S-1/A

As filed with the Securities and Exchange Commission on June __, 2009

Registration No. 333-156936

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

Amendment No. 2 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

     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 6,772,221 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 three phases: a subscription offering phase, a community offering phase, and a syndicated offering phase. The minimum number of shares that must be sold, the maximum number of shares that can be sold and the limit on the number of shares that any person may purchase apply to all three phases of the offering taken together.

      We are offering shares in the subscription offering phase 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 phase 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 the community offering phase, which will commence simultaneously with and end concurrently with the subscription offering phase unless extended by us. We may also sell shares of our common stock to offerees in a syndicated community offering phase that may be conducted concurrently with or subsequent to the subscription offering and the community offering phases.

      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 9.99% of the total number of shares sold in the offering. Therefore, the maximum number of shares sold may be increased to 6,772,221 shares solely to accommodate the 9.99% 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		6,772,221
Gross offering proceeds	$	45,050,000	$	53,000,000	$	60,950,000	$	67,722,210
Less: Proceeds from ESOP shares (1)	$	4,504,990	$	5,299,990	$	6,094,990	$	6,772,210
Conversion and 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	$	37,299,260	$	44,335,010	$	51,370,760	$	57,364,167
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 9.99% 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 phase. See “The Conversion and Offering — Marketing and Underwriting Arrangements” for commissions to be paid in the event of a syndicated community offering phase.

     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		45
BUSINESS		82
THE CONVERSION AND OFFERING		109
FEDERAL INCOME TAX CONSIDERATIONS		128
MANAGEMENT		133
RESTRICTIONS ON ACQUISITION OF PENN MILLERS HOLDING CORPORATION		158
DESCRIPTION OF THE CAPITAL STOCK		162
TRANSFER AGENT AND REGISTRAR		163
LEGAL MATTERS		163
EXPERTS		163
ADDITIONAL INFORMATION		163
INDEX TO FINANCIAL STATEMENTS		F-1
EX-8.1
EX-10.18
EX-10.19
EX-23.1
EX-23.2
EX-99.1
EX-99.3
EX-99.4
EX-99.5
EX-99.7
EX-99.8

(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 6,772,221 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 either (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., (A.M. Best) which is the fourth highest out of fifteen possible ratings. The latest rating evaluation by A.M. Best occurred on June 23, 2009.

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, Inc. (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. Upon the completion of the merger, 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 the potential of 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. Currently, the PennEdge product is approved in seven states.

• 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.

Risks Related to Our Business

     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 of such products, 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 — Risks Related to Our Business.”

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. Like shareholders, 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. However, unlike shares held by shareholders, the memberships in Penn Millers Mutual are not transferable and do not exist separate from the related insurance policy with Penn Millers Insurance Company. Therefore, these membership rights are extinguished when a policyholder cancels its policy with Penn Millers Insurance Company.

     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. A majority of the members of Penn Millers Mutual as of July 10, 2009 must approve the plan of conversion at a special meeting of the members to be held on October 15, 2009.

     As part of the conversion, we are offering between 4,505,000 shares and 6,772,221 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 phase, 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 9.99% 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 phase, 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. We refer to this phase of the offering as the “syndicated community offering.” 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 6,772,221 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, 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 $65.2 million, after the payment of $2.57 million in estimated conversion and 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	$	4,504,990	$	6,772,210
Commissions	$	675,750	$	1,015,833
General corporate purposes	$	37,299,260	$	57,364,167
Total	$	42,480,000	$	65,152,210

     After paying our conversion and 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 9.99% 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 “Christiana Bank & Trust Company, 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. 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 9.99% 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 9.99% 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 will return all funds received in the offerings promptly to purchasers, without interest. In that event, 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 submit new subscriptions or 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 6,772,221 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 9.99% 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		9.99	%		609,499	$	6,094,990
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, 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 July 10, 2009 must approve the plan of conversion; and we must sell at least the minimum number of shares offered.

      No funds will be released from the escrow account until all of the phases of the offering have been completed and all of these conditions have been satisfied. If all of these conditions are not satisfied by        , 2009, the offering will be terminated and all funds will be returned promptly without interest.

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 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 15 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 23, 2009. 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 first quarter of 2009. 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. As of December 31, 2008, approximately 26% of our direct premiums written originated 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;

• 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 limits 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 requirements for minimum capital and surplus, and for risk-based capital.

• classifying assets as admissible for purposes of determining solvency and compliance with minimum capital and surplus requirements;

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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 9.99% 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 $4,504,990 at the minimum of the offering range and $6,772,210 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 voting 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 without prior approval of the board of directors;

• 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, to be elected as a director, 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, and therefore eligible members may be deemed to have taxable income as a result of their receipt of the subscription rights.

      Generally, the federal income tax consequences of the receipt, exercise and expiration of subscription rights are uncertain. 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 of such deemed exchange must be recognized and included in such eligible member’s gross income for federal income tax purposes, 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. Nevertheless, Curtis Financial cannot assure us that the Internal Revenue Service will not challenge its determination that the subscription rights will not have any fair market value or that such challenge, if made, would not be successful.

     You should consult your tax advisors with respect to the potential tax consequences to you of the receipt, exercise and expiration of subscription rights.

     The United States federal income tax consequences of the receipt, exercise or expiration of the subscription rights granted to eligible members of Penn Millers Mutual, our ESOP, and the directors, officers and employees of Penn Millers are uncertain.

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

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

     Following the conversion, 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 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 shareholders’ 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.

Because Stevens & Lee is acting as legal counsel to us and to its affiliate, Griffin Financial, in this transaction, a conflict of interest exists which may adversely affect us.

Stevens & Lee, together with independent counsel retained by our independent directors, is acting as counsel in connection with this transaction. Griffin Financial, an indirect, wholly owned subsidiary of Stevens & Lee, is acting as our underwriter in connection with this transaction. Accordingly, conflicts of interest may arise because Stevens & Lee is simultaneously acting as counsel to us and to Griffin Financial. This could cause Stevens & Lee to provide advice in the best interests of Griffin Financial rather than providing advice that is in our best interests.

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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 at March 31, 2009 and 2008 and the statement of operations data for the three months ended March 31, 2009 and 2008 are derived from our unaudited financial statements beginning on page F-2. 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-24.

     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.

     These historical results are not necessarily indicative of future results, and the results for any interim period are not necessarily indicative of the results that may be expected for a full year.

	At or for the three months ended						At or for the years ended
	March 31,						December 31,
	2009			2008			2008			2007			2006		2005(4)			2004
	(unaudited)						(Dollars in thousands)
Statement of Operations Data:
Direct premiums written	$	22,754		$	22,510		$	94,985		$	94,073		$	84,544	$	84,084		$	89,041
Net premiums written	$	18,082		$	19,252		$	77,367		$	74,119		$	67,525	$	62,057		$	67,036
Net premiums earned	$	18,457		$	19,867		$	78,737		$	70,970		$	64,645	$	64,723		$	63,090
Net investment income		1,359			1,396			5,335			5,324			4,677		4,444			4,278
Net realized investment gains (losses)		29			1,837			(5,819	)		(702	)		349		424			936
Other revenue		20			149			411			508			345		277			301
Total revenue	$	19,865		$	23,249		$	78,664		$	76,100		$	70,016	$	69,868		$	68,605
Expenses
Loss and loss adjustment expense	$	11,970		$	13,017		$	57,390		$	49,783		$	43,766	$	40,242		$	42,910
Amortization of deferred acquisition costs		5,506			5,574			23,081			21,930			20,080		21,556			20,464
Underwriting and administrative expense		1,126			1,206			3,481			2,233			3,216		7,662			3,895
Interest expense		76			47			184			125			222		195			84
Other operating expenses		47			36			365			184			314		266			82
Total losses and expenses	$	18,725		$	19,880		$	84,501		$	74,255		$	67,598	$	69,921		$	67,435
Income (loss) from continuing operations, before income taxes	$	1,140		$	3,369		$	(5,837	)	$	1,845		$	2,418	$	(53	)	$	1,170
Income tax expense (benefit)		289			985			(1,378	)		396			506		(295	)		(21	)
Income (loss) from continuing operations	$	851		$	2,384		$	(4,459	)	$	1,449		$	1,912	$	242		$	1,191
Income (loss) on discontinued operations		(820	)		(4	)		(2,920	)		(363	)		168		47			199
Net income (loss)	$	31		$	2,380		$	(7,379	)	$	1,086		$	2,080	$	289		$	1,390
Balance Sheet Data (at period end):
Total investments, cash and cash equivalents	$	143,993		$	135,562		$	133,873		$	136,312		$	126,655	$	116,898		$	117,002
Total assets		228,415			221,455			220,524			219,613			207,768		197,897			192,020
Unpaid loss and loss adjustment expenses		116,775			100,481			108,065			95,956			89,405		83,849			73,287
Unearned premiums		44,811			45,680			45,322			46,595			43,294		39,984			42,798
Total liabilities		177,254			159,283			169,769			158,212			147,238		140,128			132,114
Equity		51,161			62,172			50,755			61,401			60,530		57,769			59,906

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	At or for the three months ended						At or for the years ended
	March 31,						December 31,
	2009			2008			2008			2007			2006			2005(4)			2004
	(unaudited)						(Dollars in thousands)
U.S. GAAP Ratios:
Loss and loss adjustment expense ratio (1)		64.9	%		65.5	%		72.9	%		70.1	%		67.7	%		62.2	%		68.0	%
Underwriting expense ratio (2)		35.8	%		33.3	%		32.8	%		33.3	%		35.1	%		39.2	%		38.0	%
Combined ratio (3)		100.7	%		98.8	%		105.7	%		103.4	%		102.8	%		101.4	%		106.0	%
Return on average equity, continuing operations		1.7	%		3.9	%		(8.0	%)		2.4	%		3.2	%		0.4	%		2.0	%
Return on average equity		0.1	%		3.9	%		(13.2	%)		1.8	%		3.5	%		0.5	%		2.3	%
Statutory Data:
Statutory net income (loss)	$	1,813		$	2,834		$	(4,718	)	$	878		$	1,374		$	3,171		$	634
Statutory surplus		43,525			49,037			42,569			50,795			50,524			47,216			45,445
Ratio of net premiums written to statutory surplus		41.5	%		39.3	%		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	$	67,722,210
Conversion and offering expenses		2,570,000		2,570,000
Net proceeds before loan to ESOP	$	42,480,000	$	65,152,210
Use of Net Proceeds
Loan to ESOP	$	4,504,990	$	6,772,210
Commissions	$	675,750	$	1,015,833
General corporate purposes		37,299,260		57,364,167
Total	$	42,480,000	$	65,152,210

     After the payment of our conversion and 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 9.99% 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 March 31, 2009, the Company had $1.7 million 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 conversion and 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 our 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 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 March 31, 2009, 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-2 of this prospectus. The total number of shares to be issued in the offering will range from 4,505,000 shares to 6,772,221 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 March 31, 2009
(In thousands, except share and per share data)

	Penn Millers
	Historical
	Consolidated												Adjusted
	Capitalization			Minimum			Midpoint			Maximum			Maximum
Long term debt and lines of credit	$	3,037		$	1,354		$	1,354		$	1,354		$	1,354
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		51,945			51,945			51,945			51,945			51,945
Accumulated other comprehensive income (loss), net of tax		(784	)		(784	)		(784	)		(784	)		(784	)
Less: common stock to be acquired by ESOP(2)		—			(4,505	)		(5,300	)		(6,095	)		(6,772	)
Total shareholders’ equity	$	51,161		$	88,460		$	95,496		$	102,532		$	108,525

(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 9.99% 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 March 31, 2009, gives effect to the completion of the offering, including implementation of the ESOP, as if it had occurred as of March 31, 2009. 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 statements of operations for the three months ended March 31, 2009 and 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, 2009 and January 1, 2008, respectively.

     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 offering and community offering phases, the remaining shares may be sold in the syndicated community offering phase.

     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 March 31, 2009
(In thousands)

	Penn Millers						Penn Millers
	Historical			Pro Forma			Pro Forma
	Consolidated			Adjustments			Consolidated
Assets
Cash and invested assets	$	143,993		$	35,616	(1)	$	179,609
Premiums and fees receivable		28,753			—			28,753
Reinsurance receivables and recoverables		25,064			—			25,064
Deferred policy acquisition costs		10,522			—			10,522
Prepaid reinsurance premiums		4,170			—			4,170
Accrued investment income		1,391			—			1,391
Property and equipment, net of accumulated depreciation		4,071			—			4,071
Income taxes receivable		1,294			—			1,294
Deferred income taxes		3,656			—			3,656
Other assets		4,058			—			4,058
Deferred offering costs		1,443			—			1,443
Assets held for sale		—			—			—
Total assets	$	228,415		$	35,616		$	264,031
Liabilities
Losses and loss adjustment expense reserves	$	116,775		$	—		$	116,775
Unearned premiums		44,811			—			44,811
Accounts payable and accrued expenses		12,631			—			12,631
Borrowings under line of credit		1,683			(1,683	)(2)		—
Long-term debt		1,354			—			1,354
Liabilities held for sale		—			—			—
Total liabilities	$	177,254		$	(1,683	)	$	175,571
Shareholders’ equity
Common stock	$	—		$	45	(1)	$	45
Unearned compensation		—			(4,505	)(3)		(4,505	)
Additional paid in capital		—			41,759	(1)		41,759
Retained earnings		51,945			—			51,945
Accumulated other comprehensive loss, net of deferred taxes		(784	)		—			(784	)
Total shareholders’ equity	$	51,161		$	37,299		$	88,460
Total liabilities and shareholders’ equity	$	228,415		$	35,616		$	264,031

(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)	We intend to repay in full the outstanding principal balance under our lines of credit with proceeds from the offering.
(3)	Reflects the $4,504,990 loan from us to our ESOP, the proceeds of which will be used to purchase 9.99% 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 $5,299,990, $6,094,990, and $6,772,210 if 5,300,000, 6,095,000, and 6,772,221 shares, respectively, are sold in the offering. The ESOP loan will bear interest at an annual rate equal to the current long-term Applicable Federal Rate with semi-annual compounding in effect 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, except share data)
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			6,772,221

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 share and per share data)

	Penn Millers						Penn Millers
	Historical			Pro Forma			Pro Forma
	Consolidated			Adjustments			Consolidated
Revenue:
Premiums earned	$	78,737		$	—		$	78,737
Investment income, net of investment expense		5,335			—	(1)		5,335
Realized investment losses, net		(5,819	)		—			(5,819	)
Other income		411			—			411
Total revenues		78,664			—			78,664
Expenses:
Losses and loss adjustment expenses	$	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 expense, net		365			451	(2)		816
Total losses and expenses		84,501			451			84,952
Loss from continuing operations before income taxes	$	(5,837	)	$	(451	)	$	(6,288	)
Income tax (benefit) expense		(1,378	)		(153	)(3)		(1,531	)
Loss from continuing operations	$	(4,459	)	$	(298	)	$	(4,757	)
Earnings per share data:
Basic and diluted loss per common share from continuing operations	$	—					$	(1.17	)
Weighted average basic and diluted common shares outstanding		—						4,077,025

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Unaudited Pro Forma Condensed Statement of Operations
Three Months Ended March 31, 2009
(in thousands, except share and per share data)

	Penn Millers					Penn Millers
	Historical		Pro Forma			Pro Forma
	Consolidated		Adjustments			Consolidated
Revenue:
Premiums earned	$	18,457	$	—		$	18,457
Investment income, net of investment expense		1,359		—	(1)		1,359
Realized investment gains, net		29		—			29
Other income		20		—			20
Total revenues		19,865		—			19,865
Losses and expenses:
Losses and loss adjustment expenses	$	11,970	$	—		$	11,970
Amortization of deferred policy acquisition costs		5,506		—			5,506
Underwriting and administrative expenses		1,126		—			1,126
Interest expense		76		—			76
Other expense, net		47		113	(2)		160
Total losses and expenses		18,725		113			18,838
Income from continuing operations before income taxes	$	1,140	$	(113	)	$	1,027
Income tax expense (benefit)		289		(38	)(3)		251
Income from continuing operations	$	851	$	(75	)	$	776
Earnings per share data:
Basic and diluted loss per common share from continuing operations	$	—				$	0.19
Weighted average basic and diluted common shares outstanding		—					4,060,132

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Notes to Unaudited Pro Forma Condensed Statements of Operations

(1)	We anticipate that we would earn approximately $1.3 million of investment income assuming the net proceeds were available for investment and received as of January 1, 2009 and January 1, 2008, respectively, and that they were invested with an average annual pre-tax rate of return of 3.47%.
(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 $4,504,990 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 of principal and interest.
(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 9.99% 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 three months ended March 31, 2009 and for the year ended December 31, 2008, respectively; (ii) (A) that 11,262, 13,250, 15,237, and 16,931 shares at the minimum, the midpoint, the maximum and adjusted maximum of the offering range, respectively, were committed to be released at the end of the three months ended March 31, 2009, at an average fair value of $10.00 per share, in accordance with SOP 93-6, (B) 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 (C) 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, and equal to 444,868, 523,374, 601,880, and 668,756 during the three months ended March 31, 2009, were subtracted from total shares outstanding of 4,505,000, 5,300,000, 6,095,000, and 6,772,221 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 9.99% of the shares of common stock sold in the offering with a loan from us;

• Expenses of the conversion and 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 March 31, 2009, 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 March 31, 2009, 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 Three Months Ended March 31, 2009
	(In thousands, except for share and per share data)
										6,772,221 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		51,161			51,161			51,161			51,161
Pro forma proceeds after ESOP shares		37,299			44,335			51,371			57,364
Pro forma shareholders’ equity (2)	$	88,460		$	95,496		$	102,532		$	108,525
Pro forma per share data
Total shares outstanding after the offering		4,505,000			5,300,000			6,095,000			6,772,221
Pro forma book value per share	$	19.64		$	18.02		$	16.82		$	16.02
Pro forma price-to-book value		50.92	%		55.49	%		59.45	%		62.42	%
Pro forma net income:
Historical income from continuing operations	$	851		$	851		$	851		$	851
Loss on discontinued operations		(820	)		(820	)		(820	)		(820	)
ESOP expense		(75	)		(87	)		(101	)		(112	)
Pro forma income	$	(44	)	$	(56	)	$	(70	)	$	(81	)
Weighted average shares outstanding (3)		4,060,132			4,776,626			5,493,120			6,103,465
Pro forma loss per share	$	(.01	)	$	(.01	)	$	(.01	)	$	(.01	)

(1)

It is assumed that 9.99% 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 three months ended March 31, 2009; 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 677,221 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)

It is assumed that 9.99% 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 three months ended March 31, 2009; (ii) that 11,262, 13,250, 15,237, and 16,931 shares at the minimum, midpoint, maximum and adjusted maximum of the offering range, respectively, were committed to be released at the end of the three months ended March 31, 2009, 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 444,868, 523,374, 601,880, and 668,756 and at the minimum, midpoint, maximum and adjusted maximum of the offering range during the three months ended March 31, 2009, were subtracted from total shares outstanding of 4,505,000, 5,300,000, 6,095,000, and 6,772,221 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 substantially all of the net assets of Eastern Insurance Group, which was a wholly owned subsidiary insurance agency of PMHC. In July 2008, we completed the sale of substantially all of the net 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 property (fire and allied lines and inland marine), liability (general, products and umbrella), commercial automobile, and workers’ compensation 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 23, 2009.

     For the three months ended March 31, 2009, we had direct premiums written of $22.8 million, net premiums earned of $18.5 million and net income from continuing operations of $0.9 million. At March 31, 2009, we had total assets of $228.4 million and equity of $51.2 million.

     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 proportion 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		As of
	March 31,		December 31,		December 31,
	2009		2008		2007
Case reserves	$	61,516	$	57,976	$	48,957
IBNR reserves		26,346		27,464		28,272
Net unpaid loss and LAE		87,862		85,440		77,229
Reinsurance recoverables on unpaid loss and LAE		28,913		22,625		18,727
Reserves for unpaid loss and LAE	$	116,775	$	108,065	$	95,956

     At March 31, 2009, 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
$82,385	$87,862	$92,519

     Our actuaries determined a range of reasonable reserve estimates which reflect the uncertainty inherent in the loss reserve process. This range does not represent the range of all possible outcomes. We believe that the actuarially-determined ranges represent reasonably likely changes in the loss and LAE estimates, however actual results could differ significantly from these estimates. The range was determined by line of business and accident year after a review of the output generated by the various actuarial methods utilized. The actuaries reviewed the variance around the select loss reserve estimates for each of the actuarial methods and selected reasonable low and high estimates based on their knowledge and judgement. The method of determining the reserve range has not changed. The reserve range generated by our actuaries is consistent with the observed development of our loss reserves over the last few years.

     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 aggregate stop loss reinsurance contract that provides reinsurance coverage for the 2009 and 2008 accident years 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 three months ended March 31, 2009 and 2008, we experienced favorable development of $1.5 million and $1.5 million, respectively. 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 March 31, 2009, 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 March 31, 2009 and December 31, 2008, we had ceded reinsurance loss recoverable under this stop loss contract of $5.3 million and $4.3 million, respectively, 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 $11.1 million of adverse development up to a 92% loss ratio. As of March 31, 2009, the actual 2009 accident year loss ratio for business subject to the aggregate stop loss treaty is approximately 62%.

     The following table provides case and IBNR reserves for losses and loss adjustment expenses by major lines of business as of March 31, 2009 and 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 March 31, 2009

							Actuarially Determined Range of Estimates
					Total
($ in thousands)	Case Reserves		IBNR Reserves		Reserves		Low		High
Commercial auto liability	$	8,374	$	3,508	$	11,882	$	11,219	$	12,350
Workers’ compensation		11,296		4,681		15,977		15,356		16,796
Commercial multi-peril		16,398		6,170		22,568		22,029		23,529
Liability		11,057		7,373		18,430		16,483		18,963
Fire & allied		8,006		102		8,108		8,025		8,208
Assumed		4,571		4,199		8,770		7,513		9,893
Other		1,814		313		2,127		1,760		2,780
Total net reserves		61,516		26,346		87,862	$	82,385	$	92,519
Reinsurance recoverables		13,308		15,605		28,913
Gross reserves	$	74,824	$	41,951	$	116,775

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 - -4% to +8%, with the ranges around each of our core lines of business (excluding Assumed and Other lines) ranging from the widest being -6% to +8% (Liability) to the narrowest being -1% to +1% (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

Dollars in thousands	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 March 31, 2009 (dollars in thousands):

Reserve Range for Unpaid	Aggregate Loss and		Percentage Change (1)
Loss and LAE	LAE Reserve		in Equity
Low End	$	82,385		7.1	%
Recorded	$	87,862		—
High End	$	92,519		(6.0	%)

(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 March 31, 2009 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 March 31, 2009 would be reduced by $5.5 million with corresponding increases in net income and equity of $3.6 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 March 31, 2009, the commercial multi-peril line of business had recorded reserves, net of reinsurance, of $22.6 million, which represented 25.7% 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 March 31, 2009, our liability line of business had recorded reserves, net of reinsurance of $18.4 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 $0.9 million, or 4.9%, 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 March 31, 2009, our workers’ compensation line of business recorded reserves, net of reinsurance,

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of $16.0 million, or 18.2% of our total net reserves. This reserve is $0.5 million, or 2.9%, 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 March 31, 2009, our commercial automobile liability line of business had recorded reserves, net of reinsurance, of $11.9 million, which represented 13.5% 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 March 31, 2009, our fire and allied lines of business had recorded reserves, net of reinsurance, of $8.1 million, which represented 9.2% 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 March 31, 2009, our assumed lines of business had recorded reserves, net of reinsurance, of $8.8 million, which represented 10% of our total net reserves. This reserve is $0.3 million, or 3.5%, 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 March 31, 2009, December 31, 2008 and December 31, 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
March 31, 2009 :
Agencies not backed by the full faith and credit of the U.S. government	$	566	$	5	$	—	$	—	$	566	$	5
State and political subdivisions		1,081		4		2,130		55		3,211		59
Mortgage-backed securities		1,742		239		2,108		408		3,850		647
Corporate securities		13,795		1,453		7,164		872		20,959		2,325
Total fixed maturities		17,184		1,701		11,402		1,335		28,586		3,036
Total temporarily impaired securities	$	17,184	$	1,701	$	11,402	$	1,335	$	28,586	$	3,036

	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

	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

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     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 three months ended March 31, 2009, our fixed maturity portfolio had net unrealized gains of $510,000 due to increases in fair values. Unrealized gains in asset-backed and mortgage-backed securities and tax exempt bonds were partially offset by unrealized losses in U.S. Treasury and government agencies securities.

     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 was 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 three months ended March 31, 2009, we made a determination that none of our securities were other-than-temporarily impaired as of the measurement date. 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 March 31, 2009 and as of December 31, 2008, all of our fixed maturity investments were priced using this one primary service. This pricing service provides us with one quote per instrument. 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 March 31, 2009 and 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 three months ended March 31, 2009 and the years ended December 31, 2008 and 2007, and no adjustments were made to the estimates provided by the pricing service for the three months ended March 31, 2009 and 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. 141R, Business Combinations. The residual fair value after this allocation is the implied fair value of the reporting unit goodwill. For impairment tests performed for periods ended prior to December 15, 2008, the implied fair value of goodwill was calculated under the guidance outlined in SFAS No. 141, Business Combinations.

      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 non-binding offers obtained in the selling process at prices less than the carrying amount, 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, beginning on page F-24. 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 $248,000. 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 $16,000.

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     As of December 31, 2008, intangible assets with a carrying amount of $464,000 were 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 were classified as held for sale, we measured 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 exceeded the carrying amount by $135,000. As such, the intangible assets were carried at $464,000, at December 31, 2008.

     As of March 31, 2009 we have no goodwill or intangible assets.

     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 March 31, 2009, and December 31, 2008, 2007 and 2006, deferred acquisition costs and the related unearned premium reserves were as follows (in thousands):

	March 31,		December 31,
	2009		2008		2007		2006
Agribusiness segment
Deferred acquisition costs	$	6,332	$	5,981	$	6,429	$	6,252
Unearned premium reserves	$	28,272	$	27,352	$	27,552	$	26,686
Commercial business segment
Deferred acquisition costs	$	4,187	$	4,616	$	4,579	$	4,120
Unearned premium reserves	$	16,527	$	17,957	$	19,021	$	16,573
Other
Deferred acquisition costs	$	3	$	4	$	6	$	9
Unearned premium reserves	$	12	$	13	$	22	$	35
Total
Deferred acquisition costs	$	10,522	$	10,601	$	11,014	$	10,381
Unearned premium reserves	$	44,811	$	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 $9.6 million at March 31, 2009 and $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. At March 31, 2009 and at December 31, 2008, we are carrying a valuation allowance associated with these items of $1.1 million and $1.0 million, respectively.

     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, and March 31, 2009, we had no material unrecognized tax benefits or accrued interest and penalties. Federal tax years 2005 through 2008 were open for examination as of March 31, 2009.

     We have reviewed the potential of a tax position regarding a worthless stock deduction for our investment in Eastern Insurance Group. We have determined that the more-likely-than-not (i.e., a greater than fifty percent likelihood that the deduction will be sustained upon examination) recognition threshold would not be met. If we were to conclude to take this tax deduction on our 2009 federal income tax return, the benefit would need to be recorded as an uncertain tax position, with no current benefit recognized. The maximum impact of a tax deduction is approximately $0.9 million, with a reasonable possibility that the tax return position will not be taken.

     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. We believe that a one half of one percent change in the discount rate and/or the return on plan assets has a reasonable likelihood of occurrence. However, actual results could differ significantly from this estimate.

     Further information on our pension and other employee benefit obligations is included in note 9 of the Notes to our Consolidated Financial Statements, beginning on page F-24.

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):

	Three Months Ended March 31,						Years Ended December 31,
	2009			2008			2008			2007			2006
Revenues:
Premiums earned:
Agribusiness	$	10,968		$	11,387		$	45,298		$	40,245		$	35,889
Commercial Business		7,185			8,167			31,805			29,260			26,761
Other		304			313			1,634			1,465			1,995
Total premiums earned		18,457			19,867			78,737			70,970			64,645
Investment income, net of investment expense		1,359			1,396			5,335			5,324			4,677
Realized investment gains (losses), net		29			1,837			(5,819	)		(702	)		349
Other income		20			149			411			508			345
Total revenues	$	19,865		$	23,249		$	78,664		$	76,100		$	70,016
Components of net income (loss):
Underwriting (loss) income:
Agribusiness	$	(512	)	$	601		$	313		$	441		$	2
Commercial Business		250			(247	)		(5,046	)		(1,913	)		(678	)
Other		150			(116	)		288			(998	)		(1,106	)
Total underwriting (losses) income		(112	)		238			(4,445	)		(2,470	)		(1,782	)
Investment income, net of investment expense		1,359			1,396			5,335			5,324			4,677
Realized investment gains (losses), net		29			1,837			(5,819	)		(702	)		349
Other income		20			149			411			508			345
Corporate expense		(33	)		(168	)		(770	)		(506	)		(635	)
Interest expense		(76	)		(47	)		(184	)		(125	)		(222	)
Other expense, net		(47	)		(36	)		(365	)		(184	)		(314	)
Income (loss) from continuing operations, before income taxes		1,140			3,369			(5,837	)		1,845			2,418
Income tax expense (benefit)		289			985			(1,378	)		396			506
Income (loss) from continuing operations		851			2,384			(4,459	)		1,449			1,912
Discontinued Operations:
(Loss) income from discontinued operations, before income taxes		(16	)		(2	)		(3,090	)		(489	)		292
Income tax expense (benefit)		804			2			(170	)		(126	)		124
(Loss) income on discontinued operations		(820	)		(4	)		(2,920	)		(363	)		168
Net income (loss)	$	31		$	2,380		$	(7,379	)	$	1,086		$	2,080

     Premiums Written and Premiums Earned

     For the three months ended March 31, 2009, premiums earned decreased $1.4 million or 7.1% compared to the three months ended March 31, 2008. The change in net premiums earned is due primarily to an increase in 2009 ceded premiums written of approximately $1.4 million. This increase in ceded premiums is due principally to increased rates on our excess of loss reinsurance program and a change in our reinsurance program for 2009 in which we lowered our participation on our per-risk reinsurance treaty. Losses between $500,000 and $1.0 million are retained at 52.5% in 2009 versus a 75% retention rate in 2008. Losses between $1.0 million and $5.0 million are retained at 0% in 2009 versus 25% in 2008. In addition, our ceded premium under our aggregate stop loss reinsurance contract agreement has increased by approximately $0.2 million due to additional premiums owed for 2008 accident year loss development.

     The effect of reinsurance, with respect to premiums, for the three month periods ended March 31, 2009 and 2008 is as follows (in thousands):

	For the three months ended March 31,
	2009						2008
	Written			Earned			Written			Earned
Direct	$	22,754		$	23,302		$	22,510		$	23,423
Assumed		222			222			246			248
Ceded		(4,894	)		(5,067	)		(3,504	)		(3,804	)
Net	$	18,082		$	18,457		$	19,252		$	19,867

     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 (dollars in thousands):

							Year Ended
	Three Months Ended March 31,						December 31,
	2009			2008			2008			2007			2006
Average cash and invested assets	$	138,993		$	135,937		$	135,093		$	131,484		$	121,777
Net investment income		1,359			1,396			5,335			5,324			4,677
Return on average cash and invested assets		1.0	%		1.0	%		3.9	%		4.0	%		3.8	%

      Net investment income decreased $37,000 for the three months ended March 31, 2009 as compared to the three months ended March 31, 2008. Declines in interest rates were partly offset by increases in cash and invested assets.

      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 Gains (Losses)

     We had realized investment gains of $29,000 for the three months ended March 31, 2009 from sales of fixed maturity investments. For the three months ended March 31, 2008, we had realized investment gains of $1.8 million primarily due to sales of equity investments as we transitioned from an actively managed portfolio to indexed mutual funds.

      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.

     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.

     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. At March 31, 2009 and December 31, 2008, we had gross unrealized losses on fixed maturity securities of $3.0 million and $2.9 million, respectively. Most of these unrealized losses were in 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 aforementioned 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 maturity investments during the periods reported.

     Other Income

     Other income in all periods presented primarily consists of premium installment charges and fluctuations in returns of company owned life insurance (COLI) policies. The decline in other income for the three months ended March 31, 2009 as compared to the three months ended March 31, 2008 is primarily due to lower returns on the COLI policies. The decline in other income for the year 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 expense (LAE) ratio decreased to 64.9% for the three months ended March 31, 2009, compared to 65.5% for the three months ended March 31, 2008. Loss and LAE were $1.0 million lower in 2009 primarily due to a lower level of new claim activity across most lines of business. This lower level of claim activity included lower catastrophe losses of $0.3 million in the first three months of 2009 compared to the first three months of 2008. The favorable impact on the loss and LAE ratio from lower loss and LAE was offset by decreased earned premiums for the same period of $1.4 million, due mostly to the change in our 2009 reinsurance coverage.

     Our 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 net favorable development for the year 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 net favorable development for the year 2007 is primarily attributable to favorable loss development in the workers’ compensation (approximately $2.8 million), commercial auto liability (approximately $2.5 million), and fire and allied (approximately $1.0 million) lines of business. 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. Our strategy has been to grow our net premium volume while controlling overhead costs. For the three months ended March 31, 2009 as compared to the same period of 2008, total underwriting and administrative expenses, including amortization of deferred policy acquisition costs declined from $6.8 million in 2008 to $6.6 million in 2009. Amortization of deferred policy acquisition costs experienced a small reduction of $68,000 and underwriting and administrative expenses declined $80,000 due primarily to reductions in profitability-based incentive costs.

     The underwriting expense ratio increased from 33.3% at March 31, 2008 to 35.8% in 2009 due primarily to the decrease in net premiums earned as we ceded a greater portion of our losses to reinsurers in 2009 as compared to 2008.

     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 three months ended March 31, 2009 was $76,000 as compared to $47,000 in 2008. Increased interest expense on our aggregate stop loss reinsurance contract contributed $24,000 to the change.

     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. Other expense increased from $36,000 at March 31, 2008 to $47,000 at March 31, 2009. The increase of $11,000 is due primarily to write-offs of uncollectible premiums and reserve adjustments.

     Income (loss) from continuing operations, before income taxes

     For the three months ended March 31, 2009, we had pre-tax income from continuing operations of $0.9 million compared to pre-tax income of $2.4 million for the three months ended March 31, 2008. This decrease was primarily attributable to realized gains of $1.8 million in 2008 from sales of investments and a $1.4 million decrease in net premiums earned, partially offset by decreased loss and LAE of $1.0 million.

     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 expense (benefit) 

     For the three months ended March 31, 2009, income tax expense for continuing operations was $289,000, or an effective rate of 25.4%, as compared to $985,000 of income tax expense, or an effective rate of 29.2% for the three month period ended March 31, 2008. The decrease in the effective rate is due to tax exempt investment income accounting for a greater portion of 2009 pre-tax book income as compared to 2008.

     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 net assets of Penn Software was finalized in July 2008, and the sale of Eastern Insurance Group was finalized in February 2009. For the three months ended March 31, 2009, the net loss from discontinued operations of $820,000 includes a provision for income taxes of $804,000, the majority of which represents state and federal income tax expense from the sale of the net assets of Eastern Insurance Group whose book basis exceeded their tax basis.

     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 income (loss)

     For the three months ended March 31, 2009, we had net income of $31,000 compared to net income of $2.4 million for the three months ended March 31, 2008. The decrease of $2.4 million is primarily due to a decline in realized investment gains of $1.8 million; a $1.4 million decrease in net premiums earned; and a net loss on discontinued operations of $820,000. These declines were partially offset by lower loss and LAE of $1.0 million.

     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:

	Three Months Ended March 31,						Years Ended December 31,
Dollar amounts in thousands	2009			2008			2008			2007			2006
Direct premiums written	$	15,299		$	13,275		$	57,281		$	55,965		$	51,874
Net premiums written		11,934			10,959			45,110			41,402			38,350
Revenues:
Net premiums earned	$	10,968		$	11,387		$	45,298		$	40,245		$	35,889
Other income		(27	)		55			182			245			115
Total revenues(1)	$	10,941		$	11,442		$	45,480			40,490			36,004
Operating income (loss):
Underwriting (loss) income	$	(512	)	$	601		$	313		$	441		$	2
Other income		(27	)		55			182			245			115
Interest & other expenses		(43	)		(28	)		(202	)		(77	)		(150	)
Total operating income (loss)	$	(582	)	$	628		$	293		$	609		$	(33	)
Loss and loss expense ratio		73.0	%		64.1	%		68.7	%		67.9	%		66.3	%
Underwriting expense ratio		31.6	%		30.6	%		30.6	%		31.0	%		33.7	%
GAAP combined ratio		104.6	%		94.7	%		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 during 2007 and 2008. Direct premiums written increased from $13.3 million at March 31, 2008 to $15.3 million for the three months ended March 31, 2009. This $2.0 million increase is due primarily to improved premium retention and the impact of recent price increases on certain lines of business. 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, 2009, we modified our reinsurance program and retained less of our losses as compared to 2008, which resulted in an increase in ceded premiums written of $1.0 million or 45.3%. This increase in ceded premiums written partially offset the $2.0 million growth in direct premiums written. Net premiums earned declined from $11.4 million at March 31, 2008 to $11.0 million at March 31, 2009. This decrease in net premiums earned is due to increased reinsurance costs and the timing of the growth in direct premiums written.

     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 compared to 2007. 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 fluctuations in returns on COLI policies. The decline of $82,000 in other income for the three months ended March 31, 2009 as compared to the same period of 2008 is due primarily to lower returns on COLI policies in effect. 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 income (loss)

     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 (LAE) increased $0.7 million from $7.3 million at March 31, 2008 to $8.0 million at March 31, 2009. For the three months ended March 31, 2009, our agribusiness segment experienced unfavorable prior years’ loss and LAE development of $0.1 million, versus the three months ended March 31, 2008, in which this segment experienced favorable prior years’ development of approximately $1.1 million. Lower catastrophe losses of $0.3 million as compared to 2008 partially offset the variance in the loss development. The decrease in net premiums earned of $0.4 million together with the increase in loss and LAE resulted in the loss and loss adjustment expense ratio increasing from 64.1% at March 31, 2008 to 73.0% at March 31, 2009.

     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 were $3.5 million for the three month periods ending March 31, 2009 and 2008, respectively. Relatively flat underwriting expenses combined with the decline in net premiums earned resulted in our underwriting expense ratio increasing from 30.6% at March 31, 2008 to 31.6% at March 31, 2009. This increase in the underwriting expense ratio, together with the increase in the loss and LAE ratio, had the effect of our combined ratio increasing from 94.7% at March 31, 2008 to 104.6% at March 31, 2009.

     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 the three months ended March 31, 2009 was $43,000 as compared to $28,000 for the three months ended March 31, 2008. The increase is due primarily to interest expense on our aggregate stop loss reinsurance contract.

     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:

	Three Months ended						Years Ended
	March 31,						December 31,
Dollar amounts in thousands	2009			2008			2008			2007			2006
Direct premiums written	$	7,373		$	9,170		$	37,458		$	37,860		$	32,365
Net premiums written		5,844			7,982			30,632			31,266			27,144
Revenues:
Net premiums earned	$	7,185		$	8,167		$	31,805		$	29,260		$	26,761
Other income		48			94			229			263			230
Total revenues (1)	$	7,233		$	8,261		$	32,034		$	29,523		$	26,991
Operating income (loss):
Underwriting income (loss)	$	250		$	(247	)	$	(5,046	)	$	(1,913	)	$	(678	)
Other income		48			94			229			263			230
Interest & other expenses		(52	)		(32	)		(247	)		(113	)		(257	)
Operating income (loss)	$	246		$	(185	)	$	(5,064	)	$	(1,763	)	$	(705	)
Loss and loss expense ratio		54.8	%		66.0	%		80.1	%		70.3	%		65.5	%
Underwriting expense ratio		41.7	%		37.0	%		35.8	%		36.2	%		37.0	%
GAAP Combined ratio		96.5	%		103.0	%		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 during this period. Our direct premiums written decreased from $9.2 million for the three months ended March 31, 2008 to $7.4 million for the three months ended March 31, 2009. This decline of $1.8 million is primarily attributable to our strategic decisions to withdraw from certain unprofitable classes of business and terminate relationships with several underperforming producers.

     Effective January 1, 2009, we modified our reinsurance program by retaining less of our losses as compared to 2008, which resulted in an increase in ceded premiums written of $0.3 million, a 28.7% increase from the same period in 2008. This increase in ceded premiums written, combined with the decline in direct premiums written, contributed to the approximately $1.0 million net decrease in net premiums earned for the three months ended March 31, 2009 as compared to the same period of 2008.

     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 as compared to 2007 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 of 2007. 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 fluctuations in returns on COLI policies. The decline in other income for the three months ended March 31, 2009 as compared to the same period of 2008 of $46,000 is due primarily to a lower rate of return on COLI policies in effect. 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 Income (loss) 

     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 were $3.9 million for the three months ended March 31, 2009 as compared to $5.4 million at March 31, 2008. The decline of $1.5 million, or 27.0%, is primarily due to a higher level of favorable prior year development. For the three months ended March 31, 2009, our commercial segment experienced $1.4 million of favorable development from settlements on prior year claims, compared to $0.4 million of favorable development for the three months ended March 31, 2008. This segment has also experienced a lower level of new claim activity across most lines of business, particularly the property and workers’ compensation lines. This decrease in loss and loss adjustment expenses relative to the smaller decrease in net premiums earned was responsible for the loss and loss adjustment expense ratio declining from 66.0% at March 31, 2008 to 54.8% at March 31, 2009.

