exposure.

Claims Management

     Claims on insurance policies are received directly from the insured or through the Company’s independent producers. Penn Millers currently staffs 14 employees in its claims department. Any settlement of a claim for an amount in excess of $100,000 requires the approval of the claims reserve committee comprised of Mr. Gaudet, Mr. Banks, Mr. Roberts, and Mr. Higgins. According to management, Penn Millers will focus on improving its customer-centric claims culture in the coming years by implementing customer satisfaction surveys and re-tooling its after-hours claims services through the implementation of an integrated voice response system. The Company also plans to implement a claims audit process and implement a workers compensation nurse case management triage program.

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Financial Strength Ratings by A.M. Best

     A.M. Best is a widely recognized rating agency dedicated to the insurance industry. A.M. Best provides ratings (“Best’s Ratings”) that indicate the financial strength of insurance companies. The objective of A.M. Best’s rating system is to provide an independent opinion of an insurer’s financial strength and its ability to meet ongoing obligations to policyholders. The assigned rating is derived from an in-depth evaluation and analysis of a company’s balance sheet strength, operating performance, and business profile. The Best’s Ratings scale is comprised of 15 individual ratings grouped into 9 categories (excluding suspended ratings).

     A.M. Best currently assigns a Best’s Rating of “A-” (Excellent) to PMIC and “B++” (Good) to American Millers, effective June 2, 2008. These ratings are the fourth-and fifth-highest of 15 ratings, respectively. The categories of “Excellent” and “Good” represent the second and third highest of nine categories. Insurance companies rated “A-” are considered by A.M. Best to have “an excellent ability to meet their ongoing obligations” to policyholders and companies rated “B++” are considered by A.M. Best to have “a good ability to meet their ongoing obligations” to policyholders. PMIC and American Millers were both assigned an A- rating in reports as of May 18, 2007 and May 3, 2006. According to A.M. Best, American Millers’ current rating has dropped due to its modest business profile.

     In its most recent ratings report on Penn Millers, A.M. Best cited that the Company’s rating reflects solid capitalization, steps taken to retain a greater portion of direct underwriting profits through a more efficient use of ceded reinsurance, significant presence in the agri-business market segment and strong agency relationships. The report indicated that these positive rating factors were partially offset by the Company’s below average underwriting results driven by a high expense ratio, erratic reserve development and history of large storm losses. The

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Company’s Best’s Rating may be an important factor affecting its ability to attract new business from customers and producers.

     Best Capital Adequacy Ratio (“BCAR”) is the ratio of adjusted surplus to net required capital, as determined by A.M. Best. The Company’s BCAR rating impacts its overall A.M. Best rating and, thus, its ability to write and renew business. In the second-half of 2008, the Company’s portfolio of equity investments declined markedly as a result of the overall deteriorating market conditions. To protect its BCAR rating by preserving capital and eliminating equity market risk, the Company sold its entire equity portfolio and reinvested the proceeds into fixed asset securities during the second-half of 2008.

Financial Condition

     Table 1 presents selected data concerning the Company’s financial position and Exhibit IV-1 presents the Company’s balance sheet as of December 31, 2003 through December 31, 2008.

Table 1
Selected Financial Condition Data
As of December 31, 2006, December 31, 2007 and December 31, 2008
(Dollars in Thousands)

	12/31/2008			12/31/2007			12/31/2006
Balance Sheet Data
Total assets		220,524			219,613			207,768
Total investments and cash		133,873			136,312			126,655
Premiums and fees receivable		31,080			32,489			30,465
Reinsurance receivables		20,637			15,640			18,886
Loss and loss adjustment expense reserves		108,065			95,956			89,405
Unearned premiums		45,322			46,595			43,294
Total liabilities		169,769			158,212			147,238
Total surplus		50,755			61,401			60,530
Total surplus / assets		23.02	%		27.96	%		29.13	%

Source: Penn Millers’ GAAP financial statements.

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     The Company’s total assets increased 5.7% from $207.8 million at December 31, 2006 to $219.6 million at December 31, 2007 and increased 0.4% to $220.5 million at December 31, 2008. From December 31, 2007 to December 31, 2008, reinsurance receivables increased by $5.0 million, deferred income taxes increased by $2.9 million, and cash increased by $1.8 million. These increases were offset by a $4.3 million decline in investment securities, which resulted from a write-down of impaired, equity securities, a $1.4 million decline in premiums and fees receivable and a $3.9 million decline in assets from discontinued operations.

     The Company’s portfolio of investment securities amounted to $121.9 million at December 31, 2008 and constituted 55.3% of total assets. The Company’s investment portfolio amounted to $126.2 million as of December 31, 2007. Exhibit IV-3 presents the Company’s investment portfolio as of December 31, 2006, December 31, 2007, and December 31, 2008. All of the Company’s investment securities are carried at fair value. The Company’s investment objectives are to (a) fund insurance policy liabilities when they are due and (b) maximize enterprise value. In addition, the Company’s investment approach seeks to (a) emphasize bond portfolio interest income rather than realized gains; (b) emphasize long-term appreciation on common stock investments; (c) limit realized losses, and (d) ensure stable surplus growth consistent with the Company’s objective to maintain a high quality portfolio while managing duration to limit interest rate risk.

     Consistent with its investment policy, the Company’s investment portfolio is primarily comprised of fixed-income debt securities. The Company’s fixed-income investment portfolio is professionally managed by an external firm, Conning Asset Management (“CAM”), which is a registered independent investment advisor that specializes in providing investment management

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services to the insurance industry. As of December 31, 2008, CAM managed approximately $61.1 billion of assets.

     In the second half of 2008, the Company sold all its equity investments to preserve capital and eliminate further equity market risk. In accordance with the Company’s investment policy, the proceeds from the sale of equity investments were reinvested in fixed income securities. Prior to selling its equity investments, the Company’s equity portfolio was invested in index funds with the majority placed in an S&P 500 based fund.

     As of year-end 2008, Penn Millers’ investments consisted of $25.3 million of mortgage-backed securities, and $96.6 million of other types of fixed-income securities. The current average maturity of the Company’s debt security investments, excluding mortgage-backed securities that are subject to prepayment, was approximately 4.7 years. The current average duration of the mortgage-backed securities portfolio is 5.5 years. The Company’s portfolio of debt securities as of December 31, 2008 was considered investment grade based on third-party ratings agencies. The following chart shows the composition of securities of Penn Millers’ investment portfolio as of December 31, 2008.

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Chart 2
Penn Millers’ Investment Portfolio
As of December 31, 2008

Source: Penn Millers’ management.

     Total liabilities increased from $147.2 million at December 31, 2006 to $158.2 million at December 31, 2007, before increasing further to $169.8 million at December 31, 2008. The $11.6 million increase in total liabilities from December 31, 2007 to December 31, 2008 primarily reflected a $12.1 million increase in loss and loss adjustment expense reserves, offset by a $1.3 million decline in unearned premiums.

     Penn Millers had $1.7 million of borrowed debt outstanding as of December 31, 2007 and $2.4 million of borrowed debt outstanding as of December 31, 2008, of which $1.7 million and $1.4 million at December 31, 2007 and December 31, 2008, respectively, represented long-term debt originated to fund the acquisition of GSR and EIG. The Company intends to retire the long-term debt with the proceeds from the sale of EIG. This term loan matures in 2010 and is subject to certain covenants and restrictions, including limitations on additional borrowing arrangements, encumbrances, and sales of assets. As of December 31, 2008, the Company also had $950,000 of borrowings under a line of credit.

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     The Company’s total surplus, as measured under generally accepted accounting principles (“GAAP”), increased modestly from $60.5 million in 2006 to $61.4 million in 2007 as a result of profitable operating results. The Company’s total surplus declined from $61.4 million at year-end 2007 to $50.8 million at December 31, 2008. The decline was attributable primarily to unprofitable operating results, realized investment losses, and a goodwill write-down related to discontinued operations. The Company’s ratio of total surplus to total assets decreased from 28.0% at December 31, 2007 to 23.0% at December 31, 2008. The combination of decreased equity capital and increased asset totals has contributed to the recent decline of the Company’s surplus to total assets ratio. Additionally, as shown in the following chart, the Company’s return on average assets (“ROAA”) and return on average equity (“ROAE”) have declined during the past several years.

Chart 3
Penn Millers ROAA and ROAE
For the Year Ended December 31, 2003 to December 31, 2008

Source: Curtis calculation based on Penn Millers’ GAAP financial statements.

Income and Expense Trends

     Table 2 displays the Company’s earnings results and selected operating ratios for 2006, 2007 and 2008. Exhibit IV-2 displays the Company’s annual income statements for 2003

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through 2008. Penn Millers’ operating results are influenced by factors affecting the P&C insurance industry in general. The performance of the P&C insurance industry is subject to significant variations due to competition, weather, catastrophic events, regulation, general economic conditions, judicial trends, fluctuations in interest rates, and other factors.

Table 2
Selected Operating Performance Data
For the Year Ended December 31, 2006, December 31, 2007 and December 31, 2008
(Dollars in Thousands)

	2008			2007			2006
REVENUE
Premiums earned	$	78,737		$	70,970		$	64,645
Investment income, net of investment expense		5,335			5,324			4,677
Realized investment (losses) gains, net		(5,819	)		(702	)		349
Other revenue		411			508			345
Total revenue		78,664			76,100			70,016
LOSSES AND EXPENSES
Losses and loss adjustment expenses		57,390			49,783			43,766
Underwriting and administrative expenses		26,562			24,163			23,296
Interest expense		184			125			222
Other expenses, net		365			184			314
Total losses and expenses		84,501			74,255			67,598
Income from continuing operations		(5,837	)		1,845			2,418
Income taxes expense (benefit)		(1,378	)		396			506
Net income (loss) from continuing operations		(4,459	)		1,449			1,912
Discontinued Operations:
Pre-tax (loss) income on discontinued ops		(3,090	)		(489	)		292
Income tax (benefit) expense		(170	)		(126	)		124
(Loss) income on discontinued ops		(2,920	)		(363	)		168
Net income		(7,379	)		1,086			2,080
Operating Ratios
Loss ratio (a)		72.9	%		70.1	%		67.7	%
Expense ratio (b)		33.7	%		34.0	%		36.0	%
Combined ratio (c)		106.6	%		104.2	%		103.7	%

Notes:
(a)	Losses and loss adjustment expenses divided by premiums earned.
(b)	Underwriting and administrative expenses divided by premiums earned.
(c)	Sum of the loss ratio and the expense ratio.

Source: Audited financial reports prepared by the management of the Company and audited by KPMG. Statutory financials provided in Exhibit V.

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     Penn Millers’ total revenue grew from $70.0 million in 2006 to $78.7 million in 2008, excluding revenue from discontinued operations. Net premiums earned grew from $64.6 million in 2006 to $78.7 million in 2008, representing a compound annual growth rate of 10.4%. Realized investment losses of $5.8 million in 2008, caused by recent financial markets activity, had a negative impact on total revenue growth and net income. Including discontinued operations, Penn Millers experienced a net loss of $7.4 million in 2008 as compared to net income of $1.1 million for 2007 and $2.1 million in 2006. On February 2, 2009, the Company completed the sale of EIG to Eastern Insurance Acquisition Agency, LLC for approximately $3.4 million. Performance results of EIG have been classified as discontinued operations in Penn Millers’ historical financial statements.

     A key measurement of the core profitability of any insurance company for a given period is its combined ratio, which is equal to the sum of its loss ratio and its expense ratio. However, investment income, federal income taxes and other non-underwriting income or expense are not reflected in the combined ratio. The profitability of P&C insurance companies depends on income from underwriting, investment, and service operations. Underwriting results are considered profitable when the combined ratio is under 100% and unprofitable when the combined ratio is over 100%.

     Underwriting and administrative expenses increased from $23.3 million in 2006 to $26.6 million in 2008. As a percent of earned premium revenue, the Company’s expense ratio has decreased steadily from 36.0% in 2006 to 33.7% in 2008. The loss ratio increased from 67.7% in 2006 to 72.9% in 2008, resulting in a combined ratio that increased from 103.7% in 2006 to 106.6% in 2008. According to management, Penn Millers experienced unusually high

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     losses in 2007 and 2008. As shown in the following chart, since 2003, Penn Millers’ combined ratio has ranged from 103.7% to 107.3%.

Chart 4
Penn Millers Combined Ratio Composition
For the Year Ended December 31, 2003 to December 31, 2008

Source: Penn Millers GAAP financial statements. Statutory ratios provided in Exhibit V.

     Net investment income increased from $4.7 million in 2006 to $5.3 million in 2007 and remained flat in 2008. Net realized investment gains decreased from $349,000 in 2006 to negative $702,000 in 2007, and decreased further to negative $5.8 million in 2008. This decrease in net realized gains was mostly attributable to the sale of the Company’s portfolio of equity securities. As discussed further in the Industry Fundamentals Section of this report, the recent crisis in the financial markets has had an industry-wide effect on insurance companies’ investment portfolios.

     The Company’s commercial lines segment has remained unprofitable over the past three years but net premiums earned grew from $26.8 in 2006 to $29.3 million in 2007, representing a growth rate of 9.3%, before further growing to $31.8 million in 2008. Losses and loss adjustment expenses grew from 65.5% of net premiums earned in 2006 to 80.1% of net

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premiums earned in 2008, which was the primary driver behind segment losses from the Company’s commercial lines business. Commercial losses totaled $5.3 million in 2008.

Chart 5
Penn Millers Commercial Lines Net Premiums Written and Loss Ratio
For the Years Ended December 31, 2006, December 31, 2007, and December 31, 2008

Source: Penn Millers financial statements.

     The Company’s agribusiness segment broke even in 2006, was profitable in 2007, and marginally profitable in 2008. Net premiums earned grew from $35.9 in 2006 to $40.2 million in 2007, representing a growth rate of 12.1%, before further growing to $45.3 million in 2008. Losses and loss adjustment expenses grew from 66.3% of net premiums earned in 2006 to 68.7% of net premiums earned in 2008, which was the primary driver behind segment losses from the Company’s agribusiness. Agribusiness income totaled $111,000 in 2008.

Chart 6
Penn Millers Agribusiness Net Premiums Written and Loss Ratio
For the Year Ended December 31, 2006, December 31, 2007, and December 31, 2008

Source: Penn Millers financial statements.

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     The Company exited the personal lines business in 2004. Expenses related to the personal lines amounted to approximately $100,000 in each of 2006 and 2007 and in 2008 the Company recognized income of $335,000. The Company’s assumed reinsurance business relates primarily to its participation in various involuntary pools and associations and the run-off of the Company’s participation in voluntary reinsurance agreements that have been terminated. Assumed reinsurance accounted for 3.0% of net premiums written in 2006, 2.0% of net premiums written in 2007 and 2.1% of net premiums written in 2008. Assumed reinsurance was not profitable in 2006 or 2007 and resulted in $47,000 of underwriting loss in 2008.

     Penn Millers ceded $17.6 million, $21.2 million and $18.7 million of gross written premiums to reinsurers for the years ended December 31, 2008, 2007 and 2006, respectively. The 2008 decrease was a result of Penn Millers retaining additional premiums written.

     Table 3 provides operating performance segment data for the Company for the years ended December 31, 2006, 2007 and 2008.

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Table 3
Segment Operating Performance Data
For the Years Ended December 31, 2006, December 31, 2007 and December 31, 2008
(Dollars in Thousands)

	For the twelve month period ended December 31, 2008
																		As a % of Total
	Agri		Commerical			Personal			Assumed			Total			Agri			Comm			Pers			Assum
Direct premiums written	$	57,281	$	37,458		$	0		$	245			94,984			60.3	%		39.4	%		0.0	%		0.3	%
Net premiums written		45,110		30,632			0			1,625			77,367			58.3	%		39.6	%		0.0	%		2.1	%
Net premiums earned		45,298		31,805			0			1,634			78,737			57.5	%		40.4	%		0.0	%		2.1	%
Losses and loss adjustment expenses		31,137		25,480			(335	)		1,108			57,390			54.3	%		44.4	%		-0.6	%		1.9	%
Other underwriting expenses		13,848		11,371			0			574			25,793			53.7	%		44.1	%		0.0	%		2.2	%
Total losses and expenses		44,985		36,851			(335	)		1,682			83,183			54.1	%		44.3	%		-0.4	%		2.0	%
Underwriting income (loss)		313		(5,046	)		335			(48	)		(4,446	)		-7.0	%		113.5	%		-7.5	%		1.1	%

	For the year ended December 31, 2007
																		As a % of Total
	Agri		Commerical			Personal			Assumed			Total			Agri			Comm			Pers			Assum
Direct premiums written	$	55,965	$	37,860		$	0		$	248			94,073			59.5	%		40.2	%		0.0	%		0.3	%
Net premiums written		41,402		31,266			0			1,450			74,119			55.9	%		42.2	%		0.0	%		2.0	%
Net premiums earned		40,245		29,260			0			1,464			70,970			56.7	%		41.2	%		0.0	%		2.1	%
Losses and loss adjustment expenses		27,313		20,570			94			1,806			49,783			54.9	%		41.3	%		0.2	%		3.6	%
Other underwriting expenses		12,491		10,603						561			23,656			52.8	%		44.8	%		0.0	%		2.4	%
Total losses and expenses		39,804		31,173			94			2,367			73,439			54.2	%		42.4	%		0.1	%		3.2	%
Underwriting income (loss)		441		(1,913	)		(94	)		(903	)		(2,469	)		-17.9	%		77.5	%		3.8	%		36.6	%

	For the year ended December 31, 2006
																		As a % of Total
	Agri		Commerical			Personal			Assumed			Total			Agri			Comm			Pers			Assum
Direct premiums written	$	51,874	$	32,365		$	0		$	305			84,544			61.4	%		38.3	%		0.0	%		0.4	%
Net premiums written		38,350		27,144			0			2,030			67,525			56.8	%		40.2	%		0.0	%		3.0	%
Net premiums earned		35,889		26,761			0			1,995			64,645			55.5	%		41.4	%		0.0	%		3.1	%
Losses and loss adjustment expenses		23,795		17,531			98			2,342			43,766			54.4	%		40.1	%		0.2	%		5.4	%
Other underwriting expenses		12,092		9,908			0			661			22,661			53.4	%		43.7	%		0.0	%		2.9	%
Total losses and expenses		35,887		27,439			98			3,004			66,428			54.0	%		41.3	%		0.1	%		4.5	%
Underwriting income (loss)		2		(678	)		(98	)		(1,008	)		(1,782	)		-0.1	%		38.0	%		5.5	%		56.6	%

Source: Penn Millers financial statements.