     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 were $3.0 million for each of the three month periods ending March 31, 2009 and 2008. Relatively flat underwriting expenses combined with the decline in net premiums earned resulted in the underwriting expense ratio increasing from 37.0% for the first quarter of 2008 to 41.7% for the same period in 2009. This increase in the underwriting expense ratio was less than the decrease in the loss and loss adjustment expense ratio and, as a result of this net favorable effect, our combined ratio decreased from 103.0% at March 31, 2008 to 96.5% at March 31, 2009.

     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 the three months ended March 31, 2009 was $52,000 as compared to $32,000 for the three months ended March 31, 2008. The increase is due primarily to interest expense on our aggregate stop loss reinsurance contract.

     Interest and other expense for the year 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:

	Three Months Ended March 31,						Years Ended December 31,
Dollar amounts in thousands	2009			2008			2008			2007			2006
Assumed premiums written	$	304		$	311		$	1,625		$	1,451		$	2,031
Net premiums written		304			311			1,625			1,451			2,031
Revenues:
Net premiums earned	$	304		$	313		$	1,634		$	1,465		$	1,995
Total revenues	$	304		$	313		$	1,634		$	1,465		$	1,995
Underwriting income (loss)	$	150		$	(116	)	$	288		$	(998	)	$	(1,106	)
Operating income (loss)	$	150		$	(116	)	$	288		$	(998	)	$	(1,106	)
Loss and loss expense ratio		6.6	%		102.6	%		47.3	%		129.7	%		122.3	%
Underwriting expense ratio		44.1	%		34.5	%		35.1	%		38.4	%		33.1	%
GAAP Combined ratio		50.7	%		137.1	%		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. For the three months ended March 31, 2009 net premiums earned were $304,000 as compared to $313,000 for the three months ended March 31, 2008. Our total claims and expenses were $3.1 million in 2006, $2.5 million in 2007, and $1.3 million in 2008. For the three months ended March 31, 2009, claims and expenses were $154,000, compared to $429,000 for the three months ended March 31, 2008. The decrease is primarily due to favorable prior year loss development in 2009 in our mandatory assumed pools.

      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 three months ended March 31, 2009 the other segment produced operating income of $150,000, compared to an operating loss for the three months ended March 31, 2008 of $116,000. 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:

							Years Ended
	Three Months Ended March 31,						December 31,
Amounts in thousands	2009			2008			2008			2007			2006
Mandatory Assumed Reinsurance	$	245		$	(197	)	$	239		$	95		$	(332	)
Personal Lines — runoff		(11	)		126			335			(94	)		(98	)
Voluntary Assumed Reinsurance — runoff		(84	)		(45	)		(286	)		(999	)		(676	)
Operating income (loss)	$	150		$	(116	)	$	288		$	(998	)	$	(1,106	)

Financial Position

     At March 31, 2009 we had total assets of $228.4 million, compared to total assets of $220.5 million at December 31, 2008. The increase is due to increases in ceded loss recoverables and the increased market value of our fixed maturity portfolio.

     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 March 31, 2009, we had total liabilities of $177.3 million, compared to $169.8 million at December 31, 2008. The increase is primarily due to an increase in loss and LAE reserves of $8.7 million.

     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 increased from $50.8 million at December 31, 2008 to $51.2 million at March 31, 2009. The increase is primarily due to net unrealized gains on fixed maturity investments of $340,000.

     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.

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 $88.5 million and $108.5 million, an increase of approximately 72.9% to 112.1% over our equity at March 31, 2009. 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 9.99% 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 March 31, 2009 and 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 (LIBOR) 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 $2.0 million, which allows us to meet our short term cash needs as they may arise. As of March 31, 2009 we had $500,000 outstanding under the $500,000 line of credit and $1,183,000 outstanding under the $2.0 million line of credit. As of December 31, 2008, we had $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 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.

      In order to provide for short term cash availability and operational flexibility, in July 2009 we expect to execute a refinancing of the two lines of credit by entering into a new four year $3.0 million revolving line of credit agreement with a commercial bank. We have received a commitment letter for an agreement that will require monthly payments of accrued interest, with principal due no later than the maturity of the loan agreement, four years from the inception date. The refinancing is expected to occur in July 2009 and the initial interest rate on outstanding borrowings will be LIBOR plus 175 basis points. This rate will be increased annually at each anniversary of the loan agreement by an additional 25 basis points.

     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 March 31, 2009 and 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 three months ended March 2009 and 2008 and years ended December 31, 2008, 2007, and 2006 were as follows (in thousands):

							Year Ended
	Three Months Ended March 31,						December 31,
	2009			2008			2008			2007			2006
Cash flows provided by (used in) operating activities	$	7,113		$	(78	)	$	7,383		$	11,017		$	11,711
Cash flows used in investing activities		(3,202	)		(2,558	)		(5,702	)		(13,373	)		(6,592	)
Cash flows provided by (used in) financing activities		(175	)		(78	)		144			(562	)		(2,087	)
Net increase (decrease) in cash and cash equivalents	$	3,736		$	(2,714	)	$	1,825		$	(2,918	)	$	3,032

      Cash flows from operating activities increased by $7.2 million for the twelve month period ended March 31, 2009. The change is primarily due to lower net amounts paid to settle claims, higher collections of reinsurance recoverables on paid losses and timing of reinsurance premium payments.

     Investing activities used $3.2 million and $2.6 million of net cash for the three months ended March 31, 2009 and 2008, respectively. For the first three months of 2009, net purchases of investments classified as available for sale were $5.9 million, as compared to $2.5 million for the same period in 2008. Net proceeds from our February 2009 sale of the net assets of Eastern Insurance Group provided $2.6 million of net cash. Cash flows used in financing activities for the three months ended March 31, 2009 include $830,000 of amounts paid for fees and expenses associated with our conversion and public offering, partially offset by $733,000 of borrowings on our $2.0 million line of credit.

     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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(i) 10% of the surplus as regards policyholders of Penn Millers Insurance Company as reported on its most recent annual statement filed with the Pennsylvania Insurance Department, or (ii) the statutory net income of Penn Millers Insurance Company for the period covered by such annual statement. Dividends in excess of this amount are considered “extraordinary” and are subject to the approval of the Pennsylvania Insurance Department.

      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 based upon the insurance company’s 2008 annual statement. Prior to its payment of any dividend, Penn Millers Insurance Company is required to provide notice of the dividend to the Pennsylvania Insurance Department. This notice must be provided to the Pennsylvania Insurance Department 30 days prior to the payment of an extraordinary dividend and 10 days prior to the payment of an ordinary dividend. 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 March 31, 2009, was 4.5 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 maturity 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 March 31, 2009:

Hypothetical Change in	Estimated Change
Interest Rates	in Fair Value			Fair Value
	(dollars in thousands)
200 basis point increase	$	(9,278	)	$	119,020
100 basis point increase		(4,412	)		123,886
No change		—			128,298
100 basis point decrease		4,328			132,626
200 basis point decrease		9,198			137,496

     The interest rate risk for our variable rate debt not subject to the interest rate swap is not material at March 31, 2009 and 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 March 31, 2009 and 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 delayed 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). As of January 1, 2009 and March 31, 2009, we had no nonfinancial assets or liabilities that were affected by the guidance outlined in FSP FAS 157-2.

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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 had no impact on our financial condition or results of operations, and we have complied with this standard’s disclosure requirement.

     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 was 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 did not impact 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.

      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, and we do not expect it to have a material impact on our financial condition or results of operations.

      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 after June 15, 2009, with early adoption permitted for periods ending after March 15, 2009. We are currently evaluating the impact of adopting FSP FAS 115-2 and FAS 124-2, and we do not expect it to have a material impact on our financial condition or results of operations.

      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, and we intend to comply with this Statement’s disclosure provisions.

     In May 2009, the FASB issued SFAS No. 165, Subsequent Events. SFAS No. 165 establishes general standards of accounting for and disclosure of events that occur after the balance sheet date but before financial statements are issued or available to be issued. These standards include the evaluation time period, circumstances when an entity should recognize a subsequent event and the necessary disclosures. This SFAS is effective for interim or annual reporting periods ending after June 15, 2009, and we are currently evaluating its impact on our results and disclosures.

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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, our assets are not allocated to segments and are reviewed by management 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, which is the fourth highest out of fifteen ratings. The latest rating evaluation by A.M. Best occurred on June 23, 2009.

     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 do not expect to 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 this 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 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, which is the fifth highest out of fifteen possible ratings. The latest rating evaluation by A.M. Best occurred on June 23, 2009.

     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, is a wholly-owned subsidiary of PMHC. On February 2, 2009, we sold substantially all of the net assets of Eastern Insurance Group. In July 2008, we completed the sale of substantially all of the net assets of Penn Software, a Pennsylvania software development company. We plan to begin the process dissolve both Eastern Insurance Group and Penn Software.

     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. Currently, the PennEdge product is approved in seven states.

     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 the lines of business of our agribusiness product for the periods indicated (dollars in thousands):

							For the Years Ended
	For the Three Months Ended March 31,						December 31,
	2009			2008			2008			2007			2006
Direct Premiums Written:
Property	$	5,582		$	4,286		$	20,831		$	20,263		$	18,961
Commercial Auto		3,409			3,147			12,919			14,055			13,334
Liability		3,202			2,465			9,615			8,635			8,029
Workers’ Compensation		1,792			1,566			8,064			7,394			6,610
Other		1,314			1,811			5,852			5,618			4,940
Total	$	15,299		$	13,275		$	57,281		$	55,965		$	51,874
Net Premiums Earned:
Property	$	3,885		$	4,216		$	16,412		$	13,772		$	12,620
Commercial Auto		2,806			3,187			12,119			11,859			11,189
Liability		2,381			2,184			8,795			7,540			6,768
Workers’ Compensation		1,728			1,634			7,310			6,394			5,166
Other		168			166			662			680			146
Total	$	10,968		$	11,387		$	45,298		$	40,245		$	35,889
Net Loss Ratios:
Property		87.6	%		63.4	%		86.1	%		84.9	%		60.4	%
Commercial Auto		65.2	%		59.5	%		41.9	%		48.5	%		62.7	%
Liability		67.4	%		51.5	%		90.1	%		102.6	%		46.4	%
Workers’ Compensation		67.8	%		72.5	%		51.4	%		54.2	%		113.8	%
Other		0.0	%		0.0	%		37.7	%		-196.2	%		92.0	%
Total		73.0	%		64.1	%		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 March 31, 2009, 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 March 31, 2009, 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 March 31, 2009, 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 March 31, 2009, 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 lines of business of our commercial business product for the periods indicated (dollars in thousands):

							For the Years Ended
	For the Three Months Ended March 31,						December 31,
	2009			2008			2008			2007			2006
Direct Premiums Written:
Property & Liability	$	4,172		$	5,242		$	21,056		$	22,474		$	20,567
Workers’ Compensation		1,219			1,876			8,031			7,716			5,825
Commercial Auto		1,275			1,307			5,068			4,914			3,983
Other		707			745			3,303			2,756			1,990
Total	$	7,373		$	9,170		$	37,458		$	37,860		$	32,365
Net Premiums Earned:
Property & Liability	$	4,384		$	5,080		$	19,428		$	18,301		$	18,076
Workers’ Compensation		1,583			1,856			7,451			6,524			5,077
Commercial Auto		1,152			1,168			4,659			4,194			3,564
Other		66			63			267			241			44
Total	$	7,185		$	8,167		$	31,805		$	29,260		$	26,761
Net Loss Ratios:
Property & Liability		64.2	%		71.6	%		99.0	%		87.0	%		59.9	%
Workers’ Compensation		62.1	%		29.9	%		54.5	%		37.1	%		74.0	%
Commercial Auto		12.3	%		56.3	%		45.9	%		54.9	%		78.2	%
Other		(0.5	%)		403.6	%		17.2	%		(35.3	%)		359.3	%
Total		54.8	%		66.0	%		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 March 31, 2009, our commercial business segment had approximately 5,200 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 March 31, 2009, our commercial business segment had approximately 1,700 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 March 31, 2009, our commercial business segment had approximately 940 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. Our producers 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 comparable 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 33 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 streamlined internal processes to achieve operational efficiencies through the implementation of a policy and claim 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 three months ended March 31, 2009, we ceded to reinsurers $4.9 million of written premiums as compared to $3.5 million of written premiums for the three months ended March 31, 2008. For the year ended December 31, 2008, we 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 (dollars 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 $2.6 million at March 31, 2009, and $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 three month periods ended March 31, 2009 and 2008, and the years ended December 31, 2008, 2007 and 2006, prepared in accordance with GAAP.

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	Three Months Ended						Years Ended
	March 31,						December 31,
	2009			2008			2008			2007			2006
	(in thousands)						(in thousands)
Balance at January 1	$	108,065		$	95,956		$	95,956		$	89,405		$	83,849
Reinsurance recoverable on unpaid loss and LAE		22,625			18,727			18,727			20,089			22,817
Net liability at January 1		85,440			77,229			77,229			69,316			61,032
Loss and LAE incurred, net:
Current year	$	13,431		$	14,482		$	62,612		$	54,421		$	43,785
Prior years		(1,461	)		(1,465	)		(5,222	)		(4,638	)		(19	)
Total incurred loss and LAE		11,970			13,017			57,390			49,783			43,766
Less loss and LAE paid, net:
Current year	$	2,105		$	2,373		$	26,578		$	22,191		$	14,222
Prior years		7,443			8,340			22,601			19,679			21,260
Total loss and LAE expenses paid		9,548			10,713			49,179			41,870			35,482
Net liability for unpaid loss and LAE, at end of period	$	87,862		$	79,533		$	85,440		$	77,229		$	69,316
Reinsurance recoverable on unpaid losses and LAE		28,913			20,948			22,625			18,727			20,089
Reserve for unpaid losses and LAE at end of period	$	116,775		$	100,481		$	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 have 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 continued 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 our 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

     Effective January 1, 2009, we changed our reinsurance program for 2009, which lowered the participation on our per-risk reinsurance treaty. Losses between $500,000 and $1.0 million are retained at 52.5% for 2009 versus a 75% retention rate in 2008, Losses between $1.0 million and $5.0 million are retained at 0% for 2009 versus 25% in 2008.

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 March 31,				At December 31,
	2009				2008				2007
	Cost or Amortized		Estimated Fair		Cost or Amortized		Estimated Fair		Cost or Amortized		Estimated Fair
	Cost		Value		Cost		Value		Cost		Value
Agencies not backed by the full faith and credit of the U.S. government	$	15,994	$	16,937	$	14,929	$	16,089	$	18,523	$	18,888
U.S. treasury securities		8,540		9,126		8,530		9,310		7,837		8,096
States, Territories and possessions		15,718		16,674		15,753		16,475		15,310		15,771
Special Revenue		16,511		17,258		16,022		16,482		15,011		15,363
Public Utilities		5,040		5,092		5,419		5,396		2,516		2,580
Industrial and Miscellaneous		40,180		38,594		34,511		32,857		31,140		31,347
Mortgage-Backed Securities		24,431		24,617		25,374		25,305		20,636		20,724
Total Debt Securities		126,414		128,298		120,538		121,914		110,973		112,769
Equity Securities		—		—		—		—		10,525		13,409
Total	$	126,414	$	128,298	$	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 March 31, 2009 and at December 31, 2008 (dollars in thousands).

	March 31, 2009					December 31, 2008
	Estimated		Percent			Estimated		Percent
Rating (1)	Fair Value		of Total (2)			Fair Value		of Total (2)
Agencies not backed by the full faith and credit of the U.S. government	$	15,864		12.4	%	$	16,089		13.2	%
U.S. treasury securities		9,126		7.1	%		9,310		7.6	%
AAA		43,946		34.2	%		44,452		36.5	%
AA		24,143		18.8	%		17,866		14.7	%
A		30,381		23.7	%		29,409		24.1	%
BBB		4,478		3.5	%		4,788		3.9	%
BB		360		0.3	%		—		0.0	%
Total	$	128,298		100.0	%	$	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 National Association of Insurance Commissioners (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 March 31, 2009 and 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).

	March 31, 2009				December 31, 2008
	Amortized Cost		Estimated Fair Value (1)		Amortized Cost		Estimated Fair Value (1)
Less than one year	$	8,230	$	8,367	$	8,321	$	8,439
One though five years		47,562		48,263		42,747		43,356
Five through ten years		39,608		40,201		39,299		39,824
Greater than ten years		6,583		6,850		4,797		4,990
Mortgaged-backed securities (2)		24,431		24,617		25,374		25,305
Total debt securities	$	126,414	$	128,298	$	120,538	$	121,914

(1)

Debt securities are carried at fair value in our financial statements beginning on page F-2.

(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 March 31, 2009, the average maturity of our mortgage-backed securities was 3.1 years and the average effective duration was 1.6 years. The average maturity of our fixed maturity investment portfolio, excluding mortgage-backed securities, was 4.9 years and the average duration was 3.8 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 March 31, 2009, December 31, 2008 and December 31, 2007 (dollars in thousands).

	March 31, 2009				December 31, 2008				December 31, 2007
			Average				Average				Average
			Credit				Credit				Credit
	Fair Value		Rating		Fair Value		Rating		Fair Value		Rating
U.S. Agency guaranteed RMBS	$	20,672		AAA	$	21,373	AAA		$	15,688	AAA
Non-Agency guaranteed RMBS		—		—		—		—		—		—
Prime First Lien		—		—		—		—		—		—
Prime Second Lien		—		—		—		—		—		—
Alt-A Loans		—		—		—		—		—		—
Subprime Loans	—			—		—		—		—		—
Total	$	20,672		—	$	21,373		—	$	15,688		—

     At March 31, 2009, 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.

     At March 31, 2009 and December 31, 2008 approximately 18% and 19%, respectively of our investments in fixed maturity securities were guaranteed by third party monoline insurers. The following table sets forth information with respect to our fixed maturity securities that were guaranteed by third party insurers. We hold no securities issued by any third party insurer.

	(Dollars in Thousands)
	March 31, 2009				December 31, 2008				December 31, 2007
			Average			Average				Average
			Credit			Credit				Credit
	Fair Value		Rating	Fair Value		Rating		Fair Value		Rating
Auto loan backed securities	$	—	—	$	—		—	$	—		—
Home equity loan backed securities		—	—		—		—		—		—
Municipal bonds	$	23,136	AA+	$	22,864	AA+		$	23,258	AAA

     The following table sets forth information with respect to the fair value at March 31, 2009, December 31, 2008, and December 31, 2007, of the fixed maturity securities that are guaranteed by each of the third party insurers (dollars in thousands).

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	Fair Value at		Fair Value at		Fair Value at
Insurer	March 31, 2009		December 31, 2008		December 31, 2007
AMBAC	$	3,309	$	3,259	$	3,274
FGIC		5,524		2,772		2,735
FSA		8,915		8,829		8,730
MBIA		5,388		8,004		8,519
Total	$	23,136	$	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 March 31, 2009 and with the guarantee at December 31, 2008 and 2007 (dollars in thousands).

	At March 31, 2009				At December 31, 2008		At December 2007
Rating	With Guarantee Fair Value		Without Guarantee Fair Value		With Guarantee Fair Value		With Guarantee Fair Value
AAA	$	8,918	$	1,108	$	22,864	$	23,258
AA		12,025		16,612		—		—
A		2,193		5,416		—		—
Total	$	23,136	$	23,136	$	22,864	$	23,258

     Our average cash and invested assets, net investment income and return on average cash and invested assets for the three months ended March 31, 2009 and 2008, and for the years ended December 31, 2008, 2007 and 2006 were as follows (dollars in thousands):

							Year Ended
	Three Months Ended March 31,						December 31,
	2009			2008			2008			2007			2006
Average cash and invested assets	$	138,993		$	135,937		$	135,093		$	131,484		$	121,777
Net investment income		1,359			1,396			5,335			5,324			4,677
Return on average cash and invested assets		1.0	%		1.0	%		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. This rating is the fourth highest out of 15 rating classifications. The latest rating evaluation by A.M. Best occurred on June 23, 2009. 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 stated that we had solid capitalization and an established market position. A.M. Best cited our strong agency relationships, significant presence in the agribusiness market, and strong loss control services within the agri-business market. The report stated 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, below average underwriting leverage, 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 stated 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 prescribed deductible amount. 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.

     One such proposal includes the Obama administration’s recent proposal, Federal Regulatory Reform: A New Foundation: Rebuilding Financial Supervision and Regulation. As part of larger reforms for the financial industry, the administration is proposing the formation of an Office of National Insurance (ONI) within the U.S. Department of the Treasury. Under this proposal, the ONI would support proposals to modernize and improve insurance regulation, including but not limited to, those that (i) reduce systemic risk posed to the financial system from the insurance industry; (ii) promote strong capital standards and appropriate risk management, (iii) provide meaningful and consistent consumer protections applicable to insurance products and services; (iv) increase national uniformity through either a federal charter or effective action by the states, (v) improve and broaden the regulation of insurance companies and affiliates on a consolidated basis, including affiliated businesses outside of the traditional insurance business, and (vi) coordinate regulation within existing international insurance regulatory frameworks.

     Under the proposal, the ONI would be responsible for gathering information, developing expertise, negotiating international agreements and coordinating policy in the insurance industry. At this time, we can not conclude with any degree of certainty the likelihood that the foregoing reforms will be adopted and what impact such reforms would have on our business.

     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 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 requires disclosure of material transactions involving Penn Millers Insurance Company and its affiliates, and requires prior notice and/or approval of certain transactions, such as “extraordinary dividends” distributed by Penn Millers Insurance Company. Under these laws, the Pennsylvania Insurance Department also has the right to examine us and Penn Millers Insurance Company at any time.

     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 July 10, 2009, at a special meeting to be held on October 15, 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 July 10, 2009 approve the plan of conversion. 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 July 10, 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 9.99% 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. These voting rights are similar to those held by shareholders. However, this membership interest, unlike shares held by shareholders, 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 July 10, 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 members, 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 9.99% of the common stock to be issued in the offering. The ESOP intends to purchase 9.99% of the shares of common stock, or between 450,500 shares and 677,221 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 9.99% 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 5% 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 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 June 5, 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 677,221 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, or establish a new valuation range and hold a new offering. In either event, the funds of any who submitted a subscription or order will be returned to such person promptly, without interest. If we proceed with a new 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 place new subscriptions and orders. See “— Resolicitation.” 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 9.99% of the shares issued in the offering. No more than 6,772,221 shares of common stock will be issued in the 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 sole and 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 6,772,221 shares (including shares issued to the ESOP). At that time, the offering will be promptly completed.

     Upon completion of the offering 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 sole and 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 6,772,221 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 phases of the Offering 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, the funds received from each purchaser will be returned to such purchaser, without interest.

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 return the funds received to the purchasers, without interest, and we will resolicit those who have previously subscribed for shares in the subscription and community offerings and any syndicated community offering.

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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 and our unaudited GAAP and statutory financial statements for the three months ended March 31, 2009.

     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 March 31, 2009.

					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		204,676		76,228		62,937		37.2		-3.2		-8.1
Baldwin & Lyons, Inc.		765,729		325,649		167,677		42.5		0.3		0.7
CRM Holdings, Ltd.		452,951		101,677		134,533		22.4		-3.5		-13.5
Donegal Group Inc.		890,379		368,350		378,007		41.4		2.2		5.3
Eastern Insurance Holdings, Inc.		385,487		137,234		129,820		35.6		-5.4		-13.5
EMC Insurance Group Inc.		1,105,584		286,182		406,030		25.9		-0.4		-1.3
First Mercury Financial Corporation		985,641		274,384		231,115		27.8		4.4		15.2
Hallmark Financial Services, Inc.		551,279		190,555		267,758		34.6		2.3		6.5
Mercer Insurance Group, Inc.		566,221		141,843		158,581		25.1		1.5		6.3
National Interstate Corporation		1,025,934		224,907		295,232		21.9		1.4		6.4
National Security Group, Inc.		125,054		35,045		59,538		28.0		-3.4		-11.5
NYMAGIC, INC.		977,190		171,154		102,751		17.5		-7.1		-35.5
SeaBright Insurance Holdings, Inc.		896,537		333,196		269,751		37.2		2.7		7.1
Unico American Corporation		182,340		76,226		45,089		41.8		2.9		7.3
Comparative Group Mean		651,072		195,902		193,487		31.4		-0.4		-2.0
Comparative Group Median		665,975		180,855		163,129		31.3		0.8		3.0
Penn Millers		228,415		51,161		75,280		22.4		-2.7		-10.6

(1) LTM corresponds to last twelve months ended March 31, 2009. 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 March 31, 2009 and 2008 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 June 5, 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		27,087		35.5		35.5	Neg			0.43		13.2
Baldwin & Lyons, Inc.		309,369		95.0		95.0		130.94		1.85		40.4
CRM Holdings, Ltd.		19,609		19.3		19.9	Neg			0.15		4.3
Donegal Group Inc.		405,745		110.2		110.4		20.91		1.07		45.6
Eastern Insurance Holdings, Inc.		85,767		62.5		72.8	Neg			0.66		22.2
EMC Insurance Group Inc.		288,182		100.7		101.0	Neg			0.71		26.1
First Mercury Financial Corporation		252,444		92.0		120.1		6.51		1.09		25.6
Hallmark Financial Services, Inc.		145,694		76.5		120.2		12.03		0.54		26.4
Mercer Insurance Group, Inc.		94,742		66.8		69.4		11.26		0.60		16.7
National Interstate Corporation		323,002		143.6		143.6		23.51		1.09		31.5
National Security Group, Inc.		21,213		60.5		60.5	Neg			0.36		17.0
NYMAGIC, INC.		126,620		74.0		74.0	Neg			1.23		13.0
SeaBright Insurance Holdings, Inc.		201,575		60.5		61.3		9.01		0.75		22.5
Unico American Corporation		43,085		56.5		56.5		8.09		0.96		23.6
Comparative Group Mean		167,438		75.3		81.5		27.78		0.82		23.4
Comparative Group Median		136,157		70.4		73.4		11.65		0.73		23.1
Penn Millers (Fully Converted)
Pro Forma Minimum		45,050		50.9		50.9	Neg			0.59		17.0
Pro Forma Midpoint		53,000		55.5		55.5	Neg			0.69		19.4
Pro Forma Maximum		60,950		59.4		59.4	Neg			0.79		21.8

(1) LTM EPS corresponds to earnings per share for the last twelve months ended March 31, 2009. LTM revenue corresponds to total revenue for the last twelve months ended March 31, 2009.

     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 25% to 35% 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 June 5, 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 June 5, 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 6,772,221 shares solely to accommodate the purchase by the ESOP of 9.99% 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 return all of the funds received from purchasers, without interest, and we will resolicit subscribers offering them the opportunity to submit new orders. 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 “Christiana Bank & Trust Company, 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 “Christiana Bank & Trust Company, escrow agent.” Payments will be placed in an escrow account at Christiana Bank & Trust Company, 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 and 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.

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 proceeding with the offering and that of Griffin Financial.

     Pursuant to our engagement letter with Stevens & Lee, Stevens & Lee has agreed to perform its services in connection with the conversion and offering based on its standard hourly rates subject to a cap 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. An amount equal to $150,000 shall be deemed payable to Stevens & Lee for services as Griffin’s underwriters’ counsel. However, this $150,000 fee is also subject to the $800,000 legal fee cap.

     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.

     In addition, all fees and commissions payable to Stevens & Lee and Griffin Financial (or other FINRA members participating in the offering) in connection with the conversion and offering are subject to an aggregate cap of 6% of the gross offering proceeds.

     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.

      Christiana Bank & Trust Company will perform records management services and escrow agent services for us in the offering. Christiana Bank & Trust Company 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; and

• 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 9.99% 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 sole and 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		*
Donald A. Pizer		50,000		5,000		*
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 (16 persons)	$	1,330,000		133,000		2.95	%

*	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 9.99% of the common stock issued in the offering (which equals between 450,499 shares if 4,505,000 shares are sold in the offering and 677,222 shares if 6,772,221 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 6,772,221 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 in its sole discretion.

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FEDERAL INCOME TAX CONSIDERATIONS

General

     The statements of United States federal income tax law, or legal conclusions with respect to United States federal income tax law, in the following discussion constitute the opinion of Stevens & Lee on the material 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

     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 upon the advice of Stevens & Lee, we believe, and 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, Donald A. Pizer, 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 of directors 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 of directors.

     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 June 26,
	2009		Director Since(1)		Position with Penn Millers
Heather M. Acker		57		2004	Director
F. Kenneth Ackerman, Jr.		70		1979	Vice Chairman
Dorrance R. Belin		71		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.		66		1997	Director
Donald A. Pizer		64		2009	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. 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.

     Donald A. Pizer was a partner at Ernst & Young in its audit and assurance practice for twenty-one years until his retirement in 2003. After his retirement in 2003, Mr. Pizer provided consulting services to assist Ernst & Young in its design of educational programs for its professionals working in the firm’s insurance and banking practices. Mr. Pizer also served as director and audit committee chairman for Philadelphia Consolidated Holding Corp., a NASDAQ listed insurance holding company from February 2003 until its acquisition by Tokio Marine Group, Inc. in December 2008. Since the acquisition, Mr. Pizer serves as director and audit committee chair of Philadelphia Indemnity Insurance Company and Philadelphia Insurance Company, indirect subsidiaries of Tokio Marine Group, Inc. Mr. Pizer received his bachelor of science and master of science degrees in accounting from Penn State University. He is a certified public accountant and has served as a Director since April 2009.

     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, Pizer, 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, Pizer, 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, Pizer, 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, Churnetski, Coleman, and Gaudet, and Ms. Michelstein. 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, Pizer, 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 50, 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. Mr. Banks is a former certified public accountant. He graduated from the University of Delaware with a bachelor of science degree in accounting.

     Harold W. Roberts, age 55, 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 College with a bachelor of science degree 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.

     Frank Joanlanne was our Senior Vice President and the President of Penn Software from 2003 until 2008. His employment with us was terminated effective December 1, 2008 in connection with our sales of substantially all of the net assets of Penn Software and Eastern Insurance Group.

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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. Due to the current economic environment, the compensation committee did not authorize any increases in base salary for officers in 2009, and therefore, their base salaries will remain at their 2008 levels.

     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 satisfactorily 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 objectives for 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:

					Eastern
	Insurance	Commercial		Holding	Insurance
Name	Company	Business	Agribusiness	Company	Group, Inc
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 amended our Success Sharing Bonus Plan. Under the amended Success Sharing Plan, all full-time and part-time employees who have completed at least four months of service prior to the end of the calendar year and who during this period satisfactorily perform their duties, tasks, and assignments are eligible to participate in the plan. Employees required to participate in a performance improvement plan or on disciplinary probation are not eligible to participate. Employees not eligible to participate under such circumstances will become eligible to participate in the plan once their performance is deemed satisfactory or they are removed from disciplinary probation status. Bonus awards under the plan are pro-rated based upon the number of full months during the calendar year that an employee was eligible to participate in the plan.

     Bonus awards under the plan are based on three measures of the Company’s performance: return on average equity (ROAE), gross premium growth, and operating expense control. The table below summarizes the threshold, targets and maximums for each performance element measure and the respective weight given to each measure in the determination as to whether a bonus will be paid.

Performance
Measure	Threshold			Target			Maximum			Weight
ROAE		3.00	%		5.25	%		7.87	%		60	%
Gross Premium Growth Rate		1.50	%		2.60	%		3.80	%		20	%
Operating Expense	$	16,000,000		$	15,700,000		$	15,000,000			20	%

     The objective of the ROAE measure is to ensure the appropriate return on capital and align our employees’ interest with those of our shareholders. In calculating ROAE, we will not include the following items into average stockholder’s equity: impacts on equity for changes in pension liability, realized and unrealized investment gains and losses, results from our discontinued operations, and the proceeds from this offering.

     The gross premium growth rate was selected as a measure because it reflects the Company’s strategic goal to gain market share by increasing premiums written. The operating expense measure will not include expenses associated with the public offering or any acquisition or merger, and was selected because the Company believes that controlling expenses in an important element of profitability.

     Interpolation within each performance goal level between the threshold, target and maximum goals will be used to determine the actual percentage payable for that operational performance measure and each such measure, respectively weighted, will be totaled to determine the total bonus award. However, in the event that the ROAE threshold is not met, no bonus payout may be made.

     Under the 2009 plan, our employees have the opportunity to earn a percentage of their base salary as a cash bonus. The maximum bonus award as a percentage of the employee’s base salary at the threshold, target and maximum levels is shown by position on the table below.

Title	Threshold			Target			Maximum
Chief Executive Officer		11.25	%		45.0	%		67.5	%
Executive Vice President & Senior Vice President		10.00	%		40.0	%		60.0	%
Vice President		8.75	%		35.0	%		52.5	%
Assistant Vice President		5.00	%		20.0	%		30.0	%
Manager, Assistant Manager & Supervisor		3.00	%		12.0	%		18.0	%
Staff Employees		1.25	%		5.0	%		7.5	%

     The bonus awards for employees at the Assistant Vice President level and above and the majority of our other employees will be based solely on the performance measures mentioned above. Certain individuals at the beginning of the calendar year who are below the Assistant Vice President level and who have responsibility for operational and strategic objectives will have his or her bonus award based on the operational goals outlined above and such individual’s achievement of his or her individual performance goals. The bonus potential for 2009 for our named executive officers is displayed in the table below.

Title	Threshold		Target		Maximum
Douglas A. Gaudet	$	38,528	$	154,114	$	231,171
Michael O. Banks	$	23,571	$	94,282	$	141,424
Frank Joanlanne	$	0	$	0	$	0
Harold W. Roberts	$	18,659	$	74,636	$	111,953
Kevin D. Higgins	$	14,261	$	57,044	$	85,566
Jonathan C. Couch	$	11,683	$	46,733	$	70,100

     The compensation committee may determine, in its discretion to grant no bonus awards under the plan, if it believes none are warranted. Conversely, even if the goals under the Success Sharing Plan are not met, the compensation committee may award bonuses if, in the exercise of its business judgment, the compensation committee determines that such awards are warranted under the circumstances and in the best interest of the Company. Bonus awards under the program will be based upon the employee’s performance in the respective calendar year and will paid on or before March 15 of the following calendar year.

     Bonus awards to our executive officers under the plan are subject to a claw back provision. Under this provision, the board of directors will require our executive officers to reimburse Penn Millers for any Success Sharing bonus award that:

• Was calculated based on the achievement of financial results that were subsequently restated;

• The restatement was caused in whole or in part by the intentional misconduct of the executive officer; and

• Had the financial results been properly reported, the amount awarded under the plan would have been lower than the amount actually rewarded.

This provision is designed to discourage intentional misconduct that may negatively impact our shareholders.

     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 9.99% 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.

     Because our stock-based plans will provide us with an opportunity to encourage the long-term 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, the board of directors is evaluating the need to continue the SERP and defined pension plan after the implementation of these stock-based plans.

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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 9.99% 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. The board is considering eliminating the SERP upon the approval of the stock incentive plan.

     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. The board of directors is considering freezing the pension plan when the ESOP is implemented.

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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	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; and

• 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 on December 1, 2008.

     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(2)	$	0	$	0	$	(6,455	)	$	0	$	1,447
Harold W. Roberts	$	12,033	$	0	$	(11,370	)	$	0	$	23,645
Kevin D. Higgins	$	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.
(2)	Mr. Joanlanne’s employment with Penn Millers was terminated on December 1, 2008.

     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.

     Severance Obligations to Former Executives. 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.

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 and under Pennsylvania Law

     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;

159

          (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.

160

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 6,772,221 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

161

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.

162

PENN MILLERS HOLDING CORPORATION

UP TO 6,772,221 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
Interim Financial Statements (Unaudited)
Consolidated Balance Sheets (As of March 31, 2009 and December 31, 2008)		F-2
Consolidated Statements of Operations (Three months ended March 31, 2009 and 2008)		F-3
Consolidated Statements of Equity (Three months ended March 31, 2009 and 2008)		F-4
Consolidated Statements of Cash Flows (Three months ended March 31, 2009 and 2008)		F-5
Notes to Consolidated Interim Financial Statements		F-6
Report of Independent Accounting Firm		F-23
Financial Statements
Consolidated Balance Sheets (As of December 31, 2009 and 2008)		F-24
Consolidated Statements of Operations (Years ended December 31, 2009, 2008 and 2007)		F-25
Consolidated Statements of Equity (Years ended December 31, 2009, 2008 and 2007)		F-26
Consolidated Statements of Cash Flows (Years ended December 31, 2009, 2008 and 2007)		F-27
Notes to Consolidated Financial Statements		F-28
Schedules to Consolidated Financial Statements		F-66

PENN MILLERS MUTUAL HOLDING CORPORATION AND SUBSIDIARY

Consolidated Balance Sheets

March 31, 2009 and December 31, 2008

(Dollars in thousands)

	March 31,			December 31,
	2009			2008
	(Unaudited)
Assets
Investments:
Fixed maturities investments:
Available for sale, at fair value (amortized cost $126,414 in 2009 (unaudited) and $120,538 in 2008)	$	128,298			121,914
Cash and cash equivalents		15,695			11,959
Premiums and fees receivable		28,753			31,080
Reinsurance receivables and recoverables		25,064			20,637
Deferred policy acquisition costs		10,522			10,601
Prepaid reinsurance premiums		4,170			4,342
Accrued investment income		1,391			1,431
Property and equipment, net of accumulated depreciation		4,071			4,231
Income taxes receivable		1,294			1,508
Deferred income taxes		3,656			4,728
Other		4,058			3,864
Deferred offering costs		1,443			1,015
Assets held for sale		—			3,214
Total assets	$	228,415			220,524
Liabilities and Equity
Liabilities:
Losses and loss adjustment expense reserves	$	116,775			108,065
Unearned premiums		44,811			45,322
Accounts payable and accrued expenses		12,631			13,353
Borrowings under line of credit		1,683			950
Long-term debt		1,354			1,432
Liabilities held for sale		—			647
Total liabilities		177,254			169,769
Equity:
Retained earnings		51,945			51,914
Accumulated other comprehensive loss		(784	)		(1,159	)
Total equity		51,161			50,755
Total liabilities and equity	$	228,415			220,524

See accompanying notes to consolidated financial statements.

F-2

PENN MILLERS MUTUAL HOLDING CORPORATION AND SUBSIDIARY

Consolidated Statements of Operations

(Unaudited)

Three months ended March 31, 2009 and 2008

(Dollars in thousands)

	2009			2008
Revenues:
Premiums earned	$	18,457			19,867
Investment income, net of investment expense		1,359			1,396
Realized investment gains, net		29			1,837
Other income		20			149
Total revenues		19,865			23,249
Losses and expenses:
Losses and loss adjustment expenses		11,970			13,017
Amortization of deferred policy acquisition costs		5,506			5,574
Underwriting and administrative expenses		1,126			1,206
Interest expense		76			47
Other expense, net		47			36
Total losses and expenses		18,725			19,880
Income from continuing operations, before income taxes		1,140			3,369
Income tax expense		289			985
Income from continuing operations		851			2,384
Discontinued Operations:
Loss on discontinued operations, before income taxes		(16	)		(2	)
Income tax expense		804			2
Loss on discontinued operations		(820	)		(4	)
Net income	$	31			2,380

See accompanying notes to consolidated financial statements.

F-3

PENN MILLERS MUTUAL HOLDING CORPORATION AND SUBSIDIARY

Consolidated Statements of Equity

(Unaudited)

Three months ended March 31, 2009 and 2008

(Dollars in thousands)

			Accumulated
			other
	Retained		comprehensive
	earnings		income (loss)			Total
Balance at December 31, 2007	$	59,293		2,108			61,401
Net income		2,380		—			2,380
Other comprehensive loss, net of taxes:
Unrealized investment holding loss arising during period, net of related income tax benefit of $197		—		(382	)		(382	)
Reclassification adjustment for realized gains included in net income, net of related income tax expense of $638		—		(1,239	)		(1,239	)
Net unrealized investment loss							(1,621	)
Defined benefit pension plan, net of related income tax expense of $6		—		12			12
Comprehensive income							771
Balance at March 31, 2008		61,673		499			62,172
Balance at December 31, 2008	$	51,914		(1,159	)		50,755
Net income		31		—			31
Other comprehensive income, net of taxes:
Unrealized investment holding gain arising during period, net of related income tax expense of $184		—		357			357
Reclassification adjustment for realized gains included in net income, net of related income tax expense of $9		—		(17	)		(17	)
Net unrealized investment gain							340
Defined benefit pension plan, net of related income tax expense of $18		—		35			35
Comprehensive income							406
Balance at March 31, 2009	$	51,945		(784	)		51,161

See accompanying notes to consolidated financial statements.

F-4

PENN MILLERS MUTUAL HOLDING CORPORATION AND SUBSIDIARY

Consolidated Statements of Cash Flows

(Unaudited)

Three months ended March 31, 2009 and 2008

(Dollars in thousands)

	2009			2008
Cash flows from operating activities:
Net income	$	31			2,380
Loss on discontinued operations		820			4
Adjustments to reconcile net income to net cash provided by (used in) operating activities:
Change in receivables, unearned premiums, and prepaid reinsurance		(2,019	)		(3,770	)
Increase in losses and loss adjustment expense reserves		8,710			4,525
Change in accounts payable and accrued expenses		(629	)		(2,755	)
Deferred income taxes		910			153
Change in deferred acquisition costs		79			157
Amortization and depreciation		172			176
Realized investment gains, net		(29	)		(1,837	)
Other, net		(932	)		889
Cash provided by (used in) operating activities — continuing operations		7,113			(78	)
Cash provided by operating activities — discontinued operations		—			501
Net cash provided by operating activities		7,113			423
Cash flows from investing activities:
Available-for-sale investments:
Purchases		(9,983	)		(23,912	)
Sales		2,066			15,258
Maturities		2,000			6,105
Proceeds on sale of net assets of subsidiary		2,576			—
Purchases of property and equipment, net		139			(9	)
Cash used in investing activities — continuing operations		(3,202	)		(2,558	)
Cash provided by (used in) investing activities — discontinued operations		285			(12	)
Net cash used in investing activities		(2,917	)		(2,570	)
Cash flows from financing activities:
Initial public offering costs paid		(830	)		—
Net borrowings on line of credit		733			—
Repayment of long-term debt		(78	)		(78	)
Net cash used in financing activities — continuing operations		(175	)		(78	)
Net cash used in financing activities — discontinued operations		(285	)		(260	)
Net cash used in financing activities		(460	)		(338	)
Net increase (decrease) in cash		3,736			(2,485	)
Cash and cash equivalents at beginning of period		11,959			10,462
Cash and cash equivalents at end of period		15,695			7,977
Less cash of discontinued operations at end of period		—			476
Cash and cash equivalents of continuing operations at end of period	$	15,695			7,501

See accompanying notes to consolidated financial statements.