     Table 4 presents additional gross premium data for the Company’s agribusiness and commercial lines segments for the years ended December 31, 2007 and December 31, 2008.

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Table 4
Agribusiness and Commercial Lines Segment Gross Premium Data
For the Year Ended December 31, 2007 and December 31, 2008
(Dollars in Thousands)

	Agribusiness						Commerical Lines
	2008			2007			2008			2007
Direct premiums written:
Fire and Allied		18,504		$	17,796			5,097		$	5,482
Inland		2,166			2,302			281			247
Workers Compensation		8,064			7,394			8,031			7,716
General Liability		10,048			9,379			5,949			5,425
Product Liability		4,529			3,990			334			254
Surety		19			18			—			—
Burglary		161			166			38			42
Boiler and Machinery		871			866			850			768
Auto		12,919			14,055			5,068			4,914
Commercial Multi-Peril		—			—			11,782			12,987
Earthquake		—			—			27			27
Total		57,281			55,965			37,458			37,860
(% of Total Premiums)
Direct premiums written:
Fire and Allied		32.3	%		31.8	%		13.6	%		14.5	%
Inland		3.8	%		4.1	%		0.7	%		0.7	%
Workers Compensation		14.1	%		13.2	%		21.4	%		20.4	%
General Liability		17.5	%		16.8	%		15.9	%		14.3	%
Product Liability		7.9	%		7.1	%		0.9	%		0.7	%
Surety		0.0	%		0.0	%		0.0	%		0.0	%
Burglary		0.3	%		0.3	%		0.1	%		0.1	%
Boiler and Machinery		1.5	%		1.5	%		2.3	%		2.0	%
Auto		22.6	%		25.1	%		13.5	%		13.0	%
Commercial Multi-Peril		0.0	%		0.0	%		31.5	%		34.3	%
Earthquake		0.0	%		0.0	%		0.1	%		0.1	%
Total		100.0	%		100.0	%		100.0	%		100.0	%

Source: Penn Millers GAAP financial data.

     Fire and allied gross premiums written, the largest component of the Company’s agribusiness segment, increased by 4.0% to $18.5 million in 2008, compared to $17.8 million in 2007. Direct commercial multi-peril gross premiums written, the largest component of the Company’s commercial lines segment, decreased by 9.3% to $11.8 million in 2008, compared to $13.0 million in 2007 due to declining prices. The chart below shows the Company’s composition of direct premiums written, by line of business, for the year ended December 31, 2008.

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Chart 7
Agribusiness and Commercial Lines Composition of Gross Premiums Written
For the Year Ended December 31, 2008

Source: Penn Millers financial data.

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III. INDUSTRY FUNDAMENTALS

     The P&C insurance industry fluctuates between “soft markets” characterized by declining premiums, pricing and excess underwriting capacity, and “hard markets” characterized by increasing premium rates and shortages of underwriting capacity. During hard markets, P&C coverage can be more difficult to find due to premium price increases and insurers exiting marginally profitable business lines. During soft market conditions, premium rates are at best stagnant and P&C insurance coverage is readily available to insureds. The P&C insurance industry is currently experiencing a soft market. The following chart shows the cyclical nature of the industry over the past thirteen years. As mentioned earlier in this report and shown below, Penn Millers has been able to increase revenue above industry averages during hard market conditions.

Chart 8
Historical Net Premiums Written Growth

Source: Penn Millers’ management.

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     The P&C industry includes insurers ranging from large, diverse, global companies to small, specialized regional companies. Often times, smaller insurance companies compete with many insurance companies with substantially greater financial resources, more advanced technology, larger volumes of business, more diversified insurance coverage, broader ranges of projects, and higher ratings. Insurance companies compete on the sale of products to customers and recruitment and retention of agents. Larger insurers may have certain competitive advantages over smaller regional companies, including increased name recognition, increased loyalty of their customer base, greater efficiencies and economies of scale and lower policy acquisition costs.

     According to a March 9, 2009 article from SNL Financial, statutory results released thus far for the domestic P&C industry for full year 2008 were adversely impacted by increasing capital and underwriting losses, challenged top-line growth and diminishing surplus positions. The industry’s combined ratio was 102.69% for 2008, up from a combined ratio of 93.63% for FY 2007. Net premiums written declined by approximately 0.8% from $360.4 billion in 2007 to $357.7 billion for 2008. Further, realized capital losses totaled $11.54 billion in 2008 versus realized capital gains for 2007 of $4.61 billion. Of the $11.5 billion in 2008 capital losses, $6.32 billion were realized in Q4 2008. As a result, surplus for reporting entities declined by a combined 8.7%, which more than erased aggregate surplus gains achieved by the same entities of 7.6% from 2006 to 2007.

     The Insurance Services Office (“ISO”) Property Claim Services unit reported in January 2009 that U.S. catastrophe losses totaled $25.2 billion in 2008, the fourth highest yearly total during the past decade.

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     SNL reports that despite adverse conditions, underwriting and capital losses do not appear to be sufficient to offset investment income and send the industry as a whole to a net loss. Of the approximately 2,200 entities having reported full year 2008 results, 1,600 reported a net profit, although only about 600 recorded year-over-year increases in profitability.

     SNL reports the poor equity and bond market conditions that adversely impacted the P&C industry, combined with ongoing soft market conditions for primary insurers, are expected to continue to suppress the industry’s performance during Q1 2009.

     Fitch, Inc. (“Fitch”) downgraded the United States P&C industry from a stable to negative rating outlook in October 2008 primarily reflected the fallout from significant deterioration in the global financial markets, and the adverse impact on insurers’ balance sheets and financial flexibility. According to Fitch, the downgrade reflects the significant falls in the global credit and equity markets, and unprecedented market volatility and uncertainty. Declining market value of investment holdings has lead to significant declines in economic capitalization and profitability. Furthermore, ongoing market volatility creates the potential for further reductions in capital as market values decline and additional impairments are recognized.

     According to Fitch, the P&C insurance industry has fared better than other financial services sectors. Unlike life insurance companies, non-life, or P&C companies generally have minimal liquidity exposure as their products are not deposit-based or linked to institutional funding. However, P&C companies do face pressures from declining investment (and capital) values, intense competition and soft premium rates in many lines of business. According to Fitch, these factors along with the general deterioration of underwriting results and expected reductions in reserve releases as compared to recent years could ease the “softening” trend in pricing.

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     For the remainder of 2009, Fitch anticipates: underwriting results, excluding the impact of catastrophe losses, to further deteriorate; unfavorable investment performance to continue due to low portfolio yields; ongoing recognition of realized losses from 2008 market movements; and additional credit-related losses as the economic recession unfolds.

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IV. COMPARISONS WITH PUBLICLY-TRADED COMPANIES

General Overview

     Curtis considered several established valuation methodologies for this Appraisal, including the discounted cash flow approach, cost approach, and comparative market approach. The comparative market approach was chosen to determine the Estimated Pro Forma Market Value of PMMHC because: 1) it has been widely accepted as a valuation approach by applicable regulatory authorities; 2) where possible, the generally employed valuation method in initial public offerings is the comparative market approach, which can also be relied upon to determine the Estimated Pro Forma Market Value of an insurance company mutual-to-stock conversion; and 3) reliable market and financial data are readily available for most comparable companies.

     The comparable market approach provides a basis for determining estimates of going-concern valuations where a regular and active market exists for the stocks of comparable companies. The comparable market approach measures the value of an asset through an analysis of recent sales or offerings of property sharing valuation characteristics with the subject company. When applied to the valuation of equity interests, consideration is given to the financial condition and operating performance of the company being appraised relative to those of publicly-traded companies, or recently acquired companies operating in the same or similar lines of business. These companies are potentially subject to similar economic, environmental and political factors and considered to be reasonable investment alternatives. Publicly-traded companies provide indications of value of a freely-traded minority interest (i.e. non-control).

     The comparable market approach derives valuation benchmarks from the trading patterns of selected comparable companies that, due to certain factors such as financial performance and operating strategies, enable the appraiser to estimate the potential value of the subject institution

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in a mutual-to-stock conversion offering. In this chapter, our valuation analysis focuses on the selection and comparison of the Company with a comparable group of publicly-traded insurance companies. Chapter V discusses market value adjustments (both discounts and premiums) to account for actual differences between PMMHC and the comparable group of companies discussed below.

Selection Criteria

     When applying the comparative market approach, the appraiser would ideally utilize companies identical to PMMHC in terms of lines of business, growth, profitability, earnings, and the publicly-held structure. Since there are no companies identical to PMMHC, we selected a peer group of publicly-traded P&C insurance companies that share valuation characteristics with Penn Millers (the “Comparable Group”). Selected market price and financial performance data for P&C insurance companies listed on the New York and American Stock Exchanges or traded on the NASDAQ Stock Market are shown in Exhibit VI as compiled from data obtained from SNL Financial LC (“SNL Financial”), a leading provider of financial and market data focused on financial services industries and Capital IQ, Inc. (“Capital IQ”), a provider of financial and market data. Several criteria, discussed below, were used to select the individual members of the Comparable Group from the overall universe of the publicly-traded P&C insurance segment (“Public P&C Insurance Group”). Generally, we considered operating characteristics, marketability of stocks, and liquidity in our selection process.

     Operating Characteristics: A company’s operating characteristics affect investors’ expected rates of return on a company’s stock under various business and economic scenarios, and they influence the market’s general perception of the quality and attractiveness of a given company. Operating characteristics, which may vary in importance during the business cycle,

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include financial variables such as profitability, capitalization, growth, risk exposure, liquidity, and other factors such as lines of business and management strategies.

     Marketability of a stock: Marketability of a stock reflects the relative ease and promptness with which a security may be sold when desired, at a representative current price, without material concession in price merely because of the necessity of sale. Marketability also connotes the existence of buying interest as well as selling interest and is usually indicated by trading volumes and the spread between the bid and asked price for a security.

     Liquidity: Liquidity of the stock issue refers to the organized market exchange process whereby the security can be converted into cash. We attempted to limit our selection to companies that have access to a regular trading market or price quotations. We eliminated from the selection process companies with market prices that were materially influenced by publicly-announced or widely rumored acquisitions.

     Specifically, in determining the Comparable Group, we focused primarily on size, profitability, and market segment. To obtain a meaningful Comparable Group, we broadened the size criterion to encompass what we believed to be a meaningful number of companies. In addition, due to ongoing consolidation activity within the insurance industry, we sought to include a sufficient number of companies in the event that one or more of the Comparable Companies are subsequently subject to an acquisition prior to completion of the Offering.

     We focused on the lower quartile of the Public P&C Insurance Group based on asset size and market capitalization metrics. Our selection criteria are summarized below:

• Publicly-traded — stock-form insurance company whose shares are traded on New York Stock Exchange, American Stock Exchange, or NASDAQ Stock Market.

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• Market segment — insurance companies whose primary market segment is listed as P&C by SNL Financial.

• Current financial data — publicly reported financial data for the twelve months ended December 31, 2008 (the “LTM Period”).

• Asset size — total assets less than $1.2 billion.

• Profitability — return on average equity (“ROE”) less than 20.0%.

     After applying the above criteria, the screening process yielded twenty-two companies. Eight of these companies (Affirmative Insurance Holdings, Inc., American Safety Insurance Holdings, Ltd., American Physicians Services Group, Inc, American Physicians Capital, Inc, Amerisafe, Inc, Castlepoint Holdings, Inc, Hilltop Holdings, Inc, and FPIC Insurance Group, Inc.) were excluded from the Comparable Group due to their concentrated business activity in specialized products whose lines of business were not comparable to Penn Millers and/or the specialty nature of their business yielded above average profitability.

          A general operating summary of the fourteen companies selected for the Comparable Group is presented below.

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Table 8
General Operating Summary of the Comparable Group
As of the LTM Period

				Total Assets		Total Equity		Equity /
	Ticker	Exchange	State	($000)		($000)		Assets
Penn Millers	NA	NA	PA	$	220,524	$	50,755		23.0	%
Comparable Group Mean	NA	NA	NA		637,505		192,477		31.5	%
Comparable Group Median	NA	NA	NA		673,365		171,743		30.5	%
Comparable Group
21st Century Holding Company	TCHC	NASDAQ	FL		197,110		76,231		38.7	%
Baldwin & Lyons, Inc.	BWINB	NASDAQ	IN		777,743		330,067		42.4	%
CRM Holdings, Ltd.	CRMH	NASDAQ			444,192		108,860		24.5	%
Donegal Group Inc.	DGICA	NASDAQ	PA		880,109		363,584		41.3	%
Eastern Insurance Holdings, Inc.	EIHI	NASDAQ	PA		377,311		138,137		36.6	%
EMC Insurance Group Inc.	EMCI	NASDAQ	IA		1,108,099		282,916		25.5	%
First Mercury Financial Corporation	FMR	NYSE	MI		943,653		261,637		27.7	%
Hallmark Financial Services, Inc.	HALL	NASDAQ	TX		538,398		179,412		33.3	%
Mercer Insurance Group, Inc.	MIGP	NASDAQ	NJ		568,986		137,270		24.1	%
National Interstate Corporation	NATL	NASDAQ	OH		990,812		216,074		21.8	%
National Security Group, Inc.	NSEC	NASDAQ	AL		124,890		34,648		27.7	%
NYMAGIC, INC.	NYM	NYSE	NY		946,476		164,073		17.3	%
SeaBright Insurance Holdings, Inc.	SBX	NYSE	WA		842,687		324,813		38.5	%
Unico American Corporation	UNAM	NASDAQ	CA		184,603		76,958		41.7	%

Source: Penn Millers’ GAAP financial statements; SNL Financial.

     The Comparable Group includes five companies with total assets less than $500 million and three below $250 million (21^st Century Holding Company, National Security Group, Inc., and Unico American Corporation) in total assets. In addition, two of the insurance companies, Donegal Group, Inc. and Eastern Insurance Holdings, Inc., are headquartered in Pennsylvania, while another, Mercer Insurance Group, Inc. is based in New Jersey with an insurance subsidiary domiciled and generating a significant portion of its business in Pennsylvania. Two of these companies, National Interstate Corporation and First Mercury Financial Corporation, offer niche and/or underserved products in the commercial sector. Additionally, many of the Comparable Group companies completed an initial public offering within the past several years and two companies, Eastern Insurance Holdings, Inc. and Mercer Insurance Group, Inc., specifically completed mutual-to-stock conversion offerings.

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     While none of these companies are exactly identical to Penn Millers, we believe that the chosen Comparable Group on the whole provides a meaningful basis of financial comparison for valuation purposes.

Summary Profiles of the Comparable Group Companies¹

21^st Century Holding Company (NASDAQ: TCHC)

     21st Century Holding Company (“21^st Century”), an insurance holding company, engages in insurance underwriting, distribution, and claims process primarily in the United States. The company underwrites homeowners’ insurance that protects an owner of real and personal property against the causes of loss to the property; commercial general liability insurance for approximately 250 classes of artisan and mercantile trades, habitational exposures, and various special events; personal and commercial automobile insurance; and flood insurance products. It also processes claims made by third-party insureds; and provides premium financing through its distribution network of general and independent agents. The company was founded in 1991 and is based in Lauderdale Lakes, Florida.

Baldwin & Lyons, Inc. (NASDAQ: BWINB)

     Baldwin & Lyons, Inc. (“Baldwin & Lyons”), through its subsidiaries, engages in marketing and underwriting property and casualty insurance in the United States, Canada, and Bermuda. It offers fleet trucking insurance products to companies in the motor carrier industry, which include casualty insurance, such as motor vehicle liability, physical damage, and other liability insurance; workers’ compensation insurance; specialized accident, such as medical and

¹ Comparable Company business descriptions sourced from company 10-K filings and Capital IQ.

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indemnity insurance for independent contractors; fidelity and surety bonds; and cargo insurance. The company also offers various services, including risk surveys and analyses; government compliance assistance; loss control and cost studies; claims handling; and research, development, and consultation in connection with new insurance programs, including development of computerized systems to assist in monitoring accident data. In addition, Baldwin & Lyons accepts cessions and retrocessions from selected insurance and reinsurance companies, principally reinsuring against catastrophes. Further, it markets private passenger automobile liability and physical damage coverages to individuals; commercial automobile liability, physical damage, and cargo insurance to truck owner-operators. Baldwin & Lyons sells its products through a network of independent agents. The company was founded in 1930 and is based in Indianapolis, Indiana.

CRM Holdings Ltd. (NASDAQ: CRMH)

     CRM Holdings, Ltd. (“CRM”), thorough its subsidiaries, provides workers’ compensation insurance products and services. Its primary insurance segment offers workers’ compensation insurance to employers in California, Arizona, Florida, Nevada, New Jersey, and New York through independent insurance brokers and agents; and excess and frequency coverage policies to self-insured entities. The company’s Reinsurance segment includes the reinsurance of workers’ compensation coverage written by other insurance companies and self-insured entities. This segment offers excess of loss and quota share reinsurance products. Its Fee-Based Management Services segment includes the offering of various management services to self-insured groups in California and New York under fee-for-service arrangements. It provides the groups with a range of services, including general management, underwriting, risk

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assessment, medical bill review and case management, general record keeping, and regulatory compliance, as well as safety and loss control services to group members. The company also acts as an insurance broker by placing excess and frequency insurance coverage and surety bonds for the groups. CRM is based in Hamilton, Bermuda.

Donegal Group, Inc. (NASDAQ: DGICA)

     Donegal Group, Inc. (“Donegal”), through its subsidiaries, provides personal and commercial property and casualty lines of insurance to businesses and individuals in the United States. Its personal lines of insurance products include private passenger automobile, which provides protection against liability for bodily injury and property damage arising from automobile accidents, and protection against loss from damage to automobiles owned by the insured; and homeowners insurance that provides coverage for damage to residences and their contents from a range of perils, including fire, lightning, windstorm, and theft, as well as covers liability of the insured arising from injury to other persons or their property. The company’s commercial lines of insurance products comprise commercial multi-peril policies; workers’ compensation policies, which provide benefits to employees for injuries sustained during employment; and commercial automobile policies that provide protection against liability for bodily injury and property damage arising from automobile accidents, and protection against loss from damage to automobiles owned by the insured. The company markets its products through approximately 2,000 independent insurance agencies. Donegal was founded in 1986 as a downstream holding company by Donegal Mutual Insurance Company, which currently holds approximately 65.4% of the aggregate voting power of both classes of Donegal’s common stock. The company is headquartered in Marietta, Pennsylvania.

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Eastern Insurance Holdings, Inc. (NASDAQ: EIHI)

     Eastern Insurance Holdings, Inc. (“Eastern”), through its subsidiaries, offers workers’ compensation and group benefits insurance and reinsurance products in the United States. Its Workers’ Compensation Insurance segment provides workers’ compensation products, including guaranteed cost policies, policyholder dividend policies, retrospectively-rated policies, large deductible policies, and alternative market products, and large deductible policies to employers primarily in Pennsylvania, Maryland, and Delaware. The company’s Segregated Portfolio Cell Reinsurance segment offers program design, fronting, claims administration, risk management, segregated portfolio cell rental, investment, and segregated portfolio management services. Its Group Benefits Insurance segment provides dental, short and long-term disability, and term life insurance products. The company’s Specialty Reinsurance segment assumes business through its participation in reinsurance treaties with an unaffiliated insurance company related to an underground storage tank program and a non-hazardous waste transportation product. Eastern is headquartered in Lancaster, Pennsylvania.

EMC Insurance Group, Inc. (NASDAQ: EMCI)

     EMC Insurance Group, Inc. (“EMC Insurance”), through its subsidiaries, provides property and casualty insurance and reinsurance products in the United States. It operates through two segments, Property and Casualty Insurance, and Reinsurance. The Property and Casualty Insurance segment underwrites commercial and personal lines of property and casualty insurance. Its commercial lines of property and casualty insurance products include automobile, property, workers’ compensation, and liability insurance, as well as other insurance products that provide protection with respect to burglary and theft loss, aircraft, marine, fidelity and surety

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bonds, and other losses. This segment’s personal lines of property and casualty insurance products comprise automobile, property, and liability insurance. The Reinsurance segment underwrites property and casualty, property, crop, casualty, marine/aviation, and surety reinsurance for other insurers and reinsurers. EMC Insurance sells its products to small and medium-sized businesses, institutions, and individual customers through independent insurance agents. The company was founded in 1974 and is based in Des Moines, Iowa. EMC Insurance Group, Inc. is a subsidiary of Employers Mutual Casualty Company, which owns approximately 59.1% of EMC Insurance common stock.

First Mercury Financial Corporation (NYSE: FMR)

     First Mercury Financial Corporation (“First Mercury”), together with its subsidiaries, provides property and casualty insurance products and services to the specialty commercial insurance markets in the United States. The company underwrites and provides general liability insurance for the security industry, including security guards and detectives, alarm installation and service businesses, and safety equipment installation and service businesses. It also operates a wholesale insurance agency, which produces commercial lines business on an excess and surplus lines basis for non-affiliated insurers. In addition, the company provides underwriting, claims, and other insurance services to third parties through its insurance services business; third party administration services for risk sharing pools of governmental entity risks, including underwriting, claims, loss control, and reinsurance services. It markets its insurance policies through a network of wholesale and retail insurance brokers under CoverX brand name. First Mercury Financial Corporation was founded in 1973 and is headquartered in Southfield,

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Michigan with additional offices in Chicago, Illinois; Dallas, Texas; Boston, Massachusetts; Irvine, California; and Atlanta, Georgia.

Hallmark Financial Services, Inc. (NASDAQ: HALL)

     Hallmark Financial Services, Inc. (“Hallmark”), through its subsidiaries, engages in marketing, distributing, underwriting, and servicing property and casualty insurance products for businesses and individuals in the United States. The company offers standard commercial insurance products, such as commercial automobile, general liability, umbrella, commercial property, commercial multi-peril, and business owner’s insurance products; excess and surplus lines of commercial insurance; and general aviation insurance products. It also provides non-standard personal automobile insurance products, such as personal automobile liability and personal automobile physical damage insurance; and claims management services. Hallmark markets its products through independent general agents, retail agents, and specialty brokers. The company was founded in 1987 and is headquartered in Fort Worth, Texas.

Mercer Insurance Group, Inc. (NASDAQ: MIGP)

     Mercer Insurance Group, Inc. (“Mercer”), through its subsidiaries, provides property and casualty insurance products for individuals, and small and medium-sized businesses. It offers commercial multi-peril policies for apartment building owners, condominium associations, business owners who lease their buildings to tenants, mercantile business owners, and offices with owner and tenant occupancies; commercial automobile policies for trucks used in business, company-owned private passenger type vehicles, church vans, funeral director vehicles, and farm labor buses; and other liability policies that cover premises and products liability exposures, and

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vacant land and habitational risks for carpenters, painters, and electricians. The company also writes workers’ compensation policies; surety insurance for contract and subdivision bonds, and miscellaneous license and permit bonds; and fire, allied lines, and inland marine insurance. In addition, it provides homeowners and private passenger automobile insurance coverages. It has operations in Arizona, California, Nevada, New Jersey, New York, Pennsylvania, and Oregon. Mercer markets its products through a network of independent agents, as well as through Internet and direct mail. The company was founded in 1844 and is headquartered in Pennington, New Jersey.

National Interstate Corporation (NASDAQ: NATL)

     National Interstate Corporation (“National Interstate”), through its subsidiaries, operates as a specialty property and casualty insurance company in the United States, the District of Columbia, and the Cayman Islands. It underwrites and sells traditional and alternative property and casualty insurance products primarily to the passenger transportation industry and the trucking industry; general commercial insurance to small businesses in Hawaii and Alaska; and personal insurance to owners of recreational vehicles, commercial vehicles, and watercraft in the United States. The company provides truck and passenger transportation alternative risk insurance products; and commercial auto liability, general liability, physical damage, and motor truck cargo coverage for truck and passenger operators, as well as offers coverage for campsite liability, vehicle replacement coverage, and coverage for trailers, golf carts, and campsite storage facilities. It also provides companion personal auto coverage to recreational vehicle policyholders. National Interstate offers its products through various distribution channels, including independent agents and brokers, affiliated agencies, and agent Internet initiatives. The

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company was founded in 1989 and is headquartered in Richfield, Ohio. National Interstate is a subsidiary of Great American Insurance Company.

National Security Group, Inc. (NASDAQ: NSEC)

     The National Security Group, Inc. (“National Security”), through its subsidiaries, provides property and casualty, and life insurance products and services in the United States. It writes personal lines coverage, including dwelling fire and windstorm, homeowners, mobile homeowners, and personal non-standard automobile lines of insurance. The company also offers a line of life, accident and health, supplemental hospital, and cancer insurance products. National Security operates its business in the states of Alabama, Arkansas, Florida, Georgia, Kentucky, Mississippi, Oklahoma, South Carolina, Tennessee, and West Virginia, as well as on a surplus lines basis in the states of Louisiana, Missouri, and Texas. It offers its products and services through a field force of agents and career agents, as well as through a network of independent agents. The company was founded in 1947 and is based in Elba, Alabama.

NYMAGIC, Inc. (NYSE: NYM)

     NYMAGIC, INC. (“NYMAGIC”), through its subsidiaries, engages in the ownership and operation of insurance companies, risk bearing entities, and insurance underwriters and managers primarily in the United States. The company specializes in underwriting ocean marine, inland marine/fire, other liability, and aircraft insurance through insurance pools. Its ocean marine insurance covers hull and machinery, hull and machinery war risk, cargo, cargo war risk, protection and indemnity, charters’ legal liability, shoreline marine liability, marine contractor’s liability, maritime employers liability, marine umbrella (bumbershoot) liability, onshore and

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offshore oil and gas exploration and production exposures, energy umbrella (bumbershoot) liability, and petroleum and bulk liquid cargo. The company’s inland marine/fire insurance provides coverage for contractor’s equipment, motor truck cargo, transit floaters, surety, and commercial property. Its non-marine liability insurance include accountants professional, lawyers professional, contractors, commercial and habitational, and products liability products, as well as workers compensation, commercial automobile, and employment practices liability products. NYMAGIC was founded in 1964 and is based in New York, New York.

SeaBright Insurance Holdings, Inc. (NYSE: SBX)

     SeaBright Insurance Holdings, Inc. (“SeaBright”), through its subsidiaries, provides multi-jurisdictional workers’ compensation insurance in the United States. It offers insurance coverage for prescribed benefits that employers are required to provide to their employees, who may be injured in the course of their employment. The company provides its services to maritime employers with coverage needs over land, shore, and navigable waters; employers in the construction industry; and employers who are obligated to pay insurance benefits specifically under state worker’s compensation laws. It distributes its products through independent insurance brokers, and its licensed in-house wholesale insurance brokers and third-party administrators. SeaBright is licensed in 45 states and the District of Columbia to write workers’ compensation insurance. The company was founded in 1986 and is headquartered in Seattle, Washington.

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Unico American Corporation (NASDAQ: UNAM)

     Unico American Corporation (“Unico”), an insurance holding company, underwrites property and casualty insurance in the United States. The company provides multiple line property and casualty insurance products, which include commercial multiple peril policies. These policies comprise property and liability coverage for natural disasters, including hurricanes, windstorms, hail, water, explosions, winter weather, and other events, such as theft and vandalism, fires, storms, and financial loss due to business interruption resulting from covered property damage. It also provides commercial liability coverage against third party liability from accidents occurring on the insured’s premises or arising out of its operation, as well as writes separate policies to insure commercial property and commercial liability risk on a mono-line basis. The company also markets medical, dental, and vision insurance through non-affiliated insurance companies for individuals and groups. In addition, Unico provides insurance premium financing services to insurance purchasers. The company markets its insurance products through independent insurance agents and brokers. It operates primarily in California, Arizona, Nevada, Oregon, and Washington. The company was founded in 1969 and is based in Woodland Hills, California.

Recent Financial Comparisons

     Table 9 summarizes certain key financial comparisons between PMMHC and the Comparable Group. The Public P&C Insurance Group includes all the companies presented in Exhibit VI.

     The Company’s ratio of total policy reserves to total equity was 2.13x, as compared to the Comparable Group’s mean and median of 1.99x and 1.72x, respectively. Among the Comparable Group, National Security Group and First Mercury displayed ratios closest to the

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Company’s total policy reserves to total equity ratio at 2.12x and 1.99x, respectively. The Company’s total equity to total asset ratio of 23.0% was lower than the P&C industry aggregate and the Comparable Group. The Comparable Group mean and median ratios of total equity to total assets were 31.5% and 30.5%, respectively, while the Public P&C Insurance Group mean and median ratios of total equity to total assets were slightly lower at 30.0% and 27.4%, respectively.

     The Company’s ratio of cash and investments to total assets was 60.7% as of December 31, 2008, and was positioned below the Comparable Group mean and median ratios of 70.6% and 70.6%, respectively but was still within the range demonstrated by the Comparable Group.

Table 9
Comparable Financial Condition Data
Penn Millers and the Comparable Group
As of or for the LTM Period

									Total Cash
							Total Policy		and					Tangible			Total Policy		Cash and
	Total Assets		Total Equity		Tangible		Reserves		Investments		Equity /			Equity /			Reserves /		Investments /
	($000)		($000)		Equity ($000)		($000)		($000)		Assets			Assets			Equity		Assets
Penn Millers	$	220,524	$	50,755	$	48,144	$	108,065	$	133,873		23.0	%		21.8	%		2.13x		60.7	%
Public P&C Insurance Group Mean		12,566,065		3,381,086		2,791,377		6,796,363		8,012,686		30.0	%		27.6	%		2.45x		69.6	%
Public P&C Insurance Group Median		2,924,148		764,148		718,080		1,715,040		2,199,974		27.4	%		24.4	%		2.20x		72.0	%
Comparable Group Mean		637,505		192,477		180,074		367,770		438,250		31.5	%		29.5	%		1.99x		70.6	%
Comparable Group Median		673,365		171,743		147,819		395,575		459,577		30.5	%		26.6	%		1.72x		70.6	%
Comparable Group
21st Century Holding Company		197,110		76,231		76,231		106,990		150,843		38.7	%		38.7	%		1.40x		76.5	%
Baldwin & Lyons, Inc.		777,743		330,067		326,667		406,741		537,821		42.4	%		42.0	%		1.23x		69.2	%
CRM Holdings, Ltd.		444,192		108,860		105,608		258,708		344,862		24.5	%		23.8	%		2.38x		77.6	%
Donegal Group Inc.		880,109		363,584		362,662		468,823		633,967		41.3	%		41.2	%		1.29x		72.0	%
Eastern Insurance Holdings, Inc.		377,311		138,137		118,206		201,482		275,038		36.6	%		31.3	%		1.46x		72.9	%
EMC Insurance Group Inc.		1,108,099		282,916		281,974		733,897		965,349		25.5	%		25.4	%		2.59x		87.1	%
First Mercury Financial Corporation		943,653		261,637		196,803		520,570		574,863		27.7	%		20.9	%		1.99x		60.9	%
Hallmark Financial Services, Inc.		538,398		179,412		109,363		258,555		360,683		33.3	%		20.3	%		1.44x		67.0	%
Mercer Insurance Group, Inc.		568,986		137,270		131,565		384,408		381,333		24.1	%		23.1	%		2.80x		67.0	%
National Interstate Corporation		990,812		216,074		216,074		556,599		563,714		21.8	%		21.8	%		2.58x		56.9	%
National Security Group, Inc.		124,890		34,648		34,648		73,314		93,159		27.7	%		27.7	%		2.12x		74.6	%
NYMAGIC, INC.		946,476		164,073		164,073		632,114		546,986		17.3	%		17.3	%		3.85x		57.8	%
SeaBright Insurance Holdings, Inc.		842,687		324,813		320,202		447,958		554,377		38.5	%		38.0	%		1.38x		65.8	%
Unico American Corporation		184,603		76,958		76,958		98,617		152,502		41.7	%		41.7	%		1.28x		82.6	%

Source: Penn Millers’ GAAP financial statements; SNL Financial.

     Table 10 compares Penn Millers with the Comparable Group and Public P&C Insurance Group based on selected measures of profitability.