F-5

PENN MILLERS MUTUAL HOLDING COMPANY AND SUBSIDIARY

(Unaudited)

Notes to Consolidated Financial Statements

(Dollars in thousands)

(1)	Basis of Presentation
	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 own 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.
	The financial information for the interim periods included herein is unaudited; however, such information reflects all adjustments which are, in the opinion of management, necessary to a fair presentation of the financial position, results of operations, and cash flows for the interim periods. The results of operations for interim periods are not necessarily indicative of results to be expected for the full year.
	These financial statements should be read in conjunction with the financial statements and notes for the year ended December 31, 2008 included in the Company’s 2008 Financial Statements filed with the U.S. Securities and Exchange Commission as part of Form S-1.
(2)	Use of Estimates
	The preparation of financial statements in conformity with U.S. generally accepted accounting principles (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 the financial statements, and the reported amounts of revenues and expenses, during the reporting period. Actual results could differ from these estimates.
(3)	Concentration of Risk
	The Company’s business is subject to concentration of risk with respect to geographic concentration. Although the PMHC’s operating subsidiaries are licensed collectively in 33 states, direct premiums written for two states, New Jersey and Pennsylvania, accounted for more than 24% of the Company’s direct premium writings as of March 31, 2009. 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 10.5% of the Company’s direct premiums written as of March 31, 2009. Only two other producers accounted for more than 5% of the Company’s 2009 direct premium writings. No other brokers account for more than 5% of direct premium writings.

F-6

PENN MILLERS MUTUAL HOLDING COMPANY AND SUBSIDIARY

(Unaudited)

Notes to Consolidated Financial Statements

(Dollars in thousands)

(4)	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 $1,443 and $1,015 are reported separately on the consolidated balance sheets at March 31, 2009 and December 31, 2008.
(5)	Recent Accounting Pronouncements
	In March 2008, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards (SFAS) No. 161, Disclosures about Derivative Instruments and Hedging Activities, an Amendment of FASB Statement No. 133, which 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 were effective for the Company beginning January 1, 2009. The adoption of SFAS No. 161 did not impact the Company’s results of operations or financial condition.
	In May 2009, the FASB issued SFAS No. 165, Subsequent Events. SFAS No. 165 establishes general standards of accounting for and disclosure of events that occur after the balance sheet date but before financial statements are issued or available to be issued. These standards include the evaluation time period, circumstances when an entity should recognize a subsequent event and the necessary disclosures. This SFAS is effective for interim or annual reporting periods ending after June 15, 2009. The adoption of SFAS No. 165 is currently being evaluated and is not expected to have a material impact on the Company’s results of operations or financial position.
(6)	Fair Value Measurements
	In September 2006, the FASB issued SFAS No. 157, Fair Value Measurements. This statement defines fair value, establishes a framework for measuring fair value in GAAP, and expands disclosures about fair value measurements. This statement applies under other accounting pronouncements that require or permit fair value measurements. The statement was effective for financial statements issued for fiscal years beginning after November 15, 2007. The adoption of this statement as of January 1, 2008 did not have an impact on the Company’s results of operations or financial condition. The Company has adopted FASB Staff Position (FSP) No. 157-2, which allowed us to defer the effective date of SFAS No. 157 for certain non-financial assets and liabilities to January 1, 2009. As of January 1, 2009, the Company adopted SFAS No. 157 for these non-financial assets and liabilities. The company has no non-financial assets or liabilities measured at fair value at March 31, 2009 or December 31, 2008.
	The fair value of a financial asset or financial liability is the amount at which that asset or liability could be bought or sold in a current transaction between willing parties, that is, other than in a forced or liquidated

F-7

PENN MILLERS MUTUAL HOLDING COMPANY AND SUBSIDIARY

(Unaudited)

Notes to Consolidated Financial Statements

(Dollars in thousands)

sale. 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 as of March 31, 2009.

	Level 1		Level 2		Level 3		Total
Fixed maturities, available for sale	$	9,126		119,172		—		128,298
Total assets	$	9,126		119,172		—		128,298
Accounts payable and accrued expenses	$	—		63		—		63
Total liabilities	$	—		63		—		63

Included in accounts payable and accrued expenses is an interest rate swap agreement (see note 13). Management estimates the fair value of the interest rate swap based on information obtained from a third-party financial institution counterparty. Management considers the prevailing interest rate environment as a key input into the valuation of the swap.

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. As of March 31, 2009, all of the Company’s fixed maturity investments were priced using this one primary service; and the pricing service provides to us one quote per instrument. 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

F-8

PENN MILLERS MUTUAL HOLDING COMPANY AND SUBSIDIARY

(Unaudited)

Notes to Consolidated Financial Statements

(Dollars in thousands)

	service utilizes 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 services provided a fair value estimate for all of the Company’s investments at March 31, 2009, 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 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 March 31, 2009.
(7)	Investments
	The fair value and unrealized losses for securities temporarily impaired as of March 31, 2009 are as follows:

	Less than 12 months				12 months or longer				Total
			Unrealized				Unrealized				Unrealized
Description of securities	Fair value		losses		Fair value		losses		Fair value		losses
Agencies not backed by the full faith and credit of the U.S. government	$	566		5		—		—		566		5
State and political subdivisions		1,081		4		2,130		55		3,211		59
Mortgage-backed securities		1,742		239		2,108		408		3,850		647
Corporate securities		13,795		1,453		7,164		872		20,959		2,325
Total fixed maturities		17,184		1,701		11,402		1,335		28,586		3,036
Total temporarily impaired securities	$	17,184		1,701		11,402		1,335		28,586		3,036

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

F-9

PENN MILLERS MUTUAL HOLDING COMPANY AND SUBSIDIARY

(Unaudited)

Notes to Consolidated Financial Statements

(Dollars in thousands)

issued by financial institutions, whose prices have been depressed as a result of the recent turmoil in the credit markets. There are $11,402 in fixed maturity securities, at fair value, that at March 31, 2009, had been below cost for over 12 months. $1,196 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 remaining $139 of unrealized losses on such securities relates to one bond, which carried a speculative grade debt rating. 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.

Impairment charges of $0 were recorded within realized net investment gains on the accompanying consolidated statements of operations for both the three months ended March 31, 2009 and 2008. An impairment loss is recognized 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. 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 statements of operations in the future.

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 March 31, 2009, fixed maturity securities issued by banks accounted for 6.22% 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.

F-10

PENN MILLERS MUTUAL HOLDING COMPANY AND SUBSIDIARY

(Unaudited)

Notes to Consolidated Financial Statements

(Dollars in thousands)

(8)	Comprehensive Income
	Comprehensive income for the three months ended March 31, 2009 and 2008 consisted of the following:

	For the three months
	ended March 31,
	2009			2008
Net income	$	31			2,380
Other comprehensive income (loss):
Unrealized gains (losses) on securities:
Unrealized investment holding gains (losses) arising during period		357			(382	)
Less:
Reclassification adjustment for gains included in net income		(17	)		(1,239	)
Net unrealized investment gains (losses)		340			(1,621	)
Defined benefit pension plans:
Amortization		35			12
Other comprehensive income (loss)		375			(1,609	)
Comprehensive income	$	406			771

Accumulated other comprehensive loss at March 31, 2009 and December 31, 2008 consisted of the following amounts:

	March 31,			December 31,
	2009			2008
Unrealized investment gains for continuing operations, net of tax	$	1,243			908
Unrealized investment losses for discontinued operations, net of tax		—			(5	)
Defined benefit pension plan — net actuarial loss, net of tax		(2,027	)		(2,062	)
Accumulated other comprehensive loss	$	(784	)		(1,159	)

(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

F-11

PENN MILLERS MUTUAL HOLDING COMPANY AND SUBSIDIARY

(Unaudited)

Notes to Consolidated Financial Statements

(Dollars in thousands)

benefits outside of the qualified defined benefit pension plan to eligible executives based on average earnings, years of service, and age at retirement.

The net periodic pension cost for the plan consists of the following components:

	For the three months
	ended March 31,
	2009			2008
Components of net periodic pension cost:
Service cost	$	170			179
Interest cost		147			154
Expected return on plan assets		(93	)		(129	)
Amortization of prior service costs		10			16
Amortization of net loss		43			2
Net periodic pension expense	$	277			222

	The Company expects to contribute $547 to the plans in 2009. As of March 31, 2009, no contributions have been made. 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.
(10)	Income Tax
	The Company has recorded income tax expense of $804 on discontinued operations, which relates primarily to the tax expense recorded on the sale of the net assets of EIG, whose book basis exceeded their tax basis. Separately, the Company has reviewed the potential of a tax position regarding a worthless stock deduction for its investment in EIG. The Company determined that the more-likely-than-not recognition threshold would not be met. Therefore, if the Company were to conclude to take a tax return position on the 2009 federal income tax return, the benefit would need to be recorded as an uncertain tax position, with no current

F-12

PENN MILLERS MUTUAL HOLDING COMPANY AND SUBSIDIARY

(Unaudited)

Notes to Consolidated Financial Statements

(Dollars in thousands)

	benefit recognized. The maximum impact of a tax deduction is estimated to be $900, with reasonable possibility that the tax return position will not be taken.
	As of March 31, 2009, 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 March 31, 2009.
	There were no cash tax payments in the first quarter of 2009 and 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 2009 and 2008. The Company purchased catastrophe excess-of-loss reinsurance with a retention of $2,000 per event in 2009 and 2008.
	Effective January 1, 2009, the Company modified its reinsurance program in which the Company lowered its participation in the per-risk reinsurance treaty. Losses between $500 and $1,000 are retained at 52.5% in 2009 versus a 75% retention rate in 2008. Losses between $1,000 and $5,000 are retained at 0% in 2009 versus 25% in 2008.
	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, is as follows:

(a) Premiums

	For the three months ended March 31,
	2009						2008
	Written			Earned			Written			Earned
Direct	$	22,754			23,302			22,510			23,423
Assumed		222			222			246			248
Ceded		(4,894	)		(5,067	)		(3,504	)		(3,804	)
Net	$	18,082			18,457			19,252			19,867

F-13

PENN MILLERS MUTUAL HOLDING COMPANY AND SUBSIDIARY

(Unaudited)

Notes to Consolidated Financial Statements

(Dollars in thousands)

(b) Losses and Loss Adjustment Expenses

	For the three months
	ended March 31,
	2009			2008
Direct	$	19,799			15,218
Assumed		(31	)		409
Ceded		(7,798	)		(2,610	)
Net	$	11,970			13,017

(c) Unearned Premiums

	March 31,			December 31,
	2009			2008
Direct	$	44,800			45,310
Assumed		11			12
Prepaid reinsurance (ceded)		(4,170	)		(4,342	)
	$	40,641			40,980

(d) Loss and Loss Adjustment Expense Reserves

	March 31,		December 31,
	2009		2008
Direct	$	107,432		98,366
Assumed		9,343		9,699
Gross	$	116,775		108,065

(12)	Lines of Credit
	The Company currently maintains two unsecured lines of credit.
	The first unsecured line of credit is available for general corporate purposes. No additional borrowing arrangements were made after year-end.
	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 March 31, 2009 and December 31, 2008, a total of $1,183 and $450, respectively, was outstanding.
	In order to provide for short term cash availability and operational flexibility, in July 2009 the Company expects to execute a refinancing of the two lines of credit by entering into a new four year $3,000

F-14

PENN MILLERS MUTUAL HOLDING COMPANY AND SUBSIDIARY

(Unaudited)

Notes to Consolidated Financial Statements

(Dollars in thousands)

	revolving line of credit agreement with a commercial bank. A commitment letter has been received for an agreement that will require monthly payments of accrued interest, with principal due no later than the maturity of the loan agreement, four years from the inception date. The refinancing is expected to occur in July 2009 and the initial interest rate on outstanding borrowings will be LIBOR plus 175 basis points. This rate will be adjusted annually at each anniversary of the loan agreement by an additional 25 basis points.
(13)	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 $1,354 and $1,432 at March 31, 2009 and December 31, 2008, respectively.
	The Company accounts for its interest rate swap in accordance with SFAS No. 133, Accounting for Derivative Instruments and Hedging Activities, as amended by SFAS No. 138, Accounting for Certain Derivative Instruments and Certain Hedging Activities. On January 1, 2009, the Company adopted SFAS No. 161, Disclosures about Derivative Instruments and Hedging Activities, an Amendment of FASB Statement No. 133, which changes the disclosure requirements for derivative instruments and hedging activities. The adoption of SFAS No. 161 did not impact the Company’s results of operations or financial condition.
	The Company has designated the interest rate swap as a non-hedge instrument. Accordingly, the Company recognizes the fair value of the interest rate swap as an asset or a liability on the consolidated balance sheets with the changes in fair value recognized in the consolidated statements of operations. An investment gain of $3 and loss of $40 were recorded within net realized investment gains on the consolidated statements of operations at March 31, 2009 and 2008, respectively.
	By using hedging financial instruments to hedge exposures to changes in interest rates, the Company exposes itself to market and credit risk. Market risk is the adverse effect on the value of a financial instrument that results from a change in interest rates. Credit risk is the failure of the counterparty to perform under the terms of the contract. When the fair value of a contract is positive, the counterparty owes the Company, which creates credit risk for the Company. When the fair value of a contract is negative, the Company owes the counterparty and, therefore, credit risk is not present.

F-15

PENN MILLERS MUTUAL HOLDING COMPANY AND SUBSIDIARY

(Unaudited)

Notes to Consolidated Financial Statements

(Dollars in thousands)

     A summary of the fair value of the interest rate swap outstanding as of March 31, 2009 and December 31, 2008 follows:

	March 31, 2009			December 31, 2008
	Balance Sheet	Fair value		Balance Sheet	Fair value
	Location	liability		Location	liability
Interest rate swaps:
Wachovia Bank, N.A.	Accounts payable and accrued expenses	$	63	Accounts payable and accrued expenses	$	66
Total derivatives		$	63		$	66
A summary of the effect of the interest rate swap on the consolidated statements of operations for the three months ended March 31, 2009 and 2008 follows:
	March 31, 2009			March 31, 2008
	Location of Gain	Amount of Gain		Location of (Loss)	Amount of (Loss)
	Recognized in	Recognized in		Recognized in	Recognized in
	Income	Income		Income	Income
Interest rate swaps:
Wachovia Bank, N.A.	Realized investment gains	$	3	Realized investment losses	$	(40	)
Total derivatives		$	3		$	(40	)

(14)	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.

F-16

PENN MILLERS MUTUAL HOLDING COMPANY AND SUBSIDIARY

(Unaudited)

Notes to Consolidated Financial Statements

(Dollars in thousands)

Segment information for the three months ended March 31, 2009 and 2008 is as follows:

	For the three months
	ended March 31,
	2009			2008
Revenues:
Premiums earned:
Agribusiness	$	10,968			11,387
Commercial business		7,185			8,167
Other		304			313
Total premiums earned		18,457			19,867
Investment income, net of investment expense		1,359			1,396
Realized investment gains, net		29			1,837
Other income		20			149
Total revenues	$	19,865			23,249
Components of net (loss) income:
Underwriting (loss) income:
Agribusiness	$	(512	)		601
Commercial business		250			(247	)
Other		150			(116	)
Total underwriting (losses) income		(112	)		238
Investment income, net of investment expense		1,359			1,396
Realized investment gains, net		29			1,837
Other income		20			149
Corporate expense		(33	)		(168	)
Interest expense		(76	)		(47	)
Other expense, net		(47	)		(36	)
Income from continuing operations, before income taxes		1,140			3,369
Income tax expense		289			985
Income from continuing operations	$	851			2,384
Discontinued operations:
Loss on discontinued operations, before income taxes	$	(16	)		(2	)
Income tax expense		804			2
Loss on discontinued operations		(820	)		(4	)
Net income	$	31			2,380

F-17

PENN MILLERS MUTUAL HOLDING COMPANY AND SUBSIDIARY

(Unaudited)

Notes to Consolidated Financial Statements

(Dollars in thousands)

     The following table sets forth the net premiums earned by major lines of business for our core insurance products for the three months ended March 31, 2009 and 2008:

	For the three months
	ended March 31,
	2009		2008
Net premiums earned:
Agribusiness
Property	$	3,885		4,216
Commercial auto		2,806		3,187
Liability		2,381		2,184
Workers’ compensation		1,728		1,634
Other		168		166
Agribusiness subtotal		10,968		11,387
Commercial lines
Property & liability		4,384		5,080
Workers’ compensation		1,583		1,856
Commercial auto		1,152		1,168
Other		66		63
Commercial lines subtotal		7,185		8,167
Other		304		313
Total net premiums earned	$	18,457		19,867

F-18

PENN MILLERS MUTUAL HOLDING COMPANY AND SUBSIDIARY

(Unaudited)

Notes to Consolidated Financial Statements

(Dollars in thousands)

(15)	Equity
	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 March 31, 2009, the Company was in compliance with its risk-based capital requirements. Applying the current regulatory restrictions as of March 31, 2009, approximately $4,353 would be available for distribution to the Company during 2009 without prior approval.
(16)	Discontinued Operations
	In 2007, the Company’s board of directors approved a plan to pursue the sale of Penn Software & Technology Services (PSTS) in order to better focus on its core competency within the insurance business.
	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 three months ended March 31, 2009 and 2008 are as follows:

	2009		2008
Net revenue	$	—		265
Income on discontinued operations, before income taxes	$	—		34
Income tax expense		—		14
Income from discontinued operations	$	—		20

In 2008, the Company’s board of directors approved a plan to explore the sale of Eastern Insurance Group (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 non-binding offers obtained in the selling process, which were less than the carrying amount, 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

F-19

PENN MILLERS MUTUAL HOLDING COMPANY AND SUBSIDIARY

(Unaudited)

Notes to Consolidated Financial Statements

(Dollars in thousands)

discontinued operations at September 30, 2008 (unaudited), which represented its best estimate. 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 costs to sell of $248. 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 of $16. A portion of the proceeds of the sale was used to pay off $285 of acquisition payables in liabilities held for sale.

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 three months ended March 31, 2009 and 2008 are as follows:

	2009			2008
Net revenue	$	—			829
Loss on discontinued operations, before income taxes	$	(16	)		(36	)
Income tax expense (benefit)		804			(12	)
Loss from discontinued operations	$	(820	)		(24	)

Assets and liabilities of EIG as of December 31, 2008, which are included in assets and liabilities held for sale on the consolidated balance sheets, comprise the following:

	2008
Assets:
Cash	$	—
Receivables		420
Goodwill		2,147
Intangible assets		464
Other assets		183
Total assets	$	3,214
Liabilities:
Accounts payable and accrued expenses	$	362
Acquisition payables		285
Total liabilities	$	647

F-20

PENN MILLERS MUTUAL HOLDING COMPANY AND SUBSIDIARY

(Unaudited)

Notes to Consolidated Financial Statements

(Dollars in thousands)

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 three months ended March 31, 2009 and 2008 are presented below.

	2009			2008
Net revenue	$	—			1,094
Loss on discontinued operations, before income taxes	$	(16	)		(2	)
Income tax expense		804			2
Loss from discontinued operations	$	(820	)		(4	)

Total assets and liabilities held for sale as of December 31, 2008 comprise the following:

	2008
Assets:
Cash	$	—
Receivables		420
Goodwill		2,147
Intangible assets		464
Other assets		183
Total assets	$	3,214
Liabilities:
Accounts payable and accrued expenses	$	362
Other liabilities		285
Total liabilities	$	647

F-21

PENN MILLERS MUTUAL HOLDING COMPANY AND SUBSIDIARY

(Unaudited)

Notes to Consolidated Financial Statements

(Dollars in thousands)

(17)	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-22

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-23

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-24

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-25

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-26

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-27

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-28

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-29

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-30

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-31

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-32

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-33

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-34

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 as non-binding offers obtained in the selling process at prices less than carrying amount 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-35

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-36

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-37

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-38

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-39

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-40

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-41

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-42

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-43

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-44

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-45

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-46

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-47

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-48

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-49

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-50

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-51

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-52

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-53

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-54

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. Our evaluation of the significant drivers behind our loss development focuses on the broad accident year trends in frequency and severity that have developed on claim-specific losses in the major lines of business. A significant portion of our ultimate loss and loss adjustment expense reserve estimates are not directly associated with claim counts, primarily our Other segment and the Adjusting and Other category of loss adjustment expenses. Therefore, the definitive quantification of the relative impact of changes in frequency and severity on our development is impracticable.

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-55

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-56

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-57

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-58

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

The following table sets forth the net premiums earned by major lines of business for our core insurance products for the years ended December 31, 2008, 2007 and 2006:

	2008		2007		2006
Net premiums earned:
Agribusiness
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
Agribusiness subtotal		45,298		40,245		35,889
Commercial lines
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
Commercial lines subtotal		31,805		29,260		26,761
Other		1,634		1,465		1,995
Total net premiums earned	$	78,737		70,970		64,645

(Continued)

F-59

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-60

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-61

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 non-binding offers obtained in the selling process at prices less than carrying amount and the further deterioration of economic conditions indicating that it was more likely than not that the fair value of the EIG reporting unit was below its carrying amount. 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-62

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 presented in the table below. The effective tax rate of 5.5% in 2008 is primarily attributable to the $2,600 write down of goodwill, which is non-deductible for income tax purposes. Income tax expense or benefit for the year was allocated among continuing operations and discontinued operations. The amount allocated to continuing operations was the income tax calculated on the pre-tax loss from continuing operations that occurred during the year, adjusted for changes in circumstances that caused a change in judgment about the realization of deferred tax assets in future years. The remainder was allocated to discontinued operations.

	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-63

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-64

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-65

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-66

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-67

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-68

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-69

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-70

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-71

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-72

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-73

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. We also expect to incur an estimated $250,000 in conversion expenses, which will include legal expenses, filing fees with the Pennsylvania Insurance Department, and printing, postage, and mailing charges. 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		205,000
Legal fees and expenses		900,000
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	$	2,320,000

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 June 5, 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 Christiana Bank & Trust Company.**
99.7	Penn Millers Mutual Holding Company Member Proxy Materials
99.8	Power of Attorney by Donald A. Pizer

*	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

II-3

     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. 2 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 June 26, 2009.

PENN MILLERS HOLDING CORPORATION
By:	/s/ Douglas A. Gaudet
	Douglas A. Gaudet, President and
	Chief Executive Officer

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     Pursuant to the requirements of the Securities Act of 1933, this Amendment No. 2 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 (Principal Executive Officer)	June 26, 2009
/s/ J. Harvey Sproul, Jr. * J. Harvey Sproul, Jr.	Director and Chairman	June 26, 2009
/s/ F. Kenneth Ackerman, Jr. * F. Kenneth Ackerman, Jr.	Director and Vice Chairman	June 26, 2009
/s/ Heather M. Acker * Heather M. Acker	Director	June 26, 2009
/s/ Dorrance R. Belin, Esq. * Dorrance R. Belin, Esq.	Director	June 26, 2009
/s/ John L. Churnetski * John L. Churnetski	Director	June 26, 2009
/s/ John M. Coleman * John M. Coleman	Director	June 26, 2009
/s/ Kim E. Michelstein * Kim E. Michelstein	Director	June 26, 2009
/s/ Robert A. Nearing, Jr. * Robert A. Nearing, Jr.	Director	June 26, 2009
/s/ Donald A. Pizer * Donald A. Pizer	Director	June 26, 2009
/s/ James M. Revie * James M. Revie	Director	June 26, 2009
/s/ Michael O. Banks Michael O. Banks	Treasurer and Chief Financial Officer and Chief Accounting Officer (Principal Financial and Accounting Officer)	June 26, 2009

* By Michael O. Banks
As Attorney In Fact
/s/ Michael O. Banks   Michael O. Banks

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*

II-8

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 June 5, 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 Christiana Bank & Trust Company.**
99.7	Penn Millers Mutual Holding Company Member Proxy Materials
99.8	Power of Attorney by Donald A. Pizer

*	Previously filed.
**	To be filed by amendment.

II-9

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

June 5, 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 of United States federal income tax law, or legal conclusions with respect to United States federal income tax law, in the Registration Statement under the heading, “Federal Income Tax Considerations,” constitute the opinion of Stevens & Lee, and that such statements 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
June 5, 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-10.18

Exhibit 10.18

2009 SUCCESS SHARING PROGRAM FOR EMPLOYEES
OF PENN MILLERS

The Success Sharing Program is an incentive program that is designed to (a) motivate and reward strong financial and operational performance at organizational and individual performance levels, (b) reinforce the importance of teamwork and cooperation, (c) link rewards to the Company’s business plans, strategic initiatives and vision statement, (d) provide a competitive, cost effective total cash compensation opportunity, (e) communicate expectations to employees, and (f) facilitate executive retention.

DEFINITIONS

“Base Earnings” means, (a) with respect to employees classified as “exempt” under the Fair Labor Standards Act (FLSA) the basic rate of compensation payable for a one year period, and (b) with respect to employees classified as “non-exempt” under the FLSA, a participant’s base salary plus overtime. Base earnings shall not include bonuses, fringe benefits, annual stipend, employer contributions to retirement plans or similar compensation.

“Bonus Award” means the actual bonus payable to a participant in the plan.

“Bonus Award Opportunity” means the percentage of base earnings a plan participant is eligible to receive.

“Company” means Penn Millers Holding Corporation, Penn Millers Mutual Holding Company, and the subsidiaries thereof.

“Maximum Performance” means the attainment of the level of performance at which the maximum Bonus Award payment is earned.

“Performance Period” means a calendar year.

“Target Performance” means the attainment of the level of performance at which 100% of the target award payment is earned.

“Threshold Performance” means the attainment of the level of performance at which the minimum bonus award payment is earned.

ELIGIBILITY

All regular full time and regular part time employees who have completed at least four months of service prior to the end of the Performance Period and during the performance period satisfactorily perform their duties, tasks and assignments.

An employee will not be eligible to earn a Bonus Award under the plan if such employee is required to participate in a performance improvement plan or is on disciplinary probation. An employee may be reinstated after achievement of satisfactory performance or removal from disciplinary probation.

Plan Category Classification- Each plan participant is assigned a plan category. A non-executive employee’s participation status and plan category must be approved by the President & Chief Executive Officer and an executive’s participation status and plan category must be recommended by the President & Chief Executive Officer and approved by the Board of Directors.

BONUS AWARD OPPORTUNITIES

The annual Bonus Award Opportunities, expressed as a percentage of base earnings shall be established for each Performance Period by the Compensation Committee of the Board of Directors at a Threshold, Target and Maximum Performance level for each applicable performance goal and each applicable employee category listed below.

Chief Executive Officer
Executive Vice President & Senior Vice President
Vice President
Assistant Vice President
Manager, Assistant Manager
& Supervisor
Staff Employees

PERFORMANCE GOALS

For each Performance Period the Compensation Committee of the Board of Directors shall establish specific performance goals for the Company as the basis for Bonus Award Opportunities under the plan. In establishing the criteria for these goals, the Compensation Committee shall establish Target, Threshold and Maximum Performance levels for each goal, where appropriate.

In establishing performance goals and the criteria thereof, the Compensation Committee may consider any number of business factors, including, but not limited to, economic or industry conditions or forecasts. In addition, the Compensation Committee may consider corporate objectives, including, but not limited to, improving profitability, growing its market share, the proper deployment of capital and expense control.

Where appropriate, the Compensation Committee shall establish and provide definitions and formulas for establishing goals so it may be determined how the Bonus Award

should be calculated. When the criteria for each goal is selected, the Compensation Committee shall also establish a specific weight to be given to that goal in determining the employees’ Bonus Award. In determining such weight to be given, the Compensation Committee shall consider the weight which is appropriate given current economic and industry conditions and forecasts and the importance of each of the Company’s current corporate objectives and their relationship to the criteria for the goal identified.

BONUS AWARD COMPONENTS

The Bonus Award for employees at, or above, the Assistant Vice Principal (AVP) level and the majority of employees identified as “Staff Employees” will be based solely on Company performance as outlined in the Plan.

Interpolation within each performance goal between Threshold, Target and Maximum Performance goals will be used to determine the actual percentage payable for that category and the weighted results of all components will be summed to determine total Bonus Award payout. The Compensation Committee, in its discretion, may make the receipt of a Bonus Award payout contingent on the Threshold Performance criteria for one or more performance goals being met, even if performance for other performance goals would otherwise generate a Bonus Award payout in the absence of such a restriction.

Employees below the level of AVP holding a supervisory position or other key position having responsibility for operational and strategic objectives will have 50% of their Bonus Award based upon Company performance as outlined in this program and 50% on the achievement of their individual performance objectives. These individuals will be specifically identified at the beginning of the Performance Period.

With respect to the portion of a participant’s Bonus Award that relates to individual performance (if any), such portion shall be determined based upon the rating of performance in the achievement of individual objectives.

Bonus Awards shall be pro-rated based upon the number of full months during the Performance Period that an individual was a participant in the plan.

PAYMENT OF BONUS AMOUNTS

The Compensation Committee of the Board of Directors may determine, in its discretion, to grant no Bonus Awards if it believes none are warranted. Conversely, even if the goals under the Success Sharing Plan are not achieved and no Bonus Awards are earned under the program, the Compensation Committee could award bonuses if, in the exercise of its business judgment, the Compensation Committee determines that they are warranted under the circumstances and in the best interest of the Company.

The payment of Bonus Awards shall be paid on or before March 15 of the calendar year following the Performance Period.

AMENDMENT AND TERMINATION

While it is the intention of the Company to continue the Plan, the Board of Directors reserves the right to change or discontinue the Plan at any time.

CLAW BACK PROVISION

If the Board of Directors learns of any misconduct by an officer who contributed to the Company restating all or a portion of its financial statements, it will do what is required to correct the misconduct and prevent it from occurring again and, if appropriate, take necessary remedial action. To determine the corrective action, the Board of Directors will review the situation to identify whether the restatement was the result of negligence, gross negligence or intentional misconduct. The Board of Directors will require reimbursement of any success sharing incentive compensation awarded to an officer if all of the following apply:

§	The amount of the success sharing award was calculated based on the achievement of certain financial results that were subsequently the subject of a restatement.
§	The executive engaged in intentional misconduct that caused or partially caused the need for the restatement.
§	The amount of the success sharing Bonus Award that would have been awarded to the executive had the financial results been properly reported would have been lower than the amount actually awarded.

Additionally, at the Board of Directors’ discretion, it may dismiss the officer, authorize legal action for breach of fiduciary duty or take other action to enforce the executive’s obligations to the Company.

EX-10.19

Exhibit 10.19

PENN MILLERS HOLDING CORPORATION
EMPLOYEE STOCK OWNERSHIP PLAN

(Effective                                         , 2009)

Table of Contents

	Page
ARTICLE I
INTRODUCTION		1
ARTICLE II
DEFINITIONS		2
ARTICLE III
ELIGIBILITY		10
3.1 Eligibility Generally		10
3.2 Commencement of Participation		10
3.3 Cessation of Participation		10
3.4 Participation upon Reemployment		10
3.5 Change in Control		11
ARTICLE IV
VESTING		12
4.1 In General		12
4.2 Normal Retirement Date		12
4.3 Death or Disability		12
4.4 Vesting upon Reemployment		12
4.5 Forfeiture of Account		12
4.6 Change in Control		13
ARTICLE V
CONTRIBUTIONS AND ALLOCATIONS		14
5.1 Company Contributions		14
5.2 Time and Manner of Contributions		14
5.3 Employee Contributions		14
5.4 Recovery of Contributions		14
5.5 Allocation of Employer Contributions		14
5.6 Income on Investments		15
5.7 Certain Stock Transactions		15
5.8 Valuation of Trust Fund		15
ARTICLE VI
MAXIMUM LIMITATION ON ALLOCATIONS		16
6.1 Participation Solely in This Plan		16
6.2 Participation in Another Defined Contribution Plan		16
6.3 Definitions		16
ARTICLE VII
INVESTMENT OF TRUST ASSETS		18

i

	Page
ARTICLE VIII
COMPANY STOCK APPRAISAL		19
ARTICLE IX
DISTRIBUTIONS		20
9.1 Termination of Employment		20
9.2 Death		20
9.3 Time of Payment		20
9.4 Manner of Making Payments		21
9.5 Form of Payment		21
9.6 Direct Rollover		21
9.7 Diversification Election		22
9.8 Election to Retain Interests in Plan		22
9.9 Mandatory Distributions		23
9.10 Dividend Distributions		23
9.11 Right of First Refusal		24
9.12 Prohibited Allocations		24
ARTICLE X
RIGHT TO SELL COMPANY STOCK		26
10.1 Put Requirements		26
ARTICLE XI
VOTING AND TENDER OF COMPANY STOCK		28
11.1 Voting		28
11.2 Tender		28
11.3 Fiduciary Responsibilities		29
11.4 Procedures for Voting and Tender		29
ARTICLE XII
ADMINISTRATION		30
12.1 Fiduciary Responsibilities		30
12.2 The Administrative Committee		30
12.3 Plan Expenses		31
12.4 Meetings and Voting		31
12.5 Compensation		31
12.6 Claims Procedures		32
12.7 Liabilities		33
ARTICLE XIII
AMENDMENTS		34
13.1 Right to Amend		34
13.2 Amendment by Administrative Committee		34
13.3 Plan Merger and Asset Transfers		34
13.4 Amendment of Vesting Schedule		34

ii

	Page
ARTICLE XIV
TERMINATION		35
14.1 Right to Terminate		35
14.2 Effect of Termination		35
14.3 Change in Control		35
ARTICLE XV
MISCELLANEOUS		36
15.1 Non-alienation of Benefits		36
15.2 Appointment of Guardian		36
15.3 Satisfaction of Benefit Claims		36
15.4 Controlling Law		36
15.5 Non-guarantee of Employment		36
15.6 Severability and Construction of the Plan		36
15.7 No Requirement of Profits		37
15.8 All Risk on Participants and Beneficiaries		37
ARTICLE XVI
TOP-HEAVY PROVISIONS		38
16.1 Determination of Top-Heavy Status		38
16.2 Top-Heavy Definitions		38
16.3 Top-Heavy Rules		40
ARTICLE XVII
EXEMPT LOANS		42
17.1 General		42
17.2 Terms of Exempt Loan Agreements		42
17.3 Prohibition on Purchase Arrangements		42
17.4 Suspense Account		42

iii

ARTICLE I
INTRODUCTION

          The Penn Millers Holding Corporation Employee Stock Ownership Plan (the “Plan”) is hereby established by Penn Millers Holding Corporation (the “Company”) in order for its employees to participate in the ownership of the Company. The Plan, effective as of                     , 2009, is intended to be an employee stock ownership plan within the meaning of Section 4975(e)(7) of the Internal Revenue Code of 1986, as amended, and is designed to invest primarily in Company Stock, which meets the requirements for qualifying employer securities under Code Section 409(l). The purchase of Company Stock for the Plan may be made with the proceeds of exempt loans meeting the requirements of Section 54.4975-7(b) of the Treasury Regulations (including any amendments thereto) and Section 2550.408(b)-3 of the Department of Labor Regulations (including any amendments thereto), employer contributions, dividends on qualified employer securities or a combination thereof.

1

ARTICLE II
DEFINITIONS

          The following initially capitalized words and phrases when used in the Plan shall have the following meanings, unless the context clearly requires otherwise.

          2.1 Account means the bookkeeping account established for each Participant which reflects the value of the Participant’s interest in the Plan. This Account shall include a Company Stock Account, which reflects the number of shares of Company Stock allocated to the Participant and an Investment Account which reflects other investments allocated to the Participant.

          2.2 Administrative Committee and Committee, used interchangeably, means the named fiduciary of the Plan, which is appointed by the Board of Directors, as is more fully described in Article XII. In the event the Board of Directors does not appoint an Administrative Committee, Administrative Committee means the Board of Directors.

          2.3 Affiliate means the Company and any corporation which is a member of a controlled group of corporations (as defined in Code Section 414(b)) which includes the Company; any trade or business (whether or not incorporated) which is under common control (as defined in Code Section 414(c)) with the Company; any organization (whether or not incorporated) which is a member of an affiliated service group (as defined in Code Section 414(m)) which includes the Company; and any other entity required to be aggregated with the Company pursuant to regulations under Code Section 414(o).

          2.4 Beneficiary means the individual(s) or entities entitled to receive the Participant’s benefits under the Plan in the event of the Participant’s death prior to receiving all benefits payable under the Plan.

          2.5 Board of Directors means the Board of Directors of the Company as constituted from time to time.

          2.6 Break in Service means a Plan Year during which an Employee (a) has terminated employment or is no longer employed with the Company or an Affiliate, and (b) fails to complete more than five hundred (500) Hours of Service.

          2.7 Change in Control means the first to occur of any of the following events:

               (a) any “Person” (as such term is used in Sections 13(d) and 14(d) of the Securities Exchange Act of 1934, as amended), except for any of the Company’s employee benefit plans, or any entity holding the Company’s voting securities for, or pursuant to, the terms of any such plan (or any trust forming a part thereof) (the “Benefit Plan(s)”), is or becomes the beneficial owner, directly or indirectly, of the Company’s securities representing 19.9% or more of the combined voting power of the Company’s then outstanding securities other than pursuant to a transaction excepted in Clause (d);

               (b) there occurs a contested proxy solicitation of the Company’s shareholders that results in the contesting party obtaining the ability to vote securities

2

representing 19.9% or more of the combined voting power of the Company’s then outstanding securities;

               (c) a binding written agreement is executed providing for a sale, exchange, transfer, or other disposition of all or substantially all of the assets of the Company to another entity, except to an entity controlled directly or indirectly by the Company;

               (d) the shareholders of the Company approve a merger, consolidation, or other reorganization of the Company, unless:

                    (i) under the terms of the agreement providing for such merger, consolidation, or reorganization, the shareholders of the Company immediately before such merger, consolidation, or reorganization, will own, directly or indirectly immediately following such merger, consolidation, or reorganization, at least 19.9% of the combined voting power of the outstanding voting securities of the Company resulting from such merger, consolidation, or reorganization (the “Surviving Company”) in substantially the same proportion as their ownership of the voting securities immediately before such merger, consolidation, or reorganization;

                    (ii) under the terms of the agreement providing for such merger, consolidation, or reorganization, the individuals who were members of the Board immediately prior to the execution of such agreement will constitute at least 19.9% of the members of the board of directors of the Surviving Company after such merger, consolidation, or reorganization; and

                    (iii) based on the terms of the agreement providing for such merger, consolidation, or reorganization, no Person (other than (A) the Company or any Subsidiary of the Company, (B) any Benefit Plan, (C) the Surviving Company or any Subsidiary of the Surviving Company, or (D) any Person who, immediately prior to such merger, consolidation, or reorganization had beneficial ownership of 19.9% or more of the then outstanding voting securities) will have beneficial ownership of 19.9% or more of the combined voting power of the Surviving Company’s then outstanding voting securities;

               (e) a plan of liquidation or dissolution of the Company, other than pursuant to bankruptcy or insolvency laws, is adopted; or

               (f) during any period of two consecutive years, individuals, who at the beginning of such period, constituted the Board cease for any reason to constitute at least a majority of the Board unless the election, or the nomination for election by the Company’s shareholders, of each new director was approved by a vote of at least two-thirds of the directors then still in office who were directors at the beginning of the period.

     Notwithstanding Clause (a), a Change in Control shall not be deemed to have occurred if a Person becomes the beneficial owner, directly or indirectly, of the Company’s securities representing 19.9% or more of the combined voting power of the Company’s then outstanding securities solely as a result of an acquisition by the Company of its voting securities which, by reducing the number of shares outstanding, increases the proportionate number of shares beneficially owned by such Person to 19.9% or more of the combined voting power of the

3

Company’s then outstanding securities; provided, however, that if a Person becomes a beneficial owner of 19.9% or more of the combined voting power of the Company’s then outstanding securities by reason of share purchases by the Company and shall, after such share purchases by the Company, become the beneficial owner, directly or indirectly, of any additional voting securities of the Company (other than as a result of a stock split, stock dividend or similar transaction), then a Change in Control of the Company shall be deemed to have occurred with respect to such Person under Clause (a). In no event shall a Change in Control of the Company be deemed to occur under Clause (a) by virtue of the acquisition of the Company’s securities by Benefit Plans.

          2.8 Code means the Internal Revenue Code of 1986, as amended, and the regulations promulgated thereunder.

          2.9 Company means Penn Millers Holding Corporation and any Affiliate which adopts this Plan with the approval of the Board of Directors of the Company and any successor to the business of the Company that agrees to assume the Company’s obligations under the Plan.