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Table 10
Comparable Operating Performance Data
Penn Millers and the Comparable Group
For the LTM period

	Total Revenue		Net Income			GAAP			GAAP Loss			Combined
	($000)		($000)			Expense Ratio			Ratio			Ratio			ROAA			ROAE
Penn Millers	$	78,664		($4,459	)		33.7	%		72.9	%		106.6	%		-2.0	%		-8.0	%
Public P&C Insurance Group Mean		3,752,634		161,709			30.6	%		63.1	%		93.8	%		0.7	%		3.1	%
Public P&C Insurance Group Median		653,049		29,149			30.2	%		64.0	%		94.1	%		1.4	%		4.5	%
Comparable Group Mean		189,682		(541	)		33.4	%		65.6	%		99.0	%		-0.1	%		-1.3	%
Comparable Group Median		159,196		1,894			32.6	%		64.5	%		97.7	%		0.5	%		2.2	%
Comparable Group
21st Century Holding Company		67,356		(2,478	)		45.0	%		64.3	%		109.3	%		-1.2	%		-3.0	%
Baldwin & Lyons, Inc.		156,930		(7,713	)		30.9	%		63.5	%		94.4	%		-0.9	%		-2.2	%
CRM Holdings, Ltd.		143,171		(1,496	)		32.9	%		70.1	%		103.0	%		-0.4	%		-1.3	%
Donegal Group Inc.		372,312		25,542			32.5	%		64.7	%		97.2	%		2.9	%		7.2	%
Eastern Insurance Holdings, Inc.		131,204		(17,383	)		34.0	%		73.0	%		107.0	%		-4.5	%		-10.8	%
EMC Insurance Group Inc.		413,892		(1,705	)		32.7	%		75.6	%		108.3	%		-0.2	%		-0.5	%
First Mercury Financial Corporation		215,367		40,841			28.0	%		55.7	%		83.7	%		4.7	%		16.2	%
Hallmark Financial Services, Inc.		268,690		12,899			28.9	%		61.0	%		89.9	%		2.4	%		6.9	%
Mercer Insurance Group, Inc.		161,462		8,234			35.7	%		62.4	%		98.1	%		1.5	%		6.1	%
National Interstate Corporation		293,716		10,660			24.7	%		64.7	%		89.4	%		1.1	%		5.0	%
National Security Group, Inc.		61,233		(5,204	)		43.2	%		79.5	%		122.7	%		-3.8	%		-12.3	%
NYMAGIC, INC.		56,181		(104,335	)		46.3	%		65.8	%		112.1	%		-10.2	%		-46.5	%
SeaBright Insurance Holdings, Inc.		267,262		29,278			28.5	%		56.7	%		85.2	%		3.7	%		9.5	%
Unico American Corporation		46,770		5,283			24.3	%		60.7	%		85.0	%		2.8	%		7.3	%

Source: Penn Millers’ GAAP financial statements; SNL Financial.

     The Company was not profitable in the LTM period. Penn Millers’ profitability was impacted by losses on investments and a high combined ratio, which was 106.6%. The Comparable Group reported mean and median combined ratios of 99.0% and 97.7%, respectively. Seven companies in the Comparable Group experienced operating losses during the LTM period.

     The Company’s relatively high combined ratio was attributable primarily to its higher loss ratio. Penn Millers’ loss ratio measured 72.9% for the LTM period, which was above the Comparable Group mean and median loss ratios of 65.6% and 64.5%. Among the Comparable Group members, Eastern Insurance Holdings, EMC Insurance and National Security reported higher loss ratios at 73.0%, 75.6% and 79.5%, respectively.

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V. MARKET VALUE ADJUSTMENTS

General Overview

     In the foregoing sections of this Appraisal, the Company’s relative operating performance is considered against the operating metrics of the Comparable Group. The Estimated Pro Forma Market Value of the Company reflects these considerations and also certain, additional market valuation adjustments relative to the Comparable Group. This section of the Appraisal identifies such categories of market value adjustments and how each adjustment impacts the Company’s estimated pro forma valuation. Relative to the Comparable Group, the valuation adjustments in this chapter are made from the viewpoints of potential investors, which could include policyholders with subscription rights and unrelated third parties. It is assumed that these potential investors are aware of all relevant and necessary facts as they would pertain to the value of the Company relative to other publicly-traded insurance companies and relative to alternative investments.

     The concluded Valuation Range of the Company is predicated on the assumption that the current operating environment will continue for the Company and the insurance industry in general. Changes in the Company’s operating performance along with changes in the regional and national economies, the stock market, interest rates, the regulatory environment, and other external factors may occur from time to time, often with great unpredictability, which could materially impact the Estimated Pro Forma Market Value of the Company or the trading market values of insurance company stocks in general. Therefore, the Valuation Range provided herein is subject to a re-evaluation prior to the actual completion of the Offering.

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     The market value adjustments, which are based on certain financial and other criteria, include among others:

• Profitability and earnings prospects;

• Management;

• Liquidity of the issue;

• Subscription interest;

• Stock market conditions;

• Dividend outlook; and

• New issue.

Profitability and Earnings Prospects

     An investor comparing Penn Millers to the Comparable Group would consider both recent profit trends and future earnings prospects of the Company. Profitability and earnings prospects are reflective of, and dependent upon a company’s ability to grow revenue and control expenses, and the effectiveness of managing the combined ratio, (ratio of loss and operating expenses to net premiums earned). An investor’s analysis would incorporate revenue growth prospects as well as profitability expectations, and the related risk of achieving the expected results.

     Historically, Penn Millers has demonstrated the ability to generate above-average revenue growth (driven largely by net premiums written) during both hard and soft markets. The Company’s revenue for fiscal year 2008 was $78.7 million. This is an increase of $2.6 million from $76.1 million in 2007, which results in a growth rate of 3.4% (excluding revenue from discontinued operations). Comparatively, year-over-year LTM revenue growth for the Comparable Group ranged from negative 70.5% to 12.9%, with a mean of negative 10.9% and a

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median of negative 4.8%. Nine of the companies experienced negative revenue growth during 2008.

     While Penn Millers’ revenue growth outperformed the Comparable Group, its profitability was below that of the Comparable Group. Penn Millers’ loss ratio, which measures loss expenses to net premiums earned, was 72.9% for 2008, well above the Comparable Group’s mean and median loss ratios of 65.6% and 64.5%, respectively. Penn Millers’ management has advised that the Company experienced unusually high losses in 2008, which served to significantly increase the Company’s loss ratio.

     Penn Millers’ expense ratio, which measures underwriting expenses plus policy acquisition costs to net premiums earned, was 33.7% for 2008. A high expense ratio indicates excessive overhead costs while a low expense ratio would indicate an efficient organization. Penn Millers’ expense ratio for 2008 of 33.7% was slightly above the Comparable Group, which had mean and median ratios of 33.4% and 32.6%, respectively.

     On a combined ratio basis (losses and underwriting expenses), the Company underperformed the Comparative Group, yielding a combined ratio of 106.6% for 2008, compared to 99.0% and 97.7% for the mean and median of the Comparable Group, respectively. Small insurers often exhibit higher combined ratios as they typically lack economies of scale and are often more concentrated geographically as compared to larger underwriters, such as those in the Comparable Group.

     In determining Penn Millers’ future earnings prospects and related risks, an investor would consider the Company’s estimated financial projections and its likelihood of achieving such projections. Penn Millers’ management has developed a comprehensive growth plan that focuses on growing revenue, managing expenses and ultimately increasing profitability by

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targeting larger, more complex commercial accounts with highly customized products, adding new agents, terminating unprofitable agent relationships, reducing agent commission rates, expanding its geographic footprint and targeted market niches, augmenting existing products with product enhancements, pursuing new non-traditional distribution channels, adding personnel only in production roles, implementing new and renewal pricing increases and more pricing discipline to ensure rate adequacy, and improving risk selection. This detailed growth plan and forecast is predicated on hard market conditions returning in the second half of 2009.

     Due to the unknown timing of the next hard market and the Company’s recent profit trends, we do not believe investors would place much weight on the Company’s forecast and earnings prospects relative to the Comparable Group. As such, a downward adjustment is warranted as compared to the Comparable Group.

Management

     A management team’s primary charge is to articulate and implement a strategic plan, which includes creating value through revenue growth, profit improvements, risk mitigation and the efficient utilization of resources. The financial characteristics of the Company suggest that senior management and the Board of Directors have professionally managed the enterprise, and have been reasonably successful in implementing an existing operating model supported by the Company’s present organizational structure. We also believe investors will consider that the Company’s management is comprised of a team of experienced insurance executives with practical knowledge in all of the key areas of the Company’s operations, and that they have developed a detailed, strategic growth plan. Each of these are important considerations given that the Company is a smaller insurer, and that smaller insurers are often at a competitive

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disadvantage in terms of economies of scale. Given these factors, no adjustment is warranted based on management relative to the Comparable Group.

Liquidity of the Issue

     The development of a public market depends upon the presence in the marketplace of a sufficient number of willing buyers and sellers at any given time and the existence of market makers to facilitate stock trade transactions. Therefore, stock liquidity is predicated upon the development of a broad, efficient marketplace.

     Each of the fourteen companies in the Comparable Group are listed and traded on major stock exchanges. Eleven are listed on the NASDAQ Global Market, and the remaining three on the New York Stock Exchange. Following the completion of the Offering, PMMHC expects the publicly-traded Common Stock of its newly formed holding company to be quoted on the NASDAQ Global Market, pending receipt of approval. It should be noted that a partial discount for a lack of liquidity is implicit in certain companies in the Comparable Group, given that such companies’ exhibit weekly trading volumes of less than one percent of the average shares in float.

     Given the relatively small size of the Offering, there is no assurance that an established and liquid market for the Common Stock will develop or that it will continually meet listing requirements. Further, the relative attractiveness of the Common Stock in an industry of insurers with larger market capitalizations and stock issues followed widely by investors, analysts, brokers, and market makers would suggest a less liquid market post-offering. As such, we believe a downward adjustment is appropriate to address these factors.

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Subscription Interest

     The subscription interest market value adjustment endeavors to give affect to the level of investors’ confidence that an Offering or conversion will be successful. To gain insight, an investor would look to similar, previous offerings and also consider the particular attributes of the Plan and the external environment.

     While mutual-to-stock conversions are commonplace in the savings institution industry, such conversions and demutualizations are less common in the insurance industry. In recent years, IPOs of savings institution stocks have attracted a great deal of investor interest. Previous insurance demutualizations, which include Mercer and Eastern, were oversubscribed, although purchasers with subscription rights for Eastern common stock did not purchase enough stock to reach the pro forma valuation range, and a community offering was required.

     Given the recent, economic downturn, most 2008 offerings for savings institution conversions have not fulfilled the minimum number of shares offered in the subscription offering phase, and community and syndicated community offerings were necessary to complete the aggregate stock sale. There have been no completed offerings in 2009. Additionally, a “second-stage” savings offering has extended its syndicated community offering two times, thus far. Further, the P&C industry is currently experiencing a “soft” market, characterized by intense price competition, significant catastrophe losses, weak underwriting integrity and a deteriorating macro-economic environment. Each of these factors will likely serve to moderate subscription interest.

     Conversely, demutualized insurance companies have historically had an immediate “step up” in value based on pro forma share price after an initial public offering. This is because investors in a conversion always buy at a discount to book value. Demutualizing insurance

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companies, in general, have historically had a positive return after an initial public offering (“IPO”), as shown in the following table.

Table 11
Previous Demutualization Offerings

				Price / Share		Stock Price
Company Name	Ticker	Offer Date		Offering		1 Day		1 Month		1 Year
Old Guard Group, Inc.	OGGI		2/18/97	$	10.00	$	14.63	$	14.63	$	17.56
Mercer Insurance Group	MIGP		12/16/03		10.00		12.15		13.66		13.36
Eastern Insurance Holdings (Educators Mutual)	EIHI		6/19/06		10.00		11.41		12.90		14.99

     Penn Millers has engaged Griffin Financial Group, LLC (“Griffin”) as a marketing agent in connection with the Offering of the Common Stock. Griffin has agreed to use its best efforts to assist the Company with the solicitation of purchase orders for shares of Common Stock in the subscription and community offering. In addition, if necessary, Griffin would manage a syndicated community offering conducted by a group of registered broker-dealers to complete the sale of shares offered in the conversion.

     Notwithstanding the macro-environment and the fact that the Company has not yet commenced or completed the subscription and community offering, we believe that precedent demutualization outcomes provide a reasonable level of confidence to potential investors of the likelihood that the Offering can be successfully completed. Such confidence outweighs the negative factors discussed above. Based on these circumstances, we believe no adjustment is appropriate for subscription interest.

Stock Market Conditions

     Table 12 summarizes the recent performance of various insurance stock indexes maintained by SNL Financial, along with selected other industry and broader market indexes. The SNL Insurance Index of all publicly-traded insurance companies decreased 51.1% over the

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twelve month period ended April 1, 2009. The SNL Insurance Index underperformed the broader markets indexes as reflected by the Standard & Poor’s 500 and Russell 3000, which both fell 40.8% over the last year. However, the SNL P&C Insurance Index did not fare as poorly as the overall financials sector. As discussed earlier in this report, the recent decline in the financial markets has had an industry-wide effect on insurance companies’ investment portfolios. The SNL P&C Insurance Index was down 30.5% over the past year, compared to the SNL All Financial Institutions sector, which was down 58.2% over the past year.

Table 12
Selected Stock Market Index Performance
For the Period Ended April 1, 2009

	Change (%)
	Close		YTD			1 Year			3 Years
SNL Insurance Indexes
SNL Insurance		245.09		(19.80	)		(51.08	)		(54.19	)
SNL Insurance Underwriter		238.83		(20.12	)		(52.49	)		(55.37	)
SNL Insurance Broker		462.05		(15.02	)		(17.66	)		(28.15	)
SNL Sector Indexes
SNL Insurance Multiline		61.44		(33.29	)		(85.75	)		(88.68	)
SNL Insurance L&H		220.38		(41.05	)		(69.43	)		(65.92	)
SNL Insurance P&C		280.08		(14.38	)		(30.45	)		(19.26	)
SNL Reinsurance		358.14		(11.36	)		(60.83	)		(58.23	)
SNL Managed Care		349.89		(15.91	)		(41.25	)		(57.76	)
SNL Title Insurer		584.99		3.11			(16.68	)		(42.03	)
SNL Mortgage & Finl Guaranty		25.09		(23.33	)		(74.15	)		(95.43	)
SNL Asset Size Indexes
SNL Insurance < $250M		289.98		(2.39	)		(41.78	)		(55.67	)
SNL Insurance $250M-$500M		255.62		(15.61	)		(40.43	)		(56.78	)
SNL Insurance $500M-$1B		308.44		(4.92	)		(18.72	)		(28.25	)
SNL Insurance $1B-$2.5B		520.89		(13.86	)		(22.86	)		(16.62	)
SNL Insurance $2.5B-$10B		353.22		(12.33	)		(28.36	)		(39.32	)
SNL Insurance > $10B		224.41		(21.57	)		(55.77	)		(58.00	)
SNL Insurance > $1B		249.86		(20.23	)		(52.67	)		(55.49	)
SNL Insurance < $1B		346.49		(5.61	)		(24.60	)		(35.85	)
SNL Market Cap Indexes
SNL Micro Cap Insurance		128.34		(22.68	)		(61.07	)		(63.41	)
SNL Small Cap Insurance		320.07		(23.52	)		(40.39	)		(46.40	)
SNL Mid Cap Insurance		160.14		(26.81	)		(51.12	)		(61.77	)
SNL Large Cap Insurance		199.56		(18.09	)		(53.08	)		(55.54	)
Broad Market Indexes
S&P 500		811.08		(10.21	)		(40.81	)		(37.36	)
SNL All Financial Institutions		276.88		(22.69	)		(58.15	)		(65.20	)
Russell 1000		847.30		(9.63	)		(40.89	)		(37.63	)
Russell 2000		1,066.57		(14.07	)		(39.61	)		(43.91	)
Russell 3000		860.92		(9.98	)		(40.79	)		(38.21	)

Source: SNL Financial.

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     Stock market performance is factored into the liquidity of issue discount and stock market volatility is factored into new issue discount. Therefore, we conclude that no adjustment is warranted for the Stock Market Conditions.

Dividend Outlook

     When reviewing a company from an investment prospective, investors will consider a company’s capital base and its ability to pay future dividends. The payment of dividends on common stock will be subject to determination and declaration by a company’s Board of Directors and generally depends upon its financial condition, operating results, future prospects and regulatory constraints.

     Nine of the fourteen companies in the Comparable Group currently pay regular dividends, and approximately 70% of the Public P&C Insurance Group companies pay dividends. The mean of current dividend yields for the Comparable Group and the Public P&C Insurance Group were 4.6% and 3.4%, respectively. Of the six companies in the Comparable Group which completed IPOs since 2005, only two currently pay dividends, Eastern and National Interstate. Companies with new stock issues generally appear to defer dividend payments pending the post-offering determination of alternative deployment strategies and the development of seasoned trading patterns.

     Although the Company should have the capacity to make dividend payments following a successful Offering, Company management currently has no intention to pay dividends to shareholders. Further, the PID has historically prohibited converting companies from declaring or paying any dividends during the first three years following their conversions, unless granted explicit PID approval.

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     In conclusion, although the Company has not established a formal policy or committed to paying dividends at any point following the Offering, we believe that investors will take note of its solid dividend-paying capacity as evidenced by its strong pro forma capitalization. Therefore, we have concluded that no adjustment is warranted at the present time for purposes of dividend outlook.

New Issue Discount

     A “new issue” discount that reflects investor concerns and investment risks inherent in all IPOs is a factor to be considered for purposes of valuing companies converting from mutual-to-stock form. The necessity to build a new issue discount into the stock price of a converting insurance company relates to uncertainty among investors. In this regard, investors are concerned about the lack of a seasoned trading history for the converting company, its operation in an intensely competitive industry, underlying concerns regarding interest rate and economic recovery trends, recent volatility in the stock market, and the ever-changing landscape of competitors and product marketing in the insurance marketplace.

     We therefore believe that a downward adjustment is warranted for new issue in the pricing of the Company’s Estimated Pro Forma Market Value.

Summary of Adjustments

     Based on the market value adjustments discussed above, the Company’s Estimated Pro Forma Market Value should be discounted to reflect the following, additional valuation adjustments relative to the Comparable Group:

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	Adjustments
Earnings prospects	Downward
Management	Neutral
Liquidity of issue	Downward
Subscription interest	Neutral
Stock market conditions	Neutral
Dividend outlook	Neutral
New issue	Downward

Individual discounts and premiums are not necessarily additive and may, to some extent, offset or overlay each other. On the whole, we conclude that the Company’s pro forma valuation should be discounted relative to the Comparable Group. We have concluded that a discount of approximately 20% to 30% at the midpoint based on the price-to-book valuation metric is reasonable and appropriate for determining the Company’s pro forma Valuation Range relative to the Comparable Group’s trading ratios.

Valuation Approach

     In determining the Estimated Pro Forma Market Value of the Company, we have employed the comparable market valuation approach and considered the following pricing ratios: price-to-book value per share (“P/B”), price-to-earnings per share (“P/E”), and price-to-assets (“P/A”). Table 13 displays the trading market price valuation ratios of the Comparable Group as of April 1, 2009. Exhibit VII displays the pro forma assumptions and calculations utilized in analyzing the Company’s valuation ratios. In reaching our conclusions of the Valuation Range, we evaluated the relationship of the Company’s pro forma valuation ratios relative to the Comparable Group’s market valuation data.

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Table 13
Comparative Market Valuation Analysis
As of April 1, 2009

								Price /													Current
			Total Market					Tangible			Price / LTM		Price / LTM		Price / Total			Equity /			Dividend
	Closing Price		Value ($000’s)		Price / Book			Book			EPS		Revenue		Assets			Assets			Yield
Penn Millers
Pro Forma Valuation Minimum	$	10.00	$	45,050		51.2	%		52.7	%	Neg			0.57x		17.5	%		34.2	%		0.0	%
Pro Forma Valuation Midpoint		10.00		53,000		55.7	%		57.3	%	Neg			0.66x		20.0	%		35.9	%		0.0	%
Pro Forma Valuation Maximum		10.00		60,950		59.7	%		61.3	%	Neg			0.76x		22.4	%		37.6	%		0.0	%
Comparable Group Mean	NA		$	163,035		74.6	%		81.5	%		12.87x		0.85x		23.2	%		31.5	%		4.6	%
Comparable Group Median	NA			116,773		73.3	%		74.1	%		10.66x		0.77x		24.2	%		30.5	%		2.8	%
Comparable Group
21st Century Holding Company		3.30		26,446		34.7	%		34.7	%	Neg			0.39x		13.4	%		38.7	%		15.6	%
Baldwin & Lyons, Inc.		19.61		291,789		88.4	%		89.3	%	Neg			1.86x		37.5	%		42.4	%		5.5	%
CRM Holdings, Ltd.		0.63		10,389		9.5	%		9.8	%	Neg			0.07x		2.3	%		24.5	%	NA
Donegal Group Inc.		15.21		387,790		106.7	%		106.9	%		15.21x		1.04x		44.1	%		41.3	%		2.5	%
Eastern Insurance Holdings, Inc.		7.60		66,569		48.2	%		56.3	%	Neg			0.51x		17.6	%		36.6	%		3.5	%
EMC Insurance Group Inc.		21.48		285,489		100.9	%		101.2	%	Neg			0.69x		25.8	%		25.5	%		2.8	%
First Mercury Financial Corporation		14.58		267,649		102.3	%		136.0	%		6.66x		1.24x		28.4	%		27.7	%	NA
Hallmark Financial Services, Inc.		6.61		137,587		76.7	%		125.8	%		10.66x		0.51x		25.6	%		33.3	%	NA
Mercer Insurance Group, Inc.		14.40		89,465		65.2	%		68.0	%		11.08x		0.55x		15.7	%		24.1	%		2.4	%
National Interstate Corporation		16.88		327,084		151.4	%		151.4	%		30.69x		1.11x		33.0	%		21.8	%		1.3	%
National Security Group, Inc.		10.85		26,763		77.2	%		77.2	%	Neg			0.44x		21.4	%		27.7	%		6.6	%
NYMAGIC, INC.		11.44		95,959		58.5	%		58.5	%	Neg			1.71x		10.1	%		17.3	%		1.7	%
SeaBright Insurance Holdings, Inc.		10.64		227,340		70.0	%		71.0	%		7.71x		0.85x		27.0	%		38.5	%	NA
Unico American Corporation		7.50		42,165		54.8	%		54.8	%		8.06x		0.90x		22.8	%		41.7	%	NA

Source: Penn Millers, SNL Financial and Capital IQ.

     Investors continue to make decisions to buy or sell P&C insurance company stocks based primarily upon consideration of P/B and P/E, and secondarily upon P/A comparisons. The P/E ratio is an important valuation ratio in the current insurance stock environment. However, Penn Millers’ relatively low returns on equity and assets in recent years and negative profitability during the LTM period render the comparative P/E approach not applicable. Thus, the comparative P/B approach takes on additional meaning as a valuation metric. We also relied upon the P/A ratios to confirm that our Valuation Range was within reason.

     As of April 1, 2009, the mean and median P/B ratios for the Comparable Group were 74.6% and 73.3%, respectively. In comparison, the Public P&C Insurance Group mean and median P/B ratios were positioned slightly higher at 92.4% and 87.5%, respectively. In consideration of the foregoing analysis along with the additional adjustments discussed in this chapter and the assumptions summarized in Exhibit VII-1, we have determined a pro forma

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midpoint value of $53.0 million for the Company, which implies an aggregate midpoint ratio of 55.7%. Applying a range of value of 15% above and below the midpoint, the resulting minimum of $45.05 million implies a P/B ratio of 51.2% and the resulting maximum of $60.95 million implies a P/B ratio of 59.7%.

     The Company’s pro forma P/B valuation ratios reflect discounts to the Comparable Group’s mean ratio of 74.6%, measuring 20.0% at the valuation maximum, 25.3% at the valuation midpoint, and 31.4% at the valuation minimum. The Company’s P/B valuation ratios reflect a discount to the Comparable Group’s 73.3% median of 18.6% at the valuation maximum, 24.0% at the valuation midpoint, and 30.2% at the valuation minimum. In our opinion, these levels of discounts are appropriate to reflect the previously discussed adjustments for earnings prospects, the new issue discount, and liquidity of the issue. Penn Millers’ ability to deploy the excess capital profitably and to generate growth and improved returns on equity constitutes a significant operating challenge in the highly competitive P&C insurance marketplace wherein the Company strives to overcome the relative lack of scale, critical mass, and geographic diversification in its fundamental business model.

     Based on the price-to-assets (“P/A”) measure, the Company’s midpoint valuation of $53.0 million reflects a P/A ratio of 20.0%, ranging from 17.5% at the minimum to 22.4% at the maximum. The Company’s P/A valuation ratio at the maximum is slightly below the Comparable Group’s corresponding mean and median P/A ratios of 23.2% and 24.2%, respectively.

Valuation Conclusion

     It is our opinion that, as of April 1, 2009, the Estimated Pro Forma Market Value of the shares to be issued immediately following the Offering was within a range (the “Valuation

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Range”) of $45.05 million to $60.95 million with a midpoint of $53.0 million. The Valuation Range was based upon a 15% decrease from the midpoint to determine the minimum and a 15% increase from the midpoint to establish the maximum. Exhibit VII shows the assumptions and calculations utilized in determining the Company’s Valuation Range.

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EXHIBIT I

STATEMENT OF GENERAL ASSUMPTIONS AND LIMITING CONDITIONS

This report is subject to the following general assumptions and limiting conditions.

1.	No investigation has been made of, and no responsibility is assumed for, the legal description of the property being valued or legal matters, including title or encumbrances. Title to the property is assumed to be good and marketable unless otherwise stated. The property is assumed to be free and clear of any liens, easements or encumbrances unless otherwise stated.
2.	Information furnished by others, upon which all or portions of this analysis is based, is believed to be reliable, but has not been verified except as set forth in this report. No warranty is given as to the accuracy of such information.
3.	This report has been made only for the purpose stated and shall not be used for any other purpose.
4.	Except as specified in our engagement letter, neither Curtis nor any individual signing or associated with this report shall be required by reason of this report to give further consultation, provide testimony, or appear in court or other legal proceeding.
5.	No responsibility is taken for changes in market conditions and no obligation is assumed to revise this report to reflect events or conditions which occur subsequent to the date hereof.
6.	The date to which the opinions expressed in this report apply is set forth in the letter of transmittal. Our opinion is based on the purchasing power of the United States dollar as of that date.
7.	It is assumed that all required licenses, certificates of occupancy, consents, or other legislative or administrative authority from any local, state, or national government or private entity or organization have been or can readily be obtained or renewed.
8.	Full compliance with all applicable federal, state and local zoning, use, environmental and similar laws and regulations is assumed, unless otherwise stated.
9.	Competent management is assumed.
10.	The opinion is predicated on the financial structure prevailing as of the date of this report.

EXHIBIT II

CERTIFICATION

We certify that, to the best of our knowledge and belief:

• the facts and data reported by the reviewer and used in the review process are true and correct;

• the analyses, opinions, and conclusions in this report are limited only by the assumptions and limiting conditions stated in this review report, and are our personal, impartial and unbiased professional analyses, opinions and conclusions;

• we have no present or prospective interest in the property that is the subject of this review report, and we have no personal interest or bias with respect to the parties involved;

• our engagement in this assignment was not contingent upon developing or reporting predetermined results;

• our compensation is not contingent on an action or event resulting from the analyses, opinions, or conclusions in, or the use of, this report;

• We have made a personal visit to the headquarters of Penn Millers.

Anthony A. Latini, Jr. 

Paul M. Yeakel, Jr. 

Laura E. Anastasio 


April 22, 2009 

Exhibit III

Overview of Curtis

With offices in Philadelphia and Pittsburgh, PA, Curtis Financial Group, LLC (“Curtis”) is a leading investment banking and corporate finance advisory firm serving middle-market clients since 1994. Our expertise and experience with financial services industry clients is reflected in our consistently high national rankings by SNL Financial LC. The Curtis team offers clients the benefit of more than 125 years of collective experience, having served: public and private middle-market companies operating in a diverse group of industries in the United States and globally; and entrepreneurs, families, corporations, private equity and venture capital investors. All securities are sold through Curtis Securities, LLC, a FINRA (www.finra.org) registered broker-dealer.

Background of Appraisers

Anthony A. Latini, Jr., CFA
Managing Director

Mr. Latini has over 20 years of experience providing corporate finance and investment banking services to middle market and large corporate clients. Mr. Latini focuses on merger and acquisition advisory services and capital raising for clients in a wide variety of industries including manufacturing, distribution, and financial services. He has been involved with seven mutual to stock conversions. Prior to joining Curtis, Mr. Latini was a Director in the Financial Services Group at Berwind Financial L.P. and has also held positions at Evans & Company, Inc., and CoreStates Financial Corporation. Mr. Latini received his B.S. from the Wharton School at the University of Pennsylvania and is a Chartered Financial Analyst (CFA).

Paul M. Yeakel, Jr.
Vice President

Mr. Yeakel has more than eight years of investment banking and real estate financing experience, having successfully completed projects in industries including telecommunications, flat panel displays, accounts receivable management, healthcare, software, energy and real estate. Prior to joining Curtis Financial Group, Mr. Yeakel co-founded Lighthouse Development Partners, LLC, a real estate development firm, and spent four years working in a corporate development role for CD Ventures and Gatehouse Ventures, both private investment firms located in Berwyn, PA. Additionally, Mr. Yeakel worked for Corning Incorporated as an internal corporate strategy consultant. Mr. Yeakel graduated from Carnegie Mellon’s Graduate School of Industrial Administration with a M.B.A. and earned a B.A. in English from The College of Wooster.

Laura E. Anastasio
Senior Associate

Ms. Anastasio joined Curtis Financial Group in 2005 after two years with Ernst & Young, LLP. As part of the Transaction Advisory Services Group, Ms. Anastasio completed valuation assignments involving both businesses and sale leaseback transactions. She has experience working in a variety of industries ranging from consumer products to computer technology, and has been involved with three mutual to stock conversions. Ms. Anastasio holds a B.S. in Industrial Engineering from Lehigh University. She is also a member of the American Society of Appraisers.

Exhibit IV-1
Penn Millers Mutual Holding Company
Historical Balance Sheets — GAAP Basis
(Dollars in Thousands)

	12/31/2008			12/31/2007			12/31/2006			12/31/2005			12/31/2004			12/31/2003
ASSETS
Investments:
Fixed securities		121,914			112,769			99,906			94,549			92,752			87,123
Equity securities		—			13,409			13,697			12,328			12,819			11,266
Total investments		121,914			126,178			113,603			106,877			105,571			98,389
Cash and cash equivalents (cash overdraft)		11,959			10,134			13,052			10,021			11,431			14,387
Premiums and fees receivable		31,080			32,489			30,465			26,910			29,256			24,056
Reinsurance receivables		20,637			15,640			18,886			22,923			18,053			22,222
Deferred acquisition costs		10,601			11,014			10,381			9,646			10,352			9,243
Prepaid reinsurance premiums		4,342			4,234			4,119			3,645			3,731			3,209
Accrued investment income		1,431			1,499			1,439			1,302			1,225			1,236
PP&E, less accumulated depreciation		4,231			4,401			4,228			4,255			5,020			5,583
Income taxes receivable		1,508			1,056			—			894						—
Deferred income taxes		4,728			1,872			1,439			1,429			—			—
Other		4,879			3,972			2,812			2,557			2,144			1,845
Assets from discontinued operations		3,214			7,124			7,344			7,438			5,237			5,285
Total assets		220,524			219,613			207,768			197,897			192,020			185,455
LIABILITIES AND SURPLUS
Loss and loss adjustment expense reserves		108,065			95,956			89,405			83,849			73,287			69,463
Unearned premiums		45,322			46,595			43,294			39,984			42,798			38,090
Accounts due reinsurers		—			—			—			—			2,597			4,973
Accounts payable and accrued expenses		13,353			12,874			10,394			9,603			7,991			7,226
Deferred income taxes payable		—			—			—			—			673			1,344
Income taxes payable		—			—			256			1			22			161
Long-term debt		2,382			1,745			2,307			4,400			3,064			3,059
Liabilities from discontinued operations		647			1,042			1,582			2,291			1,682			1,864
Total liabilities		169,769			158,212			147,238			140,128			132,114			126,180
Unassigned surplus		51,914			59,293			58,207			56,127			55,837			54,439
Accumulated other comprehensive income, net		(1,159	)		2,108			2,323			1,642			4,069			4,836
Total surplus		50,755			61,401			60,530			57,769			59,906			59,275
Total liabilities and surplus		220,524			219,613			207,768			197,897			192,020			185,455
Performance and Capital Ratios
Return on average assets		-2.03	%		0.68	%		0.94	%		0.12	%		0.64	%		1.00	%
Return on average surplus		-7.95	%		2.38	%		3.23	%		0.41	%		2.03	%		3.12	%
Surplus to total assets		23.02	%		27.96	%		29.13	%		29.19	%		31.20	%		31.96	%

Notes:
Source:	Audited financial reports prepared by the management of the Company and audited by KPMG.

Exhibit IV-2
Penn Millers Mutual Holding Company
Historical Income Statements — GAAP Basis
(Dollars in Thousands)

	2008			2007			2006			2005			2004			2003
REVENUE
Premiums earned	$	78,737		$	70,970		$	64,645		$	64,723		$	63,090		$	56,065
Investment income, net of investment expense		5,335			5,324			4,677			4,444			4,278			4,058
Realized investment (losses) gains, net		(5,819	)		(702	)		349			424			936			833
Other revenue		411			508			345			277			301			371
Total revenue		78,664			76,100			70,016			69,868			68,605			61,327
LOSSES AND EXPENSES
Losses and loss adjustment expenses		57,390			49,783			43,766			40,242			42,910			35,822
Underwriting and administrative expenses		26,562			24,163			23,296			29,221			24,359			22,911
Interest expense		184			125			222			195			51			56
Other expenses, net		365			184			314			266			82			101
Total losses and expenses		84,501			74,255			67,598			69,924			67,402			58,890
Income from continuing operations		(5,837	)		1,845			2,418			(56	)		1,203			2,437
Income taxes expense (benefit)		(1,378	)		396			506			(296	)		(4	)		587
Net income (loss) from continuing operations		(4,459	)		1,449			1,912			240			1,207			1,850
Discontinued Operations:
Pre-tax (loss) income on discontinued ops		(3,090	)		(489	)		292			385			240			340
Income tax (benefit) expense		(170	)		(126	)		124			151			63			143
(Loss) income on discontinued ops		(2,920	)		(363	)		168			234			177			197
Net income		(7,379	)		1,086			2,080			474			1,384			2,047
Operating Ratios
Loss ratio (a)		72.9	%		70.1	%		67.7	%		62.2	%		68.0	%		63.9	%
Expense ratio (b)		33.7	%		34.0	%		36.0	%		45.1	%		38.6	%		40.9	%
Combined ratio (c)		106.6	%		104.2	%		103.7	%		107.3	%		106.6	%		104.8	%

Notes:
(a)	Losses and loss adjustment expenses divided by premiums earned.
(b)	Underwriting and administrative expenses divided by premiums earned.
(c)	Sum of the loss ratio and the expense ratio.
Source: Audited financial reports prepared by the management of the Company and audited by KPMG. Statutory financials provided in Exhibit V.