          2.10 Company Stock means shares of common stock issued by the Company that are readily tradable on an established securities market; provided, however, if the Company’s common stock is not readily tradable on an established securities market, “Company Stock” means common stock issued by the Company having a combination of voting power and dividend rates equal to or in excess of: (a) that class of common stock of the Company having the greatest voting power and (b) that class of common stock of the Company having the greatest dividend rights. Non-callable preferred stock shall be treated as Company Stock for purposes of the Plan if such stock is convertible at any time into stock that is readily tradable on an established securities market (or, if applicable, that meets the requirements of (a) and (b) next above) and if such conversion is at a conversion price that, as of the date of the acquisition by the Plan, is reasonable. For purposes of the immediately preceding sentence, preferred stock shall be treated as non-callable if, after the call, there will be a reasonable opportunity for a conversion that meets the requirements of the immediately preceding sentence. Company Stock shall be held under the Trust only if such stock satisfies the requirements of Section 407(d)(5) of ERISA. For purposes of this definition “Company” includes any corporation that is a member of a controlled group of corporations with the Company (within the meaning of Section 409(l)(4) of the Code).

          2.11 Compensation means wages within the meaning of Code Section 3401(a) and all other payments of compensation to a Participant by the Employer during a Plan Year for which the Employer is required to report on Form W-2. Compensation must be determined without regard to any rules under Code Section 3401(a) that limit the remuneration included in wages based on the nature or location of the employment or the services performed. Compensation also includes any salary reduction contributions elected by a Participant which is not includible in the gross income of the Participant pursuant to any plan maintained by the Company in accordance with Code Sections 401(k), 125 or 132(f)(4).

               Payments made within 2 ¹/2 months after severance from employment (within the meaning of Code Section 401(k)(2)(B)(i)(I)) will be Compensation if they are payments that, absent a severance from employment, would have been paid to the Participant

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while the Participant continued in employment with the Employer and are regular compensation for services during the Participant’s regular working hours, compensation for services outside the Participant’s regular working hours (such as overtime or shift differential), commissions, bonuses, or other similar compensation, and payments for accrued bona fide sick, vacation or other leave, but only if the Participant would have been able to use the leave if employment had continued. Any payments not described above are not considered Compensation if paid after severance from employment, even if they are paid within 2 ¹/2 months following severance from employment, except for payments to an individual who does not currently perform services for the Employer by reason of qualified military service (within the meaning of Code Section 414(u)(1)) to the extent these payments do not exceed the amounts the individual would have received if the individual had continued to perform services for the Employer rather than entering qualified military service.

               Notwithstanding the foregoing, Compensation shall not include any amounts earned prior to becoming a Participant in the Plan.

               The annual compensation for each Participant taken into account under the Plan shall not exceed $200,000, as adjusted by the Internal Revenue Service at the same time and in the same manner as under Code Section 415(d).

          2.12 Disability means a medically determinable physical or mental impairment which is of such permanence and degree that it can be expected to result in death or that a Participant is unable, because of such impairment, to perform any substantial gainful activity for which the Participant is suited by virtue of such Participant’s experience, training or education and which would entitle the Participant to benefits under the Employer’s long-term disability plan, if any, or to Social Security disability benefits as evidenced by a disability award letter.

          2.13 Disqualified Person means a person defined in Code Section 4975(e), including but not limited to (i) a fiduciary of the Plan; (ii) a person providing services to the Plan; (iii) an owner of 50% or more of the combined voting power or value of all classes of stock of the Company entitled to vote or the total value of shares of all classes of stock of the Company and certain members of such owner’s family; or (iv) an officer, director, 10% or greater shareholder or highly compensated employee (who earns 10% or more of the yearly wages) of the Company.

          2.14 Effective Date means                                         , 2009 which is the date on which the provisions of this Plan become effective.

          2.15 Employee means an individual who is employed as a common law employee by the Company or an Affiliate on a salaried or hourly basis and with respect to whom the Company or the Affiliate is required to withhold taxes from remuneration paid to such Employee by the Company or Affiliate for personal services rendered to the Company, including any officer or director who shall so qualify. If an individual is not considered to be an Employee in accordance with the preceding sentence for a Plan Year, a subsequent determination by the Company, any governmental agency or court that the individual is a common law employee of the Company, even if such determination is applicable to prior years, will not have a retroactive effect for purposes of eligibility to participate in the Plan.

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          2.16 Employer means the Company.

          2.17 Entry Date means January 1, March 1, July 1 and October 1 of each Plan Year.

          2.18 ERISA means the Employee Retirement Income Security Act of 1974, as amended from time to time, including any regulations promulgated thereunder.

          2.19 Exempt Loan means the issuance of notes, a series of notes or other installment obligations incurred by the Trustee, in accordance with the Trust, in connection with the purchase of Company Stock, the terms of which shall satisfy the requirements of Treasury Regulations Section 54.4975-7(b), including the requirements: (a) that the loan bear a reasonable rate of interest, be for a definite period (rather than payable on demand), and be without recourse against the Plan, and (b) that the only assets of the Plan that may be given as collateral are shares of Common Stock purchased with the proceeds of that loan or with the proceeds of a prior Exempt Loan.

          2.20 Highly Compensated Employee

               (a) Highly Compensated Employee means an Employee who performs service during the determination year and is described in one or more of the following groups:

                    (i) An Employee who is a 5% owner, as defined in Code Section 416(i)(1)(A)(iii), at any time during the determination year or the look-back year.

                    (ii) An Employee who receives compensation in excess of $80,000 (indexed in accordance with Code Section 415(d)) during the look-back year and is a member of the top-paid group for the look-back year.

               (b) For purposes of the definition of Highly Compensated Employee, the following definitions and rules shall apply:

                    (i) The determination year is the Plan Year for which the determination of who is highly compensated is being made.

                    (ii) The look-back year is the 12 month period immediately preceding the determination year, or if the Employer elects, the calendar year ending with or within the determination year.

                    (iii) The top-paid group consists of the top 20% of employees ranked on the basis of compensation received during the year. For purposes of determining the number of employees in the top-paid group, employees described in Code Section 414(q)(8) and Treasury Regulations Section 1.414(q)-1T Q&A 9(b) are excluded.

               (c) Compensation is compensation within the meaning of Code Section 415(c)(3), plus, for purposes thereof, elective or salary reduction contributions to a cafeteria plan, cash or deferred arrangement under Code Section 401(k) or tax-sheltered annuity

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under Code Section 403(b), or made pursuant to Code Section 132(f)(4). Employers aggregated under Code Sections 414(b), (c), (m), or (o) are treated as a single employer.

          2.21 Hours of Service means:

               (a) Performance of Duties. The actual hours for which an Employee is paid or entitled to be paid by the Company for the performance of duties;

               (b) Nonworking Paid Time. Each hour for which an Employee is paid or entitled to be paid by the Company on account of a period of time during which no duties are performed (irrespective of whether the employment relationship has terminated) due to vacation, holiday, illness, incapacity, disability (to the extent not already included in Compensation), layoff, jury duty, military duty or leave of absence; provided, however, no more than 501 Hours of Service shall be credited to an Employee under this subsection for any single continuous period (whether or not such period occurs in a single computation period); and provided further that no credit shall be given for payments made or due under a plan maintained solely for the purpose of complying with applicable worker’s or unemployment compensation or disability insurance laws or for payments which solely reimburse an Employee for medical or medically related expenses incurred by the Employee; and

               (c) Maternity, Paternity and FMLA Leave. Solely for purposes of determining whether a one year Break in Service has occurred for purposes of determining eligibility to participate and vesting, each hour for which an Employee is absent from employment by reason of (i) pregnancy of the Employee, (ii) birth of a child of the Employee, (iii) placement of a child in connection with the adoption of the child by an individual, or (iv) caring for the child during the period immediately following the birth or placement for adoption. Hours of Service shall also, for these limited purposes, include each hour for which an Employee who has worked for the Company or an Affiliate for at least 12 months and for at least 1,250 Hours of Service during the year preceding the start of the leave, is absent from employment on an unpaid family leave for up to 12 weeks, as provided for in the Family and Medical Leave Act of 1993 (the “FMLA Leave”), by reason of (A) the birth or adoption of a child, (B) the care of a spouse, child or parent with a serious health condition, or (C) the Employee’s own serious health condition, provided that such an Employee provides the Company with a 30-day advance notice if the leave is foreseeable, and/or medical certification satisfactory to support the Employee’s request for leave because of a serious health condition. For purposes of determining whether an Employee’s leave qualifies as a “FMLA Leave” in order to be credited with Hours of Service under this Plan, the Family and Medical Leave Act of 1993 (“FMLA”) and the regulations promulgated thereunder shall apply. During the period of absence, the Employee shall be credited with the number of hours that would be generally credited but for such absence or if the general number of work hours is unknown, eight Hours of Service for each normal workday during the leave (whether or not approved). These hours shall be credited to the computation period in which the leave of absence commences if crediting of such hours is required to prevent the occurrence of a one year Break in Service in such computation period, and in other cases, in the immediately following computation period. The computation period shall be the same as the relevant period for determining eligibility computation periods and vesting computation periods. Unless otherwise required under the FMLA and the regulations promulgated thereunder, no more than 501 Hours of Service shall be

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credited under this paragraph for any single continuous period (whether or not such period occurs in a single computation period).

               (d) Back Pay. Each hour for which back pay, irrespective of mitigation of damages, is either awarded or agreed to by the Company; provided, however, Hours of Service credited under paragraphs (a), (b) and (c) above shall not be recredited by operation of this paragraph.

               (e) Equivalencies. The Administrative Committee shall have the authority to adopt any of the following equivalency methods for counting Hours of Service that are permissible under regulations issued by the Department of Labor: (i) Working Time; (ii) Periods of Employment; (iii) Earnings; or (iv) Elapsed Time. The adoption of any equivalency method for counting Hours of Service shall be evidenced by a certified resolution of the Committee, which shall be attached to and made part of the Plan. Such resolution shall indicate the date from which such equivalency shall be effective.

               (f) Miscellaneous. Unless the Administrative Committee directs otherwise, the methods of determining Hours of Service when payments are made for other than the performance of duties and of crediting such Hours of Service to Plan Years set forth in Department of Labor Regulations Sections 2530.200b-2(b) and (c), shall be used hereunder and are incorporated by reference into the Plan.

               Participants on military leaves of absence who are not directly or indirectly compensated or entitled to be compensated by the Company while on such leave shall be credited with Hours of Service as required by the Uniformed Services Employment and Reemployment Rights Act.

               Notwithstanding any other provision of this Plan to the contrary, an Employee shall not be credited with Hours of Service more than once with respect to the same period of time.

          2.22 Investment Manager means an investment advisor, bank or insurance company, meeting the requirements of ERISA Section 3(38), appointed by the Company to manage the Plan’s assets in accordance with the Trust Agreement.

          2.23 Leased Employee means any person who performs services for an Employer or an Affiliate (the “recipient”) (other than an employee of the “recipient”) pursuant to an agreement between the “recipient” and any other person (the “leasing organization”) on a substantially full-time basis for a period of at least one year, provided that such services are performed under primary direction of or control by the “recipient”.

          2.24 Normal Retirement Date means the first day of the calendar month coincident with or following the later of (i) the date on which a Participant attains age 65 or (ii) the date on which the Participant attains five Years of Service.

          2.25 Participant means an Employee participating in the Plan in accordance with Article III.

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          2.26 Plan means the Penn Millers Holding Corporation Employee Stock Ownership Plan, as set forth in this document and in the Trust Agreement pursuant to which the Trust is maintained, in each case as amended from time to time.

          2.27 Plan Year means the calendar year.

          2.28 Suspense Account means the account established and maintained to hold Company Stock acquired with the proceeds of an Exempt Loan and held in the Trust, which Company Stock has not been allocated to the Accounts of Participants with respect to the year of such acquisition.

          2.29 Trust or Trust Fund means all property held by the Trustee pursuant to the terms of the Trust Agreement and this Plan. Such property shall be held for the exclusive benefit of Participants and Beneficiaries.

          2.30 Trust Agreement means the agreement of trust established by the Company and the Trustee for purposes of holding title to the assets of the Plan.

          2.31 Trustee means the trustee as named in the Trust Agreement, or a successor thereto or substitute therefor, in any case as appointed by the Board of Directors of the Company in accordance with Article XII to hold legal title to the assets of the Trust and that expressly agrees to be bound by the terms and conditions of the Trust Agreement.

          2.32 Valuation Date means the last business day of each calendar quarter, and such other more frequent dates as the Administrative Committee may from time to time establish.

          2.33 Year of Service means a Plan Year during which a Participant is credited with at least 1,000 Hours of Service. Notwithstanding the foregoing, a Year of Service for purposes of determining eligibility in the Plan under Article III shall be the earlier of (1) the 12-consecutive month period commencing with the day on which the Employee is first credited with an Hour of Service if the Employee has been credited with at least 1,000 Hours of Service or (2) any Plan Year commencing after the day on which the Employee first is credited with an Hour of Service in which the Employee has been credited with at least 1,000 Hours of Service. For purposes of determining eligibility to participate in the Plan under Article III, Years of Service shall include periods of employment with the Employer prior to the Effective Date of the Plan.

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ARTICLE III
ELIGIBILITY

          3.1 Eligibility Generally. An Employee is eligible to become a Participant in the Plan when the Employee attains age 21 and has completed one Year of Service.

          Notwithstanding the foregoing, the following individuals shall not be eligible to participate in the Plan:

               (a) Leased Employees;

               (b) Individuals whose employment with the Company or an Affiliate is governed by a collective bargaining agreement between the Company and representatives of the employee bargaining unit if evidence exists that retirement benefits were a subject of good faith bargaining between the parties, and provided such bargaining agreement does not provide for participation in this Plan; and

               (c) Non-resident aliens who do not receive earned income from sources within the United States.

          3.2 Commencement of Participation. Each Employee who has satisfied the requirements of Section 3.1 of the Plan shall commence participation in the Plan on the later of the Effective Date or the Entry Date concurrent with or next following the date on which such requirements are satisfied.

          3.3 Cessation of Participation. An Employee shall cease to be a Participant upon the earliest of (a) the date on which the Employee retires under the Plan; (b) the date on which the Employee’s employment with the Company terminates for any reason, including death or Disability; (c) the date on which the Employee’s employment with the Company is governed by a collective bargaining agreement that does not provide for participation in this Plan; or (d) the date on which the Employee becomes a “leased employee” as defined in Code Section 414(n).

          3.4 Participation upon Reemployment. Upon the reemployment of any person after the Effective Date who had previously been employed by the Company on or after the Effective Date, the following rules shall apply in determining the Employee’s participation in the Plan and Years of Service under the Plan:

               (a) No Prior Participation. If the reemployed Employee was not a Participant in the Plan during the prior period of employment and the reemployed Employee incurred a Break in Service, only Service with the Company after reemployment will count for purposes of meeting the requirements of Section 2.1 of the Plan. If the reemployed Employee was not a Participant in the Plan during the prior period of employment and the reemployed Employee did not incur a Break in Service, all Service with the Company (both before and after the Break in Service) will be aggregated for purposes of meeting the requirements of Section 2.1 of the Plan.

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               (b) Prior Participation. If the reemployed Employee was a Participant in the Plan during the prior period of employment, the reemployed Employee shall be entitled to resume participation in the Plan on the date of the Employee’s reemployment.

               (c) Years of Service. Upon reemployment following a Break in Service, any Employee who was previously entitled to a nonforfeitable (vested) benefit will have all Years of Service (both before and after the Break in Service) aggregated. Any Employee who was not eligible for a nonforfeitable (vested) benefit will have all Years of Service (both before and after the Break in Service) aggregated unless the period of unemployment with the Company exceeds the greater of (i) Years of Service prior to the Break in Service or (ii) five years. For purposes of this paragraph (c) of this Section 2.5, the period of unemployment commences with the Employee’s termination date and ends with the date of reemployment.

               (d) Veterans Reemployment Rights. Notwithstanding any other provision of the Plan to the contrary, contributions, benefits, and service credit with respect to qualified military service shall be provided in accordance with Code Section 414(u).

          3.5 Change in Control. Notwithstanding the provisions of this Article III or any other provisions of the Plan to the contrary, upon a change in Control, no additional Employee shall be eligible to become a Participant in the Plan.

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ARTICLE IV
VESTING

     4.1 In General. Each Participant shall have a vested interest in the Participant’s Account, if any, in accordance with the following vesting schedule:

Years of Service After the Effective Date	Vested Percentage
0-1 Years of Service		0	%
2 Years of Service		20	%
3 Years of Service		40	%
4 Years of Service		60	%
5 Years of Service		80	%
6 or more Years of Service		100	%

          4.2 Normal Retirement Date. Notwithstanding the provisions of Section 4.1 of the Plan, a Participant whose employment terminates on or after such Participant’s Normal Retirement Date shall be 100 percent vested.

          4.3 Death or Disability. Notwithstanding the provisions of Section 4.1 of the Plan, a Participant whose employment is terminated on account of death or Disability shall be 100 percent vested.

          4.4 Vesting upon Reemployment. Upon the reemployment of any person after the Effective Date who had previously been employed by the Company on or after the Effective Date, the following rules shall apply in determining the reemployed Employee’s vesting in the Plan:

               (a) Five Consecutive Breaks in Service. If a Participant has five consecutive Breaks in Service, all Years of Service after such Breaks in Service will be disregarded for the purpose of vesting the Employer-derived Account balance that accrued before such Breaks in Service. Both pre-Break and post-Break service, however, will count for the purposes of vesting the Employer-derived Account balance that accrues after such Breaks in Service. Both Accounts will share in the earnings and losses of the fund.

               (b) Less than Five Consecutive Breaks in Service. If a Participant does not have five consecutive Breaks in Service, both the pre-Break and post-Break service will count in vesting all Account balances.

          4.5 Forfeiture of Account. If prior to being 100 percent vested, a Participant terminates employment for a reason other than death, Disability or attainment of Normal Retirement Date, the nonvested portion will be treated as a forfeiture. Assets in the Participant’s Account other than Company Stock acquired with the proceeds of an Exempt Loan will be forfeited before Company Stock acquired with the proceeds of an Exempt Loan are forfeited. Forfeitures shall be allocated to the Accounts of Participants who were employed by the

12

Company on the last day of the Plan Year or, in the Company’s discretion, used to pay Plan administrative expenses. Forfeitures allocated to Participants shall be allocated in the ratio that the Compensation of each Participant for such Plan Year bears to the total Compensation of all such Participants for such Plan Year. For purposes of this Section 4.5, if the value of a Participant’s vested account balance is zero, the participant shall be deemed to have received a distribution of such vested account balance.

               If any former Participant shall be reemployed by the Employer before incurring five consecutive Breaks in Service, and such former Participant had received, or was deemed to have received, a distribution of the Participant’s entire vested interest prior to reemployment, the forfeited account shall be reinstated upon the reemployment of such Participant. In the event of a deemed distribution, the undistributed portion of the Participant’s account must be restored in full, unadjusted by any gains or losses occurring subsequent to the Valuation Date coinciding with or next following the Participant’s termination of employment. The source for such reinstatement shall be any forfeitures occurring during the Plan Year. If such source is insufficient, then the Employer shall contribute an amount which is sufficient to restore any such forfeited account provided, however, that if a discretionary contribution is made for such Plan Year pursuant to Section 5.1, such contribution shall first be applied to restoring such accounts and the remainder shall be allocated in accordance with Section 5.5.

          4.6 Change in Control. Notwithstanding the provisions of Section 4.1 of the Plan, a Participant shall be 100 percent vested upon a Change in Control.

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ARTICLE V
CONTRIBUTIONS AND ALLOCATIONS

          5.1 Company Contributions. For each Plan Year, the Company may contribute cash or shares of Company Stock, or both, to the Plan in such amounts as may be determined by the Board of Directors.

          In the event shares of Company Stock are sold to the Trustee for a Plan Year, the fair market value of such Company Stock shall be determined in accordance with the provisions of Article VIII.

          5.2 Time and Manner of Contributions. All Company contributions shall be paid directly to the Trustee, and a contribution for any Plan Year shall be made not later than the date prescribed by law for filing the Company’s Federal income tax return (including extensions, if any) for the Company’s taxable year that ends within or with that Plan Year.

          5.3 Employee Contributions. Participants are neither permitted nor required to make contributions to the Plan.

          5.4 Recovery of Contributions. The Company may recover contributions to the Plan, only as set forth in this Section 5.4.

               (a) Contributions made to the Plan shall be conditioned upon the initial and continuing qualification of the Plan. If the Plan is determined to be disqualified, contributions made in respect of any period subsequent to the effective date of such disqualification shall be returned to the Company. With respect to the initial qualification of the Plan, the Company may recover contributions only if (i) the Plan receives an adverse determination letter with respect to its initial qualification and (ii) the application for determination letter is filed within the applicable remedial amendment period that applies to new plans (determined in accordance with the concepts of Rev. Proc. 2007-44).

               (b) Contributions made to the Plan shall be conditioned upon their deductibility under the Code. To the extent that a deduction is disallowed for any contribution, such amount shall be returned to the Company within one year after the disallowance of the deduction.

               (c) If a contribution, or any part thereof, is made on account of a mistake of fact, the amount of the contribution attributable to such mistake shall be returned to the Company within one year after it is made.

          5.5 Allocation of Employer Contributions. Subject to the limitations set forth in Article VI, Employer contributions made to the Trust in the form of cash or Company Stock for a Plan Year shall be allocated to the Accounts of Participants in the ratio of the Compensation of each Participant for the Plan Year to the total Compensation of all Participants for the Plan Year, provided that the Participant has completed 1,000 Hours of Service and is actively employed on the last date of the Plan Year.

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          5.6 Income on Investments. The income, gains, and losses attributable to investments under the Plan shall be allocated as of each Valuation Date or at such other times as the Administrative Committee may determine to the Accounts of Participants and Beneficiaries who have undistributed balances in their Accounts on the Valuation Date, in proportion to the amounts in the Accounts immediately after the preceding Valuation Date, but after first reducing each Account by any distributions, withdrawals or transfers from the Trust during the interim period and increasing each Account by any transfers to the Trust and by contributions made to the Trust during the interim period.

          Distributions from the Plan shall include income, gains, and losses accrued as of the coincident or immediately preceding Valuation Date, and shall not be adjusted proportionately to reflect any income, gains, or losses accrued after that Valuation Date. All valuations shall be based on the fair market value of the assets in the Trust on the Valuation Date.

          5.7 Certain Stock Transactions. Shares of Company Stock received by the Trustee as a result of a stock split, dividend, conversion, or as a result of a reorganization or other recapitalization of the Company shall be allocated as of the day on which such shares are received by the Trustee in the same manner as the shares of Company Stock to which they are attributable are then allocated.

          5.8 Valuation of Trust Fund. As of each Valuation Date, the Trustee shall determine the fair market value of the Trust, after deducting withdrawals, distributions, and any expenses of Plan administration paid out of the Trust, and including any contributions allocated to Participants’ Accounts, for the valuation period ending on the Valuation Date. In determining value, the Trustee may use such generally accepted methods as the Trustee, in its discretion, deems advisable, which, in the case of Company Stock shall be in accordance with the provisions of Article VIII.

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ARTICLE VI
MAXIMUM LIMITATION ON ALLOCATIONS

          6.1 Participation Solely in This Plan.

               (a) If the Participant does not participate in, and has never participated in another plan qualified under Code Section 401(a) that is maintained by the Employer, or a welfare benefit fund (as defined in Code Section 419(e)) maintained by the Employer, or an individual medical account (as defined in Code Section 415(l)(2)) maintained by the Employer, which provides an Annual Addition, the amount of Annual Additions which may be credited to the Participant’s Account for any Limitation Year shall not exceed the lesser of the Maximum Permissible Amount or any other limitation contained in the Plan. Except as provided in Section 6.1(d), if the Company’s contribution that would otherwise be contributed or allocated to the Participant’s Account would cause the Annual Additions for the Limitation Year to exceed the Maximum Permissible Amount, the amount contributed or allocated will be reduced so that the Annual Additions for the Limitation Year will equal the Maximum Permissible Amount.

               (b) Prior to determining the Participant’s actual Compensation for the Limitation Year, the Company may determine the Maximum Permissible Amount for a Participant on the basis of a reasonable estimation of the Participant’s Compensation for the Limitation Year, uniformly determined for all Participants similarly situated.

               (c) As soon as is administratively feasible after the end of the Limitation Year, the Maximum Permissible Amount for the Limitation Year will be determined on the basis of the Participant’s actual Compensation for the Limitation Year.

          6.2 Participation in Another Defined Contribution Plan. This Section 6.2 applies if a Participant is also covered under another defined contribution plan or a welfare benefit fund (as defined in Code Section 419(e)), an individual medical account (as defined in Code Section 415(l)(2) or a simplified employee pension (as defined in Code Section 408(k)) maintained by the Employer which provides an Annual Addition during any Limitation Year. If the Participant participates in one or more such plans, all reductions in Annual Additions shall be made under such plans and not under this Plan. In the event that, notwithstanding the preceding sentence, the Annual Additions to be credited under this Plan should exceed the Maximum Permissible Amount, the Annual Additions which would otherwise be credited to the Participant’s Account under any other such plan shall be reduced prior to making any reduction hereunder, which reduction shall be reduced in the manner set forth in Section 6.1 of the Plan.

          6.3 Definitions. The following definitions apply solely for purposes of this Article VI.

               (a) Annual Additions means the sum of the following amounts credited to a Participant’s Account for the Limitation Year:

                    (i) employer contributions

                    (ii) employee contributions

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                    (iii) forfeitures

                    (iv) amounts allocated to an individual medical account (as defined in Code Section 415(l)(2)) which is part of a pension or annuity plan maintained by the Employer which are treated as Annual Additions to a defined contribution plan, and

                    (v) amounts derived from contributions paid or accrued, which are attributable to post-retirement medical benefits, allocated to the separate account of a key employee, as defined in Code Section 419A(d)(3), under a welfare benefit fund maintained by the Employer which are treated as Annual Additions to a defined contribution plan.

                    (vi) Excess amounts applied to reduce Employer contributions under Sections 6.2 or 6.1 of the Plan in the Limitation Year will be Annual Additions for such Limitation Year.

               (b) Employer means the Company and all members of a controlled group of corporations (as defined in Code Section 414(b) and modified by Code Section 415(h)) all commonly controlled trades or businesses (as defined in Code Section 414(c) as modified by Code Section 415(h)), any affiliated service group (as defined in Code Section 414(m)) of which the Company is a part, and any other entity required to be aggregated with the Employer pursuant to regulations under Code Section 414(o).

               (c) Excess Amount means the excess of the Participant’s Annual Additions for the Limitation Year over the Maximum Permissible Amount.

               (d) Limitation Year means the calendar year.

               (e) Maximum Permissible Amount means the Maximum Annual Additions that may be contributed or allocated to a Participant’s Account for any Limitation Year. Such amount shall not exceed the lesser of:

                    (i) $40,000 (as adjusted for increases in the cost-of-living under Code Section 415(d)), or

                    (ii) 100 percent of the Participant’s Compensation for the Limitation Year.

          The Maximum Permissible Amount shall be pro-rated in the case of any Limitation Year of less than 12 months created by the changing of the Limitation Year.

          If no more than one-third of Company contributions to the Plan for a Plan Year which are deductible under Code Section 404(a)(9) are allocated to the Accounts of Participants who are Highly Compensated Employees, there shall be excluded in determining the Maximum Permissible Amount of each Participant for such Plan Year (A) the contributions applied to the payment of interest on an Exempt Loan; and (B) any forfeitures of Company contributions if the forfeited contributions were Company Stock acquired with the proceeds of an Exempt Loan.

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ARTICLE VII
INVESTMENT OF TRUST ASSETS

          All assets of the Plan shall be held in the Trust. To the extent the Trustee deems practical, the Trustee shall use all available cash, as directed by the Administrative Committee, to purchase Company Stock in open market transactions, from other stockholders or to buy newly issued Company Stock from the Company. If the purchase is from the Company or a Disqualified Person, such purchase shall be for adequate consideration and no commission is to be charged with respect to the purchase. If no such stock is available for purchase, or if the Trustee determines that the purchase of such additional stock is not practical, the Trustee shall invest in other securities or property, real or personal, consistent with the requirements of Title I of ERISA. These other securities, property and cash shall be held by the Trustee in the Trust. The Trust income shall be allocated as of each Valuation Date to Participant’s Investment Accounts in accordance with Section 5.6 of the Plan.

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ARTICLE VIII
COMPANY STOCK APPRAISAL

          The fair market value of Company Stock shall be determined, on any relevant day, as follows: (a) if such stock is then traded in the over-the-counter market, the closing sale price (as reported in the National Market System by NASDAQ with respect to such stock) for the most recent date (including such relevant day) during which a trade in such stock has occurred, or (b) if such stock is then traded on a national securities exchange, the closing sale price for the most recent date (including such relevant date) during which a trade in such stock has occurred. In accordance with the provisions of Code Section 401(a)(28)(C), if Company stock is not actively traded in the over-the-counter market, or on a national securities exchange, a valuation of Company stock required to be made under this Plan shall be made by an independent appraiser who satisfies requirements similar to those contained in regulations issued under Code Section 170(a)(1).

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ARTICLE IX
DISTRIBUTIONS

          9.1 Termination of Employment. In the event of the Participant’s termination of employment for any reason (including attainment of Normal Retirement Date or on account of death), a Participant shall be entitled to a distribution of all amounts determined under Article IV that are credited to the Participant’s Account at the times set forth in this Article IX.

          9.2 Death. Upon the death of a Participant, all amounts credited to the Participant’s Account shall be distributed to the Participant’s Beneficiary, determined in accordance with this Section 9.2.

               (a) The Administrative Committee may require such proof of death and such other evidence of the right of any person to receive payment of the Account of a deceased Participant as the Administrative Committee deems necessary. The Administrative Committee’s determination of death and of the right of any person to receive payment shall be conclusive and binding on all parties.

               (b) The Beneficiary upon the death of a Participant shall be the Participant’s spouse; provided, however, that the Participant may designate, on a form provided by the Administrative Committee for such purpose, a Beneficiary other than the Participant’s spouse, if:

                    (i) the spouse has waived the right to be the Participant’s Beneficiary in the manner set forth in subsection (c) of this Section 9.2; or

                    (ii) the Participant has established to the satisfaction of the Administrative Committee that the Participant has no spouse or that the spouse cannot be located.

               (c) Any consent by a Participant’s spouse to waive a death benefit must be filed with the Administrative Committee in writing, in a manner, and on a form provided by the Committee for such purpose. The spouse’s consent must acknowledge the effect of the consent and must be witnessed by a notary public or a Plan representative. The designation of a Beneficiary other than the spouse made by a married Participant must be consented to by the Participant’s spouse and may be revoked by the Participant in writing without the consent of the spouse. Any new beneficiary designation must comply with the requirements of this subsection (c). A former spouse’s waiver shall not be binding on a new spouse.

               (d) In the event the designated Beneficiary fails to survive the Participant, or if such designation shall be ineffective for any reason, the Participant’s Account shall be paid in the following order of priority: first to the Participant’s surviving spouse, if any; second, if there is no surviving spouse, to the Participant’s surviving children, if any, in equal shares; third, if there is neither a surviving spouse nor surviving children, to the legal representatives of the estate of the Participant.

          9.3 Time of Payment. The distribution of a Participant’s Account shall begin as soon as administratively feasible. Unless a Participant elects otherwise, such distribution shall

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not be later than 60 days after the latest of the close of the Plan Year in which occurs (i) the date on which the Participant attains Normal Retirement Date, (ii) the 10th anniversary of the year in which the Participant commenced participation in the Plan, or (iii) the date the Participant terminates service with the Employer.

          9.4 Manner of Making Payments. A Participant’s Account will be distributed in one lump sum.

          9.5 Form of Payment. Distributions of a Participant’s Account balance shall be made in Company Stock unless the distributee elects cash. In the event the Participant’s Account includes securities acquired with the proceeds of the Exempt Loan and such proceeds consist of more than one class of securities, the amount distributed shall include substantially the same proportion of each class of securities acquired with the proceeds of the Exempt Loan.

          Such distributions shall be the fair market value of each share multiplied by the number of shares credited to the Participant’s Account, with appropriate adjustments to reflect intervening stock dividends, stock splits, stock redemptions, or similar changes to the number of outstanding shares. The fair market value of a share shall be determined as of the Valuation Date coinciding with or immediately following the date of the distribution request or, in the case of a transaction between the Plan and a Disqualified Person, determined as of the date of the transaction.

          9.6 Direct Rollover.

               (a) Notwithstanding any provision of the Plan to the contrary that would otherwise limit a distributee’s election under this Article IX, a distributee may elect, at the time and in the manner prescribed by the Plan Administrator, to have any portion of an eligible rollover distribution paid directly to an eligible retirement plan specified by the distributee in a direct rollover.

               For purposes of this Section 9.6, the following definitions apply:

          “Eligible rollover distribution”. An eligible rollover distribution is any distribution of all or any portion of the balance to the credit of the distributee, except that an eligible rollover distribution does not include: any distribution that is one of a series of substantially equal periodic payments (not less frequently than annually) made for the life (or life expectancy) of the distributee or the joint lives (or joint life expectancies) of the distributee and the distributee’s designated Beneficiary, or for a specified period of ten years or more; any distribution to the extent such distribution is required under Code Section 401(a)(9); a distribution on account of hardship; or the portion of any distribution that is not includable in gross income (determined without regard to the exclusion for net unrealized appreciation with respect to employer securities).

          “Eligible retirement plan”. An eligible retirement plan is an eligible plan under Code Section 457(b) which is maintained by a state, political subdivision of a state, or any agency or instrumentality of a state, or political subdivision of a state and which agrees to separately account for amounts transferred into such plan from this Plan, an individual retirement account described in Code Section 408(a), an individual retirement annuity described in Code

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Section 408(b), an annuity plan described in Code Section 403(a), an annuity contract described in Code Section 403(b), a qualified plan described in Code Section 401(a), or a Roth IRA described in Code Section 408A, that accepts the distributee’s eligible rollover distribution. The definition of eligible retirement plan shall also apply in the case of a distribution to a surviving spouse, or to a spouse or former spouse who is the alternate payee under a qualified domestic relations order, as defined in Code Section 414(p).

          “Distributee”. A distributee includes an employee or former employee. In addition, the employee’s or former employee’s surviving spouse and the employee’s or former employee’s spouse or former spouse who is the alternate payee under a qualified domestic relations order, as defined in Code Section 414(p), are distributees with respect to the interest of the spouse or former spouse. A distributee also includes the Participant’s nonspouse designated Beneficiary, in which case, the direct rollover may be made only to an individual retirement account or annuity described in Code Sections 408(a) or 408(b) that is established on behalf of the designated Beneficiary and that will be treated as an inherited IRA pursuant to the provisions of Code Section 402(c)(11); provided, however, that the determination of any required minimum distribution that is ineligible for rollover shall be made in accordance with Notice 2007-7, Q&A 17 and 18.

          “Direct rollover”. A direct rollover is a payment by the plan to the eligible retirement plan specified by the distributee.

          9.7 Diversification Election. Notwithstanding any provision of this Article to the contrary, a Participant who has attained age 55 and completed at least ten years of participation in this Plan may elect in writing, on a form provided by the Administrative Committee for such purpose, within ninety days after the close of each Plan Year during the Qualified Election Period, to direct the investment of a portion of the Participant’s interest in the Company Stock Account not in excess of 25 percent of such interest, less amounts subject to all prior elections under this Section 9.7 as a transfer to the applicable Penn Millers Insurance Company 401(k) Plan which permits Participants to make investment elections. Upon a Participant’s election to diversify a portion of the Participant’s interest in the Company Stock Account, Company Stock in an amount equal to the portion so elected, valued as of the Valuation Date concurrent with or immediately following the date of such election will be transferred to the applicable Penn Millers Insurance Company 401(k) Plan which permits Participants to make investment elections. A participant may then make investment elections among the several funds. Starting from the sixth Plan Year during the Qualified Election Period of a Participant, 50 percent shall be substituted for 25 percent in the preceding sentence.

          For purposes of this Section 9.7, “Qualified Election Period” means, with respect to a Participant, the period beginning with the later of (a) the Plan Year in which the Participant attains age 55 or (b) the Plan Year in which the Participant completes at least ten years of participation in the Plan and ending with the year in which the Participant terminates employment for any reason.

          9.8 Election to Retain Interests in Plan. No distribution shall be made to a Participant before such Participant’s Normal Retirement Date unless (a) the Participant’s prior written consent to the distribution has been obtained by the Administrative Committee, or (b) the

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value of the Participant’s vested Account does not exceed $1,000 as of the date of the event giving rise to the distribution.

          9.9 Mandatory Distributions.

               (a) notwithstanding any provision of this Plan to the contrary, all amounts credited to a Participant’s Account shall commence to be distributed not later than the later of (i) April 1 of the calendar year following the calendar year in which the Participant attains age 70¹/2 or (ii) the date the Participant retires; except that distributions to a 5% owner (as defined in Code Section 416) must commence by the April 1 of the calendar year following the calendar year in which such Participant attains age 70¹/2. Any and all subsequent distributions shall be made in accordance with the rules set forth in Code Section 401(a)(9), including the minimum distribution incidental death requirements of Code Section 401(a)(9)(G).

               (b) In the event the Participant dies after distributions have commenced under this Article IX but before the Participant’s entire Account is distributed, the remaining portion of the Participant’s Account shall be distributed at least as rapidly as under the method of distribution being used as of the date of the Participant’s death.

               (c) In the event the Participant dies before distributions under this Article IX have commenced, then, unless the Beneficiary of the Participant is the Participant’s spouse, the entire balance in the Account of the Participant shall be distributed on or before the December 31 of the calendar year in which occurs the fifth anniversary of the death of such Participant.

               (d) If the Participant’s designated Beneficiary is the surviving spouse of such Participant or former Participant, such distribution shall not be required to begin prior to the date on which the Participant or former Participant would have attained age 70 ¹/2 (if the surviving spouse dies prior to commencement of distributions to such spouse, then this subsection (i) shall be applied as if the surviving spouse were the Participant or former Participant).

          Any amount payable to a child pursuant to the death of a Participant or former Participant shall be treated as if it were payable to the Participant’s or former Participant’s surviving spouse if such amount would become payable to the surviving spouse upon such child reaching majority (or other designated event permitted by regulations).

          Any distribution required under the incidental death benefit requirements of Code Section 401(a)(9) shall be treated as a distribution required under this Section of 9.9.

          9.10 Dividend Distributions.

               (a) Any cash dividends on Company Stock acquired with the proceeds of an Exempt Loan and held in the Suspense Account shall be applied first to repay the principal and, at the Committee’s discretion, the interest, of the Exempt Loan. In addition, if any cash dividends on shares of such Company Stock allocated to Participant’s Accounts are used to pay the principal and/or the interest of the Exempt Loan at the Committee’s discretion, Company

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Stock with a fair market value not less than the amount of the dividends so used must be allocated to the Participants’ Accounts to which such cash dividends would have been allocated.

               (b) After the payment of the principal and the interest of the Exempt Loan, any remaining cash dividends on Company Stock may be used to purchase Company Stock or allocated to Accounts of Participants in accordance with subsection (c) below.

               (c) In the case of any cash dividends on Company Stock that are allocable to the Accounts of Participants with respect to vested shares, they may be paid currently (or within ninety days after the end of the Plan Year in which the dividends are paid to the Trust) as cash, or the Company may pay such dividends directly to the Participants’ Accounts as the Administrative Committee may determine.

          9.11 Right of First Refusal. In the event a Participant, former Participant, or Beneficiary desires to sell to a third person Company Stock received as a distribution from the Plan, such person must first offer the Company, then the Plan, the right to purchase such Company Stock at a price and on such terms not less favorable to the Participant than the greater of (a) the price established by a bona fide offer or (b) the fair market value of the Company Stock using the value determined as of the concurrent or next following Valuation Date. The right of the Company and the Plan to purchase such stock shall lapse on the 14th day after such written notice is given to the Company or the Plan of the fact that an offer has been received from a third party to purchase the Company Stock and of the price and other terms of such offer.

          9.12 Prohibited Allocations.

               (a) No portion of the assets of the Plan attributable to (or allocable in lieu of) Company Stock acquired by the Plan in a sale to which Code Section 1042 applies may be allocated to the Account of (i) any Qualifying Selling Shareholder during the Nonallocation Period, or (ii) any other person who owns more than 25 percent of (A) any class of outstanding stock of the Company or any of its Affiliates, or (B) the total value of any class of outstanding stock of the Company or any of its Affiliates.

               (b) For purposes of this Section 9.12, the following initially capitalized words shall carry the following meanings:

                    (i) “Affiliate” means Affiliate as defined in Section 2.3 of the Plan, modified in accordance with Code Section 409(l)(4).

                    (ii) “Qualifying Selling Shareholder” means any shareholder of Company Stock who makes an election under Code Section 1042(a) with respect to Company Stock, or any individual who is related to (within the meaning of Code Section 267(b)) the shareholder of Company Stock as defined above. The term shall not include any lineal descendant of such shareholder or if the aggregate amount allocated to the benefit of all such lineal descendants during the Nonallocation Period does not exceed more than 5 percent of Company Stock (or amounts allocated in lieu thereof) held by the Plan which are attributable to a sale to the Plan by any person related to such descendants (within the meaning of Code Section 267(c)(4)) in a transaction to which Code Section 1042 applied.

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                    (iii) “Nonallocation Period” means the period beginning on the date of the sale of Company Stock and ending on the later of the date which is 10 years after the date of the sale, or the date of the Plan allocation attributable to the final payment of acquisition indebtedness incurred in connection with such sale.

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ARTICLE X
RIGHT TO SELL COMPANY STOCK

          10.1 Put Requirements.

               (a) In the event Company Stock is distributed and is not publicly traded in the over-the-counter market or on a national securities exchange at the time of distribution, the Participant, former Participant, or Beneficiary may have an option (the “Put”) to require the Company to purchase all of the shares actually distributed to such individual. The Put may be exercised at any time during the Option Period (as defined in subsection (f) below) by giving the Administrative Committee and the Company written notice of the election to exercise the Put. The Put may be exercised by a former Participant or a Beneficiary only during the Option Period with respect to which the former Participant or Beneficiary receives a distribution of Company Stock.