Exhibit IV-3
Penn Millers Mutual Holding Company
Investment Portfolio
(Dollars in Thousands)

	12/31/2008				12/31/2007				12/31/2006
	Amortized		Estimated		Amortized		Estimated		Amortized		Estimated
	Cost		Fair Value		Cost		Fair Value		Cost		Fair Value
ASSETS
Fixed Securities:
U.S. government and agencies		23,459		25,399		26,360		26,984		27,509		27,461
State and political subdivisions		31,775		32,957		30,321		31,134		26,538		27,047
Mortgage backed		25,374		25,305		20,636		20,724		11,618		11,488
Corporate		39,930		38,253		33,656		33,927		33,964		33,910
Total fixed securities		120,538		121,914		110,973		112,769		99,629		99,906
Equity		—		—		10,525		13,409		10,476		13,697
Total investment securities		120,538		121,914		121,498		126,178		110,105		113,603

Notes:

Source: Audited GAAP financial reports prepared by the management of the Company and audited by KPMG.

Exhibit V-1
Penn Millers Mutual Holding Company (b)
Historical Balance Sheets — Statutory Basis (a)
(Dollars in Thousands)

	12/31/2008 (c)			12/31/2007			12/31/2006			12/31/2005			12/31/2004			12/31/2003
ASSETS
Investments:
Bonds		120,538			110,972			99,628			93,879			89,641			82,441
Stocks		1			13,411			13,697			12,329			12,819			11,267
Real estate		2,694			2,788			2,909			1,199			1,204			1,076
Receivables for securities					91			—			—			—			—
Total investments		123,233			127,262			116,234			107,407			103,664			94,784
Cash and cash equivalents (cash overdraft)		11,695			10,034			12,911			9,459			10,996			14,365
Premiums and considerations		30,951			32,416			30,396			26,730			29,076			23,919
Reinsurance receivables		3,073			917			1,120			1,114			838			1,036
Accrued investment income		1,431			1,499			1,439			1,302			1,225			1,236
Other receivables		1,160			1,723			1,524			1,682			1,490			926
PP&E		642			857			508			152			194			295
Income taxes receivable		1,406			646			—			10			13			—
Deferred income taxes		5,190			4,893			4,242			4,071			3,820			3,747
Receivable from parent		186			557			219			361			204			250
Aggregate write-ins for other than invested assets		2,973			3,011			1,960			1,761			981			517
Total assets		181,941			183,815			170,553			154,049			152,501			141,075
LIABILITIES AND SURPLUS
Loss and loss adjustment expense reserves		85,437			77,222			69,317			61,033			55,805			48,072
Unearned premiums		41,062			42,499			39,221			36,348			39,102			35,122
Accounts due reinsurers and provisions		5			22			276			227			100			287
Commissions payable, contingent commissions		1,488			2,515			2,581			2,292			2,867			2,154
Other expenses		6,411			6,532			6,110			6,124			5,480			5,361
Ceded reinsurance premiums payable		2,024			3,686			1,275			614			2,482			2,782
Funds held by company under reinsurance treaties		2,616			—			677			73			114			2,191
Amounts withheld or retained by company		55			47			67			78			68			130
Payable for securities		—			414			472			—			—			—
Aggregate write ins for liabilities		—			—			—			—			811			273
Payable to parent		15			83			32			44			227			371
Total liabilities		139,114			133,020			120,028			106,833			107,056			96,743
Total surplus		42,827			50,795			50,525			47,216			45,445			44,332
Total liabilities and surplus		181,941			183,815			170,553			154,049			152,501			141,075
Performance and Capital Ratios
Return on assets		-2.44	%		0.50	%		0.85	%		2.07	%		0.43	%		0.43	%
Return on surplus		-9.53	%		1.73	%		2.81	%		6.84	%		1.41	%		1.37	%
Surplus to total assets		23.54	%		27.63	%		29.62	%		30.65	%		29.80	%		31.42	%

Notes:
(a)	Statutory financials do not include the effects of discontinued operations.
(b)	Statutory financial statements represent the results of operations of PMHC.
(c)	Financial statements as of December 31, 2008 prepared by Company management. Audited statutory financial statements as of December 31, 2008 were not available as of the date of this report.

Source: Statutory prepared financial statements.

Exhibit V-2
Penn Millers Mutual Holding Company(e)
Historical Income Statements — Statutory Basis(d)
(Dollars in Thousands)

	2008			2007			2006			2005			2004			2003
REVENUE
Premiums earned		78,737		$	70,970		$	64,645		$	64,723		$	63,090		$	56,065
Investment income, net of investment expense		5,085			5,104			4,370			4,131			4,052			4,097
Realized investment (losses) gains, net		(5,778	)		(431	)		232			262			937			833
Total revenue		78,044			75,643			69,247			69,116			68,079			60,995
LOSSES AND EXPENSES
Losses and loss adjustment expenses		57,391			49,774			43,770			40,242			42,910			35,822
Underwriting and administrative expenses		25,256			24,059			23,525			24,427			24,407			23,407
Other expenses, net		39			(318	)		(31	)		(114	)		(219	)		(212	)
Total losses and expenses		82,686			73,515			67,264			64,555			67,098			59,017
Income from continuing operations		(4,642	)		2,128			1,983			4,561			981			1,978
Income taxes expense (benefit)		(181	)		1,250			609			1,390			347			1,369
Net income (loss)		(4,461	)		878			1,374			3,171			634			609
Operating Ratios
Loss ratio (a)		72.9	%		70.1	%		67.7	%		62.2	%		68.0	%		63.9	%
Expense ratio (b)		32.1	%		33.9	%		36.4	%		37.7	%		38.7	%		41.7	%
Combined ratio (c)		105.0	%		104.0	%		104.1	%		99.9	%		106.7	%		105.6	%

Notes:
(a)	Losses and loss adjustment expenses divided by net premiums earned.
(b)	Underwriting expenses divided by net premiums earned.
(c)	Sum of the loss ratio and the expense ratio.
(d)	Statutory financials do not include the effects of discontinued operations. Audited statutory financial statements as of December 31, 2008 were not yet available as of the date of this report.
(e)	Statutory financial statements represent the results of operations of PMHC.

Source: Statutory prepared financial statements.

Exhibit VI-1
Penn Millers Mutual Holding Company
Financial Performance Data for Publicly Traded Property and Casualty Companies

												Cash and		Cash and		Policy				Tangible		Net Prem				GAAP		GAAP
		Total Assets		Total Policy		Total Equity		Tangible Equity		Total Policy		Investments		Investments /		Reserves /		Total Equity		Equity /		Writ/ Avg		GAAP Loss		Expense		Combined
Company Name	Ticker	($000)		Reserves ($000)		($000)		($000)		Revenue ($000)		($000)		Assets		Equity		/ Assets		Assets		Equity (x)		Ratio (%)		Ratio (%)		Ratio (%)		ROAA (%)		ROAE (%)
21st Century Holding Company	TCHC		197,110		106,990		76,231		76,231		65,130		150,843		0.77		1.40		0.39		0.39		0.66		64.30		44.97		109.27		-1.18		-3.04
ACE Limited	ACE		72,057,000		46,375,000		14,446,000		10,699,000		13,203,000		41,414,000		0.57		3.21		0.20		0.15		0.82		60.60		29.00		89.60		1.60		7.48
Affirmative Insurance Holdings, Inc.	AFFM		802,051		313,734		216,483		35,578		357,301		351,613		0.44		1.45		0.27		0.04		1.57		76.80		20.90		97.70		0.17		0.66
Alleghany Corporation	Y		6,181,828		3,192,657		2,646,689		2,495,466		948,652		4,294,266		0.69		1.21		0.43		0.40		0.32		60.10		30.20		90.30		2.14		5.31
Allied World Assurance Company Holdings, Ltd	AWH		9,072,079		5,507,186		2,416,862		2,076,920		1,116,905		6,863,397		0.76		2.28		0.27		0.23		0.50		57.40		26.80		84.20		2.21		8.32
Allstate Corporation	ALL		134,798,000		100,774,000		12,641,000		11,767,000		28,862,000		96,413,000		0.72		7.97		0.09		0.09		1.54		74.40		25.00		99.40		-1.13		-9.74
American Financial Group, Inc.	AFG		26,427,500		20,654,600		2,490,000		2,203,400		3,301,800		16,870,500		0.64		8.30		0.09		0.08		1.01		56.60		31.00		87.60		0.74		6.85
American Physicians Capital, Inc.	ACAP		1,005,823		700,380		254,037		254,037		124,268		830,648		0.83		2.76		0.25		0.25		0.46		52.60		22.10		74.70		4.35		17.21
American Physicians Service Group, Inc.	AMPH		283,554		128,926		136,465		134,201		64,081		231,769		0.82		0.94		0.48		0.47		0.51		28.98		17.30		46.28		6.78		14.79
American Safety Insurance Holdings, Ltd.	ASI		1,026,364		708,906		217,030		207,334		174,471		686,637		0.67		3.27		0.21		0.20		0.80		63.10		42.90		106.00		0.03		0.14
AMERISAFE, Inc.	AMSF		1,107,833		710,761		253,272		253,272		289,493		799,973		0.72		2.81		0.23		0.23		1.25		60.90		20.50		81.40		3.99		19.05
AmTrust Financial Services, Inc.	AFSI		3,143,893		1,773,974		392,548		290,123		439,097		1,361,440		0.43		4.52		0.12		0.09		1.40		54.30		20.10		74.40		2.89		20.88
Arch Capital Group Ltd.	ACGL		14,616,545		9,193,639		3,432,965		3,405,565		2,845,454		10,820,774		0.74		2.68		0.23		0.23		0.75		65.00		30.00		95.00		1.82		7.79
Argo Group International Holdings, Ltd.	AGII		6,381,500		3,804,200		1,352,900		1,095,300		1,127,100		4,001,500		0.63		2.81		0.21		0.17		0.83		64.30		36.20		100.50		1.07		4.54
Aspen Insurance Holdings Limited	AHL		7,288,800		3,881,000		2,779,100		2,770,900		1,701,700		5,754,000		0.79		1.40		0.38		0.38		0.65		65.80		29.80		95.60		1.40		3.70
AXIS Capital Holdings Limited	AXS		14,282,834		8,407,184		4,461,041		4,400,624		2,687,181		10,432,571		0.73		1.88		0.31		0.31		0.53		63.74		26.13		89.87		2.54		7.73
Baldwin & Lyons, Inc.	BWINB		777,743		406,741		330,067		326,667		182,299		537,821		0.69		1.23		0.42		0.42		0.49		63.50		30.90		94.40		-0.93		-2.16
Berkshire Hathaway Inc.	BRK.A		267,399,000		71,343,000		109,267,000		75,486,000		25,525,000		127,779,000		0.48		0.65		0.41		0.28		0.23		70.91		18.15		89.06		1.80		4.23
Chubb Corporation	CB		48,429,000		28,734,000		13,432,000		12,965,000		11,828,000		38,794,000		0.80		2.14		0.28		0.27		0.84		58.32		30.81		89.13		3.57		12.88
Cincinnati Financial Corporation	CINF		13,369,000		7,181,000		4,182,000		4,182,000		3,136,000		9,899,000		0.74		1.72		0.31		0.31		0.64		68.30		32.30		100.60		2.86		8.62
CNA Surety Corporation	SUR		1,565,519		687,548		767,295		628,510		431,696		1,126,079		0.72		0.90		0.49		0.40		0.60		18.70		54.50		73.20		7.18		15.39
CRM Holdings, Ltd.	CRMH		444,192		258,708		108,860		105,608		121,942		344,862		0.78		2.38		0.25		0.24		1.12		70.12		32.91		103.03		-0.36		-1.34
Donegal Group Inc.	DGICA		880,109		468,823		363,584		362,662		346,575		633,967		0.72		1.29		0.41		0.41		1.02		64.70		32.50		97.20		2.93		7.16
Eastern Insurance Holdings, Inc.	EIHI		377,311		201,482		138,137		118,206		135,807		275,038		0.73		1.46		0.37		0.31		0.84		73.00		34.00		107.00		-4.51		-10.80
EMC Insurance Group Inc.	EMCI		1,108,099		733,897		282,916		281,974		389,318		965,349		0.87		2.59		0.26		0.25		1.16		75.60		32.70		108.30		-0.15		-0.51
Employers Holdings, Inc.	EIG		3,756,713		2,654,525		444,728		390,318		328,947		2,245,834		0.60		5.97		0.12		0.10		0.78		41.50		44.40		85.90		3.12		25.43
Endurance Specialty Holdings Ltd.	ENH		7,272,470		4,120,944		2,207,283		2,006,492		1,766,485		5,358,087		0.74		1.87		0.30		0.28		0.76		64.30		29.20		93.50		1.28		4.19
Enstar Group Limited	ESGR		4,358,151		2,798,287		615,209		593,987		0		3,508,778		0.81		4.55		0.14		0.14		0.00	NA		NA		NA			2.24		16.17
Erie Indemnity Company	ERIE		2,613,386		1,389,451		791,875		791,875		207,407		1,042,748		0.40		1.75		0.30		0.30		0.22		66.20		27.40		93.60		2.49		7.24
Everest Re Group, Ltd.	RE		16,846,590		10,242,343		4,960,355		4,960,355		3,694,301		13,714,280		0.81		2.06		0.29		0.29		0.65		66.00		29.60		95.60		-0.11		-0.35
Fairfax Financial Holdings Limited	FFH		27,305,400		16,619,000		4,968,800		4,845,600		4,529,100		19,979,200		0.73		3.34		0.18		0.18		0.92		82.16		27.94		110.10		5.34		31.23
First Acceptance Corporation	FAC		441,411		154,170		225,670		81,228		257,288		213,516		0.48		0.68		0.51		0.18	NA			69.70		23.20		92.90		-1.53		-3.13
First Mercury Financial Corporation	FMR		943,653		520,570		261,637		196,803		193,744		574,863		0.61		1.99		0.28		0.21		0.87		55.70		28.00		83.70		4.69		16.16
Flagstone Reinsurance Holdings Limited	FSR		2,215,970		682,456		986,013		935,999		654,168		1,700,844		0.77		0.69		0.44		0.42		0.63		58.10		31.30		89.40		-8.06		-17.05
FPIC Insurance Group, Inc.	FPIC		997,985		664,011		259,894		249,061		172,830		712,665		0.71		2.55		0.26		0.25		0.57		57.70		22.00		79.70		3.07		11.33
GAINSCO, INC.	GAN		239,483		123,964		55,347		54,738		176,606		176,575		0.74		2.24		0.23		0.23		2.96		73.30		25.70		99.00		-1.41		-5.65
Greenlight Capital Re, Ltd.	GLRE		958,005		170,351		485,382		485,382		114,949		857,859		0.90		0.35		0.51		0.51		0.25		48.30		48.20		96.50		-10.84		-21.02
Hallmark Financial Services, Inc.	HALL		538,398		258,555		179,412		109,363		236,320		360,683		0.67		1.44		0.33		0.20		1.26		61.00		28.90		89.90		2.37		6.92
Hanover Insurance Group, Inc.	THG		9,230,200		4,491,900		1,887,200		1,717,300		2,484,900		4,719,900		0.51		2.38		0.20		0.19		1.16		65.40		33.20		98.60		0.22		0.95
Harleysville Group Inc.	HGIC		3,155,318		2,252,161		652,634		629,234		918,515		2,473,738		0.78		3.45		0.21		0.20		1.34		66.50		34.02		100.52		1.33		5.95
HCC Insurance Holdings, Inc.	HCC		8,332,383		4,456,891		2,639,341		1,780,492		2,007,774		5,006,535		0.60		1.69		0.32		0.21		0.81		60.40		25.00		85.40		3.67		11.98
Hilltop Holdings Inc.	HTH		1,048,770		102,474		791,455		753,465		115,247		906,444		0.86		0.13		0.75		0.72		0.14		69.80		35.60		105.40		-2.08		-2.82
Horace Mann Educators Corporation	HMN		5,507,718		3,691,552		448,845		401,449		658,532		3,910,959		0.71		8.22		0.08		0.07		1.69		76.90		23.80		100.70		0.18		1.93
Infinity Property and Casualty Corporation	IPCC		1,721,335		925,181		525,331		450,056		922,451		1,172,668		0.68		1.76		0.31		0.26		1.53		70.29		22.23		92.52		1.02		3.30
IPC Holdings, Ltd.	IPCR		2,388,688		441,366		1,850,947		1,850,947		387,367		2,235,187		0.94		0.24		0.77		0.77		0.20		40.20		16.20		56.40		3.61		4.55
Kingsway Financial Services Inc.	KFS		3,343,441		2,415,496		453,572		407,795		1,484,263		2,537,757		0.76		5.33		0.14		0.12		1.70		81.20		35.20		116.40		-9.61		-50.45
Markel Corporation	MKL		9,477,690		6,320,227		2,180,674		1,836,643		2,022,184		6,908,456		0.73		2.90		0.23		0.19		0.80		62.76		36.52		99.28		-0.59		-2.39
Meadowbrook Insurance Group, Inc.	MIG		1,813,916		1,167,783		438,170		272,191		369,721		1,085,648		0.60		2.67		0.24		0.15		1.06		62.00		31.30		93.30		1.98		7.75
Mercer Insurance Group, Inc.	MIGP		568,986		384,408		137,270		131,565		152,577		381,333		0.67		2.80		0.24		0.23		1.09		62.40		35.70		98.10		1.48		6.09
Mercury General Corporation	MCY		3,950,195		2,013,159		1,494,051		1,694,772		2,808,839		2,969,216		0.75		1.35		0.38		0.43		1.56		73.30		28.50		101.80		-5.70		-13.71
Montpelier Re Holdings Ltd.	MRH		2,797,600		994,100		1,357,600		1,352,850		528,500		2,365,200		0.85		0.73		0.49		0.48		0.36		55.80		35.20		91.00		-4.52		-9.60