               (b) (i) The price paid for Company Stock sold to the Plan or the Company pursuant to the Put shall be the fair market value of each share multiplied by the number of shares to be sold under the Put, with appropriate adjustments to reflect intervening stock dividends, stock splits, stock redemptions, or similar changes to the number of outstanding shares. The fair market value of a share shall be determined (A) as of the Valuation Date concurrent with or immediately following the date the Put is exercised, or (B) in the case of a transaction between the Plan and a Disqualified Person, determined as of the date of the transaction.

                    (ii) If the distribution of Company Stock to a former Participant or Beneficiary constituted a distribution within one taxable year of the balance of the Participant’s Account, the Company reserves the right to establish guidelines to be exercised in a uniform and nondiscriminatory manner, to make payment for the shares subject to the Put on an installment basis in substantially equal annual, quarterly or monthly payments over a period not to exceed five years, such period beginning no later than thirty days after exercise of the Put. The Company shall pay reasonable interest at least annually on the unpaid balance of the price and shall provide to the former Participant or Beneficiary adequate security with respect to the unpaid balance. If the distribution was part of an installment distribution, the Company shall pay the Participant in cash within thirty days after exercise of the Put.

               (c) The Put shall not be assignable, except that the Participant’s or former Participant’s legal representative (in the event of a Participant’s incapacity) or, the Participant’s Beneficiary (in the event of a Participant’s or former Participant’s death) shall be entitled to exercise the Put during the Option Period for which it is applicable.

               (d) The Trustee (on behalf of the Plan) in its discretion, may assume the Company’s obligations under this Section at the time a Participant, former Participant, or Beneficiary exercises the Put, with the Company’s consent. If the Trustee assumes the Company’s obligations, the provisions of this Section that apply to the Company shall also apply to the Trustee.

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               (e) The Administrative Committee shall notify each Participant, former Participant, and Beneficiary who is eligible to exercise the Put of the fair market value of each share of Company Stock as soon as practicable following its determination. The Administrative Committee shall send all notices required under this Section to the last known address of a Participant, former Participant, or Beneficiary, and it shall be the duty of those persons to inform the Administrative Committee of any changes in address.

               (f) For purposes of this Section, the “Option Period” is the period of sixty days following the day on which a Participant, former Participant, or Beneficiary receives a distribution. If such person does not exercise the Put during that sixty-day period, the Option Period shall also be the sixty-day period beginning on the first anniversary of the day on which such person received a distribution. Notwithstanding the preceding sentences, when Company Stock is acquired with the proceeds of an Exempt Loan, the “Option Period” shall be the fifteen (15) month period beginning on the date such Company Stock is distributed to a Participant (or the Participant’s Beneficiary). Such 15-month period shall be extended by a period equal to the number of days, if any, during which the Company is precluded from honoring the put option by reason of applicable federal or state law.

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ARTICLE XI
VOTING AND TENDER OF COMPANY STOCK

          11.1 Voting.

               (a) All shares of Company Stock held in the Trust shall be voted by the Trustee.

               (b) Each Participant and Beneficiary shall be entitled to direct the Trustee as to the manner in which Company Stock allocated to the Participant’s Account is to be voted on any and all matters which may be presented to the shareholders of Company Stock.

               (c) With respect to (i) allocated Company Stock as to which no direction is received, (ii) unallocated shares of Company Stock in the Suspense Account and (iii) allocated shares of Company Stock that are not subject to voting right pass through requirement under Code Section 409(e), the Trustee shall vote such shares in the same ratio as the allocated and voted shares. When voting such shares, however, the Trustee shall comply with its fiduciary duties as required by ERISA.

          11.2 Tender.

               (a) The Trustee shall not sell, alienate, encumber, pledge, transfer or otherwise dispose of any Company Stock; except (i) as specifically provided for in the Plan or a Trust Agreement, or (ii) in the case of a “tender or exchange offer”, as set forth in subsection (b) of this Section 11.2.

          For purposes of this Article XI, the term “tender or exchange offer” shall mean: (A) any offer for, or request for or invitation for tenders or exchanges of, or offers to purchase or acquire any shares of Company Stock that is directed generally to shareholders of the Company, or (B) any transaction involving Company Stock which may be defined as a “tender offer” under proposed or final rules or regulations promulgated by the Securities and Exchange Commission.

               (b) (i) In the event of a tender or exchange offer, each Participant or, if the Participant is not alive, the Participant’s Beneficiary, shall have the right to determine confidentially whether to tender or exchange any whole and fractional shares of Company Stock allocated to the Participant’s Account and shall be entitled to instruct the Trustee as to the tender of such shares. Upon receipt of such instructions, the Trustee shall act with respect to such Company Stock as instructed. With respect to Company Stock as to which no instruction is received and shares of Company Stock in the Suspense Account, the Trustee shall tender such shares in the Trustee’s discretion. In exercising such discretion, the Trustee shall comply with its fiduciary requirements of ERISA.

                    (ii) All shares of Company Stock held in the Fund and not tendered pursuant to subsection (b)(i) of this Section 11.2, including allocated shares for which no instructions are received, shall continue to be held by the Trustee.

                    (iii) Any shares of Company Stock not tendered by a Participant or Beneficiary pursuant to subsection (b)(i) of this Section 11.2 shall continue to be held by the

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Trustee in such Participant’s or Beneficiary’s Account. The Account of each Participant or Beneficiary tendering shares of Company Stock pursuant to subsection (b)(i) of this Section 11.2 shall be credited with the cash received by the Trustee in exchange for the shares tendered from such Participant’s or Beneficiary’s Account.

          11.3 Fiduciary Responsibilities.

          Each Participant shall be a “named fiduciary,” within the meaning of ERISA Section 402(a), with respect to the voting and tender of Company Stock pursuant to Sections 11.1 and 11.2 of the Plan.

          11.4 Procedures for Voting and Tender.

               (a) The Administrative Committee shall establish and maintain procedures by which Participants and Beneficiaries shall be (i) timely notified of their right to direct the voting and tender of Company Stock allocated to their Accounts and the manner in which any such directions are to be conveyed to the Trustee, and (ii) given information relevant to making such decisions. No directions shall be honored by the Trustee unless timely and properly conveyed in accordance with such procedures.

               (b) Voting instructions received from Participants and Beneficiaries shall be held in confidence by the Trustee or its delegate for this purpose and shall not be divulged to the Company or to any officer or employee of the Company or to any other person.

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ARTICLE XII
ADMINISTRATION

          12.1 Fiduciary Responsibilities. A fiduciary shall have only those specific powers, duties, responsibilities and obligations as are specifically given to such person under the Plan or the Trust. The Company shall have sole responsibility to make the contributions provided for under the Plan and, by action of the Board of Directors, to amend or terminate, in whole or in part, the Plan or the Trust. The Board of Directors shall have sole responsibility to appoint and remove members of the Administrative Committee and the Trustees of the Plan. The Administrative Committee shall have sole responsibility for the general administration of this Plan and for the investment policies of the Plan, for the selection of the Plan’s investment funds pursuant to the Plan, and for the appointment and removal of any Investment Manager. Subject to the provisions of the Plan and the Trust Agreement, the Trustee shall have sole responsibility for the administration of the Trust and the management of the assets held in the Trust, as set forth in the Plan and the Trust. It is intended that each fiduciary shall be responsible for the proper exercise of such fiduciary’s own powers, duties, responsibilities, and obligations and, except as otherwise provided by law, shall not be responsible for any act or failure to act by another fiduciary. A fiduciary may serve in more than one fiduciary capacity with respect to the Plan. A fiduciary of the Plan who is also an Employee shall not be compensated in such individual’s capacity as fiduciary.

          12.2 The Administrative Committee. Any member of the Administrative Committee may resign with sixty (60) days advance written notice to the Board of Directors. The Administrative Committee shall select a Chairman and a Secretary to keep records or to assist it in the discharge of its responsibilities. The Administrative Committee shall have such duties and powers as are necessary to discharge its responsibilities under the Plan, including, but not limited to, the following:

               (a) To require any person to furnish such information as it requests for the purpose of the proper administration of the Plan;

               (b) To make and enforce such rules and regulations and prescribe the use of such forms as it deems necessary for the efficient administration of the Plan;

               (c) To construe and interpret the Plan, including the right to determine eligibility for participation, eligibility for payment, the amount of benefits payable, the timing of distributions and all other issues arising under the Plan as well as the right to remedy possible ambiguities, inconsistencies or omissions; provided, however, that all such interpretations and decisions shall be applied in a uniform manner to all similarly situated Participants and Beneficiaries;

               (d) To employ and rely upon such advisors (including attorneys, independent public accountants, investment advisors and enrolled actuaries) as it deems appropriate or helpful in connection with the operation and administration of the Plan;

               (e) To maintain complete records of the administration of the Plan;

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               (f) To prepare and file with the appropriate governmental agencies such reports as required from time to time with respect to the Plan under ERISA, the Code, or other laws and regulations governing the administration of the Plan;

               (g) To furnish or disclose to Participants, Employees who may become Participants, and Beneficiaries information about the Plan and statements of accrued benefits under the Plan, in accordance with ERISA, the Code, or other laws and regulations governing the administration of the Plan;

               (h) To delegate to one or more members of the Administrative Committee, or to persons other than Administrative Committee members, any authority, duty or responsibility pertaining to the administration or operation of the Plan; provided, however, that each such delegation shall be made by a written instrument authorized by the Administrative Committee and maintained with the records of the Plan. If any person other than an Employee is so designated, such person must acknowledge, in writing, acceptance of the duties and responsibilities delegated. All such instruments and acknowledgments shall be considered a part of the Plan;

               (i) To determine, pursuant to procedures adopted by it, whether a state domestic relations order served upon the Plan is a “qualified domestic relations order” (as defined in Code Section 414(p)); to place in escrow any benefits payable in the period during which the Administrative Committee determines the status of an order; and to take any necessary action to administer distributions under the terms of a “qualified domestic relations order”;

               (j) To discharge any responsibilities which are allocated to the Administrative Committee elsewhere in this Plan.

          All decisions and interpretations of the Administrative Committee shall be binding and shall be entitled to the maximum deference permitted under the law.

          12.3 Plan Expenses. All expenses authorized and incurred by the Administrative Committee shall be from the assets of the Plan, except to the extent such expenses are paid by the Company.

          12.4 Meetings and Voting. The Administrative Committee shall act by a majority vote of its respective members at a meeting or, by written consent of a majority of its members, without a meeting. The Administrative Committee shall hold meetings, as deemed necessary by them, although any member may call a special meeting of the committee by giving reasonable notice to the other members. The Secretary of the Administrative Committee shall have authority to give certified notice in writing of any action taken by the committee.

          12.5 Compensation. The members of the Administrative Committee, if Employees, shall serve without compensation.

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          12.6 Claims Procedures.

               (a) Any Participant or Beneficiary (“Claimant”) may file a written claim for a benefit under the Plan with the Administrative Committee or with a person named by the Administrative Committee to receive such claims;

               (b) In the event of a denial or limitation of any benefit or payment due or requested by any Claimant, such Claimant shall be given a written notification containing specific reasons for the denial or limitation of the benefit. The written notification shall contain specific reference to the pertinent Plan provisions on which the denial or limitation is based. In addition, it shall contain a description of any additional material or information necessary for the Claimant to perfect a claim and an explanation of why such material or information is necessary. Further, the notification shall provide appropriate information as to the steps to be taken if the Claimant wishes to submit such claim for review. This written notification shall be given to a Claimant within ninety days after receipt of the claim by the Administrative Committee (or its delegatee to receive such claims), unless special circumstances require an extension of time for processing the claim. If such an extension of time is required, written notice of the extension shall be furnished to the Claimant prior to the termination of the ninety-day period and such notice shall indicate the special circumstances which make the postponement appropriate;

               (c) In the event of a denial or limitation of benefits, the Claimant or the Claimant’s duly authorized representative shall be permitted to review pertinent documents and to submit issues and comments in writing to the Administrative Committee. In addition, the Claimant or the Claimant’s duly authorized representative may make a written request for a full and fair review of the claim and its denial by the Administrative Committee; provided, however, that such written request must be received by the Administrative Committee (or its delegatee to receive such requests) within sixty days after receipt by the Claimant of written notification of the denial or limitation. The sixty-day requirement may be waived by the Administrative Committee in appropriate cases; and

               (d) (i) A decision shall be rendered by the Administrative Committee within sixty days after the receipt of the request for review; provided, however, that where special circumstances require an extension of time for processing the decision, it may be postponed, on written notice to the Claimant (prior to the expiration of the initial sixty-day period) for an additional sixty days, but in no event shall the decision be rendered more than one hundred and twenty days after the receipt of such request for review.

                    (ii) Notwithstanding subsection (d)(i) of this Section 12.6, if the Administrative Committee holds regularly scheduled meetings at least quarterly to review such appeals, a Claimant’s request for review shall be acted upon at the meeting immediately following the receipt of the Claimant’s request unless such request is filed within thirty days preceding such meeting. In such instance, the decision shall be made no later than the date of the second meeting following the receipt of such request by the Administrative Committee (or its delegatee to receive such requests). If special circumstances require a further extension of time for processing a request, a decision shall be rendered not later than the third meeting of the Administrative Committee following the receipt of such request for review, and written notice of the extension shall be furnished to the Claimant prior to the commencement of the extension.

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                    (iii) Any decision by the Administrative Committee shall be furnished to the Claimant in writing and in a manner calculated to be understood by the Claimant and shall set forth the specific reason(s) for the decision and the specific Plan provision(s) on which the decision is based.

          12.7 Liabilities. The Administrative Committee, each member or former member of such Committee, and each person to whom duties and responsibilities have been delegated under the Plan shall be indemnified and held harmless by the Company, to the fullest extent permitted by ERISA, other applicable laws, and the charter and By-laws of the Company.

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ARTICLE XIII
AMENDMENTS

          13.1 Right to Amend. Except as otherwise set forth in this Article XIII or as may be required by law, the Board of Directors reserves the right to amend the Plan at any time and in any manner, without prior notification, consultation, or bargaining with any Employee or representative of Employees by written resolution of the Board of Directors adopted at a duly convened meeting of the Board of Directors in accordance with the By-Laws of the Company and the laws of the Commonwealth of Pennsylvania. To the extent required by the Code or ERISA, no amendment to the Plan shall decrease a Participant’s benefit or eliminate an optional form of distribution. No amendment shall make it possible for any assets of the Plan to be used for or diverted to any purposes other than for the exclusive benefit of Participants and Beneficiaries.

          13.2 Amendment by Administrative Committee. The Administrative Committee may adopt any ministerial and nonsubstantive amendment it deems necessary or appropriate to (a) facilitate the administration, management and interpretation of the Plan, (b) conform the Plan to current practice, or (c) cause the Plan and its related Trust to qualify under Code Sections 401(a)(1), 501(a) and 4975(e)(7) or to comply with ERISA or any other applicable laws; provided that such amendment does not have any material effect on the estimated cost to the Company of maintaining the Plan.

          13.3 Plan Merger and Asset Transfers. No assets of the Trust shall be merged or consolidated with, nor shall any assets or liabilities be transferred to any other plan, unless the benefits payable to each Participant or Beneficiary, if this Plan were terminated immediately after such action, would be equal to or greater than the benefits such individuals would have been entitled to receive if this Plan had been terminated immediately before such action.

          13.4 Amendment of Vesting Schedule. Notwithstanding anything to the contrary, no amendment to the Plan shall have the effect of decreasing a Participant’s nonforfeitable percentage determined without regard to such amendment as of the later of the date such amendment is adopted or the date it becomes effective. If the Plan’s vesting schedule is amended, or the Plan is amended in any way that directly or indirectly affects the computation of a Participant’s nonforfeitable percentage, each Participant with at least 3 Years of Service may elect, within a reasonable period after the adoption of the amendment, to have the nonforfeitable percentage computed under the Plan without regard to such amendment. The Participant’s election may be made at any time during the period ending on the latest of:

               (a) 60 days after the amendment is adopted;

               (b) 60 days after the amendment becomes effective; or

               (c) 60 days after the Participant is issued written notice of the amendment by the Company or the Administrative Committee.

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ARTICLE XIV
TERMINATION

          14.1 Right to Terminate. While the Company intends the Plan to be permanent, the Board of Directors reserves the right to terminate the Plan at any time, without prior notification, consultation, or bargaining with any Employee or representative of Employees by written resolution of the Board of Directors adopted at a duly convened meeting of the Board of Directors in accordance with the By-laws of the Company and the laws of the Commonwealth of Pennsylvania.

          14.2 Effect of Termination. If the Plan is terminated, contributions shall cease, and the assets remaining in the Trust, after payment of any expenses, including expenses of administration or liquidation, shall be retained in the Trust for distribution in accordance with the terms of the Plan. Upon termination (including a partial termination), or upon the complete discontinuance of contributions by the Company, all Participants shall be 100 percent vested in their Accounts.

          14.3 Change in Control. Notwithstanding the provisions of this Article XIII or any other provisions of the Plan to the contrary, the Plan will terminate, upon a Change in Control. Such termination shall be effective as of the date of an occurrence of Change in Control determined under Section 2.7(a), (b), (e), or (f) of the Plan. For purposes of a Change in Control as described under Plan Section 2.7(c), such termination shall be effective as of the “closing” or “effective date” of a transaction described in Section 2.7(c) or (d).

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ARTICLE XV
MISCELLANEOUS

          15.1 Non-alienation of Benefits. Except as provided in Code Section 401(a)(13) (relating to qualified domestic relations orders), Code Section 401(a)(13)(C) and (D) (relating to offsets ordered or required under a criminal conviction involving the Plan, a civil judgment in connection with a violation or alleged violation of fiduciary responsibilities under ERISA, or a settlement agreement between the Participant and the Department of Labor in connection with a violation or alleged violation of fiduciary responsibilities under ERISA), Section 1.401(a)-13(b)(2) of Treasury regulations (relating to Federal tax levies and judgments), or as otherwise required by law, no benefit under the Plan at any time shall be subject in any manner to anticipation, alienation, assignment (either at law or in equity), encumbrance, garnishment, levy, execution, or other legal or equitable process; and no person shall have power in any manner to anticipate, transfer, assign (either at law or in equity), alienate or subject to attachment, garnishment, levy, execution, or other legal or equitable process, or in any way encumber the Participant’s benefits under the Plan, or any part thereof, and any attempt to do so shall be void.

          15.2 Appointment of Guardian. Where it is established to the satisfaction of the Administrative Committee that a guardian has been duly appointed on behalf of a person entitled to a distribution under the Plan, the Administrative Committee may cause payment to be made to the guardian for the benefit of the entitled person. The Administrative Committee shall have no responsibility with respect to the application of amounts so paid.

          15.3 Satisfaction of Benefit Claims. The assets of the Trust shall be the sole source of benefits under this Plan, and each Participant or any other person who shall claim the right to any payment or benefit under this Plan shall be entitled to look only to the Trust for such payment or benefit, and shall not have any right, claim or demand against the Company or any officer or director of the Company. Such Participant or person shall not have a right to or interest in any assets of the Trust, except as provided from time to time under this Plan.

          15.4 Controlling Law. The provisions of the Plan shall be construed, administered and enforced under the laws of the United States and the Commonwealth of Pennsylvania.

          15.5 Non-guarantee of Employment. Nothing contained in this Plan shall be construed as a contract of employment between the Company and any Employee, or as a right of any Employee to be continued in the employment of the Company or as a limitation of the right of the Company to discharge any of its Employees, with or without cause.

          15.6 Severability and Construction of the Plan.

               (a) If any provision of the Plan or the application of it to any circumstance(s) or person(s) is invalid, the remainder of the Plan and the application of such provision to other circumstances or persons shall not be affected thereby.

               (b) Unless the context otherwise indicates, the masculine wherever used shall include the feminine and neuter; the singular shall include the plural; and words such as

36

“herein”, “hereof,” “hereby,” “hereunder” and words of similar import shall refer to the Plan as a whole and not any particular part of it.

          15.7 No Requirement of Profits. Contributions may be made to the Plan without regard to current or accumulated profits of the Company.

          15.8 All Risk on Participants and Beneficiaries. Each Participant and Beneficiary shall assume all risk in connection with any decrease in the value of the assets of the Trust and the Participants’ and Beneficiaries’ Accounts.

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ARTICLE XVI
TOP-HEAVY PROVISIONS

          16.1 Determination of Top-Heavy Status.

               (a) Any provision of this Plan to the contrary notwithstanding, for any Plan Year in which the Plan is a Top-Heavy Plan, the provisions of this Article shall apply. The provisions of this Article shall have effect only to the extent required under Code Section 416. This Plan shall be deemed a Top-Heavy Plan only with respect to any Plan Year in which, as of the Determination Date, the Top-Heavy Ratio exceeds 60 percent.

               (b) If the Plan is not included in a Required Aggregation Group with other plans, then it shall be Top-Heavy only if (i) when considered by itself it is a Top-Heavy Plan and (ii) it is not included in a Permissive Aggregation Group that is not a Top-Heavy Group.

               (c) If the Plan is included in a Required Aggregation Group with other plans, it shall be Top-Heavy only if the Required Aggregation Group, including any permissively aggregated plans, is Top-Heavy.

          16.2 Top-Heavy Definitions. Solely for purposes of this Article, the following words and phrases shall have the following meaning;

               (a) “Aggregation Group or Top Heavy Group” means either a Required Aggregation Group or a Permissive Aggregation Group.

               (b) “Determination Date” means, with respect to any Plan Year, the last day of the preceding Plan Year or in the case of the first Plan Year of any plan, the last day of such Plan Year or such other date as permitted under rules issued by the U.S. Department of the Treasury.

               (c) “The Company” means the Company and all members of a controlled group of corporations (as defined in Code Section 414(b) as modified by Code Section 415(h)), all commonly controlled trades or businesses (as defined in Code Section 414(c) as modified by Code Section 415(h)), or affiliated service groups (as defined in Code Section 414(m)) of which the Company is a part.

               (d) “Key Employee” means any employee or former employee (including any deceased employee) who at any time during the Plan Year that includes the Determination Date was an officer of the Company having annual compensation greater than $130,000 (as adjusted under Code Section 416(i)(1)), a five percent owner of the Company, or a one percent owner of the Company having annual compensation of more than $150,000. For this purpose, annual compensation means compensation within the meaning of Code Section 415(c)(3). The determination of who is a Key Employee will be made in accordance with Code Section 416(i)(1) and the applicable regulations and other guidance of general applicability issued thereunder.

               (e) “Non-Key Employee” means any Employee who is not a Key Employee.

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               (f) “Permissive Aggregation Group” means a Required Aggregation Group plus any other plans maintained and selected by the Company; provided that all such plans when considered together satisfy the requirements of Code Sections 401(a)(4) and 410.

               (g) “Required Aggregation Group” means each qualified plan of the Company in which at least one Key Employee participates or which enables any plan in which a Key Employee participates to meet the requirements of Code Sections 401(a)(4) or 410.

               (h) “Top-Heavy Ratio” means:

                    (i) If the Company maintains one or more defined contribution plans (including any Simplified Employee Pension Plan) and the Company has not maintained any defined benefit plan which during the 5-year period ending on the Determination Date(s) has or has had accrued benefits, the Top-Heavy Ratio is a fraction, the numerator of which is the sum of the Account balances of all Key Employees as of the Determination Date(s) (including any part of any Account balance distributed in the 1-year period (5-year period in the case of a distribution made for a reason other than severance from employment, death or disability) ending on the Determination Date(s)), and the denominator of which is the sum of all Account balances (including any part of any Account balance distributed in the 1-year period (5-year period in the case of a distribution made for a reason other than severance from employment, death or disability) ending on the Determination Date(s)), both computed in accordance with Code Section 416 and the regulations thereunder. Both the numerator and denominator of the Top-Heavy Ratio are increased to reflect any contribution not actually made as of the Determination Date, but which is required to be taken into account on that date under Code Section 416 and the regulations thereunder.

                    (ii) If the Company maintains or has maintained one or more defined benefit plans which during the 5-year period ending on the Determination Date(s) has or has had any accrued benefits, the Top-Heavy Ratio for any required or permissive aggregation group as appropriate is a fraction, the numerator of which is the sum of Account Balances under the aggregated defined contribution plan or plans for all Key Employees, determined in accordance with (i) above, and the present value of accrued benefits under the aggregated defined benefit plan or plans for all Key Employees as of the Determination Date(s), and the denominator of which is the sum of the Account balances under the aggregated defined contribution plan or plans for all Participants, determined in accordance with (i) above, and the present value of accrued benefits under the defined benefit plan or plans for all Participants as of the Determination Date(s), all determined in accordance with Code Section 416 and the regulations thereunder. The accrued benefits under a defined benefit plan in both the numerator and denominator of the Top-Heavy Ratio are increased for any distribution of an accrued benefit made in the 1-year period (5-year period in the case of a distribution made for a reason other than severance from employment, death or disability) ending on the Determination Date.

                    (iii) For purposes of (i) and (ii) above the value of Account balances and the present value of accrued benefits will be determined as of the most recent Valuation Date that falls within or ends with the 12-month period ending on the Determination Date, except as provided in Code Section 416 and the regulations thereunder for the first and second plan years of a defined benefit plan. The Account balances and accrued benefits of a Participant (1) who is

39

not a Key Employee but who was a Key Employee in a prior year, or (2) who has not been credited with at least one hour of service with any Employer maintaining the plan at any time during the 1-year period ending on the Determination Date will be disregarded. The calculation of the Top-Heavy Ratio, and the extent to which distributions, rollovers, and transfers are taken into account will be made in accordance with Code Section 416 and the regulations thereunder. Deductible employee contributions will not be taken into account for purposes of computing the Top-Heavy Ratio. When aggregating plans the value of Account balances and accrued benefits will be calculated with reference to the Determination Dates that fall within the same calendar year.

                         The accrued benefit of a Participant other than a Key Employee shall be determined under (1) the method, if any, that uniformly applies for accrual purposes under all defined benefit plans maintained by the employer, or (2) if there is no such method, as if such benefit accrued not more rapidly than the slowest accrual rate permitted under the fractional rule of Code Section 411(b)(1)(C).

               (i) “Valuation Date” means, for purposes of determining if the Plan is Top-Heavy, the most recent Valuation Date in the period of twelve months ending on the Determination Date.

          16.3 Top-Heavy Rules. For any year in which a Plan is determined to be a Top-Heavy Plan the following rules shall apply:

               (a) For each Plan Year in which the Plan is Top-Heavy, minimum contributions for a Participant who is a Non-Key Employee shall be required to be made on behalf of each Participant who is employed by the Company on the last day of the Plan Year. The amount of the minimum contribution shall be the lesser of the following percentage of compensation:

                    (i) 3 percent, or

                    (ii) the highest percentage at which Contributions are made under the Plan for the Plan Year on behalf of any Key Employee.

                         (A) For purposes of this paragraph (ii), all defined contribution plans included in a Required Aggregation Group shall be treated as one plan.

                         (B) This paragraph (ii) shall not apply if the Plan is included in a Required Aggregation Group and the Plan enables a defined benefit plan included in the Required Aggregation Group to meet the requirements of Code Sections 401(a)(4) or 410.

                         (C) If the highest percentage at which Contributions are made under the Plan for a top-heavy Plan Year on behalf of Key Employees is less than 3%, the amounts contributed as a result of a salary reduction agreement must be included in determining Contributions made on behalf of Key Employees.

          Any contributions that must be made under this subsection (a) shall be made under the Penn Millers Insurance Company 401(k) Plan.

40

               (b) The vesting schedule when the Plan is Top-Heavy is as follows:

Years of Service After the Effective Date	Vested Percentage
0-1 Years of Service		0	%
2 Years of Service		20	%
3 Years of Service		40	%
4 Years of Service		60	%
5 Years of Service		80	%
6 or more Years of Service		100	%

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ARTICLE XVII
EXEMPT LOANS

          17.1 General. The Trustee shall have the authority and discretion to borrow money from a Disqualified Person, or another source which is guaranteed by a Disqualified Person for the purpose of (a) purchasing Company Stock, or (b) repaying a prior Exempt Loan. Any Exempt Loan shall satisfy all of the requirements of this Article XVII.

          17.2 Terms of Exempt Loan Agreements. All Exempt Loans shall satisfy the following requirements:

               (a) The loan shall be primarily for the benefit of Participants and their Beneficiaries;

               (b) The loan shall be for a specified term and shall bear no more than a reasonable rate of interest.

               (c) The collateral pledged by the Trustee shall consist only of the Company Stock purchased with the borrowed funds, or Company Stock that was pledged as collateral in connection with a prior Exempt Loan that was repaid with the proceeds of the current Exempt Loan.

               (d) Under the terms of the agreement, the lender shall have no recourse against the Trust, or any of its assets, except with respect to the collateral and contributions (other than contributions of Company Stock) by the Company that are made to satisfy its obligations under the loan agreement and earnings attributable to such collateral and such contributions.

               (e) The payments made on the loan during a Plan Year shall not exceed an amount equal to the sum of such contributions and the earnings received during or prior to the year less such payments on the exempt loan in prior years.

               (f) In the event of default, the value of the assets transferred in satisfaction of the loan shall not exceed the amount of default; moreover, if the lender is a Disqualified Person, the loan agreement shall provide for a transfer of assets upon default only upon and to the extent of the failure of the Plan to meet the payment schedule of the loan.

          17.3 Prohibition on Purchase Arrangements. Except as provided in Article X and as hereinafter provided in this Article XVII, no Company Stock shall be subject to a put, call, or other option, or buy-sell or similar arrangement while held by and when distributed from the Trust, whether or not at the time of distribution the Plan is an employee stock ownership plan. These protections and rights which attach to Company Stock acquired with the proceeds of an Exempt Loan shall not be terminable.

          17.4 Suspense Account.

               (a) Company contributions made to the Trust in the form of Company Stock purchased with the proceeds of an Exempt Loan shall be held in the Suspense Account as

42

the collateral for that Exempt Loan. Such stock shall be released from the Suspense Account on a pro-rata basis according to the amount of the payment on the Exempt Loan for the Plan Year, determined under one of the following two alternative formulas in the discretion of the Administrative Committee:

                         (i) for each Plan Year during the duration of the Exempt Loan, the number of shares of Company Stock released shall equal the number of such shares held in the Suspense Account immediately before release for the current Plan Year multiplied by a fraction, the numerator of which is the amount of principal and interest paid for the year and the denominator of which is the sum of the numerator plus the remaining principal and interest to be paid for all future years. The number of future years under the Exempt Loan must be definitely ascertainable and must be determined without taking into account any possible extensions or renewal periods. If the interest rate under the loan is variable, the interest to be paid in future years must be computed by using the interest rate applicable as of the end of the Plan Year. If the collateral includes more than one class of Company Stock, the number of shares of each class to be released for a Plan Year must be determined by applying the same fraction to each class; or

                         (ii) for each Plan Year during the duration of the Exempt Loan, the number of shares of Company Stock released is determined solely with reference to the principal payment of the Exempt Loan. If Company Stock in the Suspense Account is released in accordance with this subsection (ii), (A) the Exempt Loan must provide for annual payments of principal and interest at a cumulative rate that is not less rapid at any time than level annual payments of such amounts for 10 years; and (B) interest included in any payment is disregarded only to the extent that it would be determined to be interest under standard loan amortization tables.

          This subsection (ii) will not be applicable if by reason of a renewal, extension, or refinancing, the sum of the expired duration of the Exempt Loan, the renewal period, the extension period, and the duration of a new Exempt Loan exceeds 10 years.

               (b) Shares of Company Stock released in accordance with Section 17.4(a) of the Plan shall then be allocated to the Accounts of Participants first, in an amount equal in value to any dividends paid on shares previously allocated to Participant’s Accounts that are used to repay the Exempt Loan. The remaining shares of such stock shall be allocated to the Accounts of Participants in the same manner as described in Section 5.5.

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          IN WITNESS WHEREOF, Penn Millers Holding Corporation has caused this Plan to be duly executed under seal this ___ day of                     , 2009.

PENN MILLERS HOLDING CORPORATION
By
	Name:
	Title:

Attest:

[SEAL]

44

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
June 29, 2009

EX-23.2

Exhibit 23.2

June 5, 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 June 5, 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 Update Report

of

Penn Millers Mutual Holding Company

Wilkes-Barre, Pennsylvania

As of June 5, 2009

Curtis Financial Group, LLC • One Liberty Place • 1650 Market Street, Suite 4400 • Philadelphia, PA 19103
(P) 215.972.2375 • (F) 215.972.2388 • www.curtisfinancial.com

Securities sold through Curtis Securities, LLC

June 5, 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 updated independent appraisal (the “Appraisal”) of the estimated consolidated pro forma market value of Penn Millers Mutual Holding Company (“PMMHC”) as of June 5, 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”). Our previous Appraisal as of April 1, 2009 is incorporated herein by reference.

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.

Curtis Financial Group, LLC • One Liberty Place • 1650 Market Street, Suite 4400 • Philadelphia, PA 19103
(P) 215.972.2375 • (F) 215.972.2388 • www.curtisfinancial.com

Securities sold through Curtis Securities, LLC

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 Update, we conducted an analysis of PMMHC that included discussions with the Company’s management. 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 and the quarterly period ended March 31, 2009. 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 Update, 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 Update 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 reviewed by its independent auditor, nor did we independently value the assets or liabilities of the Company. The Appraisal Update 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

Board of Directors
Penn Millers Mutual Holding Company
Page 3 of 4

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. 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 June 5, 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 VII shows the assumptions and calculations utilized in determining the Company’s Valuation Range.

LIMITING FACTORS AND CONSIDERATIONS

Our Appraisal Update 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 Update 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 Update 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 Update 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.

Board of Directors
Penn Millers Mutual Holding Company
Page 4 of 4

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 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. RECENT FINANCIAL PERFORMANCE	1
Financial Condition	1
Income and Expense Trends	3
III. INDUSTRY UPDATE	11
IV. COMPARISONS WITH PUBLICLY-TRADED COMPANIES	13
Recent Financial Comparisons	13
V. MARKET CONDITIONS AND MARKET VALUE ADJUSTMENTS	16
Stock Price Performance and Market Conditions	16
VI. VALUATION ANALYSIS AND CONCLUSIONS	18
Valuation Review	18
Valuation Analysis	18
Valuation Conclusion	21

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. RECENT FINANCIAL PERFORMANCE

Financial Condition

     Table 1 presents selected data concerning the Company’s financial position as of December 31, 2008 and March 31, 2009. Exhibit IV-1 presents the Company’s balance sheet as of December 31, 2003 through December 31, 2008, as well as March 31, 2009.

Table 1
Selected Financial Condition Data
As of December 31, 2008 and March 31, 2009
(Dollars in Thousands)

	3/31/2009			12/31/2008
Balance Sheet Data
Total assets		228,415			220,524
Total investments and cash		143,993			133,873
Premiums and fees receivable		28,753			31,080
Reinsurance receivables and recoverables		25,064			20,637
Loss and loss adjustment expense reserves		116,775			108,065
Unearned premiums		44,811			45,322
Total liabilities		177,254			169,769
Total surplus		51,161			50,755
Total surplus / assets		22.40	%		23.02	%

Source: Penn Millers’ GAAP financial statements.

     The Company’s total assets increased 3.6% from $220.5 million at December 31, 2008 to $228.4 million at March 31, 2009. From December 31, 2008 to March 31, 2009, total investments increased by $6.4 million, reinsurance receivables and recoverables increased by $4.4 million, and cash increased by $3.7 million. These increases were mostly offset by a $2.3 million decline in premiums and fees receivable, a $1.8 million decline in assets from discontinued operations, a $1.1 million decline in deferred income taxes and an $821,000 decline in other assets.

     The Company’s portfolio of investment securities amounted to $128.3 million at March 31, 2009 and constituted 56.2% of total assets. As of March 31, 2009, Penn Millers’ investments

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consisted of $24.4 million of mortgage-backed securities, and $102.0 million of other types of fixed-income securities. Exhibit IV-3 presents the Company’s investment portfolio as of December 31, 2006, December 31, 2007, December 31, 2008, and March 31, 2009. The following chart shows the composition of securities of Penn Millers’ investment portfolio as of March 31, 2009.

Chart 2
Penn Millers’ Investment Portfolio
As of March 31, 2009

Source: Penn Millers’ management.

     Total liabilities increased from $169.8 million at December 31, 2008 to $177.3 million at March 31, 2009. The $7.5 million increase in total liabilities from December 31, 2008 to March 31, 2009 primarily reflected an $8.7 million increase in loss and loss adjustment expense reserves, offset by a $722,000 decline in accounts payable and accrued expenses.

     Penn Millers had $2.4 million of borrowed debt outstanding as of December 31, 2008 and $3.0 million of borrowed debt outstanding as of March 31, 2009. The $655,000 increase is due to increased borrowings under a line of credit to fund expenses associated with the Offering discussed herein.

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PRO FORMA VALUATION APPRAISAL

     The Company’s total surplus, as measured under generally accepted accounting principles (“GAAP”), increased modestly from $50.8 million at December 31, 2008 to $51.2 million at March 31, 2009 as a result of profitable operating results in the first quarter of 2009. The Company’s ratio of total surplus to total assets decreased from 23.0% at December 31, 2008 to 22.4% at March 31, 2009. As shown in the following chart, the Company’s return on average assets (“ROAA”) and return on average equity (“ROAE”) continue to decline.

Chart 3
Penn Millers ROAA and ROAE
For the Year Ended December 31, 2003 to December 31, 2008 and March 31, 2009

Source: Curtis calculation based on Penn Millers’ GAAP financial statements.

*Note: ROAA and ROAE are calculating using net income for the 12 month period ended March 31, 2009 and the average assets and equity book values at 3/31/2008 and 3/31/2009.

Income and Expense Trends

     Table 2 displays the Company’s earnings results and selected operating ratios for the trailing twelve month (“TTM”) periods ended December 31, 2008 and March 31, 2009. Exhibit IV-2 displays the Company’s annual income statements for 2003 through 2008, as well as the TTM period ended March 31, 2009.

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PRO FORMA VALUATION APPRAISAL

Table 2
Selected Operating Performance Data
For the TTM periods ended December 31, 2008 and March 31, 2009
(Dollars in Thousands)

	TTM ended
	3/31/2009 (e)			2008
REVENUE
Premiums earned	$	77,327		$	78,737
Investment income, net of investment expense		5,298			5,335
Realized investment (losses) gains, net		(7,627	)		(5,819	)
Other income		282			411
Total revenue		75,280			78,664
LOSSES AND EXPENSES
Losses and loss adjustment expenses		56,343			57,390
Underwriting and administrative expenses (a)		26,414			26,562
Interest expense		213			184
Other expenses, net		376			365
Total losses and expenses		83,346			84,501
Income from continuing operations		(8,066	)		(5,837	)
Income taxes expense (benefit)		(2,074	)		(1,378	)
Net income (loss) from continuing operations		(5,992	)		(4,459	)
Discontinued Operations:
Pre-tax (loss) income on discontinued ops		(3,104	)		(3,090	)
Income tax (benefit) expense		632			(170	)
(Loss) income on discontinued ops		(3,736	)		(2,920	)
Net income		(9,728	)		(7,379	)
Operating Ratios
Loss ratio (b)		72.9	%		72.9	%
Expense ratio (c)		34.2	%		33.7	%
Combined ratio (d)		107.0	%		106.6	%

Notes:
(a)	Includes amortization of deferred policy acquisition costs.
(b)	Losses and loss adjustment expenses divided by premiums earned.
(c)	Underwriting and administrative expenses divided by premiums earned.
(d)	Sum of the loss ratio and the expense ratio.
(e)	Represents the trailing twelve month period ended March 31, 2009.

Source: Financial reports prepared by management and reviewed by KPMG.

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PRO FORMA VALUATION APPRAISAL

     On February 2, 2009, the Company completed the sale of Eastern Insurance Group (“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.

     Excluding revenue from discontinued operations, Penn Millers’ total revenue decreased from $78.7 million for the TTM period ended December 31, 2008 to $75.3 million for the TTM period ended March 31, 2009 due to a $1.4 million decrease in premiums earned and a $1.8 million increase in realized investment losses from the TTM period ended December 31, 2008 to the TTM period ended March 31, 2009. Including discontinued operations, Penn Millers experienced a net loss of $9.7 million for the TTM period ended March 31, 2009 as compared to net loss of $7.4 million for the TTM period ended December 31, 2008.

     Underwriting and administrative expenses remained flat at $26.4 million for the TTM period ended December 31, 2008 to the TTM period ended March 31, 2009. As a percent of earned premium revenue, the Company’s expense ratio increased from 33.7% for the TTM period ended December 31, 2008 to 34.2% for the TTM period ended March 31, 2009. The loss ratio remained flat at 72.9% for the TTM period ended March 31, 2009, resulting in a combined ratio that increased from 106.6% for the TTM period ended December 31, 2008 to 107.0% for the TTM period ended March 31, 2009. According to management, Penn Millers continued to experience unusually high losses during the first quarter of 2009. As shown in the following chart, since 2003, Penn Millers’ combined ratio has ranged from 103.7% to 107.3%.

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PRO FORMA VALUATION APPRAISAL

Chart 4
Penn Millers Combined Ratio Composition
For the Year Ended December 31, 2003 to December 31, 2008
and the TTM Period Ended March 31, 2009

Source: Penn Millers GAAP financial statements. Statutory ratios provided in Exhibit V.

     The Company’s commercial lines segment remained unprofitable for the TTM period ended March 31, 2009. Net premiums earned decreased by 3.1% to $30.8 million for the TTM period ended March 31, 2009. Losses and loss adjustment expenses decreased from 80.1% of net premiums earned in the TTM period ended December 31, 2008 to 77.9% of net premiums in the TTM period ended March 31, 2009. Commercial losses totaled $4.5 million in the TTM period ended March 31, 2009.

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PRO FORMA VALUATION APPRAISAL

Chart 5
Penn Millers Commercial Lines Net Premiums Written and Loss Ratio
For the TTM Periods ended December 31, 2008 and March 31, 2009

Source: Penn Millers financial statements.

     The Company’s agribusiness segment was unprofitable in the TTM period ended March 31, 2009. Net premiums earned decrease by 0.9% to $44.9 million in TTM period ended March 31, 2009. Losses and loss adjustment expenses increased from 68.7% of net premiums earned in the TTM period ended December 31, 2008 to 71.0% of net premiums in the TTM period ended March 31, 2009. Agribusiness underwriting loss totaled $800,000 in the TTM period ended March 31, 2009.

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PRO FORMA VALUATION APPRAISAL

Chart 6
Penn Millers Agribusiness Net Premiums Written and Loss Ratio
For the TTM Periods ended December 31, 2008 and March 31, 2009

Source: Penn Millers financial statements.

     The Company exited the personal lines business in 2004. Expenses related to the personal lines amounted to approximately $198,000 in the TTM period ended March 31, 2009. Assumed reinsurance was profitable in the TTM period ended March 31, 2009.

     Penn Millers ceded $18.6 million of gross written premiums to reinsurers for the TTM period ended March 31, 2009, an increase of approximately $1.0 million as compared to the prior TTM.

     Table 3 provides operating performance segment data for the Company for the TTM periods ended December 31, 2008 and March 31, 2009.

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PRO FORMA VALUATION APPRAISAL

Table 3
Segment Operating Performance Data
For the TTM Periods ended December 31, 2008 and March 31, 2009
(Dollars in Thousands)

	For the twelve month period ended March 31, 2009
																		As a % of Total
	Agri			Commerical			Personal			Assumed		Total			Agri			Comm			Pers			Assum
Direct premiums written	$	59,305		$	35,661		$	0		$	263		95,229			62.3	%		37.4	%		0.0	%		0.3	%
Net premiums written		46,085			28,494			0			1,618		76,197			60.5	%		37.4	%		0.0	%		2.1	%
Net premiums earned		44,879			30,823			0			1,625		77,327			58.0	%		39.9	%		0.0	%		2.1	%
Losses and loss adjustment expenses		31,845			24,026			(198	)		673		56,346			56.5	%		42.6	%		-0.4	%		1.2	%
Other underwriting expenses		13,834			11,346			0			598		25,778			53.7	%		44.0	%		0.0	%		2.3	%
Total losses and expenses		45,679			35,372			(198	)		1,271		82,124			55.6	%		43.1	%		-0.2	%		1.5	%
Underwriting income (loss)		(800	)		(4,549	)		198			354		(4,797	)		16.7	%		94.8	%		-4.1	%		-7.4	%

	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	%

Source: Penn Millers financial statements.

     Table 4 presents additional gross premium data for the Company’s agribusiness and commercial lines segments for the TTM periods ended December 31, 2008 and March 31, 2009.

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PRO FORMA VALUATION APPRAISAL

Table 4
Agribusiness and Commercial Lines Segment Gross Premium Data
For the TTM Periods ended December 31, 2008 and March 31, 2009
(Dollars in Thousands)

	Agribusiness						Commerical Lines
	TTM 3/31/09			2008			TTM 3/31/09			2008
Direct premiums written:
Fire and Allied		19,235			18,504			4,837			5,097
Inland		2,238			2,166			275			281
Workers Compensation		8,290			8,064			7,373			8,031
General Liability		10,407			10,048			5,670			5,949
Product Liability		4,871			4,529			426			334
Surety		19			19			0			—
Burglary		168			161			61			38
Boiler and Machinery		898			871			838			850
Auto		13,181			12,919			5,041			5,068
Commercial Multi-Peril		—			—			11,118			11,782
Earthquake		—			—			22			27
Total		59,305			57,281			35,661			37,458
(% of Total Premiums)
Direct premiums written:
Fire and Allied		32.4	%		32.3	%		13.6	%		13.6	%
Inland		3.8	%		3.8	%		0.8	%		0.7	%
Workers Compensation		14.0	%		14.1	%		20.7	%		21.4	%
General Liability		17.5	%		17.5	%		15.9	%		15.9	%
Product Liability		8.2	%		7.9	%		1.2	%		0.9	%
Surety		0.0	%		0.0	%		0.0	%		0.0	%
Burglary		0.3	%		0.3	%		0.2	%		0.1	%
Boiler and Machinery		1.5	%		1.5	%		2.3	%		2.3	%
Auto		22.2	%		22.6	%		14.1	%		13.5	%
Commercial Multi-Peril		0.0	%		0.0	%		31.2	%		31.5	%
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 direct premiums written, the largest component of the Company’s agribusiness segment, increased by 4.0% to $19.2 million in the TTM period ended March 31, 2009. Direct commercial multi-peril direct premiums written, the largest component of the Company’s commercial lines segment, decreased by 5.6% to $11.1 million in the TTM period ended March 31, 2009 due to declining prices. The chart below shows the Company’s composition of direct premiums written, by line of business, for the TTM period ended March 31, 2009.

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PRO FORMA VALUATION APPRAISAL

Chart 7
Agribusiness and Commercial Lines Composition of Gross Premiums Written

For the TTM Period Ended March 31, 2009

Agribusiness

Commercial Lines

Source: Penn Millers financial data.

III. INDUSTRY UPDATE

     The P&C insurance industry continues to experience a soft market. According to P&C insurance data from SNL Financial as of May 22, 2009 for the first quarter of 2009, after-tax realized capital losses though near an historically high level, did exhibit marginal improvements

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PRO FORMA VALUATION APPRAISAL

from the loss levels in the third and fourth quarters of 2008. The number of companies reporting realized capital losses during the first quarter of 2009 outnumbered those posting gains by a count of 995 to 828. The industry’s combined ratio of 102.01% for the first quarter of 2009, was similar to the combined ratio of 102.53% for the fourth quarter of 2008. Net premiums written increased by approximately 7.9% from $98.7 billion in the fourth quarter of 2008 to $106.5 billion in the first quarter of 2009.

P&C individual insurance entity performance
2,691 out of 2,824 estimated P&C filers

	Q1’09			Q1’08			Q1’07			Q4’08			Q4’07			Q4’06			2008Y			2007Y
Direct premiums written ($000)		118,455,173			121,804,657			124,068,523			111,594,148			116,741,582			118,218,869			485,991,577			494,306,660
Net premiums written ($000)		106,506,506			110,863,246			110,075,278			98,751,445			103,103,331			104,799,553			436,753,985			442,117,195
Premiums earned ($000)		105,705,550			108,127,697			108,519,714			107,782,211			110,306,568			110,149,769			438,802,790			439,868,969
Losses & LAE ($000)		78,817,336			78,364,422			70,482,463			79,487,557			77,200,013			71,449,801			337,270,449			297,370,025
Under writing expenses ($000)		28,883,752			30,024,309			29,553,977			27,688,341			28,600,233			29,396,912			119,469,343			108,149,919
Under writing gain		-1,995,539			-261,033			8,483,274			606,313			4,506,322			9,303,056			-17,937,002			34,349,026
Dividends to policyholders ($000)		343,872			386,482			326,130			803,002			1,133,648			2,083,073			2,005,743			3,322,619
Loss ratio (%)		74.56	%		72.47	%		64.95	%		73.75	%		69.99	%		64.87	%		76.86	%		67.60	%
Expense ratio (NPW) (%)		27.12	%		27.08	%		26.85	%		28.04	%		27.74	%		28.05	%		27.35	%		24.46	%
Policy holder dividend ratio (%)		0.33	%		0.36	%		0.30	%		0.75	%		1.03	%		1.89	%		0.46	%		0.76	%
Combined ratio (%)		102.01	%		99.91	%		92.10	%		102.53	%		98.75	%		94.81	%		104.67	%		92.82	%
Change in DPW (%)		-2.75	%		-1.82	%					-4.41	%		-1.25	%					-1.68	%		0.78	%
Change in NPW (%)		-3.93	%		0.72	%					-4.22	%		-1.62	%					-1.21	%		-0.23	%
After-tax realized capital gains ($000)		-7,919,560			-364,638			1,858,954			-10,166,651			1,598,324			1,505,369			-19,367,269			8,807,110

Source: SNL Financial

     Fitch Ratings (“Fitch”) believes that profitability will improve moderately in 2009 but underwriting losses are anticipated to continue. Both SNL Financial and Fitch acknowledged that a primary contributor to the poor underwriting performance in the P&C sector was due to the deterioration in results for financial guarantors and mortgage insurers, which are included in the P&C industry.

     Fitch’s outlook for the P&C insurance industry is negative based on economic and investment uncertainty. Key negative factors affecting the P&C industry include: pricing trends and recession related reductions in insurance exposure that will promote a decline in premium revenue and higher expense ratios; higher accident year loss ratios (excluding catastrophe losses); reduced prior period favorable reserve development; and low investment yields and returns. According to Fitch, market underwriting capacity has not declined to a level that will spark premium rate improvements.

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PRO FORMA VALUATION APPRAISAL

IV. COMPARISONS WITH PUBLICLY-TRADED COMPANIES

Recent Financial Comparisons

     As outlined in the April 1, 2009 Appraisal, we compared PMMHC to a group of comparable companies (the “Comparable Group”). Table 5 summarizes certain key financial comparisons between PMMHC and the Comparable Group for the TTM period ended March 31, 2009. The selection criteria and background information of the publicly traded property and casualty (“P&C”) insurance companies comprising the Comparable Group were discussed in our April 1, 2009 Appraisal.

     The financial comparisons summarized in the April 1, 2009 Appraisal remained relatively unchanged for this Appraisal Update. The Company’s total assets of $228.4 and total equity of $51.2 million remained below the Comparable Group’s respective total asset mean of $651.1 million and total equity mean of $195.9 million.

     The Company experienced an increase in its book equity value of 0.8%, or approximately $406,000 between December 31, 2008 and March 31, 2009. The Comparable Group experienced mean and median increases in book equity value of 1.8% and 5.3%, respectively, over the same time period. The Company’s ratio of total equity to total assets was 22.4% at March 31, 2009 and remained below the Comparable Group mean ratio of total equity to total assets of 31.4%. The Company’s ratio of cash and investments to total assets was 63.0% at March 31, 2009 and remained below the Comparable Group mean ratio of 69.4%.

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Table 5
Comparable Financial Condition Data
Penn Millers and the Comparable Group
As of or for the TTM Period ended March 31, 2009

									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	$	228,415	$	51,161	$	51,161	$	116,775	$	143,993		22.4	%		22.4	%		2.28x		63.0	%
Public P&C Insurance Group Mean		12,459,344		3,402,190		2,806,295		6,793,526		7,932,351		30.4	%		27.8	%		2.42x		69.4	%
Public P&C Insurance Group Median		2,838,743		789,066		756,180		1,724,858		2,126,683		28.0	%		24.6	%		2.15x		70.9	%
Comparable Group Mean		651,072		195,902		183,892		378,004		443,835		31.4	%		29.5	%		2.00x		69.9	%
Comparable Group Median		665,975		180,855		153,791		388,800		454,018		31.3	%		26.9	%		1.76x		69.7	%
Comparable Group
21st Century Holding Company		204,676		76,228		76,228		114,701		150,471		37.2	%		37.2	%		1.50x		73.5	%
Baldwin & Lyons, Inc.		765,729		325,649		325,649		398,016		524,088		42.5	%		42.5	%		1.22x		68.4	%
CRM Holdings, Ltd.		452,951		101,677		98,465		273,506		340,804		22.4	%		21.7	%		2.69x		75.2	%
Donegal Group Inc.		890,379		368,350		367,428		478,479		641,909		41.4	%		41.3	%		1.30x		72.1	%
Eastern Insurance Holdings, Inc.		385,487		137,234		117,736		207,849		273,564		35.6	%		30.5	%		1.51x		71.0	%
EMC Insurance Group Inc.		1,105,584		286,182		285,240		724,156		948,106		25.9	%		25.8	%		2.53x		85.8	%
First Mercury Financial Corporation		985,641		274,384		210,125		548,289		606,108		27.8	%		21.3	%		2.00x		61.5	%
Hallmark Financial Services, Inc.		551,279		190,555		121,220		277,022		368,415		34.6	%		22.0	%		1.45x		66.8	%
Mercer Insurance Group, Inc.		566,221		141,843		136,427		379,583		383,947		25.1	%		24.1	%		2.68x		67.8	%
National Interstate Corporation		1,025,934		224,907		224,907		584,812		572,269		21.9	%		21.9	%		2.60x		55.8	%
National Security Group, Inc.		125,054		35,045		35,045		70,927		93,511		28.0	%		28.0	%		2.02x		74.8	%
NYMAGIC, INC.		977,190		171,154		171,154		651,829		582,965		17.5	%		17.5	%		3.81x		59.7	%
SeaBright Insurance Holdings, Inc.		896,537		333,196		328,636		486,743		578,196		37.2	%		36.7	%		1.46x		64.5	%
Unico American Corporation		182,340		76,226		76,226		96,150		149,331		41.8	%		41.8	%		1.26x		81.9	%

Source: Penn Millers’ GAAP financial statements; SNL Financial.

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PRO FORMA VALUATION APPRAISAL

     Table 6 compares Penn Millers with the Comparable Group and Public P&C Insurance Group based on selected measures of profitability.

Table 6
Comparable Operating Performance Data
Penn Millers and the Comparable Group
For the TTM period ended March 31, 2009

	Total Revenue		Net Income			GAAP			GAAP Loss			Combined
	($000)		($000)			Expense Ratio			Ratio			Ratio			ROAA			ROAE
Penn Millers	$	75,280	$	(5,992	)		34.2	%		72.9	%		107.0	%		-2.7	%		-10.6	%
Public P&C Insurance Group Mean		3,502,076		161,709			32.1	%		61.4	%		93.6	%		0.6	%		2.2	%
Public P&C Insurance Group Median		634,172		29,149			31.3	%		60.8	%		93.2	%		1.1	%		3.8	%
Comparable Group Mean		193,487		139			36.1	%		63.8	%		99.9	%		-0.4	%		-2.0	%
Comparable Group Median		163,129		3,844			34.8	%		62.2	%		99.1	%		0.8	%		3.0	%
Comparable Group
21st Century Holding Company		62,937		(6,484	)		47.5	%		63.8	%		111.3	%		-3.2	%		-8.1	%
Baldwin & Lyons, Inc.		167,677		2,336			34.9	%		54.1	%		89.0	%		0.3	%		0.7	%
CRM Holdings, Ltd.		134,533		(14,860	)		51.3	%		80.8	%		132.1	%		-3.5	%		-13.5	%
Donegal Group Inc.		378,007		19,152			31.2	%		74.7	%		105.9	%		2.2	%		5.3	%
Eastern Insurance Holdings, Inc.		129,820		(20,512	)		34.8	%		67.0	%		101.7	%		-5.4	%		-13.5	%
EMC Insurance Group Inc.		406,030		(4,121	)		37.8	%		58.2	%		96.0	%		-0.4	%		-1.3	%
First Mercury Financial Corporation		231,115		39,802			30.4	%		58.0	%		88.4	%		4.4	%		15.2	%
Hallmark Financial Services, Inc.		267,758		12,208			29.5	%		62.0	%		91.5	%		2.3	%		6.5	%
Mercer Insurance Group, Inc.		158,581		8,533			36.0	%		62.4	%		98.4	%		1.5	%		6.3	%
National Interstate Corporation		295,232		13,735			22.4	%		56.6	%		79.0	%		1.4	%		6.4	%
National Security Group, Inc.		59,538		(4,505	)		42.0	%		76.5	%		118.4	%		-3.4	%		-11.5	%
NYMAGIC, INC.		102,751		(71,109	)		48.2	%		51.5	%		99.7	%		-7.1	%		-35.5	%
SeaBright Insurance Holdings, Inc.		269,751		22,414			34.0	%		66.1	%		100.1	%		2.7	%		7.1	%
Unico American Corporation		45,089		5,352			26.0	%		61.0	%		87.0	%		2.9	%		7.3	%

Source: Penn Millers’ GAAP financial statements; SNL Financial.

     The Company was not profitable in the TTM period ended March 31, 2009. Six companies in the Comparable Group also experienced operating losses during the TTM period ended March 31, 2009. Penn Millers’ profitability continues to be impacted by a high combined ratio, which was 107.0%. The Comparable Group reported mean and median combined ratios of 99.9% and 99.1%, respectively.

     The Company’s relatively high combined ratio was attributable primarily to its higher loss ratio. Penn Millers’ loss ratio measured 72.9% for the TTM period ended March 31, 2009, which was above the Comparable Group mean and median loss ratios of 63.8% and 62.2%. Among the Comparable Group members, CRM Holdings, Ltd., Donegal Group, Inc., and National Security Group, Inc. reported higher loss ratios at 80.8%, 74.7%, and 76.5%, respectively.

15

PRO FORMA VALUATION APPRAISAL

V. MARKET CONDITIONS AND MARKET VALUE ADJUSTMENTS

Stock Price Performance and Market Conditions

     Table 7 summarizes stock price and valuation ratios changes for the Comparable Group from April 1, 2009 and December 31, 2008, respectively. Ten companies experienced a price increase, and four companies experienced a price decline. The mean and median price changes among the Comparable Group were negative 9.4% and positive 3.5%, respectively. The market valuation ratios of the Comparable Group have remained relatively unchanged since April 1, 2009.

Table 7
Comparative Market Valuation Performance
As of April 1, 2009 and June 5, 2009

														6/5/2009			4/1/2009
	Change in													Price /			Price /			6/5/2009		4/1/2009		6/5/2009		4/1/2009		6/5/2009			4/1/2009
	Closing			6/5/2009		4/1/2009		6/5/2009 Price			4/1/2009 Price			Tangible			Tangible			Price / LTM		Price / LTM		Price / LTM		Price / LTM		Price / Total			Price / Total
	Price			Closing Price		Closing Price		/ Book			/ Book			Book			Book			EPS		EPS		Revenue		Revenue		Assets			Assets
Public P&C Insurance Group Mean	NA			NA		NA			96.4	%		93.2	%		106.9	%		103.6	%		28.43x		26.05x		1.53x		0.66x		28.6	%		27.6	%
Public P&C Insurance Group Median	NA			NA		NA			92.1	%		87.2	%		101.6	%		94.5	%		11.58x		10.44x		0.99x		0.95x		26.1	%		25.7	%
Comparable Group Mean		9.4	%	NA		NA			75.3	%		74.7	%		81.5	%		81.6	%		27.78x		12.87x		0.82x		0.85x		23.4	%		23.2	%
Comparable Group Median		3.5	%	NA		NA			70.4	%		73.4	%		73.4	%		74.0	%		11.65x		10.66x		0.73x		0.77x		23.1	%		24.2	%
Comparable Group
21st Century Holding Company		2.4	%		3.38		3.30		35.5	%		34.7	%		35.5	%		34.7	%	Neg		Neg			0.43x		0.39x		13.2	%		13.4	%
Baldwin & Lyons, Inc.		6.8	%		20.95		19.61		95.0	%		87.7	%		95.0	%		88.6	%		130.94x	Neg			1.85x		1.85x		40.4	%		37.2	%
CRM Holdings, Ltd.		87.3	%		1.18		0.63		19.3	%		9.6	%		19.9	%		9.9	%	Neg		Neg			0.15x		0.07x		4.3	%		2.4	%
Donegal Group Inc.		4.5	%		15.89		15.21		110.2	%		106.8	%		110.4	%		107.1	%		20.91x		15.21x		1.07x		1.04x		45.6	%		44.1	%
Eastern Insurance Holdings, Inc.		24.3	%		9.44		7.60		62.5	%		50.0	%		72.8	%		58.4	%	Neg		Neg			0.66x		0.53x		22.2	%		18.3	%
EMC Insurance Group Inc.		1.3	%		21.75		21.48		100.7	%		100.6	%		101.0	%		100.9	%	Neg		Neg			0.71x		0.69x		26.1	%		25.7	%
First Mercury Financial Corporation		-4.4	%		13.94		14.58		92.0	%		100.9	%		120.1	%		134.2	%		6.51x		6.66x		1.09x		1.23x		25.6	%		28.0	%
Hallmark Financial Services, Inc.		5.6	%		6.98		6.61		76.5	%		76.9	%		120.2	%		126.2	%		12.03x		10.66x		0.54x		0.51x		26.4	%		25.6	%
Mercer Insurance Group, Inc.		5.6	%		15.20		14.40		66.8	%		65.4	%		69.4	%		68.2	%		11.26x		11.08x		0.60x		0.56x		16.7	%		15.8	%
National Interstate Corporation		-1.1	%		16.69		16.88		143.6	%		151.2	%		143.6	%		151.2	%		23.51x		30.69x		1.09x		1.11x		31.5	%		33.0	%
National Security Group, Inc.		-20.7	%		8.60		10.85		60.5	%		77.2	%		60.5	%		77.2	%	Neg		Neg			0.36x		0.44x		17.0	%		21.4	%
NYMAGIC, INC.		28.8	%		14.74		11.44		74.0	%		59.9	%		74.0	%		59.9	%	Neg		Neg			1.23x		1.75x		13.0	%		10.4	%
SeaBright Insurance Holdings, Inc.		-11.1	%		9.46		10.64		60.5	%		69.8	%		61.3	%		70.8	%		9.01x		7.71x		0.75x		0.85x		22.5	%		26.9	%
Unico American Corporation		2.5	%		7.68		7.50		56.5	%		54.6	%		56.5	%		54.6	%		8.09x		8.06x		0.96x		0.90x		23.6	%		22.8	%

Source: SNL Financial and CapitalIQ.

     Table 8 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 increased 17.4% between

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PRO FORMA VALUATION APPRAISAL

April 1, 2009 and June 5, 2009. The SNL Insurance Index slightly outperformed the broader markets indexes as reflected by the Standard & Poor’s 500, which increased 15.9% and the Russell 3000, which increased 17.1% between April 1, 2009 and June 5, 2009.

Table 8
Selected Stock Market Index Performance
For the Period Ended June 5, 2009

	Index Value		Index Value					Change (%)
	6/5/2009		4/1/2009		4/1/2009			YTD			1 Year			3 Years
SNL Insurance Indexes
SNL Insurance		287.77		245.09		17.41			(5.83	)		(41.25	)		(44.17	)
SNL Insurance Underwriter		283.17		238.83		18.57			(5.28	)		(42.09	)		(45.19	)
SNL Insurance Broker		469.08		462.05		1.52			(13.73	)		(23.33	)		(20.72	)
S&P Insurance		138.28		106.56		29.77			(6.63	)		(55.17	)		(60.07	)
SNL Sector Indexes
SNL Insurance Multiline		88.20		61.44		43.57			(4.23	)		(76.90	)		(82.86	)
SNL Insurance L&H		358.42		220.38		62.63			(4.13	)		(48.16	)		(45.58	)
SNL Insurance P&C		299.74		280.08		7.02			(8.37	)		(26.27	)		(13.59	)
SNL Reinsurance		379.44		358.14		5.95			(6.09	)		(52.13	)		(55.73	)
SNL Managed Care		432.64		349.89		23.65			3.99			(30.51	)		(39.59	)
SNL Title Insurer		425.66		584.99		(27.24	)		(24.98	)		(30.31	)		(60.80	)
SNL Mortgage & Finl Guaranty		45.50		25.09		81.37			39.06			(33.80	)		(91.56	)
SNL Asset Size Indexes
SNL Insurance < $250M		323.83		289.98		11.67			9.00			(32.28	)		(47.97	)
SNL Insurance $250M-$500M		285.08		255.62		11.52			(5.89	)		(36.20	)		(49.44	)
SNL Insurance $500M-$1B		317.42		308.44		2.91			(2.16	)		(15.52	)		(25.06	)
SNL Insurance $1B-$2.5B		561.29		520.89		7.75			(7.18	)		(22.07	)		(12.78	)
SNL Insurance $2.5B-$10B		368.06		353.22		4.20			(8.64	)		(25.19	)		(34.15	)
SNL Insurance > $10B		272.55		224.41		21.45			(4.75	)		(44.50	)		(47.13	)
SNL Insurance > $1B		296.65		249.86		18.73			(5.29	)		(42.22	)		(45.25	)
SNL Insurance < $1B		363.09		346.49		4.79			(1.08	)		(20.74	)		(31.32	)
SNL Market Cap Indexes
SNL Micro Cap Insurance		176.53		128.34		37.55			6.35			(44.91	)		(49.17	)
SNL Small Cap Insurance		358.86		320.07		12.12			(14.25	)		(31.14	)		(38.42	)
SNL Mid Cap Insurance		199.72		160.14		24.72			(8.71	)		(39.01	)		(50.71	)
SNL Large Cap Insurance		233.30		199.56		16.91			(4.24	)		(43.55	)		(46.00	)
Broad Market Indexes
S&P 500		940.09		811.08		15.91			4.08			(33.04	)		(25.70	)
SNL All Financial Institutions		347.62		276.88		25.55			(2.94	)		(43.62	)		(55.79	)
Russell 1000		987.61		847.30		16.56			5.33			(33.40	)		(25.50	)
Russell 2000		1,318.08		1,066.57		23.58			6.19			(30.51	)		(25.71	)
Russell 3000		1,008.03		860.92		17.09			5.40			(33.18	)		(25.54	)

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PRO FORMA VALUATION APPRAISAL

VI. VALUATION ANALYSIS AND CONCLUSIONS

Valuation Review

     In the April 1, 2009 Appraisal, the Company’s Estimated Pro Forma Market Value was discounted on a P/B basis relative to the trading market valuations of the Comparable Group. The Company’s Estimated Pro Forma Market Value was adjusted for earnings prospects, liquidity of issue and new issue discounts.

     The Comparable Group’s market valuation ratios have remained relatively unchanged since the April 1, 2009 Appraisal. The median P/B ratio of the Comparable Group decreased from 73.4% at April 1, 2009 to 70.4% at June 5, 2009 and the mean P/B ratio of the Comparable Group increased from 74.7% at April 1, 2009 to 75.3% at June 5, 2009. The P/B ratio continues to be the primary valuation metric generally accepted for financial services companies in the current investment climate. Penn Millers’ relatively low returns on equity and assets and negative profitability during the TTM period ended March 31, 2009 render the P/E ratio not applicable. The P/A ratio was again considered to confirm that our Valuation Range for PMMHC was within reason.

Valuation Analysis

     As noted in our April 1, 2009 Appraisal, a discount of approximately 25% to 35% based on the P/B ratio was deemed appropriate for determining the Company’s Estimated Pro Forma Market Value relative to the Comparable Group’s market valuation ratios. The Company is valued at a pro-forma P/B ratio of 50.9% at the minimum, 55.5% at the midpoint, and 59.4% at the maximum as shown in Table 9.

18

PRO FORMA VALUATION APPRAISAL

Table 9
Penn Millers Comparative Valuation Ratios
Based on the Estimated Pro Forma Market Valuation Range
(Dollars in Thousands)

	Estimated Pro Forma Market Valuation Range
	Minimum			Midpoint			Maximum
June 5, 2009 Appraisal
Financial Data as of March 31, 2009
Gross Proceeds	$	45,050		$	53,000		$	60,950
Price / Book Value		50.9	%		55.5	%		59.4	%
Price / Tangible Book Value		50.9	%		55.5	%		59.4	%
Price / Total Assets		17.0	%		19.4	%		21.8	%
Price / LTM EPS	neg			neg			neg
April 1, 2009 Appraisal
Financial Data as of December 31, 2008
Gross Proceeds	$	45,050		$	53,000		$	60,950
Price / Book Value		51.2	%		55.7	%		59.7	%
Price / Tangible Book Value		52.7	%		57.3	%		61.2	%
Price / Total Assets		17.5	%		20.0	%		22.4	%
Price / LTM EPS	neg			neg			neg

Source: Curtis Financial Group.

19

PRO FORMA VALUATION APPRAISAL

     Table 10 displays the market valuation ratios of the Comparable Group as of June 5, 2009 and pro forma ratios for the Company.

Table 10
Comparative Market Valuation Analysis
As of June 5, 2009

								Price /
			Total Market					Tangible			Price / LTM			Price / LTM			Price / Total			Equity /
	Closing Price		Value ($000’s)		Price / Book			Book			EPS			Revenue			Assets			Assets
Penn Millers
Pro Forma Valuation Minimum	$	10.00	$	45,050		50.9	%		50.9	%	Neg				0.59	x		17.0	%		33.3	%
Pro Forma Valuation Midpoint		10.00		53,000		55.5	%		55.5	%	Neg				0.69	x		19.4	%		35.0	%
Pro Forma Valuation Maximum		10.00		60,950		59.4	%		59.4	%	Neg				0.79	x		21.8	%		36.6	%
Comparable Group Mean	NA		$	167,438		75.3	%		81.5	%		27.78	x		0.82	x		23.4	%		31.4	%
Comparable Group Median	NA			136,157		70.4	%		73.4	%		11.65	x		0.73	x		23.1	%		31.3	%
Comparable Group
21st Century Holding Company		3.38		27,087		35.5	%		35.5	%	Neg				0.43	x		13.2	%		37.2	%
Baldwin & Lyons, Inc.		20.95		309,369		95.0	%		95.0	%		130.94	x		1.85	x		40.4	%		42.5	%
CRM Holdings, Ltd.		1.18		19,609		19.3	%		19.9	%	Neg				0.15	x		4.3	%		22.4	%
Donegal Group Inc.		15.89		405,745		110.2	%		110.4	%		20.91	x		1.07	x		45.6	%		41.4	%
Eastern Insurance Holdings, Inc.		9.44		85,767		62.5	%		72.8	%	Neg				0.66	x		22.2	%		35.6	%
EMC Insurance Group Inc.		21.75		288,182		100.7	%		101.0	%	Neg				0.71	x		26.1	%		25.9	%
First Mercury Financial Corporation		13.94		252,444		92.0	%		120.1	%		6.51	x		1.09	x		25.6	%		27.8	%
Hallmark Financial Services, Inc.		6.98		145,694		76.5	%		120.2	%		12.03	x		0.54	x		26.4	%		34.6	%
Mercer Insurance Group, Inc.		15.20		94,742		66.8	%		69.4	%		11.26	x		0.60	x		16.7	%		25.1	%
National Interstate Corporation		16.69		323,002		143.6	%		143.6	%		23.51	x		1.09	x		31.5	%		21.9	%
National Security Group, Inc.		8.60		21,213		60.5	%		60.5	%	Neg				0.36	x		17.0	%		28.0	%
NYMAGIC, INC.		14.74		126,620		74.0	%		74.0	%	Neg				1.23	x		13.0	%		17.5	%
SeaBright Insurance Holdings, Inc.		9.46		201,575		60.5	%		61.3	%		9.01	x		0.75	x		22.5	%		37.2	%
Unico American Corporation		7.68		43,085		56.5	%		56.5	%		8.09	x		0.96	x		23.6	%		41.8	%

Source: Penn Millers, SNL Financial and Capital IQ.

     The Company’s pro forma P/B valuation ratios reflect discounts to the Comparable Group’s mean ratio of 75.3% measuring 21.0% at the valuation maximum, 26.3% at the valuation midpoint, and 32.3% at the valuation minimum. The Company’s P/B valuation ratios reflect a discount to the Comparable Group’s 70.4% median of 15.5% at the valuation maximum, 21.2% at the valuation midpoint, and 27.6% at the valuation minimum. In our opinion, these levels of discounts are appropriate to reflect the adjustments for earnings prospects, the new issue discount, and liquidity of the issue discussed in the previous Appraisal as of April 1, 2009.

     Based on the P/A ratio, the Company’s midpoint valuation of $45.0 million reflects a P/A ratio of 19.4%, ranging from 17.0% at the minimum to 21.8% at the maximum. The Company’s P/A valuation ratio at the midpoint is below the Comparable Group’s corresponding mean and

20

PRO FORMA VALUATION APPRAISAL

median P/A ratios of 23.4% and 23.1%, respectively, but considered within a reasonable range from the mean and median of the Comparable Group.

Valuation Conclusion

     It is our opinion that, as of June 5, 2009, the Estimated Pro Forma Market Value of the shares to be issued 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 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.

21

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

June 5, 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)

	3/31/2009			12/31/2008			12/31/2007			12/31/2006			12/31/2005			12/31/2004			12/31/2003
ASSETS
Investments:
Fixed securities		128,298			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		128,298			121,914			126,178			113,603			106,877			105,571			98,389
Cash and cash equivalents (cash overdraft)		15,695			11,959			10,134			13,052			10,021			11,431			14,387
Premiums and fees receivable		28,753			31,080			32,489			30,465			26,910			29,256			24,056
Reinsurance receivables and recoverables		25,064			20,637			15,640			18,886			22,923			18,053			22,222
Deferred acquisition costs		10,522			10,601			11,014			10,381			9,646			10,352			9,243
Prepaid reinsurance premiums		4,170			4,342			4,234			4,119			3,645			3,731			3,209
Accrued investment income		1,391			1,431			1,499			1,439			1,302			1,225			1,236
PP&E, less accumulated depreciation		4,071			4,231			4,401			4,228			4,255			5,020			5,583
Income taxes receivable		1,294			1,508			1,056			—			894						—
Deferred income taxes		3,656			4,728			1,872			1,439			1,429			—			—
Other		4,058			4,879			3,972			2,812			2,557			2,144			1,845
Assets from discontinued operations		1,443			3,214			7,124			7,344			7,438			5,237			5,285
Total assets		228,415			220,524			219,613			207,768			197,897			192,020			185,455
LIABILITIES AND SURPLUS
Loss and loss adjustment expense reserves		116,775			108,065			95,956			89,405			83,849			73,287			69,463
Unearned premiums		44,811			45,322			46,595			43,294			39,984			42,798			38,090
Accounts due reinsurers		—			—			—			—			—			2,597			4,973
Accounts payable and accrued expenses		12,631			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		3,037			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		177,254			169,769			158,212			147,238			140,128			132,114			126,180
Unassigned surplus		51,945			51,914			59,293			58,207			56,127			55,837			54,439
Accumulated other comprehensive income, net		(784	)		(1,159	)		2,108			2,323			1,642			4,069			4,836
Total surplus		51,161			50,755			61,401			60,530			57,769			59,906			59,275
Total liabilities and surplus		228,415			220,524			219,613			207,768			197,897			192,020			185,455
Performance and Capital Ratios
Return on average assets (a)		-2.66	%		-2.03	%		0.68	%		0.94	%		0.12	%		0.64	%		1.00	%
Return on average surplus (a)		-10.57	%		-7.95	%		2.38	%		3.23	%		0.41	%		2.03	%		3.12	%
Surplus to total assets		22.40	%		23.02	%		27.96	%		29.13	%		29.19	%		31.20	%		31.96	%

Notes:
(a)	Return on average assets and return on average equity as of 3/31/2009; asset and equity values are derived as the average of 3/31/2008 and 3/31/2009.

Source: Financial reports prepared by management and reviewed by KPMG.

Exhibit IV–2
Penn Millers Mutual Holding Company
Historical Income Statements — GAAP Basis
(Dollars in Thousands)

	TTM ended
	3/31/2009 (e)			2008			2007			2006			2005			2004			2003
REVENUE
Premiums earned	$	77,327		$	78,737		$	70,970		$	64,645		$	64,723		$	63,090		$	56,065
Investment income, net of investment expense		5,298			5,335			5,324			4,677			4,444			4,278			4,058
Realized investment (losses) gains, net		(7,627	)		(5,819	)		(702	)		349			424			936			833
Other income		282			411			508			345			277			301			371
Total revenue		75,280			78,664			76,100			70,016			69,868			68,605			61,327
LOSSES AND EXPENSES
Losses and loss adjustment expenses		56,343			57,390			49,783			43,766			40,242			42,910			35,822
Underwriting and administrative expenses (a)		26,414			26,562			24,163			23,296			29,221			24,359			22,911
Interest expense		213			184			125			222			195			51			56
Other expenses, net		376			365			184			314			266			82			101
Total losses and expenses		83,346			84,501			74,255			67,598			69,924			67,402			58,890
Income from continuing operations		(8,066	)		(5,837	)		1,845			2,418			(56	)		1,203			2,437
Income taxes expense (benefit)		(2,074	)		(1,378	)		396			506			(296	)		(4	)		587
Net income (loss) from continuing operations		(5,992	)		(4,459	)		1,449			1,912			240			1,207			1,850
Discontinued Operations:
Pre-tax (loss) income on discontinued ops		(3,104	)		(3,090	)		(489	)		292			385			240			340
Income tax (benefit) expense		632			(170	)		(126	)		124			151			63			143
(Loss) income on discontinued ops		(3,736	)		(2,920	)		(363	)		168			234			177			197
Net income		(9,728	)		(7,379	)		1,086			2,080			474			1,384			2,047
Operating Ratios
Loss ratio (b)		72.9	%		72.9	%		70.1	%		67.7	%		62.2	%		68.0	%		63.9	%
Expense ratio (c)		34.2	%		33.7	%		34.0	%		36.0	%		45.1	%		38.6	%		40.9	%
Combined ratio (d)		107.0	%		106.6	%		104.2	%		103.7	%		107.3	%		106.6	%		104.8	%

Notes:
(a)	Includes amortization of deferred policy acquisition costs.
(b)	Losses and loss adjustment expenses divided by premiums earned.
(c)	Underwriting and administrative expenses divided by premiums earned.
(d)	Sum of the loss ratio and the expense ratio.
(e)	Represents the trailing twelve month period ended March 31, 2009.

Source: Financial reports prepared by management and reviewed by KPMG. Statutory financials provided in Exhibit V.

Exhibit IV-3
Penn Millers Mutual Holding Company
Investment Portfolio
(Dollars in Thousands)

	3/31/2009				12/31/2008				12/31/2007				12/31/2006
	Amortized		Estimated		Amortized		Estimated		Amortized		Estimated		Amortized		Estimated
	Cost		Fair Value		Cost		Fair Value		Cost		Fair Value		Cost		Fair Value
ASSETS
Fixed Securities:
U.S. government and agencies		24,533		26,063		23,459		25,399		26,360		26,984		27,509		27,461
State and political subdivisions		32,228		33,932		31,775		32,957		30,321		31,134		26,538		27,047
Mortgage backed		24,431		24,617		25,374		25,305		20,636		20,724		11,618		11,488
Corporate		45,220		43,686		39,930		38,253		33,656		33,927		33,964		33,910
Total fixed securities		126,412		128,298		120,538		121,914		110,973		112,769		99,629		99,906
Equity		—		—		—		—		10,525		13,409		10,476		13,697
Total investment securities		126,412		128,298		120,538		121,914		121,498		126,178		110,105		113,603

Notes:

Financial reports prepared by management and reviewed by KPMG.

Exhibit V-1
Penn Millers Mutual Holding Company (b)
Historical Balance Sheets — Statutory Basis (a)
(Dollars in Thousands)

	12/31/2008			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		31,950			32,416			30,396			26,730			29,076			23,919
Reinsurance receivables		3,074			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		182,941			183,815			170,553			154,049			152,501			141,075
LIABILITIES AND SURPLUS
Loss and loss adjustment expense reserves		85,439			77,222			69,317			61,033			55,805			48,072
Unearned premiums		41,061			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		139,115			133,020			120,028			106,833			107,056			96,743
Aggregate write-ins for special surplus funds		2,250			2,250			2,250			2,250			2,250			2,250
Common capital stock		5,000			5,000			5,000			5,000			5,000			5,000
Gross paid in and contributed surplus		5,000			5,000			5,000			5,000			5,000			5,000
Unassigned surplus		30,576			38,545			38,275			34,966			33,195			32,082
Total surplus		42,826			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		-2.43	%		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		23.41	%		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.