Exhibit VI-1 (Continued)
Penn Millers Mutual Holding Company
Financial Performance Data for Publicly Traded Property and Casualty Companies

												Cash and		Cash and		Policy				Tangible		Net Prem				GAAP		GAAP
		Total Assets		Total Policy		Total Equity		Tangible Equity		Total Policy		Investments		Investments /		Reserves /		Total Equity		Equity /		Writ/ Avg		GAAP Loss		Expense		Combined
Company Name	Ticker	($000)		Reserves ($000)		($000)		($000)		Revenue ($000)		($000)		Assets		Equity		/ Assets		Assets		Equity (x)		Ratio (%)		Ratio (%)		Ratio (%)		ROAA (%)			ROAE (%)
National Interstate Corporation	NATL		990,812		556,599		216,074		216,074		290,741		563,714		0.57		2.58		0.22		0.22		1.39		64.70		24.70		89.40		1.08			4.97
National Security Group, Inc.	NSEC		124,890		73,314		34,648		34,648		56,264		93,159		0.75		2.12		0.28		0.28		1.46		79.53		43.19		122.72		-3.79			-12.29
Navigators Group, Inc.	NAVG		3,349,580		2,334,329		689,317		682,695		643,976		1,917,715		0.57		3.39		0.21		0.20		0.99		61.00		32.80		93.80		1.59			7.70
NYMAGIC, INC.	NYM		946,476		632,114		164,073		164,073		167,073		546,986		0.58		3.85		0.17		0.17		0.74		65.80		46.30		112.10		-10.16			-46.53
Odyssey Re Holdings Corp.	ORH		9,726,509		5,952,439		2,827,735		2,777,435		2,076,364		7,892,538		0.81		2.11		0.29		0.29		0.75		72.70		28.50		101.20		5.66			20.23
Old Republic International Corporation	ORI		13,266,000		8,534,300		3,740,300		3,578,900		3,318,100		8,746,800		0.66		2.28		0.28		0.27		0.75		81.80		39.10		120.90		-4.23			-13.54
OneBeacon Insurance Group, Ltd.	OB		7,940,800		5,382,200		1,155,100		1,155,100		1,879,000		3,864,500		0.49		4.66		0.15		0.15		1.28		59.90		35.10		95.00		-4.39			-24.99
PartnerRe Ltd.	PRE		16,279,320		10,216,468		4,199,108		3,769,589		3,928,024		11,724,671		0.72		2.43		0.26		0.23		0.93		63.90		30.20		94.10		0.28			1.08
Platinum Underwriters Holdings, Ltd.	PTP		4,927,163		2,682,396		1,809,397		1,809,397		1,114,796		4,259,939		0.86		1.48		0.37		0.37		0.55		64.40		27.50		91.90		4.54			11.95
PMA Capital Corporation	PMACA		2,502,716		1,496,535		344,656		314,308		390,217		772,498		0.31		4.34		0.14		0.13		1.12		69.40		44.67		114.07		0.22			1.53
ProAssurance Corporation	PRA		4,280,938		2,565,224		1,423,585		1,351,372		459,278		3,579,401		0.84		1.80		0.33		0.32		0.33		46.10		21.90		68.00		4.05			13.66
Progressive Corporation	PGR		18,250,500		10,353,300		4,215,300		4,215,300		13,631,400		12,981,000		0.71		2.46		0.23		0.23		2.96		73.50		21.10		94.60		-0.37			-1.52
RenaissanceRe Holdings Ltd.	RNR		7,984,051		2,670,847		3,032,743		2,958,562		1,386,824		6,317,274		0.79		0.88		0.38		0.37		0.41		54.80		24.20		79.00		0.35			0.89
RLI Corp.	RLI		2,419,401		1,494,481		708,154		681,940		528,764		1,697,525		0.70		2.11		0.29		0.28		0.68		46.70		37.50		84.20		3.02			10.45
Safety Insurance Group, Inc.	SAFT		1,437,817		757,254		603,371		603,371		576,556		1,071,590		0.75		1.26		0.42		0.42		0.94		64.10		30.00		94.10		4.83			11.93
SeaBright Insurance Holdings, Inc.	SBX		842,687		447,958		324,813		320,202		248,644		554,377		0.66		1.38		0.39		0.38		0.83		56.70		28.50		85.20		3.68			9.49
Selective Insurance Group, Inc.	SIGI		4,941,332		3,485,307		890,493		860,856		1,495,490		3,558,952		0.72		3.91		0.18		0.17		1.48		67.80		33.20		101.00		0.87			4.35
Specialty Underwriters’ Alliance, Inc.	SUAI		454,737		295,553		136,289		125,544		143,465		263,613		0.58		2.17		0.30		0.28		1.03		62.30		39.12		101.42		1.72			5.54
State Auto Financial Corporation	STFC		2,443,600		1,306,300		761,000		759,000		1,126,000		2,091,800		0.86		1.72		0.31		0.31		1.43		75.20		34.60		109.80		-1.28			-3.70
Tower Group, Inc.	TWGP		1,533,013		863,838		335,204		295,778		314,551		709,555		0.46		2.58		0.22		0.19		1.08		51.70		30.70		82.40		4.08			18.01
Transatlantic Holdings, Inc.	TRH		13,376,938		9,344,615		3,198,220		3,198,220		4,067,389		10,518,477		0.79		2.92		0.24		0.24		1.26		71.50		27.00		98.50		0.68			3.13
Travelers Companies, Inc.	TRV		109,751,000		72,030,000		25,319,000		21,265,000		21,579,000		71,088,000		0.65		2.84		0.23		0.19		0.84		59.40		32.50		91.90		2.58			11.36
Unico American Corporation	UNAM		184,603		98,617		76,958		76,958		33,950		152,502		0.83		1.28		0.42		0.42		0.43		60.70		24.30		85.00		2.81			7.33
United America Indemnity, Ltd.	INDM		2,473,201		1,656,106		631,993		622,684		382,508		1,599,528		0.65		2.62		0.26		0.25		0.40		79.80		37.30		117.10		-5.34			-18.34
United Fire & Casualty Company	UFCS		2,687,130		1,970,740		641,741		641,191		503,375		2,205,355		0.82		3.07		0.24		0.24		0.69		84.50		29.40		113.90		-0.48			-1.82
Universal Insurance Holdings, Inc.	UVE		544,637		346,437		101,554		101,554		147,414		266,014		0.49		3.41		0.19		0.19		1.61		55.20	NA		NA			7.17			42.86
Validus Holdings, Ltd.	VR		4,322,480		1,844,753		1,938,734		1,791,124		1,256,518		3,281,385		0.76		0.95		0.45		0.41		0.63		61.50		30.70		92.20		1.19			2.69
W.R. Berkley Corporation	WRB		16,121,158		10,965,746		3,046,319		2,938,755		4,289,580		12,278,116		0.76		3.60		0.19		0.18		1.23		62.70		30.40		93.10		1.70			8.60
Wesco Financial Corporation	WSC		3,050,695		323,063		2,377,756		2,100,014		237,964		2,194,592		0.72		0.14		0.78		0.69		0.13		72.36		29.54		101.90		2.59			3.30
White Mountains Insurance Group, Ltd.	WTM		15,895,800		8,997,500		2,898,800		2,879,300		3,710,000		9,529,200		0.60		3.10		0.18		0.18		0.87		67.56		32.86		100.42		-3.03			-12.96
Zenith National Insurance Corp.	ZNT		2,520,783		1,319,812		1,023,437		1,002,452		607,327		1,968,472		0.78		1.29		0.41		0.40		0.55		46.00		40.00		86.00		3.57			8.90
Group Aggregate
Overall P&C Insurance Group Mean			12,566,065		6,796,363		3,381,086		2,791,377		2,404,730		8,012,686		0.70		2.45		0.30		0.28		0.91		63.29		30.96		94.35		0.74			3.10
Overall P&C Insurance Group Median			2,924,148		1,715,040		764,148		718,080		552,660		2,199,974		0.72		2.20		0.27		0.24		0.83		64.10		30.30		94.25		1.37			4.55
P&C Group Mean > $1.2 Bil. Total Assets			18,081,814		9,780,953		4,846,812		3,993,509		3,436,251		11,510,847		0.70		2.69		0.29		0.27		0.88		63.45		30.76		94.21		0.92			3.46
P&C Group Median > $1.2 Bil. Total Assets			5,844,773		3,338,982		1,869,074		1,785,808		1,321,671		3,956,230		0.72		2.33		0.26		0.24		0.81		64.30		30.20		93.80		1.50			4.55
P&C Group Mean < $1.2 Bil. Total Assets			685,989		368,017		224,137		202,170		182,992		478,186		0.70		1.94		0.33		0.30		0.98		62.94		31.40		94.65		0.36			2.32
P&C Group Median < $1.2 Bil. Total Assets			789,897		330,086		216,279		149,137		169,952		459,577		0.72		2.05		0.28		0.25		0.87		63.30		30.90		97.20		0.63			2.82
P&C Group Mean > $500 m Total Revenue			14,077,671		7,614,522		3,784,390		3,124,460		2,686,758		8,974,499		0.69		2.55		0.29		0.27		0.89		63.12		30.88		94.10		0.85			3.60
P&C Group Mean > $500 m Total Revenue			3,349,580		2,252,161		986,013		935,999		658,532		2,473,738		0.72		2.38		0.26		0.24		0.82		63.82		30.20		94.10		1.48			4.97
P&C Group Mean < $500 m Total Revenue			305,255		160,192		109,845		89,707		117,170		211,320		0.72		1.63		0.36		0.31		1.13		64.66		31.63		96.29		(0.16	)		(0.95	)
P&C Group Median < $500 m Total Revenue			283,554		128,926		108,860		81,228		121,942		213,516		0.75		1.46		0.37		0.28		0.94		69.70		32.91		101.42		(1.18	)		(3.04	)

Source: SNL Financial.

Exhibit VI-2

Penn Millers Mutual Holding Company

Market Valuation Data for Publicly Traded Property and Casualty Companies

				Total Diluted								(a)
				Shares						Price /		Price /		(a)							Current		One-Year
				Outstand.		Total Market		Price / Book		Tangible		Operating		Price / LTM		Price / LTM			Price / Total		Dividend		Price Change
Company Name		Closing price		(000’S)		value (000’s)		(%)		Book (%)		EPS (x)		EPS (x)		Revenue (x)			Assets (%)		Yield (%)		(%)
21st Century Holding Company	TCHC		3.30		8,014		26,446		34.69		34.69		6.00	Neg			0.39			13.42		15.55		(74.10	)
ACE Limited	ACE		40.82		332,800		13,584,896		94.04		126.97		5.24		11.56		0.99			18.85		2.04		(28.77	)
Affirmative Insurance Holdings, Inc.	AFFM		3.25		15,415		50,099		23.14		140.81		27.08		27.08		0.11			6.25		2.53		(58.01	)
Alleghany Corporation	Y		274.98		8,438		2,320,344		87.67		92.98		23.09		17.48		2.35			37.53	NA			(18.79	)
Allied World Assurance Company Holdings, Ltd	AWH		38.55		50,367		1,941,641		80.34		93.49		4.27		10.74		1.68			21.40		1.77		(8.63	)
Allstate Corporation	ALL		20.06		536,100		10,754,166		85.07		91.39		6.12	Neg			0.37			7.98		5.01		(59.74	)
American Financial Group, Inc.	AFG		16.35		116,600		1,906,410		76.56		86.52		4.00		9.79		0.44			7.21		2.19		(39.40	)
American Physicians Capital, Inc.	ACAP		41.64		9,379		390,542		153.73		153.73		8.56		9.05		2.44			38.83		0.83		(13.79	)
American Physicians Service Group, Inc.	AMPH		19.08		7,134		136,117		99.74		101.43		7.23		7.23		1.82			48.00		1.39		(2.20	)
American Safety Insurance Holdings, Ltd.	ASI		11.28		10,274		115,895		53.40		55.90		376.00		376.00		0.60			11.29	NA			(37.40	)
AMERISAFE, Inc.	AMSF		16.11		19,198		309,277		122.11		122.11		5.51		7.49		1.02			27.92	NA			18.98
AmTrust Financial Services, Inc.	AFSI		9.37		60,281		564,833		143.89		194.69		4.52		6.84		0.98			17.97		1.72		(43.21	)
Arch Capital Group Ltd.	ACGL		55.74		60,048		3,347,090		97.50		98.28		6.23		13.63		1.13			22.90	NA			(21.95	)
Argo Group International Holdings, Ltd.	AGII		30.37		30,700		932,359		68.92		85.12		10.88	Neg			0.74			14.61	NA			(16.70	)
Aspen Insurance Holdings Limited	AHL		22.66		83,423		1,890,365		68.02		68.22		12.48		25.46		1.06			25.94		2.47		(15.89	)
AXIS Capital Holdings Limited	AXS		23.59		149,363		3,523,473		78.98		80.07		8.08		10.44		1.25			24.67		2.75		(32.87	)
Baldwin & Lyons, Inc.	BWINB		19.61		14,880		291,789		88.40		89.32		12.51	Neg			1.86			37.52		5.50		(23.76	)
Berkshire Hathaway Inc.	BRK.A		87,600.00		1,549		135,712,548		124.20		179.79		14.08		27.17		1.26			50.75	NA			(33.41	)
Chubb Corporation	CB		42.65		359,600		15,336,940		114.18		118.29		7.50		8.67		1.16			31.67		2.59		(16.81	)
Cincinnati Financial Corporation	CINF		23.72		162,486		3,854,158		92.16		92.16		11.20		9.05		1.01			28.83		5.37		(40.66	)
CNA Surety Corporation	SUR		18.81		44,266		832,643		108.52		132.48		7.48		7.55		1.74			53.19	NA			19.05
CRM Holdings, Ltd.	CRMH		0.63		16,491		10,389		9.54		9.84	Neg		Neg			0.07			2.34	NA			(87.27	)
Donegal Group Inc.	DGICA		15.21		25,496		387,790		106.66		106.93		14.12		15.21		1.04			44.06		2.50		(13.82	)
Eastern Insurance Holdings, Inc.	EIHI		7.60		8,765		66,569		48.19		56.32	Neg		Neg			0.51			17.64		3.49		(49.57	)
EMC Insurance Group Inc.	EMCI		21.48		13,291		285,489		100.91		101.25		20.12	Neg			0.69			25.76		2.81		(25.26	)
Employers Holdings, Inc.	EIG		10.05		48,902		491,465		110.51		125.91		4.86		4.86		1.24			13.08		1.45		(44.90	)
Endurance Specialty Holdings Ltd.	ENH		25.45		59,616		1,517,234		68.74		75.62		8.31		19.28		0.85			20.86		3.28		(33.36	)
Enstar Group Limited	ESGR		57.09		14,471		826,166		134.29		139.09		9.05		9.05		16.49			18.96	NA			(48.52	)
Erie Indemnity Company	ERIE		33.88		57,405		1,944,891		245.61		245.61		13.63		28.47		1.81			74.42		4.78		(35.41	)
Everest Re Group, Ltd.	RE		72.37		61,272		4,434,255		89.39		89.39		7.88	Neg			1.26			26.32		2.52		(22.61	)
Fairfax Financial Holdings Limited	FFH		323.50		17,592		5,691,128		114.54		117.45		4.07		4.07		0.71			20.84		1.60		2.27
First Acceptance Corporation	FAC		2.44		47,658		116,286		51.53		143.16	Neg		Neg			0.39			26.34	NA			(18.39	)
First Mercury Financial Corporation	FMR		14.58		18,357		267,649		102.30		136.00		8.53		6.66		1.24			28.36	NA			(17.53	)
Flagstone Reinsurance Holdings Limited	FSR		8.05		84,879		683,272		69.30		73.00	Neg		Neg			1.51			30.83		1.64		(36.81	)
FPIC Insurance Group, Inc.	FPIC		38.00		8,120		308,560		118.73		123.89		7.51		10.22		1.62			30.92	NA			(22.02	)
GAINSCO, INC.	GAN		1.45		16,100		23,345		42.18		42.65		32.56	Neg			0.12			9.75	NA			(51.01	)
Greenlight Capital Re, Ltd.	GLRE		16.77		35,919		602,355		124.10		124.10	Neg		Neg			(53.89	)		62.88	NA			(8.86	)
Hallmark Financial Services, Inc.	HALL		6.61		20,815		137,587		76.69		125.81		6.80		6.30		0.51			25.55	NA			(45.05	)
Hanover Insurance Group, Inc.	THG		29.84		51,400		1,533,776		81.27		89.31		8.71		74.60		0.57			16.62		1.05		(30.99	)
Harleysville Group Inc.	HGIC		32.26		28,353		914,677		140.15		145.36		11.26		22.40		0.93			28.99		3.46		(12.05	)
HCC Insurance Holdings, Inc.	HCC		25.84		114,111		2,948,628		111.72		165.61		9.13		9.79		1.29			35.39		1.87		8.12
Hilltop Holdings Inc.	HTH		11.41		56,456		644,163		81.39		85.49	Neg		Neg			6.28			61.42	NA			8.56

Exhibit VI-2 (Continued)
Penn Millers Mutual Holding Company
Market Valuation Data for Publicly Traded Property and Casualty Companies

				Total Diluted								(a)
				Shares						Price /		Price /		(a)						Current		One-Year
				Outstand.		Total Market		Price / Book		Tangible		Operating		Price / LTM		Price / LTM		Price / Total		Dividend		Price Change
Company Name		Closing price		(000’S)		value (000’s)		(%)		Book (%)		EPS (x)		EPS (x)		Revenue (x)		Assets (%)		Yield (%)		(%)
Horace Mann Educators Corporation	HMN		8.42		39,800		335,116		74.66		83.48		6.48		31.19		0.40		6.08		2.29		(54.26	)
Infinity Property and Casualty Corporation	IPCC		34.54		14,303		494,026		94.04		109.77		6.95		28.08		0.53		28.70		0.94		(23.12	)
IPC Holdings, Ltd.	IPCR		27.48		55,135		1,515,105		81.86		81.86		5.86		18.95		4.84		63.43		2.94		(4.95	)
Kingsway Financial Services Inc.	KFS		2.58		55,090		142,132		31.34		34.85	Neg		Neg			0.10		4.25		4.37		(78.78	)
Markel Corporation	MKL		287.86		9,823		2,827,597		129.67		153.95		13.72	Neg			1.49		29.83	NA			(36.87	)
Meadowbrook Insurance Group, Inc.	MIG		6.52		57,781		376,730		85.98		138.41		9.71		10.69		0.86		20.77		1.24		(22.01	)
Mercer Insurance Group, Inc.	MIGP		14.40		6,213		89,465		65.17		68.00		6.93		11.08		0.55		15.72		2.37		(15.49	)
Mercury General Corporation	MCY		29.52		54,764		1,616,633		108.20		95.39		13.97	Neg			0.67		40.93		5.04		(36.53	)
Montpelier Re Holdings Ltd.	MRH		12.85		84,112		1,080,843		79.61		79.89		11.47	Neg			2.97		38.63		1.79		(23.28	)
National Interstate Corporation	NATL		16.88		19,377		327,084		151.38		151.38		9.98		30.69		1.11		33.01		1.34		(26.51	)
National Security Group, Inc.	NSEC		10.85		2,467		26,763		77.24		77.24	Neg		Neg			0.44		21.43		6.57	NA
Navigators Group, Inc.	NAVG		47.17		16,971		800,522		116.13		117.26		10.45		15.52		1.17		23.90	NA			(15.95	)
NYMAGIC, INC.	NYM		11.44		8,388		95,959		58.49		58.49	Neg		Neg			1.71		10.14		1.68		(50.43	)
Odyssey Re Holdings Corp.	ORH		39.17		59,818		2,343,059		82.86		84.36		25.17		4.61		0.77		24.09		0.58		3.51
Old Republic International Corporation	ORI		11.20		233,764		2,618,154		70.00		73.16	Neg		Neg			0.81		19.74		5.70		(20.68	)
OneBeacon Insurance Group, Ltd.	OB		10.49		95,100		997,599		86.36		86.36		8.77	Neg			0.77		12.56		8.05		(46.53	)
PartnerRe Ltd.	PRE		63.51		56,602		3,594,799		85.61		95.36		7.66		288.68		0.90		22.08		2.58		(18.12	)
Platinum Underwriters Holdings, Ltd.	PTP		29.00		54,499		1,580,471		87.35		87.35		7.29		7.29		1.20		32.08		0.89		(13.30	)
PMA Capital Corporation	PMACA		4.13		31,585		130,444		37.85		41.50		6.06		22.94		0.26		5.21	NA			(53.70	)
ProAssurance Corporation	PRA		47.38		33,765		1,599,786		112.38		118.38		7.73		9.08		2.82		37.37	NA			(12.98	)
Progressive Corporation	PGR		13.80		671,800		9,270,840		219.93		219.93		10.66	Neg			0.72		50.80	NA			(17.17	)
RenaissanceRe Holdings Ltd.	RNR		50.71		60,732		3,079,720		101.55		104.10		15.95	Neg			2.50		38.57		1.78		(4.77	)
RLI Corp.	RLI		50.86		21,706		1,103,967		155.89		161.89		10.13		14.13		1.95		45.63		1.70		(0.70	)
Safety Insurance Group, Inc.	SAFT		31.53		16,121		508,284		84.24		84.24		7.28		7.23		0.79		35.35		4.20		(13.73	)
SeaBright Insurance Holdings, Inc.	SBX		10.64		21,367		227,340		69.99		71.00		7.71		7.71		0.85		26.98	NA			(28.30	)
Selective Insurance Group, Inc.	SIGI		12.22		51,945		634,768		71.28		73.74		8.36		14.90		0.37		12.85		2.27		(50.67	)
Specialty Underwriters’ Alliance, Inc.	SUAI		3.35		15,800		52,930		38.84		42.16		7.13		7.13		0.34		11.64	NA			(27.96	)
State Auto Financial Corporation	STFC		17.67		39,500		697,965		91.72		91.96	Neg		Neg			0.59		28.56		2.00		(40.28	)
Tower Group, Inc.	TWGP		25.18		23,267		585,867		174.78		198.08		8.77		10.19		1.21		38.22		0.71		(6.88	)
Transatlantic Holdings, Inc.	TRH		37.19		66,595		2,476,668		77.44		77.44		6.43		24.31		0.61		18.51		1.90		(45.12	)
Travelers Companies, Inc.	TRV		42.14		593,000		24,989,020		98.70		117.51		7.82		8.74		1.02		22.77		2.65		(15.62	)
Unico American Corporation	UNAM		7.50		5,622		42,165		54.79		54.79		7.99		8.52		0.90		22.84	NA			(20.21	)
United America Indemnity, Ltd.	INDM		4.10		31,410		128,781		20.38		20.68	Neg		Neg			0.32		5.21	NA			(79.54	)
United Fire & Casualty Company	UFCS		22.64		26,693		604,324		94.17		94.25	Neg		Neg			1.00		22.49		1.93		(40.55	)
Universal Insurance Holdings, Inc.	UVE		3.80		39,511		150,141		147.84		147.84		3.75		3.58		0.82		27.57		32.92		(6.17	)
Validus Holdings, Ltd.	VR		23.91		75,741		1,810,957		93.41		101.11		10.35		12.65		1.42		41.90		3.63		2.01
W.R. Berkley Corporation	WRB		23.02		167,859		3,864,114		126.85		131.49		7.53		10.05		0.82		23.97		0.87		(19.71	)
Wesco Financial Corporation	WSC		275.00		7,120		1,957,948		82.34		93.23		25.24		21.09		2.45		64.18		0.53		(33.09	)
White Mountains Insurance Group, Ltd.	WTM		180.38		6,529		1,177,788		40.63		40.91	Neg		Neg			0.40		7.41		0.39		(61.63	)
Zenith National Insurance Corp.	ZNT		25.06		37,435		938,121		91.66		93.58		8.74		7.41		1.37		37.22		6.64		(32.80	)

Exhibit VI-2 (Continued)
Penn Millers Mutual Holding Company
Market Valuation Data for Publicly Traded Property and Casualty Companies

	Total
	Diluted
	Shares																		One-
	Outstand.	Total						(a)		(a)									Year
	Closing	Market		Price /		Price /		Price /		Price /		Price /			Price /		Current		Price
	price	Value		Book		Tangible		Operating		LTM		LTM			Total		Dividend		Change
Company Name	(000’S)	(000’s)		(%)		Book (%)		EPS (x)		EPS (x)		Revenue (x)			Assets (%)		Yield (%)		(%)
Group Aggregate
Overall P&C Insurance Group Mean			3,640,874		92.39		102.64		15.39		26.05		0.66			27.33		3.42		(27.47	)
Overall P&C Insurance Group Median			813,344		87.51		93.53		8.34		10.44		0.95			25.66		2.29		(23.28	)
P&C Group Mean > $1.2 Bil. Total Assets			5,238,741		97.76		107.00		9.60		22.47		1.45			27.73		2.62		(27.32	)
P&C Group Median > $1.2 Bil. Total Assets			1,590,128		90.53		93.53		8.36		11.15		1.01			24.38		2.12		(23.20	)
P&C Group Mean < $1.2 Bil. Total Assets			199,315		80.81		93.24		30.32		35.60		(1.02	)		26.45		6.11		(27.82	)
P&C Group Median < $1.2 Bil. Total Assets			136,852		76.96		95.28		7.99		8.52		0.76			26.05		2.53		(23.76	)
P&C Group Mean > $500 m Total Revenue			6,418,519		94.00		101.42		9.68		25.82		1.04			25.93		2.75		(26.45	)
P&C Group Mean > $500 m Total Revenue			1,898,388		88.53		92.57		8.54		12.65		0.96			24.38		2.27		(22.87	)
P&C Group Mean < $500 m Total Revenue			424,654		90.51		104.06		22.63		26.29		0.23			28.94		4.64		(28.70	)
P&C Group Median < $500 m Total Revenue			276,569		84.16		104.18		7.86		9.06		0.94			26.05		2.44		(25.26	)

Source: SNL Financial and market data provided by CapitalIQ.

(a) Price / Operating EPS and Price / EPS is reported as “Neg” if the company has negative earnings.

Exhibit VII-1
Penn Millers Mutual Holding Company
Pro Forma Assumptions for Conversion Valuation

B-1	The initial offering price is $10.00 per share and the number of shares offered is calculated by dividing the estimated pro forma market value by the offering price.
B-2	Offering expenses are estimated at $2.570 million plus commissions and fees of 1.5% of the total shares sold in the subscription and community offerings. Also assumes that no shares are sold in a syndicated community offering.
B-3	It is assumed that 10.0% of the shares offered for sale will be acquired by the employee stock ownership plan (“ESOP”). Pro forma adjustments have been made to earnings and equity to reflect the impact of the ESOP. Under generally accepted accounting principles, the aggregate purchase price of shares of common stock to be purchased by the ESOP in the offering represents unearned compensation and is reflected as a reduction in capital. It is further assumed that the ESOP purchase is funded by a loan from PMHC. No reinvestment is assumed on proceeds used to fund the ESOP. The amount of this borrowing has been reflected as a reduction from gross proceeds to determine the estimated net funds available for reinvestment. The ESOP expense reflects recognition of expense based upon shares committed to be allocated under the ESOP. For purposes of this calculation, the average market value was assumed to be equal to the initial offering price of $10.00.
B-4	The net investable proceeds is fully invested at the beginning of the applicable period. The net investable proceeds are invested to yield a return of 2.78%, which represents the estimated yield on the 10 year U.S. Treasury bond at the end March 2009. The effective income tax rate was assumed to be 35.0%, resulting in an after-tax yield of 1.81%.
B-5	The net increase in earnings excludes after-tax ESOP amortization over 10 years.
B-6	No effect has been given in the pro forma equity calculation for the assumed earnings on the net proceeds.
B-7	For the earnings per share (“EPS”) calcluations, pro forma per share amounts have been computed by dividing pro forma amounts by the total outstanding number of shares of stock, adjusted to give effect to the purchase of ESOP shares in accordance with Statement of Position (“SOP”) 93-6. Under SOP 93-6, the weighted average of the ESOP shares that have not been committed for release are subtracted from total shares outstanding when calculated EPS.
B-8	For the book value calcluations, pro forma per share amounts have been computed by dividing pro forma amounts by the total outstanding number of shares of stock.
B-9	The additional shares that Penn Millers expects to issue after the Conversion in conjunction with the grant of options or restricted stock awards under the stock-based incentive plan have not been considered in our analysis.

Exhibit VII-2

Penn Millers Mutual Holding Company
Pro Forma Conversion Valuation Range
(Dollars in Thousands, except per share data)

	Minimum			Midpoint			Maximum
Total implied shares offered		4,505,000			5,300,000			6,095,000
Offering price (b-1)	$	10.00		$	10.00		$	10.00
Implied gross proceeds:	$	45,050		$	53,000		$	60,950
Less: estimated expenses (b-2)		(3,246	)		(3,365	)		(3,484	)
Implied net offering proceeds		41,804			49,635			57,466
Less: ESOP purchase (b-3)		(4,505	)		(5,300	)		(6,095	)
Net investable proceeds (b-4)	$	37,299		$	44,335		$	51,371
Net income:
LTM ended 12/31/2008 (a)		(4,459	)		(4,459	)		(4,459	)
Pro forma income on net proceeds (b-4)		674			801			928
Pro forma ESOP adjustment (b-5)		(293	)		(345	)		(396	)
Pro forma net income		(4,078	)		(4,002	)		(3,927	)
Pro forma earnings per share (b-8)		(1.01	)		(0.84	)		(0.72	)
Total Revenue:
LTM ended 12/31/2008 (a)		78,664			78,664			78,664
Pro forma revenue on net proceeds, pre-tax		1,037			1,233			1,428
Pro forma total revenue		79,701			79,897			80,092
Total Equity:
Total equity at 12/31/2008		50,755			50,755			50,755
Net offering proceeds		41,804			49,635			57,466
Less: ESOP purchase		(4,505	)		(5,300	)		(6,095	)
Pro forma total equity (b-6)		88,054			95,090			102,126
Pro forma book value per share (b-7)		19.55			17.94			16.76
Tangible Equity:
Total tangible equity at 12/31/2008 (c)		48,144			48,144			48,144
Net offering proceeds		41,804			49,635			57,466
Less: ESOP purchase		(4,505	)		(5,300	)		(6,095	)
Pro forma tangible equity		85,443			92,479			99,515
Pro forma tangible book value per share (b-7)		18.97			17.45			16.33
Total Assets:
Total assets at 12/31/2008		220,524			220,524			220,524
Net offering proceeds		41,804			49,635			57,466
Less: ESOP purchase		(4,505	)		(5,300	)		(6,095	)
Pro forma total assets		257,823			264,859			271,895
Pro Forma Ratios:
Price / LTM EPS		-9.94x			-11.92x			-13.97x
Price / LTM Revenue		0.57x			0.66x			0.76x
Price / Book Value		51.16	%		55.74	%		59.68	%
Price / Tangible Book Value		52.73	%		57.31	%		61.25	%
Price / Total Assets		17.47	%		20.01	%		22.42	%
Total Equity / Assets		34.15	%		35.90	%		37.56	%
Tangible Equity / Assets		33.14	%		34.92	%		36.60	%

Notes:
(a)	Excludes income from discontinued operations.
(b)	See Exhibit VII-1 for explanation of assumptions.
(c)	Tangible book value excludes goodwill and intangible assets in the amounts of $2.147 million and $464,000, which are classified as assets from discontinued operations in the December 31, 2008 balance sheet.

EX-99.2

Exhibit 99.2

April 22, 2009

Board of Directors
Penn Millers Mutual Holding Company
72 North Franklin Street
Wilkes-Barre, Pennsylvania 18773

Members of the Board:

At your request, we hereby provide an opinion of the economic value of the subscription rights to be received by eligible policyholders of Penn Millers Mutual Holding Company (“PMMHC” or the “Company”) to purchase the common stock of Penn Millers Holding Corporation (the “Issuer”). Pursuant to a Plan of Conversion (the “Plan”) adopted by the Board of Directors of PMMHC on April 22, 2009, will issue its common stock to the public.

In accordance with the Plan, the Issuer will offer its newly issued shares of common stock for sale in a subscription offering to eligible policyholders of PMMHC and to other eligible subscribers. Any shares of common stock not sold in the subscription offering may be offered for sale to certain members of the general public in a community offering or a syndicated community offering.

It is the opinion of Curtis Financial Group, LLC, that the subscription rights to be received by eligible policyholders of PMMHC and other eligible subscribers to purchase shares of common stock of the Issuer, pursuant to the Plan, will not have any economic value at the time of distribution or at the time the rights are exercised in the subscription offering.

Our opinion is based on the fact that the subscription rights are acquired by the recipients without cost, are nontransferable, nonnegotiable and of short duration, and provide the recipient with the right only to purchase shares of common stock of the Issuer in the subscription offering at a price that is equal to the estimated pro forma market value of the common stock, which will be the same price at which any unsubscribed shares will be sold to purchasers in the community offering or the syndicated community offering.

Sincerely,

Curtis Financial Group, LLC