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.
(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		204,676		114,701		76,228		76,228		60,429		150,471		0.74		1.50		0.37		0.37		0.68		63.81		47.50		111.31		-3.17		-8.12
ACE Limited	ACE		73,127,000		46,365,000		14,718,000		10,983,000		13,457,000		41,970,000		0.57		3.15		0.20		0.15		0.86		59.70		27.80		87.50		1.86		8.97
Affirmative Insurance Holdings, Inc.	AFFM		811,112		327,695		231,944		51,207		355,658		356,534		0.44		1.41		0.29		0.06		1.63		74.70		24.00		98.70		0.92		3.49
Alleghany Corporation	Y		6,012,686		3,164,484		2,551,029		2,400,723		921,215		4,112,254		0.68		1.24		0.42		0.40		0.32		51.70		30.90		82.60		1.47		3.63
Allied World Assurance Company Holdings, Ltd	AWH		8,892,255		5,598,837		2,491,860		2,152,983		1,167,805		6,710,099		0.75		2.25		0.28		0.24		0.51		45.80		29.50		75.30		2.15		7.92
Allstate Corporation	ALL		130,371,000		98,099,000		12,271,000		11,397,000		28,712,000		94,710,000		0.73		7.99		0.09		0.09		1.60		71.70		25.10		96.80		-1.61		-14.00
American Financial Group, Inc.	AFG		25,842,100		20,189,900		2,678,800		2,396,900		3,241,900		17,135,600		0.66		7.54		0.10		0.09		1.02		47.30		34.60		81.90		0.87		8.35
American Physicians Capital, Inc.	ACAP		996,515		700,842		248,092		248,092		121,927		827,666		0.83		2.82		0.25		0.25		0.45		53.30		24.30		77.60		4.27		16.88
American Physicians Service Group, Inc.	AMPH		289,825		129,537		142,139		139,885		63,184		240,641		0.83		0.91		0.49		0.48		0.51		37.00		18.00		55.00		7.23		15.42
American Safety Insurance Holdings, Ltd.	ASI		1,036,776		714,595		223,150		213,454		181,102		696,774		0.67		3.20		0.22		0.21		0.82		60.60		40.50		101.10		-0.01		-0.04
AMERISAFE, Inc.	AMSF		1,143,399		728,610		262,111		262,111		285,194		808,555		0.71		2.78		0.23		0.23		1.19		67.20		21.40		88.60		3.87		17.81
AmTrust Financial Services, Inc.	AFSI		3,164,023		1,848,674		401,488		297,489		474,107		1,355,805		0.43		4.60		0.13		0.09		1.44		56.60		23.10		79.70		2.78		21.30
Arch Capital Group Ltd.	ACGL		16,092,287		9,326,748		3,630,396		3,603,333		2,837,784		11,144,493		0.69		2.57		0.23		0.22		0.77		57.20		29.50		86.70		1.53		6.59
Argo Group International Holdings, Ltd.	AGII		6,479,500		3,895,100		1,384,300		1,126,200		1,251,800		4,065,900		0.63		2.81		0.21		0.17		0.92		59.20		37.10		96.30		0.85		3.85
Aspen Insurance Holdings Limited	AHL		7,639,800		4,060,000		2,832,400		2,824,200		1,757,400		6,062,500		0.79		1.43		0.37		0.37		0.65		56.10		28.40		84.50		1.54		4.09
AXIS Capital Holdings Limited	AXS		14,777,366		9,038,856		4,492,837		4,397,457		2,693,906		10,448,241		0.71		2.01		0.30		0.30		0.57		58.31		28.34		86.65		1.76		5.51
Baldwin & Lyons, Inc.	BWINB		765,729		398,016		325,649		326,667		181,375		524,088		0.68		1.22		0.43		0.43		0.49		54.10		34.90		89.00		0.29		0.68
Berkshire Hathaway Inc.	BRK.A		260,542,000		71,239,000		106,919,000		73,140,000		27,499,000		121,426,000		0.47		0.67		0.41		0.28		0.23		79.38		16.47		95.85		0.95		2.27
Chubb Corporation	CB		48,572,000		28,435,000		13,804,000		13,337,000		11,678,000		39,187,000		0.81		2.06		0.28		0.27		0.84		57.15		32.24		89.39		2.97		10.72
Cincinnati Financial Corporation	CINF		13,108,000		7,248,000		3,881,000		3,881,000		3,120,026		9,391,000		0.72		1.87		0.30		0.30		0.70		74.20		33.30		107.50		3.55		11.10
CNA Surety Corporation	SUR		1,609,466		715,456		797,909		659,124		430,206		1,162,204		0.72		0.90		0.50		0.41		0.59		29.30		53.70		83.00		7.00		14.85
CRM Holdings, Ltd.	CRMH		452,951		273,506		101,677		98,465		110,733		340,804		0.75		2.69		0.22		0.22		1.04		80.80		51.30		132.10		-3.45		-13.46
Donegal Group Inc.	DGICA		890,379		478,479		368,350		367,428		352,918		641,909		0.72		1.30		0.41		0.41		0.98		74.70		31.20		105.90		2.17		5.32
Eastern Insurance Holdings, Inc.	EIHI		385,487		207,849		137,234		117,736		136,542		273,564		0.71		1.51		0.36		0.31		0.88		66.95		34.77		101.72		-5.35		-13.47
EMC Insurance Group Inc.	EMCI		1,105,584		724,156		286,182		285,240		386,795		948,106		0.86		2.53		0.26		0.26		1.23		58.20		37.80		96.00		-0.36		-1.31
Employers Holdings, Inc.	EIG		3,764,778		2,655,209		459,942		406,392		364,651		2,273,650		0.60		5.77		0.12		0.11		0.86		53.00		46.80		99.80		2.85		23.33
Endurance Specialty Holdings Ltd.	ENH		7,797,419		4,377,166		2,253,540		2,055,093		1,772,717		5,461,590		0.70		1.94		0.29		0.26		0.74		58.20		34.00		92.20		1.29		4.23
Enstar Group Limited	ESGR		4,371,009		2,797,827		860,581		839,359		0		3,477,957		0.80		3.25		0.20		0.19		0.00	NA		NA		NA			2.05		14.05
Erie Indemnity Company	ERIE		2,542,434		1,400,302		776,948		776,948		207,231		1,030,654		0.41		1.80		0.31		0.31		0.22		83.10		28.10		111.20		1.86		5.62
Everest Re Group, Ltd.	RE		16,724,994		10,207,310		5,039,854		5,039,854		3,714,618		13,601,083		0.81		2.03		0.30		0.30		0.70		61.10		28.60		89.70		0.07		0.23
Fairfax Financial Holdings Limited	FFH		25,686,300		16,535,400		4,558,200		4,272,200		4,531,700		18,016,300		0.70		3.63		0.18		0.17		0.92		71.48		27.22		98.70		2.87		16.36
First Acceptance Corporation	FAC		447,662		161,513		226,661		82,219		239,924		215,102		0.48		0.71		0.51		0.18	NA			70.10		23.90		94.00		-1.20		-2.44
First Mercury Financial Corporation	FMR		985,641		548,289		274,384		210,125		202,767		606,108		0.61		2.00		0.28		0.21		0.81		58.00		30.40		88.40		4.36		15.24
Flagstone Reinsurance Holdings Limited	FSR		2,472,039		851,020		1,224,152		1,175,599		691,746		1,770,190		0.72		0.70		0.50		0.48		0.60		44.30		36.10		80.40		-7.45		-13.91
FPIC Insurance Group, Inc.	FPIC		985,043		652,238		258,656		247,823		166,949		704,737		0.72		2.52		0.26		0.25		0.57		60.50		23.70		84.20		2.90		10.83
GAINSCO, INC.	GAN		246,972		131,732		54,741		54,132		179,266		175,854		0.71		2.41		0.22		0.22		3.11		70.40		25.30		95.70		-0.65		-2.68
Greenlight Capital Re, Ltd.	GLRE		1,128,804		212,216		520,545		520,545		133,650		981,729		0.87		0.41		0.46		0.46		0.28		65.40		38.20		103.60		-7.95		-16.00
Hallmark Financial Services, Inc.	HALL		551,279		277,022		190,555		121,220		236,185		368,415		0.67		1.45		0.35		0.22		1.29		62.00		29.50		91.50		2.26		6.52
Hanover Insurance Group, Inc.	THG		7,698,100		4,395,800		1,967,600		1,798,000		2,499,200		4,789,600		0.62		2.23		0.26		0.23		1.22		67.80		33.40		101.20		-0.13		-0.58
Harleysville Group Inc.	HGIC		3,162,276		2,257,692		671,655		648,255		907,165		2,501,363		0.79		3.36		0.21		0.20		1.30		67.30		34.32		101.62		1.11		5.17
HCC Insurance Holdings, Inc.	HCC		8,623,917		4,528,233		2,704,910		1,842,252		2,016,616		5,237,354		0.61		1.67		0.31		0.21		0.79		62.80		24.50		87.30		3.66		11.84
Hilltop Holdings Inc.	HTH		1,044,775		101,698		791,201		753,659		114,177		915,693		0.88		0.13		0.76		0.72		0.14		48.50		38.00		86.50		-1.33		-1.81
Horace Mann Educators Corporation	HMN		5,526,333		3,727,430		444,711		397,315		658,446		3,910,251		0.71		8.38		0.08		0.07		1.87		69.30		25.30		94.60		0.17		1.97
Infinity Property and Casualty Corporation	IPCC		1,729,904		928,934		529,639		454,364		902,054		1,182,724		0.68		1.75		0.31		0.26		1.54		70.47		21.94		92.41		0.88		2.85
IPC Holdings, Ltd.	IPCR		2,453,085		574,108		1,849,474		1,849,474		396,378		2,189,966		0.89		0.31		0.75		0.75		0.23		39.60		34.60		74.20		0.47		0.62
Kingsway Financial Services Inc.	KFS		3,098,788		2,299,905		370,547		308,069		1,376,335		2,369,038		0.76		6.21		0.12		0.10		1.83		86.70		34.00		120.70		-11.08		-63.37
Markel Corporation	MKL		9,395,753		6,230,459		2,180,080		1,837,228		1,979,010		6,886,611		0.73		2.86		0.23		0.20		0.81		55.42		39.77		95.19		-0.78		-3.26
Meadowbrook Insurance Group, Inc.	MIG		1,849,493		1,184,754		458,181		293,432		432,737		1,116,023		0.60		2.59		0.25		0.16		1.12		58.00		29.70		87.70		2.17		8.70
Mercer Insurance Group, Inc.	MIGP		566,221		379,583		141,843		136,427		149,082		383,947		0.68		2.68		0.25		0.24		1.06		62.40		36.00		98.40		1.52		6.26
Mercury General Corporation	MCY		4,131,962		1,976,741		1,559,344		1,445,012		2,753,986		3,084,061		0.75		1.27		0.38		0.35		1.60		66.70		30.20		96.90		-3.40		-8.39
Montpelier Re Holdings Ltd.	MRH		2,958,800		1,065,100		1,437,300		1,432,500		521,600		2,451,200		0.83		0.74		0.49		0.48		0.38		34.70		39.40		74.10		-3.04		-6.40

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		1,025,934		584,812		224,907		224,907		292,530		572,269		0.56		2.60		0.22		0.22		1.34		56.60		22.40		79.00		1.37			6.39
National Security Group, Inc.	NSEC		125,054		70,927		35,045		35,045		54,898		93,511		0.75		2.02		0.28		0.28		1.46		76.47		41.98		118.44		-3.36			-11.53
Navigators Group, Inc.	NAVG		3,403,633		2,374,350		712,454		705,922		653,182		1,951,428		0.57		3.33		0.21		0.21		0.99		60.80		32.00		92.80		1.22			5.96
NYMAGIC, INC.	NYM		977,190		651,829		171,154		171,154		162,298		582,965		0.60		3.81		0.18		0.18		0.79		51.50		48.20		99.70		-7.14			-35.54
Odyssey Re Holdings Corp.	ORH		9,533,423		5,985,527		2,713,662		2,777,435		2,034,954		7,458,632		0.78		2.21		0.28		0.29		0.73		67.60		28.90		96.50		3.01			10.73
Old Republic International Corporation	ORI		13,293,500		8,719,400		3,643,200		3,578,900		3,248,700		8,944,900		0.67		2.39		0.27		0.27		0.75		83.90		39.60		123.50		-4.49			-15.09
OneBeacon Insurance Group, Ltd.	OB		7,680,400		5,283,200		1,188,700		1,188,700		1,911,500		3,833,500		0.50		4.44		0.15		0.15		1.45		59.00		34.60		93.60		-3.89			-23.48
PartnerRe Ltd.	PRE		16,274,774		10,521,223		4,282,067		3,852,548		3,884,721		11,401,890		0.70		2.46		0.26		0.24		0.91		55.90		31.10		87.00		0.35			1.38
Platinum Underwriters Holdings, Ltd.	PTP		4,990,996		2,708,635		1,829,459		1,829,459		1,060,697		4,314,641		0.86		1.48		0.37		0.37		0.53		58.20		21.90		80.10		4.15			11.09
PMA Capital Corporation	PMACA		2,553,043		1,535,859		351,270		321,602		409,551		798,074		0.31		4.37		0.14		0.13		1.15		72.21		38.25		110.46		0.28			1.95
ProAssurance Corporation	PRA		4,322,067		2,600,074		1,462,064		1,371,814		442,592		3,597,203		0.83		1.78		0.34		0.32		0.31		66.50		23.10		89.60		3.91			12.66
Progressive Corporation	PGR		18,215,100		10,367,900		4,303,300		4,303,300		13,648,000		12,902,900		0.71		2.41		0.24		0.24		3.06		68.60		20.90		89.50		-0.41			-1.73
RenaissanceRe Holdings Ltd.	RNR		8,059,909		2,708,662		3,772,166		3,699,629		1,379,658		6,371,706		0.79		0.72		0.47		0.46		0.36		28.60		27.90		56.50		0.47			1.01
RLI Corp.	RLI		2,396,917		1,493,374		711,723		685,509		518,481		1,704,593		0.71		2.10		0.30		0.29		0.68		48.70		39.20		87.90		2.01			6.94
Safety Insurance Group, Inc.	SAFT		1,416,693		751,640		605,532		605,532		561,158		1,059,199		0.75		1.24		0.43		0.43		0.89		68.60		30.30		98.90		4.35			10.59
SeaBright Insurance Holdings, Inc.	SBX		896,537		486,743		333,196		328,636		249,926		578,196		0.64		1.46		0.37		0.37		0.86		66.10		34.00		100.10		2.73			7.10
Selective Insurance Group, Inc.	SIGI		5,001,933		3,521,660		910,135		880,498		1,478,090		3,657,712		0.73		3.87		0.18		0.18		1.52		69.30		31.50		100.80		0.21			1.07
Specialty Underwriters’ Alliance, Inc.	SUAI		451,750		288,858		138,062		127,317		142,490		261,908		0.58		2.09		0.31		0.28		1.06		60.10		43.45		103.55		1.13			3.67
State Auto Financial Corporation	STFC		2,435,800		1,328,000		760,700		758,700		1,132,800		2,063,400		0.85		1.75		0.31		0.31		1.45		78.60		33.40		112.00		-1.34			-4.06
Tower Group, Inc.	TWGP		2,481,368		1,335,168		786,930		512,378		414,211		1,486,414		0.60		1.70		0.32		0.21		1.34		53.70		33.00		86.70		3.86			17.56
Transatlantic Holdings, Inc.	TRH		13,676,207		9,438,353		3,320,907		3,320,907		4,026,731		10,874,761		0.80		2.84		0.24		0.24		1.27		68.60		26.40		95.00		0.42			1.91
Travelers Companies, Inc.	TRV		110,467,000		71,904,000		26,497,000		22,473,000		21,540,000		72,398,000		0.66		2.71		0.24		0.20		0.85		59.70		30.90		90.60		2.34			10.23
Unico American Corporation	UNAM		182,340		96,150		76,226		76,226		32,643		149,331		0.82		1.26		0.42		0.42		0.43		61.00		26.00		87.00		2.88			7.27
United America Indemnity, Ltd.	INDM		2,415,436		1,601,042		638,777		629,486		347,991		1,574,671		0.65		2.51		0.26		0.26		0.44		60.80		39.20		100.00		-5.51			-19.67
United Fire & Casualty Company	UFCS		2,710,869		1,997,120		635,259		634,724		498,753		2,230,103		0.82		3.14		0.23		0.23		0.71		75.30		30.50		105.80		-1.10			-4.35
Universal Insurance Holdings, Inc.	UVE		621,498		365,086		109,260		109,260		150,079		333,474		0.54		3.34		0.18		0.18		1.64		54.10	NA		NA			6.67			38.21
Validus Holdings, Ltd.	VR		4,762,798		2,113,965		2,022,986		1,876,416		1,283,414		3,462,657		0.73		1.04		0.42		0.39		0.68		41.40		33.60		75.00		1.81			4.12
W.R. Berkley Corporation	WRB		16,193,308		11,056,760		3,079,957		2,973,665		4,144,479		12,330,570		0.76		3.59		0.19		0.18		1.23		62.30		31.40		93.70		0.44			2.29
Wesco Financial Corporation	WSC		2,718,686		403,777		2,117,734		1,839,939		290,881		1,786,949		0.66		0.19		0.78		0.68		0.15		60.92		29.28		90.20		2.62			3.36
White Mountains Insurance Group, Ltd.	WTM		15,640,500		8,992,400		3,482,300		3,462,700		3,692,300		9,353,200		0.60		2.58		0.22		0.22		0.94		59.60		32.65		92.25		-2.64			-11.80
Zenith National Insurance Corp.	ZNT		2,485,881		1,302,902		1,001,431		980,446		566,278		1,932,593		0.78		1.30		0.40		0.39		0.52		73.10		46.60		119.70		2.15			5.32
Group Aggregate
Overall P&C Insurance Group Mean			12,459,344		6,793,526		3,402,190		2,806,295		2,425,368		7,932,351		0.69		2.42		0.30		0.28		0.93		61.36		32.14		93.59		0.56			2.16
Overall P&C Insurance Group Median			2,838,743		1,724,858		789,066		756,180		541,379		2,126,683		0.71		2.15		0.28		0.25		0.85		60.80		31.30		93.20		1.12			3.76
P&C Group Mean > $1.2 Bil. Total Assets			17,916,913		9,772,544		4,875,543		4,013,053		3,466,740		11,387,864		0.69		2.64		0.29		0.27		0.90		61.01		31.71		92.72		0.63			2.18
P&C Group Median >$1.2 Bil. Total Assets			5,769,510		3,343,072		1,908,537		1,833,344		1,329,875		3,988,076		0.71		2.24		0.28		0.24		0.83		60.80		31.10		92.25		1.17			3.97
P&C Group Mean < $1.2 Bil. Total Assets			704,582		377,180		228,815		207,123		182,412		489,706		0.69		1.95		0.33		0.29		0.99		62.10		33.07		95.48		0.41			2.10
P&C Group Median <$1.2 Bil. Total Assets			788,421		346,391		224,029		155,520		164,624		454,018		0.71		2.01		0.28		0.25		0.88		61.50		34.00		96.00		1.03			3.58
P&C Group Mean > $500 m Total Revenue			13,957,254		7,610,881		3,808,104		3,141,218		2,710,412		8,884,268		0.69		2.51		0.30		0.27		0.91		60.88		31.81		92.79		0.71			2.77
P&C Group Mean > $500 m Total Revenue			3,403,633		2,257,692		1,001,431		980,446		691,746		2,451,200		0.71		2.25		0.27		0.24		0.84		60.55		31.20		92.25		1.29			4.12
P&C Group Mean < $500 m Total Revenue			309,635		163,864		109,779		89,695		113,345		211,243		0.71		1.68		0.35		0.31		1.15		65.18		34.69		99.87		(0.66	)		(2.82	)
P&C Group Median <$500 m Total Revenue			289,825		131,732		101,677		82,219		110,733		215,102		0.74		1.51		0.36		0.28		0.96		66.95		34.77		101.72		(1.20	)		(2.68	)

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 (%)		(%)
		6/5/2009
21st Century Holding Company	TCHC		3.38		8,014	27,087		35.53		35.53	Neg		Neg			0.43		13.23		15.55		(66.00	)
ACE Limited	ACE		46.01		336,116	15,464,677		105.07		140.81		6.10		13.03		1.09		21.15		2.04		(24.84	)
Affirmative Insurance Holdings, Inc.	AFFM		3.45		15,415	53,182		22.93		103.86		28.75		28.75		0.11		6.56		2.53		(48.51	)
Alleghany Corporation	Y		258.00		9,499	2,450,616		96.06		102.08		22.96		16.40		2.80		40.76	NA			(27.31	)
Allied World Assurance Company Holdings, Ltd	AWH		38.86		51,120	1,986,525		79.72		92.27		4.27		10.82		1.66		22.34		1.77		(13.32	)
Allstate Corporation	ALL		25.05		538,900	13,499,445		110.01		118.45		9.21	Neg			0.46		10.35		5.01		(49.93	)
American Financial Group, Inc.	AFG		23.10		116,400	2,688,840		100.37		112.18		5.61		13.83		0.62		10.40		2.19		(21.91	)
American Physicians Capital, Inc.	ACAP		41.93		8,890	372,758		150.25		150.25		8.50		9.12		2.38		37.41		0.83		(11.32	)
American Physicians Service Group, Inc.	AMPH		21.29		7,083	150,797		106.09		107.80		8.06		8.06		2.03		52.03		1.39		(2.56	)
American Safety Insurance Holdings, Ltd.	ASI		12.90		10,475	135,127		60.55		63.31		430.00		430.00		0.68		13.03	NA			(18.10	)
AMERISAFE, Inc.	AMSF		17.90		19,235	344,305		131.36		131.36		6.23		8.33		1.16		30.11	NA			10.43
AmTrust Financial Services, Inc.	AFSI		10.31		60,000	618,600		154.08		207.94		4.78		7.53		1.00		19.55		1.72		(29.77	)
Arch Capital Group Ltd.	ACGL		59.22		62,560	3,704,801		102.05		102.82		7.34		14.48		1.29		23.02	NA			(16.27	)
Argo Group International Holdings, Ltd.	AGII		30.05		30,747	923,947		66.74		82.04		10.96	Neg			0.68		14.26	NA			(22.85	)
Aspen Insurance Holdings Limited	AHL		24.33		83,572	2,033,303		71.79		72.00		11.22		27.34		1.10		26.61		2.47		(4.10	)
AXIS Capital Holdings Limited	AXS		26.18		149,023	3,901,422		86.84		88.72		10.08		11.58		1.42		26.40		2.75		(23.23	)
Baldwin & Lyons, Inc.	BWINB		20.95		14,767	309,369		95.00		94.70		12.20	Neg			1.85		40.40		5.50		1.26
Berkshire Hathaway Inc.	BRK.A		89,800.00		1,549	139,143,304		130.14		190.24		14.78		27.85		1.32		53.41	NA			(30.60	)
Chubb Corporation	CB		41.20		358,300	14,761,960		106.94		110.68		7.61		8.37		1.17		30.39		2.59		(22.44	)
Cincinnati Financial Corporation	CINF		24.12		162,664	3,923,447		101.09		101.09		14.42		9.21		0.98		29.93		5.37		(27.57	)
CNA Surety Corporation	SUR		16.35		44,376	725,548		90.93		110.08		6.64		6.57		1.52		45.08	NA			14.58
CRM Holdings, Ltd.	CRMH		1.18		16,618	19,609		19.29		19.91	Neg		Neg			0.15		4.33	NA			(69.74	)
Donegal Group Inc.	DGICA		15.89		25,535	405,745		110.15		110.43		18.99		15.89		1.07		45.57		2.50		(5.59	)
Eastern Insurance Holdings, Inc.	EIHI		9.44		9,085	85,767		62.50		72.85	Neg		Neg			0.66		22.25		3.49		(40.06	)
EMC Insurance Group Inc.	EMCI		21.75		13,250	288,182		100.70		101.03		18.63	Neg			0.71		26.07		2.81		(18.86	)
Employers Holdings, Inc.	EIG		12.89		48,613	626,620		136.24		154.19		6.23		6.23		1.44		16.64		1.45		(31.62	)
Endurance Specialty Holdings Ltd.	ENH		29.73		59,007	1,754,285		77.85		85.36		9.87		22.52		0.97		22.50		3.28		(10.61	)
Enstar Group Limited	ESGR		59.90		13,699	820,595		95.35		97.76		9.49		9.49		13.87		18.77	NA			(39.96	)
Erie Indemnity Company	ERIE		36.47		57,363	2,092,032		269.26		269.26		18.45		30.65		1.98		82.28		4.78		(26.41	)
Everest Re Group, Ltd.	RE		74.30		61,433	4,564,472		90.57		90.57		9.54	Neg			1.27		27.29		2.52		(14.05	)
Fairfax Financial Holdings Limited	FFH		281.50		17,484	4,921,830		107.98		115.21		3.54		3.54		0.72		19.16		1.60		9.43
First Acceptance Corporation	FAC		2.04		48,865	99,685		43.98		121.24	Neg		Neg			0.35		22.27	NA			(46.32	)
First Mercury Financial Corporation	FMR		13.94		18,109	252,444		92.00		120.14		8.43		6.37		1.09		25.61	NA			(21.29	)
Flagstone Reinsurance Holdings Limited	FSR		9.96		85,208	848,675		69.33		72.19	Neg		Neg			1.68		34.33		1.64		(16.93	)
FPIC Insurance Group, Inc.	FPIC		34.71		7,824	271,571		104.99		109.58		7.03		9.33		1.48		27.57	NA			(24.40	)
GAINSCO, INC.	GAN		13.75		23,930	329,038		601.08		607.84		117.47	Neg			1.71		133.23	NA			(21.43	)
Greenlight Capital Re, Ltd.	GLRE		17.73		36,335	644,217		123.76		123.76	Neg		Neg			14.94		57.07	NA			(17.46	)
Hallmark Financial Services, Inc.	HALL		6.98		20,873	145,694		76.46		120.19		7.17		6.65		0.54		26.43	NA			(38.77	)
Hanover Insurance Group, Inc.	THG		37.36		51,400	1,920,304		97.60		106.80		13.26		93.40		0.71		24.95		1.05		(16.08	)
Harleysville Group Inc.	HGIC		30.09		28,463	856,448		127.51		132.12		11.45		20.90		0.88		27.08		3.46		(22.55	)
HCC Insurance Holdings, Inc.	HCC		25.49		113,289	2,887,737		106.76		156.75		8.88		9.66		1.25		33.49		1.87		7.28
Hilltop Holdings Inc.	HTH		12.33		56,459	696,139		87.99		92.37	Neg		Neg			6.05		66.63	NA			14.70
Horace Mann Educators Corporation	HMN		9.88		40,385	399,004		89.72		100.43		8.01		36.59		0.48		7.22		2.29		(38.97	)

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 (%)		(%)
		6/5/2009
Infinity Property and Casualty Corporation	IPCC		38.58		14,185		547,257		103.33		120.44		7.51		31.37		0.61		31.64		0.94		(4.95	)
IPC Holdings, Ltd.	IPCR		27.93		55,916		1,561,741		84.44		84.44		7.45		19.26		5.37		63.66		2.94		(3.79	)
Kingsway Financial Services Inc.	KFS		3.89		55,107		214,366		57.85		69.58	Neg		Neg			0.16		6.92		4.37		(57.02	)
Markel Corporation	MKL		287.23		9,823		2,821,460		129.42		153.57		15.13	Neg			1.53		30.03	NA			(28.59	)
Meadowbrook Insurance Group, Inc.	MIG		7.12		57,410		408,762		89.21		139.30		8.50		11.67		0.81		22.10		1.24		6.59
Mercer Insurance Group, Inc.	MIGP		15.20		6,233		94,742		66.79		69.45		7.31		11.69		0.60		16.73		2.37		(12.69	)
Mercury General Corporation	MCY		35.58		55,091		1,960,155		125.70		135.65		18.53	Neg			0.77		47.44		5.04		(30.64	)
Montpelier Re Holdings Ltd.	MRH		14.34		85,000		1,218,900		84.80		85.09		10.78	Neg			3.09		41.20		1.79		(14.39	)
National Interstate Corporation	NATL		16.69		19,353		323,002		143.62		143.62		9.86		30.35		1.09		31.48		1.34		(24.68	)
National Security Group, Inc.	NSEC		8.60		2,467		21,213		60.53		60.53	Neg		Neg			0.36		16.96		6.57	NA
Navigators Group, Inc.	NAVG		45.38		17,002		771,551		108.29		109.30		10.50		14.93		1.13		22.67	NA			(9.28	)
NYMAGIC, INC.	NYM		14.74		8,590		126,620		73.98		73.98	Neg		Neg			1.23		12.96		1.68		(33.54	)
Odyssey Re Holdings Corp.	ORH		41.70		59,849		2,495,696		91.97		89.86		22.38		4.91		0.98		26.18		0.58		12.67
Old Republic International Corporation	ORI		10.40		235,259		2,446,696		67.16		68.36	Neg		Neg			0.77		18.41		5.70		(29.68	)
OneBeacon Insurance Group, Ltd.	OB		12.95		95,100		1,231,545		103.60		103.60		8.89	Neg			0.91		16.03		8.05		(28.77	)
PartnerRe Ltd.	PRE		67.16		57,320		3,849,631		89.90		99.92		7.48		305.27		0.98		23.65		2.58		(7.54	)
Platinum Underwriters Holdings, Ltd.	PTP		29.77		53,702		1,598,709		87.39		87.39		7.48		7.48		1.27		32.03		0.89		(16.02	)
PMA Capital Corporation	PMACA		4.98		32,020		159,461		45.40		49.58		7.13		27.67		0.31		6.25	NA			(48.77	)
ProAssurance Corporation	PRA		47.39		33,609		1,592,731		108.94		116.10		7.82		9.08		2.96		36.85	NA			(5.05	)
Progressive Corporation	PGR		16.58		672,000		11,141,760		258.91		258.91		12.32	Neg			0.88		61.17	NA			(17.43	)
RenaissanceRe Holdings Ltd.	RNR		47.92		60,989		2,922,584		77.48		79.00		20.97	Neg			2.47		36.26		1.78		(4.67	)
RLI Corp.	RLI		49.32		21,557		1,063,191		149.38		155.10		9.80		13.70		2.06		44.36		1.70		(4.86	)
Safety Insurance Group, Inc.	SAFT		33.23		16,189		537,948		88.84		88.84		8.56		7.62		0.86		37.97		4.20		(13.73	)
SeaBright Insurance Holdings, Inc.	SBX		9.46		21,308		201,575		60.50		61.34		6.86		6.86		0.75		22.48	NA			(37.80	)
Selective Insurance Group, Inc.	SIGI		13.95		52,352		730,310		80.24		82.94		12.37		17.01		0.45		14.60		2.27		(35.54	)
Specialty Underwriters’ Alliance, Inc.	SUAI		3.65		15,945		58,199		42.15		45.71		7.77		7.77		0.38		12.88	NA			(24.59	)
State Auto Financial Corporation	STFC		17.72		39,600		701,712		92.25		92.49	Neg		Neg			0.60		28.81		2.00		(36.17	)
Tower Group, Inc.	TWGP		25.88		33,918		877,800		111.55		171.32		13.14		10.48		1.51		35.38		0.71		6.33
Transatlantic Holdings, Inc.	TRH		42.10		66,576		2,802,850		84.40		84.40		7.48		27.52		0.70		20.49		1.90		(33.49	)
Travelers Companies, Inc.	TRV		43.75		590,400		25,830,000		97.48		114.94		8.65		9.08		1.08		23.38		2.65		(7.41	)
Unico American Corporation	UNAM		7.68		5,607		43,085		56.52		56.52		8.05		8.73		0.96		23.63	NA			(13.18	)
United America Indemnity, Ltd.	INDM		4.86		31,507		153,125		23.97		24.33	Neg		Neg			0.42		6.34	NA			(66.39	)
United Fire & Casualty Company	UFCS		19.22		26,642		512,059		80.61		80.67	Neg		Neg			0.87		18.89		1.93		(42.83	)
Universal Insurance Holdings, Inc.	UVE		5.60		39,922		223,563		204.62		204.62		5.58		5.28		1.20		35.97		32.92		70.21
Validus Holdings, Ltd.	VR		23.96		79,103		1,895,299		93.69		101.01		9.03		12.68		1.47		39.79		3.63		13.18
W.R. Berkley Corporation	WRB		23.41		161,090		3,771,117		122.44		126.82		9.55		10.22		0.88		23.29		0.87		(11.93	)
Wesco Financial Corporation	WSC		304.50		7,120		2,167,982		102.37		117.83		27.95		23.35		2.55		79.74		0.53		(27.50	)
White Mountains Insurance Group, Ltd.	WTM		212.75		8,826		1,877,732		53.92		54.23	Neg		Neg			0.63		12.01		0.39		(53.75	)
Zenith National Insurance Corp.	ZNT		23.57		37,330		879,868		87.86		89.74		13.16		6.97		1.36		35.39		6.64		(40.42)

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 (%)		(%)
		6/5/2009
Group Aggregate
Overall P&C Insurance Group Mean					3,825,877		96.41		106.86		17.17		28.43		1.53		28.62		3.42		(20.27	)
Overall P&C Insurance Group Median					834,635		92.12		101.59		9.03		11.58		0.99		26.12		2.29		(21.43	)
P&C Group Mean > $1.2 Bil. Total Assets					5,504,686		100.94		111.55		10.76		24.26		1.48		29.11		2.62		(20.39	)
P&C Group Median > $1.2 Bil. Total Assets					1,886,515		94.52		101.59		9.49		12.86		1.04		26.29		2.12		(22.17	)
P&C Group Mean < $1.2 Bil. Total Assets					209,980		86.63		96.76		34.61		39.54		1.64		27.55		6.11		(20.01	)
P&C Group Median < $1.2 Bil. Total Assets					148,245		82.22		102.44		8.25		8.73		0.85		25.84		2.53		(21.29	)
P&C Group Mean > $500 m Total Revenue					6,882,451		99.08		107.53		10.78		27.87		1.12		27.41		2.77		(19.70	)
P&C Group Mean > $500 m Total Revenue					2,033,303		93.69		101.01		9.68		13.70		0.98		26.40		2.28		(17.43	)
P&C Group Mean < $500 m Total Revenue					455,809		93.46		106.11		25.53		29.04		1.98		29.95		4.51		(20.92	)
P&C Group Median < $500 m Total Revenue					271,571		90.93		107.80		8.06		9.22		1.07		25.61		2.37		(22.91	)

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 Conversion and offering expenses are estimated at $2.570 million plus commission 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% of the shares offered for sale, less one share, 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 3.47%, which represents the estimated yield on the 10 year U.S. Treasury bond at the end of May 2009. The effective income tax rate was assumed to be 35.0%, resulting in an after-tax yield of 2.26%.

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	)		(5,299	)		(6,094	)
Net investable proceeds (b-4)	$	37,300		$	44,336		$	51,371
Net income:
LTM ended 3/31/2009 (a)		(5,992	)		(5,992	)		(5,992	)
Pro forma income on net proceeds (b-4)		841			1,000			1,159
Pro forma ESOP adjustment (b-5)		(293	)		(344	)		(396	)
Pro forma net income		(5,444	)		(5,336	)		(5,229	)
Pro forma earnings per share (b-8)		(1.34	)		(1.12	)		(0.95	)
Total Revenue:
LTM ended 3/31/2009 (a)		75,280			75,280			75,280
Pro forma revenue on net proceeds, pre-tax		1,294			1,538			1,783
Pro forma total revenue		76,574			76,818			77,063
Total Equity:
Total equity at 3/31/2009		51,161			51,161			51,161
Net offering proceeds		41,804			49,635			57,466
Less: ESOP purchase		(4,505	)		(5,299	)		(6,094	)
Pro forma total equity (b-6)		88,461			95,497			102,532
Pro forma book value per share (b-7)		19.64			18.02			16.82
Tangible Equity:
Total tangible equity at 3/31/2009		51,161			51,161			51,161
Net offering proceeds		41,804			49,635			57,466
Less: ESOP purchase		(4,505	)		(5,299	)		(6,094	)
Pro forma tangible equity		88,461			95,497			102,532
Pro forma tangible book value per share (b-7)		19.64			18.02			16.82
Total Assets:
Total assets at 3/31/2009		228,415			228,415			228,415
Net offering proceeds		41,804			49,635			57,466
Less: ESOP purchase		(4,505	)		(5,299	)		(6,094	)
Pro forma total assets		265,715			272,751			279,786
Pro Forma Ratios:
Price / LTM EPS		-7.45	x		-8.94	x		-10.49	x
Price / LTM Revenue		0.59	x		0.69	x		0.79	x
Price / Book Value		50.93	%		55.50	%		59.44	%
Price / Tangible Book Value		50.93	%		55.50	%		59.44	%
Price / Total Assets		16.95	%		19.43	%		21.78	%
Total Equity / Assets		33.29	%		35.01	%		36.65	%
Tangible Equity / Assets		33.29	%		35.01	%		36.65	%

Notes:
(a)	Excludes income from discontinued operations.
(b)	See Exhibit VII-1 for explanation of assumptions.

EX-99.3

STOCK ORDER FORM For Internal Use Only BATCH #___ORDER #___CATEGORY ___REC’D___O ___C ___Stock Information Center ORDER DEADLINE & DELIVERY: A Stock Order Form, properly completed 137 West Penn Avenue and with full payment, must be received (not postmarked) by 12:00 noon, Cleona, PA 17042 Eastern Time, on ___, 2008. Subscription rights will become void after this time. Stock Order Forms can be delivered by using the enclosed Call us toll-free Order Reply Envelope, or by hand or overnight delivery to the Stock Information at 1 (800) 401-8636 Center address on this form. Stock Order Forms will only be accepted at this extension 102 address. Faxes or copies of this form will not be accepted. PLEASE PRINT CLEARLY AND COMPLETE ALL APPLICABLE SHADED AREAS — READ THE ENCLOSED STOCK ORDER FORM INSTRUCTIONS (BLUE SHEET) AS YOU COMPLETE THIS FORM            SUBSCRIPTION (3) METHOD OF PAYMENT — CHECK OR MONEY ORDER (1) NUMBER OF SHARES PRICE PER SHARE (2) TOTAL PAYMENT DUE Enclosed is a personal check, bank check or money order made payable to: Christiana Bank, $.00 X $10.00 =$.00 escrow agent in the amount of: Cash, wire transfers and third party checks will not be accepted for this purchase. Minimum Number of Shares: 25 ($250). Maximum Number of Shares : 50,000 ($500,000). Checks and money orders will be cashed upon receipt. See Stock Order Form instructions for more regarding maximum number of shares. (4) PURCHASER INFORMATION — SUBSCRIPTION OFFERING (5) PURCHASER INFORMATION — COMMUNITY OFFERING (if 4a or (descending order of priority) 4b do not apply) Check the box(es) that apply to the purchaser(s) listed in Section 9. a. Check here if you were a Lebanon Mutual policyholder as of December 19, 2007. c. Natural persons and trusts of natural persons who are residents of (List policy information below.) Berks, Dauphin, Lancaster or Lebanon Counties, Pennsylvania. b. Check here if you are a director, offi cer or employee of Lebanon Mutual who does not qualify in (a). d. Licensed insurance agencies and brokers that have been appointed by Policy Title (Names on Policy) Policy Number(s) Lebanon Mutual to market and distribute policies of insurance, and their affi liates. e. Named insured under policies of insurance issued by Lebanon Mutual after December 19, 2007. f. General Public (boxes c, d and e do not apply to the purchaser(s) listed in Section 9). (6) MANAGEMENT AND EMPLOYEES (Check a box, if applicable) Check if you are a Lebanon Mutual: Director            Offi cer            Employee PLEASE NOTE: FAILURE TO LIST YOUR ELIGIBLE POLICIES, OR PROVIDING INCORRECT OR INCOMPLETE INFORMATION, COULD RESULT IN THE LOSS OF PART OR ALL OF YOUR SHARE ALLOCATION. ATTACH A SEPARATE PAGE IF ADDITIONAL SPACE IS NEEDED (7) MAXIMUM PURCHASER IDENTIFICATION Check here if you, individually or together with others (see Section 8), are subscribing for 50,000 shares and are interested in purchasing more shares if the maximum purchase limitation is increased. See Section 1 of the Stock Order Form Instructions. (8) ASSOCIATES/AFFILIATES/ACTING IN CONCERT Check here if you, or any affi liates and associates or persons acting in concert with you, have submitted other orders for shares. If you check the box, list below all other orders submitted by you or your affi liates and associates or by persons acting in concert with you. Name(s) listed in Section 9 on other Stock Order Forms Number of shares ordered Name(s) listed in Section 9 on other Stock Order Forms Number of shares ordered (9) STOCK REGISTRATION The name(s) and address that you provide below will be refl ected on y our stock certifi cate, and will be used for communications related to this order. Please PRINT clearly and use full fi rst and last name(s), not initials. In the Subscription Offering, you may not add the names of other persons who are not named insureds on your eligible policy. See Stock Order Form Instructions for further guidance. First Name, Middle Initial, Last Name            Reporting SSN/Tax ID No. First Name, Middle Initial, Last Name SSN/Tax ID No. Street            Daytime Phone Number (important) City (important) State Zip County (important) Evening Phone Number (important) (10) FORM OF STOCK OWNERSHIP Check the applicable box. See Stock Order Form Instructions for ownership definitions. FOR BROKER USE ONLY (Community Offering Only) Individual Joint Tenants Tenants in Common            Uniform Transfer to Minors Act 3 IRA Corporation/Partnership Other ___(for reporting SSN, use minor’s) SSN of Benefi cial Owner: ___-___-___(11) ACKNOWLEDGMENT AND SIGNATURE(S) I (we) understand that, to be effective, this form, properly completed, together with full payment, must be received by LMI Holdings, Inc. no later than 12:00 noon Eastern Time, on ___, 2008, otherwise this form and all of my (our) subscription rights in the Subscription Offering will be void. (continued on reverse side of this form) ORDER NOT VALID UNLESS SIGNED BY ALL PURCHASERS Signature (title, if applicable) Date Signature (title, if applicable) Date OVER

STOCK ORDER FORM — SIDE 2 (11) ACKNOWLEDGMENT AND SIGNATURES (continued from front of Stock Order Form) I/we certify that, if signing on behalf of a company registering common stock in Section 9, or otherwise signing in a fi duciary capacity, I/we am/are legally authorized to do so. I (we) agree that after receipt by LMI Holdings, Inc., this Stock Order Form may not be modifi ed or canceled without LMI Holdings, Inc.’s consent. Subscription rights pertain to those eligible to subscribe in the Subscription Offering. Pennsylvania law prohibits any person from transferring or entering into any agreement, directly or indirectly, to transfer the legal or benefi cial ownership of subscription rights, or the underlying securities to the account of another. Under penalty of perjury, I (we) certify that (1) the Social Security or Tax ID information and all other information provided hereon are true, correct and complete, (2) I am (we are) purchasing shares solely for my (our) own account and that there is no agreement or understanding regarding the sale or transfer of such shares, or the right to subscribe for shares, and (3) I (we) am not subject to backup withholding tax [cross out (3) if you have been notifi ed by the IRS that you are subject to backup withholding.] I (WE) ACKNOWLEDGE THAT THE SHARES OF COMMON STOCK ARE NOT INSURED, AND ARE NOT GUARANTEED BY LMI HOLDINGS, INC., LEBANON MUTUAL OR BY THE FEDERAL OR STATE GOVERNMENT. I (we) further certify that, before purchasing the common stock of LMI Holdings, Inc., I (we) received the Prospectus dated ___, 2008, and that I (we) have read the terms and conditions described in the Prospectus, including disclosure concerning the nature of the security being offered and the risks involved in the investment described in the “Risk Factors” section beginning on page ___. By executing this form, the purchaser is not waiving any rights under the Federal Securities Laws, including the Securities Act of 1933 and the Securities and Exchange Act of 1934. See Front of Stock Order Form

LMI HOLDINGS, INC. STOCK ORDER FORM INSTRUCTIONS Sections (1) and (2) — Number of Shares and Total Payment Due. Indicate the Number of Shares that you wish to subscribe for and the Total Payment Due. Calculate the Total Payment Due by multiplying the number of shares by the $10.00 price per share. The minimum purchase is 25 shares ($250). The maximum allowable purchase for any person or entity, together with associates, affiliates or persons acting in concert with such person or entity, is 50,000 shares ($500,000). Please see the Prospectus section entitled “The Conversion — Limitations on Purchases of Common Stock.” By signing this form, you are certifying that your order does not conflict with these purchase limitations. Section (3) — Payment by Check or Money Order. Payment must be made by including with this form a personal check, bank check or money order made payable to Christiana Bank & Trust Company, escrow agent. These will be cashed upon receipt; the funds remitted by personal check must be available within the account when your Stock Order Form is received. Indicate the amount remitted. Please do not remit cash, wire transfers or third party checks for this purchase. Section (4) — Purchaser Information (Subscription Offering). Please check the box that reflects the highest eligibility priority of the purchasers listed in Section 9 of the Stock Order Form. If you checked box (a) please list all names and policy numbers that the purchaser(s) had at December 19, 2007. Include all policies held individually or jointly. If purchasing shares for a minor, list only the minor’s eligible policies. If purchasing shares for a corporation or partnership, list only the entity’s eligible policies. Attach a separate page, if necessary. Box (b) refers to any director, officer or employee of Lebanon Mutual who was not an Eligible Policyholder as of December 19, 2007. Failure to complete this section, or providing incorrect or incomplete information, could result in a loss of part or all of our share allocation in the event of an oversubscription. Orders placed in the Subscription Offering will take preference over orders placed in the Community Offering. See “The Conversion” section of the Prospectus for further details about the Subscription Offering and Community Offering, and the method for allocating shares in the event of an oversubscription. Section (5) Purchaser Information (Community Offering). If boxes 4 (a) and (b) do not apply, please check the Section 5 box(es) that apply to the purchaser(s) in Section 9. Orders placed in the Subscription Offering will take preference over orders placed in the Community Offering. See “The Conversion” section of the Prospectus for further details about the Subscription Offering and Community Offering, and the method for allocating shares in the event of an oversubscription. Section (6) — Management and Employees. Check the box if you are a Lebanon Mutual director, officer or employee, or a member of their immediate family. Section (7) — Maximum Purchaser Identification. Check the box, if applicable. If you check the box but have not subscribed for 50,000 shares and did not complete Section 8, you may not have an opportunity to purchase more shares. Section (8) — Associates/Affiliates/Acting in Concert. Check the box, if applicable, and provide the requested information. Attach a separate page, if necessary. Please see the Prospectus section entitled “The Conversion - Limitations on Purchases of Common Stock.” Section (9) — Stock Registration. Clearly PRINT the name(s) in which you want the shares registered and the mailing address for all correspondence related to your order, including a stock certificate. Each Stock Order Form will generate one stock certificate, subject to the stock allocation provisions described in the Prospectus. IMPORTANT: Subscription rights are non-transferable. If placing an order in the Subscription Offering, you may include the names of one or more named insureds on the eligible policy, but you may not add the names of persons who are not named insureds on your eligible policy. NOTE FOR FINRA MEMBERS (Formerly NASD): If you are a member of the Financial Industry Regulatory Authority (“FINRA”), formerly the National Association of Securities Dealers (“NASD”), or a person affiliated or associated with a FINRA member, you may have additional reporting requirements. Please report this subscription in writing to the applicable FINRA member within one day of payment thereof. Section (10) — Form of Stock Ownership. For reasons of clarity and standardization, the stock transfer industry has developed uniform stockholder registrations for issuance of stock certificates. Beneficiaries may not be named on stock registrations. If you have any questions on wills, estates, beneficiaries, etc., please consult your legal advisor. When registering stock, do not use two initials — use the full first name, middle initial and last name. Omit words that do not affect ownership such as “Dr.” or “Mrs.” Check the one box that applies. Buying Stock Individually — Used when shares are registered in the name of only one owner. To qualify in the Subscription Offering, the purchaser named in Section 9 of the Stock Order Form must have been a named insured on an eligible policy at Lebanon Mutual on December 19, 2007, or be a director, officer or employee of Lebanon Mutual. Buying Stock Jointly — To qualify in the Subscription Offering, the persons named in Section 9 of the Stock Order Form must have been a named insured on an eligible policy at Lebanon Mutual on December 19, 2007, or be a director, officer or employee of Lebanon Mutual. Joint Tenants — Joint Tenancy (with Right of Survivorship) may be specified to identify two or more owners where ownership is intended to pass automatically to the surviving tenant(s). All owners must agree to the sale of shares. Tenants in Common — May be specified to identify two or more owners where, upon the death of one co-tenant, ownership of the stock will be held by the surviving co-tenant(s) and by the heirs of the deceased co-tenant. All owners must agree to the sale of shares. Buying Stock for a Minor — Shares may be held in the name of a custodian for a minor under the Uniform Transfer to Minors Act. To qualify in the Subscription Offering, the minor (not the custodian) named in Section 9 of the Stock Order Form must have been a named insured on an eligible policy at Lebanon Mutual on December 19, 2007. The standard abbreviation for custodian is “CUST.” The Uniform Transfer to Minors Act is “UTMA.” Include the state abbreviation. For example, stock held by John Smith as custodian for Susan Smith under the PA Uniform Transfer to Minors Act, should be registered as John Smith CUST Susan Smith UTMA-PA (list only the minor’s social security number). Buying Stock for a Corporation/Partnership — On the first name line, indicate the name of the corporation or partnership and indicate that entity’s Tax ID Number for reporting purposes. To qualify in the Subscription Offering, the corporation or partnership named in Section 9 of the Stock Order Form must have been a named insured on an eligible policy at Lebanon Mutual on December 19, 2007. Buying Stock in a Trust/Fiduciary Capacity — Indicate the name of the fiduciary and the capacity under which they are acting (for example, “Executor”), or name of the trust, the trustees and the date of the trust. Indicate the Tax ID Number to be used for reporting purposes. To qualify in the Subscription Offering, the entity named in Section 9 of the Stock Order Form must have had an eligible policy at Lebanon Mutual on December 19, 2007. Buying Stock in a Self-Directed IRA (for trustee/broker use only) — The opportunity to purchase common stock through individual retirement accounts is allowable only in the Community Offering (see Section 5). Stock may be purchased using self-directed individual retirement accounts which have the ability to hold the securities, such as at a brokerage firm. The purchase of shares using such funds can only be made through a self-directed retirement account, not through retirement accounts which are not self-directed. Registration should reflect the custodian or trustee firm’s registration requirements. For example, on the first name line indicate the name of the brokerage firm, followed by CUST or TRUSTEE. On the second name line, indicate the name of the beneficial owner (for example, “FBO JOHN SMITH IRA”). You can indicate an account number or other underlying information, and the custodian or trustee firm’s address and department to which all correspondence should be mailed related to this order, including a stock certificate. Indicate the Tax ID Number under which the IRA account should be reported for tax purposes. Section (11) — Acknowledgment and Signature(s). Sign and date the Stock Order Form where indicated. All persons listed in Section 9 of the Stock Order Form must sign the form. If signing on behalf of a company registering common stock in Section 9, or otherwise signing in a fiduciary capacity, you must be legally authorized to do so. Before you sign, please carefully review the information you provided and read the acknowledgment. Verify that you have printed clearly, and completed all applicable shaded areas on the Stock Order Form. Please review the Prospectus carefully before making an investment decision. Deliver your completed Stock Order Form, with full payment, so that it is received (not postmarked) by 12:00 noon, Eastern Time, on ___ ___, 2008. Stock Order Forms can be delivered by using the enclosed postage paid Order Reply Envelope, or by hand or overnight delivery to the Stock Information Center located at our offices at 137 West Penn Avenue, Cleona, Pennsylvania 107042. Stock Order Forms will only be accepted at this address. We are not required to accept Stock Order Forms that are found to be deficient or incorrect, or that do not include proper payment or the required signature. OVERNIGHT DELIVERY can be made to the Stock Information Center address provided on the front of the Stock Order Form. QUESTIONS? Call our Stock Information Center, toll-free, at 1 (800) 401-8636 extension 102, Monday through Friday from 10:00 a.m. to 4:00 p.m. Eastern Time. The Stock Information Center is not open on weekends.

EX-99.4

Exhibit 99.4

QUESTIONS AND
ANSWERS

ABOUT OUR CONVERSION
AND STOCK OFFERING

This pamphlet answers questions about the mutual-to-stock conversion of Penn Millers Mutual Holding Company and the related common stock offering of Penn Millers Holding Corporation.

ABOUT THE PLAN OF CONVERSION

The board of directors of Penn Millers Mutual Holding Company (“Penn Millers Mutual”) adopted a Plan of Conversion from Mutual to Stock Form on April 22, 2009 (the “Plan of Conversion”), whereby Penn Millers Mutual will convert from a mutual holding company to a stock holding company. In connection with the conversion, Penn Millers Holding Corporation, a corporation newly formed by Penn Millers Mutual, is conducting an initial public offering of up to 6,095,000 shares of common stock at a purchase price of $10.00 per share. Upon completion of the conversion and related stock offering, all of Penn Millers Mutual’s common stock will be acquired by Penn Millers Holding Corporation, which will become the parent holding company of Penn Millers Mutual, and Penn Millers Mutual will become the stock holding company of Penn Millers Insurance Company. Penn Millers Holding Corporation will be owned by persons who purchase shares of common stock in the offering.

The Plan of Conversion has been approved by the Pennsylvania Insurance Department, subject to approval of the Plan of Conversion by the eligible members of Penn Millers Mutual (as defined below). In order to complete the conversion, it is necessary for Penn Millers Mutual to receive the approval of at least a majority of all the eligible members of Penn Millers Mutual, so YOUR VOTE IS VERY IMPORTANT. Please return your proxy in the enclosed [COLOR] postage-paid envelope marked “PROXY RETURN.”

THE BOARD URGES ELIGIBLE MEMBERS TO VOTE “FOR” THE PLAN OF CONVERSION. PLEASE PROMPTLY VOTE, SIGN AND MAIL YOUR PROXY CARD(S).

MUTUAL TO STOCK CONVERSION

Q: Why is Penn Millers Mutual converting from mutual to stock form?

A: Penn Millers Mutual’s conversion from mutual to stock form and the related stock offering will provide the company with additional capital that will enable it to take advantage of anticipated future growth opportunities. The conversion will also provide an opportunity for the members of Penn Millers Mutual and the directors, officers and employees of the company to acquire stock in Penn Millers Holding Corporation, which will provide additional incentive for their performance and enable them to participate in Penn Millers’ success.

Q: Will the conversion affect my coverage with Penn Millers Insurance Company?

A: No. The insurance coverage under any Penn Millers Insurance Company policy that you own will not be affected by the conversion.

Q: Will any policy that I hold with Penn Millers Insurance Company be converted to stock?

A: No. All policies will remain as they were prior to the conversion. Eligible members of Penn Millers Mutual have a right to subscribe for shares of common stock during the subscription offering. Eligible members of Penn Millers Mutual consist of named insureds under issued and in force Penn Millers Insurance Company policies as of the close of business on April 22, 2009. These rights to purchase stock cannot be transferred.

ABOUT VOTING RIGHTS

Q: Who is eligible to vote on the conversion?

A: The members of Penn Millers Mutual of record as of July 10, 2009 (the “Record Date”) are eligible to vote on the conversion.

Q: Am I required to vote?

A: No. The Record Date members of Penn Millers Mutual are not required to vote. However, because the conversion will produce a fundamental change in Penn Millers’ corporate structure and the rights of the members of Penn Millers Mutual, the Board of Directors encourages all members to vote.

Q: How can I vote?

A: You may vote by mailing your signed proxy card(s) in the [COLOR] postage-paid envelope marked “PROXY RETURN.” Should you choose to attend the special meeting of members or you decide to change your vote, you may do so by revoking any previously signed proxy.

Q: Why did I receive several proxy cards?

A: Each named insured is only entitled to one vote as a member of Penn Millers Mutual. If you have more than one policy, you may have received more than one proxy card depending upon who is named as an insured on your policy. PLEASE VOTE, SIGN AND RETURN ALL PROXY CARDS THAT YOU RECEIVED.

Q: Does my vote for the plan of conversion require me to buy common stock of Penn Millers Holding Corporation?

A: No. Voting for the plan of conversion does not obligate you to buy shares of common stock of Penn Millers Holding Corporation.

ABOUT THE STOCK OFFERING AND PURCHASING SHARES

Investment in our common stock involves certain risks. For a discussion of certain of such risks and other factors, you are urged to read the accompanying Prospectus.

Q: How many shares are being offered and at what price?

A: In the stock offering, Penn Millers Holding Corporation is offering up to 6,095,000 shares of common stock for sale at $10.00 per share. All shares will be sold at the same price, and no sales commission will be charged to purchasers in the stock offering. Our employee stock ownership plan (“ESOP”) will purchase up to 9.99% of the total number of shares sold in the offering. The maximum number of shares sold may be increased to 6,772,221 to accommodate the ESOP purchase.

Q: Who is eligible to purchase stock in the Offering?

A: Pursuant to the Plan of Conversion, non-transferable rights to purchase shares of common stock at $10.00 per share in a subscription offering have been granted in the following order of priority:

Priority #1 — Eligible members of Penn Millers Mutual, who consist of named insureds under an issued and in force Penn Millers Insurance Company policy as of the close of business on April 22, 2009.

Priority #2 — Penn Millers’ employee stock ownership plan.

Priority #3 — Directors, officers and employees of Penn Millers.

     Common stock that is not sold in the subscription offering is expected to be offered to members of the public in a community offering at $10.00 per share. Unlike the subscription offering, there are no rights to purchase common stock in the community offering. We have the right to accept or reject any order received in the community offering. However, preference may be given to the following before orders are accepted 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.

• natural persons and the trusts of natural persons residing in Lackawanna or Luzerne Counties, Pennsylvania.

     In the event that orders are received for more shares than are available for sale in the stock offering, shares will be allocated as described in the Prospectus.

     To the extent any shares remain available after orders have been received and accepted in the subscription offering and community offering, we may elect to offer such shares to the

general public in a syndicated community offering using a syndicate of registered broker/dealers managed by Griffin Financial Group, LLC.

Q: How can I buy shares during the Offering?

A: Shares may be purchased by completing a Stock Order Form and returning it, with full payment, so that it is received (not postmarked) by 12:00 noon, Eastern Time, on                     , 2009, unless the offering is extended as described in the Prospectus. Delivery of a Stock Order Form may be made in one of the following ways: (1) by mail, using the Order Reply Envelope provided, (2) by overnight delivery to the Stock Information Center address noted on the Stock Order Form, or (3) by hand-delivery to the Stock Information Center.

Q: How many shares of common stock can I purchase?

A: The minimum purchase is 25 shares ($250). The maximum allowable purchase for any person or entity, together with associates, affiliates or persons acting in concert with such person or entity, is 304,750 shares ($3,047,500), which represents 5% of the shares of common stock to be sold in a maximum offering. If less than the maximum number of shares are sold in the offering, the maximum purchase limit will be reduced so that no one person, except for the ESOP, will own more than 5% of the common stock of Penn Millers Holding Corporation following the offering. Please review the section in the prospectus entitled “The Offering — Limitations on Purchases of Common Stock” for more information regarding purchase limitations.

Q: How can I pay for the shares?

A: Payment for shares can be remitted by personal check, bank check or money order in U.S. dollars, payable to “Christiana Bank & Trust Company, escrow agent.” These will be cashed upon receipt. Cash, wire transfers and third party checks will not be accepted.

Q: What is the deadline for purchasing shares in the Subscription and Community Offerings?

A: An executed Stock Order Form, with full payment, must be received by us, using an accepted method of delivery as described above, by no later than 12:00 noon, Eastern Time, on                     , 2009, unless the offering is extended as described in the Prospectus.

Q: Is it possible that I will not receive any or all of the shares I ordered?

A: Yes. If we receive orders in the offering for more shares than we have available to sell, we will allocate shares as described in the Prospectus. If we are unable to fill your order, in whole or in part, you will receive a refund check.

Q: Will payments for common stock earn interest?

A: No. Payments that you submit will not earn interest.

Q: May I change my mind after I place an order to subscribe for stock?

A: No. After receipt, your order cannot be modified or withdrawn unless the offering is extended beyond                     , 2009, or the offering range is amended to below 4,505,000 shares or above 6,095,000 shares.

Q: I am eligible to subscribe for shares of common stock in the Subscription Offering but I am not interested in purchasing any shares. May I allow someone else to use my Stock Order Form to take advantage of my Subscription Offering priority?

A: No. Subscription rights are non-transferable! To preserve subscription rights, the shares may only be registered in the name(s) of the eligible member(s) of Penn Millers Mutual. Subscribers may not add the names of persons who are not named insureds on their eligible policy. On occasion, people attempt to persuade eligible members to transfer subscription rights, or to purchase shares in the offering based on an understanding that the shares will be subsequently transferred to others. Participation in such schemes is against the law and may subject involved parties to prosecution. If you become aware of any such activities, we ask that you notify us promptly so that we can take the necessary steps to protect subscription rights.

Q: Will my common stock be insured?

A: No. Like all stock, the common stock cannot be insured or guaranteed by any government agency, nor will it be insured or guaranteed by Penn Millers Insurance Company or Penn Millers Holding Corporation.

Q: Will dividends be paid on the stock?

A: We currently do not intend to pay dividends to shareholders of Penn Millers Holding Corporation. Our dividend policy will depend upon our financial condition, results of operations and future prospects, as well as that of our lead insurance company, Penn Millers Insurance Company.

Q: How will Penn Millers Holding Corporation shares trade?

A: Upon completion of the offering, Penn Millers Holding Corporation expects the stock to be traded on the NASDAQ Global Market under the symbol “PMIC.” Once the shares have begun trading, you may contact a firm offering investment services in order to buy or sell Penn Millers Holding Corporation shares in the future. Upon completion of the offering, stock certificates will be mailed to purchasers in the stock offering. Shareholders may not be able to sell their shares of common stock until their stock certificate is delivered to them, even though the common stock will have begun trading.

Q: Are officers and directors planning to purchase stock?

A: Yes. Our executive officers and directors, together with their affiliates and associates, plan to purchase approximately 133,000 shares of common stock in the offering.

WHERE TO GET MORE INFORMATION

Q: How can I get more information?

A: A Stock Information Center has been established at our offices at 72 North Franklin Street, Wilkes-Barre, PA 18773. You may visit the Stock Information Center or call us, toll free, at 1 (800)      -           from 10:00 a.m. to 4:00 p.m., Eastern Time, Monday through Friday. The Stock Information Center is not open on weekends or bank holidays.

     This brochure is neither an offer to sell nor a solicitation of an offer to buy shares of common stock. The offer is made only by means of the Prospectus.

     The shares of common stock are not insured and are not guaranteed by Penn Millers Holding Corporation, Penn Millers Insurance Company or by any Federal or state government or agency.

EX-99.5

Exhibit 99.5

[Griffin Financial Group, LLC]

Dear Customer of Penn Millers Insurance Company:

At the request of Penn Millers Insurance Company and its affiliates, we have enclosed materials regarding the offering of common stock in connection with the conversion of Penn Millers Mutual Holding Company from a mutual holding company to a stock holding company. As part of this conversion, Penn Millers Mutual will form Penn Millers Holding Corporation, which will become the parent holding company of Penn Millers Mutual, and Penn Millers Mutual will become the stock holding company of Penn Millers Insurance Company. The enclosed materials include a prospectus and a stock order form, which offer you the opportunity to subscribe for shares of common stock of Penn Millers Holding Corporation. We are also enclosing a questions and answers brochure containing answers to commonly asked questions about the conversion and the offering.

Please read the prospectus carefully before making an investment decision. If you decide to subscribe for shares of common stock, you must return the properly completed and signed stock order form, along with full payment for the shares, to Penn Millers’ Stock Information Center in the accompanying postage-paid envelope marked “STOCK ORDER RETURN.” Your order must be physically received by the Stock Information Center no later than 12:00 noon, Eastern Time, on xxxxxx, xxxxxxxx xx, 2009. If you have any questions after reading the enclosed materials, please call the Stock Information Center at (xxx) xxx-xxxx, Monday through Friday, between the hours of 10:00 a.m. and 4:00 p.m., and ask for a Griffin Financial representative.

We have been asked to forward these documents to you in view of certain requirements of the securities laws of your jurisdiction. We are not recommending or soliciting in any way any action by you with regard to the enclosed material.

Sincerely,

Griffin Financial Group, LLC

This letter is neither an offer to sell nor a solicitation of an offer to buy shares of common stock. The offer is made only by means of the Prospectus.

The shares of common stock are not insured and are not guaranteed by Penn Millers Holding Corporation or any of its affiliates or by any Federal or state government or agency.

[Griffin Financial Group Letterhead]

Dear Potential Investor:

     At the request of Penn Millers Holding Corporation, we are enclosing materials regarding the offering of shares of common stock of Penn Millers Holding Corporation in connection with the conversion of Penn Millers Mutual Holding Company from mutual to stock form. Included in this package are the following:

     PROSPECTUS: This document provides detailed information regarding the business operations of Penn Millers Insurance Company and the stock offering by Penn Millers Holding Corporation. Please read the Prospectus carefully, including the “Risk Factors” section, prior to making an investment decision.

     QUESTIONS & ANSWERS BROCHURE: This brochure answers commonly asked questions about the conversion and offering.

     STOCK ORDER FORM: Use this form to subscribe for common stock and mail it, along with full payment for the shares, to Penn Millers’ Stock Information Center in the enclosed postage-paid Order Reply Envelope. Your order must be physically received by the Stock Information Center no later than 12:00 noon, Eastern Time, on                     , 2009.

     Griffin Financial Group, LLC has been retained by Penn Millers Holding Corporation as marketing agent in connection with the stock offering. If you have any questions after reading the enclosed materials, please call the Stock Information Center at 1 (800) xxx-xxxx, Monday through Friday, between the hours of 10:00 a.m. and 4:00 p.m., and ask for a Griffin Financial representative. The Stock Information Center is closed on weekends and bank holidays.

Sincerely,

Griffin Financial Group, LLC

This letter is neither an offer to sell nor a solicitation of an offer to buy shares of common stock. The offer is made only by the Prospectus.

The shares of common stock are not insured and are not guaranteed by Penn Millers Holding Corporation or by any Federal or state government or agency.

[Penn Millers Mutual Holding Company]

Dear Member:

The Board of Directors of Penn Millers Mutual Holding Company has voted unanimously in favor of a plan to convert Penn Millers Mutual from a Pennsylvania mutual holding company to a Pennsylvania stock holding company. As part of this plan, we have formed Penn Millers Holding Corporation, which will be offering shares of its common stock in a stock offering and will become the parent holding company of Penn Millers Mutual. We are converting Penn Millers Mutual to stock form in order to raise additional capital that will enable Penn Millers Insurance Company to remain a viable, competitive and financially sound insurance company.

To accomplish the conversion, your participation is extremely important. A special meeting of eligible members of Penn Millers Mutual is being held on October 15, 2009. The members of Penn Millers Mutual consist of the policyholders of Penn Millers Insurance Company as of July 10, 2009. On behalf of the Board, I ask that you help us meet our goal by reading the enclosed material and then casting your vote in favor of the plan of conversion and mailing your signed proxy card immediately in the enclosed [COLOR] postage-paid envelope marked “PROXY RETURN.” Should you choose to attend the special meeting of the members and vote in person, you may do so by giving written notice of revocation to the Secretary of Penn Millers Mutual. If you have multiple insurance policies at Penn Millers Insurance Company, you may receive more than one mailing. If you do receive more than one proxy card, please vote, sign and return each one.

If the plan of conversion is approved, let me assure you that:

• Existing insurance coverage under your Penn Millers Insurance Company policy will not undergo any change as a result of the conversion.

• Voting for approval of the plan will not obligate you to buy any shares of common stock in the stock offering.

If you were a member of Penn Millers Mutual as of April 22, 2009, you may also take advantage of your nontransferable rights to subscribe for shares of Penn Millers Holding Corporation common stock on a first priority basis. The enclosed prospectus describes the stock offering and the business of Penn Millers. If you wish to purchase shares of common stock, please complete the stock order form and mail it, along with full payment for the shares to the Stock Information Center in the enclosed [COLOR] postage-paid Order Reply Envelope. Your order must be physically received by Stock Information Center no later than 12:00 noon, Eastern Time, on                     , 2009. Please read the prospectus carefully before making an investment decision.

If you have any questions after reading the enclosed material, please call our Stock Information Center at 1 (800) xxx-xxxx, Monday through Friday, between the hours of 10:00 a.m. and 4:00 p.m.

Sincerely,

Douglas A. Gaudet
President and Chief Executive Officer

This letter is neither an offer to sell nor a solicitation of an offer to buy shares of common stock. The offer is made only by means of the Prospectus.

The shares of common stock are not insured and are not guaranteed by Penn Millers Holding Corporation, Penn Millers Insurance Company or by any Federal or state government or agency.

[Penn Millers Holding Corporation]

Dear Potential Investor/Friend:

     I am pleased to tell you about an investment opportunity. In connection with the conversion of Penn Millers Mutual Holding Company from mutual to stock form, Penn Millers Holding Corporation, a newly formed company, will be conducting an initial public offering at a price per share of $10.00. Upon completion of the conversion and related stock offering, Penn Millers Holding Corporation will become the parent holding company of Penn Millers Mutual, and Penn Millers Holding Corporation will be owned by the persons who purchase shares in the offering. No sales commission will be charged to purchasers in this stock offering.

     Before making an investment decision, please carefully review the enclosed Prospectus. If you are interested in purchasing shares of Penn Millers Holding Corporation common stock, complete the enclosed Stock Order Form and return it, with full payment, in the postage-paid Order Reply Envelope provided. If you wish to purchase stock with funds you have in an IRA, call our Stock Information Center promptly for guidance, because IRA-related orders require additional processing time. Stock Order Forms and full payment must be received (not postmarked) by 12:00 noon, Eastern Time, on    , 2009, unless the offering is extended as described in the Prospectus.

     If you have questions regarding the offering, please refer to the Prospectus and Q&A Brochure, or call our Stock Information Center at the number shown below.

Sincerely,

Douglas A. Gaudet
President and Chief Executive Officer

This letter is neither an offer to sell nor a solicitation of an offer to buy shares of common stock. The offer is made only by means of the Prospectus.

The shares of common stock are not insured and are not guaranteed by Penn Millers Holding Corporation, Penn Millers Insurance Company, or any of its affiliates or by any Federal or state government or agency.

QUESTIONS?

Call our Stock Information Center, toll free, at 1-800-      -          
From 10:00 a.m. to 4:00 p.m., Eastern Time, Monday through Friday
The Stock Information Center is closed on weekends and bank holidays

EX-99.7

Exhibit 99.7

PENN MILLERS MUTUAL HOLDING COMPANY
72 NORTH FRANKLIN STREET
WILKES-BARRE, PENNSYLVANIA 18773

NOTICE OF SPECIAL MEETING OF MEMBERS

          Notice is hereby given that a Special Meeting of Members (the “Special Meeting”) of Penn Millers Mutual Holding Company (“Penn Millers Mutual” or the “Company”) will be held at                                          on October 15, 2009, at            a.m. Business to be considered at the Special Meeting shall be:

(1)	To consider and vote upon the Plan of Conversion from Mutual to Stock Organization (the “Plan”) providing for the conversion of Penn Millers Mutual from a Pennsylvania mutual holding company to a Pennsylvania stock holding company, and certain related transactions including the adoption of Amended and Restated Articles of Incorporation of the Company.
(2)	To consider and vote upon any other matters that may lawfully come before the Special Meeting.

          As of the date of mailing of this Notice of Special Meeting, the Board of Directors is not aware of any other matters that may come before the Special Meeting.

          Under the Bylaws of Penn Millers Mutual, each named insured under a policy of insurance issued by Penn Millers Mutual that was in force at the close of business on July 10, 2009, is a member entitled to vote, except that each such member is entitled to only one vote at the Special Meeting.

BY THE ORDER OF THE BOARD OF DIRECTORS
 

Douglas A. Gaudet 

President, Chief Executive Officer and Director 

                    , 2009
Wilkes-Barre, Pennsylvania

          THE BOARD OF DIRECTORS URGES YOU TO CONSIDER CAREFULLY THIS PROXY MATERIAL. WHETHER OR NOT YOU PLAN TO BE PRESENT IN PERSON AT THE SPECIAL MEETING, FILL IN, DATE, SIGN AND PROMPTLY RETURN THE ENCLOSED PROXY CARD(S) USING THE ENCLOSED PROXY REPLY ENVELOPE. THIS WILL ASSURE THAT YOUR VOTE(S) WILL BE COUNTED, BUT WILL NOT PREVENT YOU FROM VOTING IN PERSON IF YOU ATTEND THE SPECIAL MEETING. VOTING IN FAVOR OF THE PLAN WILL NOT OBLIGATE YOU TO PURCHASE COMMON STOCK IN THE OFFERING. IF YOU HAVE ANY QUESTIONS, PLEASE CONTACT                      AT PENN MILLERS MUTUAL AT (800) XXX-XXXX, BETWEEN THE HOURS OF 10:00 A.M. AND 4:00 P.M.

PENN MILLERS MUTUAL HOLDING COMPANY

PROXY STATEMENT

          YOUR PROXY IS SOLICITED BY THE BOARD OF DIRECTORS OF PENN MILLERS MUTUAL INSURANCE COMPANY FOR USE AT A SPECIAL MEETING OF ITS MEMBERS TO BE HELD ON OCTOBER 15, 2009, AND ANY ADJOURNMENT OF THAT MEETING, FOR THE PURPOSES SET FORTH IN THE FOREGOING NOTICE OF SPECIAL MEETING.

          THE BOARD OF DIRECTORS URGES YOU TO VOTE “FOR” THE PLAN OF CONVERSION FROM MUTUAL TO STOCK ORGANIZATION OF PENN MILLERS MUTUAL.

INTRODUCTION

          Purpose of Meeting. A Special Meeting of Members (the “Special Meeting”) of Penn Millers Mutual Holding Company (“Penn Millers Mutual” or the “Company”) will be held at                                         ,                     , on October 15, 2009, at                      , Eastern Time. The purpose of the Special Meeting is to consider and vote upon a Plan of Conversion from Mutual to Stock Organization (the “Plan”) (enclosed herein). The Plan was adopted by the Company’s Board of Directors and, if approved by a majority of members at the Special Meeting who are the named insureds under policies of insurance issued by the Company that were in force at the close of business on July 10, 2009 (“the Voting Record Date”), will permit the Company to convert from a Pennsylvania mutual holding company to a Pennsylvania stock holding company (the “Conversion”) and become a wholly-owned subsidiary of Penn Millers Holding Corporation (the “Holding Company”) pursuant to the provisions of the Pennsylvania Business Corporation Law (the “Act”). The Holding Company is a Pennsylvania corporation formed by Penn Millers Mutual for the purpose of becoming its holding company upon the completion of the Conversion. All statements made in this Proxy Statement regarding the Plan are qualified in their entirety by reference to the Plan, a copy of which is attached hereto as Exhibit A.

          The Plan and the Amended and Restated Articles of Incorporation are available at from the Company’s website, www.pennmillers.com.

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INFORMATION RELATING TO VOTING AT THE SPECIAL MEETING

          The Board of Directors of the Company has determined that, in accordance with the Bylaws of the Company and the terms of the Plan, each named insured under an insurance policy issued by Penn Millers Insurance Company, its property and casualty insurance company subsidiary, that was in force at the close of business on the Voting Record Date is a member who is entitled to notice of and to vote at the Special Meeting (a “Record Date Member”). Each Record Date Member will be entitled at the Special Meeting to cast only one vote if such member of the Company is the named insured as of the Voting Record Date. Thus, a Record Date Member under more than one insurance policy in force as of the Voting Record Date will have only one vote. If there is more than one Record Date Member under an insurance policy in force as of the Voting Record Date, those Record Date Members will collectively have only one vote with respect to such insurance policy.

          Twenty-five Record Date Members must be present, in person or by proxy, to constitute a quorum at the Special Meeting. Approval of the Plan will require the affirmative vote, either in person or by proxy, of at least a majority of the Record Date Members at the Special Meeting. As of the Voting Record Date, the Company had                      policies outstanding with respect to which the Record Date Members would be entitled to cast a total of                      votes at the Special Meeting.

          Record Date Members may vote at the Special Meeting or any adjournment thereof in person or by proxy. If no contrary instructions are given, signed proxies will be voted in favor of the Plan. If any other matters are properly presented before the Special Meeting, the proxies solicited hereby will be voted on such matters by the proxyholders according to their discretion. Any member giving a proxy will have the right to revoke his or her proxy at any time before it is voted by delivering written notice or a duly executed proxy bearing a later date to the Secretary of the Company, or by attending the Special Meeting and voting in person.

          In the event of more than one Record Date Member under an insurance policy, only one signature is required on the proxy. In the event that conflicting proxies are received from more than one Record Date Member with respect to the same policy or in the case of a tie,

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the proxyholders will vote in accordance with the instructions set forth in the latest proxy to be filed.

          The Company has retained Griffin Financial Group, LLC (“Griffin Financial”) to act as a best efforts underwriter in connection with the offering related to this Conversion. Independent agents of the Company, as the primary contact between the Company and members, frequently can be expected to be the initial contact with members and, as a result, may obtain proxies for or against the Plan. The Company expects to reimburse agents for their reasonable expenses. Proxies also may be solicited by officers, directors or other employees of the Company, in person, by telephone or through other forms of communication. Such persons will be reimbursed by the Company only for their expenses incurred in connection with this solicitation.

          The proxies solicited hereby will be used only at the Special Meeting and at any adjournment thereof; they will not be used at any other meeting.

PENN MILLERS HOLDING CORPORATION

          Penn Millers Holding Corporation was incorporated under the laws of the Commonwealth of Pennsylvania at the direction of the Board of Directors of Penn Millers Mutual for the purpose of serving as a holding company of Penn Millers Mutual upon the acquisition of all of the capital stock issued by Penn Millers Mutual in the Conversion. Prior to the Conversion, the Holding Company has not engaged, and will not engage, in any material operations. Upon completion of the Conversion, the Holding Company will have no significant assets other than the outstanding capital stock of Penn Millers Mutual and between approximately $37.3 million and $57.4 million of the net proceeds from the offering. The Holding Company’s principal business will be to hold the stock of Penn Millers Mutual. The Holding Company also may provide management services to Penn Millers Mutual, and its insurance company subsidiary, Penn Millers Insurance Company.

          The holding company structure will permit the Holding Company to expand the services currently offered through Penn Millers Insurance Company, although there are no definitive plans or arrangements for expansion at present. The Holding Company will have greater flexibility than Penn Millers Mutual to diversify its business activities through existing or

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newly-formed subsidiaries or through acquisition or merger with other insurance companies or financial service institutions. After the Conversion, the Holding Company will be subject to regulation by the Pennsylvania Insurance Department (the “Department”).

          The Holding Company’s executive offices are located at 72 North Franklin Street, Wilkes-Barre, Pennsylvania, and its telephone number is (800) XXX-XXXX.

PENN MILLERS MUTUAL HOLDING COMPANY

          Penn Millers Mutual is a Pennsylvania-domiciled mutual holding company formed in 1999 when Penn Millers Insurance Company converted from mutual to stock form and reorganized in a mutual holding structure. Pursuant to the Department’s 1998 order approving Penn Millers Mutual was formed and each of the policyholders of Penn Millers Insurance Company became members of Penn Millers Mutual.

PENN MILLERS INSURANCE COMPANY

          Penn Millers Insurance Company was originally formed as a mutual insurance company in 1887 and offers a wide array of property and casualty insurance products designed to meet the insurance needs of certain segments of the agricultural industry and small commercial businesses. Our agribusiness insurance product includes fire and allied lines, inland marine, general liability, commercial automobile, workers’ compensation and umbrella liability insurance. Our commercial product insurance product combines property, liability, business interruption, and crime coverage for small businesses; workers’ compensation; commercial automobile; and umbrella liability coverage. Penn Millers Insurance Company primarily markets its 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 Company, Inc., which is the fourth highest out of fifteen ratings. The latest rating evaluation by A.M. Best Company, Inc. occurred on June 23, 2009.

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          Penn Millers Insurance Company and its affiliates are, and after the Conversion will continue to be, subject to examination and comprehensive regulation by the Department. The principal offices of Penn Millers Mutual and Penn Millers Insurance Company are located at 72 North Franklin Street, Wilkes-Barre, Pennsylvania 18773, and the telephone number for this office is (800) 233-8347.

DESCRIPTION OF THE PLAN OF CONVERSION

General

          Effective as of April 22, 2009, Penn Millers Mutual adopted a Plan of Conversion to convert from a mutual to a stock form of organization. Pursuant to the Plan, Penn Millers Mutual will: (i) convert from a Pennsylvania-chartered mutual holding company to a Pennsylvania-chartered stock holding company, which will be accomplished by the amendment of its Articles of Incorporation to authorize the issuance of capital stock and to comply with the requirements of a Pennsylvania stock corporation, and (ii) issue all of its authorized capital stock to the Holding Company. The Holding Company will offer for sale between 4,505,000 and 6,095,000 shares of Holding Company common stock at a price of $10.00 per share (provided that, the maximum number of shares sold may be increased to 6,772,221 shares solely to accommodate the 9.99% interest being purchased by the ESOP, as discussed in more detail below). This amount was determined based upon an independent valuation of the consolidated pro forma market value of Penn Millers Mutual as a subsidiary of the Holding Company. The valuation was performed by Curtis Financial Group, LLC (“Curtis Financial”).

          The Conversion is contingent upon approval of the Plan by the Record Date Members of the Company. The Department is expected to approve the Plan subject to the satisfaction of certain other conditions imposed by the Department, including the Plan’s approval by the Record Date Members of the Company.

Background and Reasons for the Conversion

          The Plan of Conversion was adopted by Penn Millers Mutual on April 22, 2009. The Company adopted the Plan of Conversion because it believes that growth is critical to Penn Millers Mutual’s success. Penn Millers Mutual believes that completion of the Conversion will

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provide it with strategic flexibility. With increased capital the Company will be positioned to grow as an independent company and achieve its operational goals. Penn Millers believes this ability to continue as a separate, independent company is a desirable strategic position.

          Operationally, Penn Millers Insurance Company is primarily a commercial property and casualty insurer and it expects that its agribusiness and commercial business will remain its focus. Penn Millers Insurance Company will use the capital generated by the Conversion and related stock offering to strengthen this core competency. Specifically, Penn Millers Insurance Company goals are to:

• Take advantage of growth opportunities when and if a hard market cycle market returns. During a “hard market” cycle price competition is less severe in the property and casualty insurance industry and insurers are able to increase premiums, maintain underwriting discipline, and earn higher profit margins. During such hard market cycles, Penn Millers Insurance Company has historically experienced growth that exceeded industry growth rates. Therefore, Penn Millers Insurance Company wants to ensure it has sufficient capital to support the additional premium growth and growth opportunities that it may experience in the next hard market cycle.

• Attract and retain high-quality insurance producers. Penn Millers Insurance Company’s policies are sold through select independent insurance producers. There producers significantly influence the insured’s decision to choose Penn Millers Insurance Company’s products over those of its competitors. Penn Millers Insurance Company will need capital to continue to differentiate itself and attracting producers through by providing responsive and consistent communications and services from Penn Millers Insurance Company loss control, claim adjustment, and management representatives.

• Continue to develop and market products for niche businesses and industries. Penn Millers Insurance Company has been a niche player in the agribusiness market for over 120 years. In 2009, we introduced our PennEdge product that will enable us to write customized coverages for mid-size commercial accounts. The PennEdge product is designed for niche industry segments, such as dry cleaners, manufacturing, hospitality, and printers. Penn Millers Insurance Company will need capital to continue to develop and market these niche products by growing its producer network and entering into select strategic alliances.

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The Offering of Holding Company Common Stock

          In connection with the Plan, the Holding Company is concurrently offering for sale Holding Company common stock through the issuance of nontransferable subscription rights (the “Subscription Offering”), first, to the members of Penn Millers Mutual, who are policyholders of Penn Millers Insurance Company, as of April 22, 2009 (the “Eligible Members”), second, to the Holding Company’s employee stock ownership plan (the “ESOP”), and third, to the directors, officers and employees of the Company. Subscription rights received in any of the foregoing categories will be subordinated to the subscription rights of those in a prior category, except that the ESOP shall have the right to purchase in the aggregate up to 9.99% of the number of shares of Holding Company common stock issued in the Conversion.

          This Proxy Statement does not constitute an offer to sell shares of Holding Company common stock. Such offer shall be made only by means of the prospectus that accompanies this Proxy Statement. Please review the prospectus carefully before investing. The prospectus contains detailed information concerning the Subscription Offering, including:

• a discussion of the risks of investing in shares of Holding Company common stock;

• historical financial data for Penn Millers Mutual;

• pro forma financial data for the Holding Company;

• a discussion of Penn Millers Mutual’s business, financial condition and results of operations;

• a review of certain tax consequences of the Conversion to Penn Millers Mutual and its members;

• information concerning management and management compensation; and

• a discussion of the Holding Company’s articles of incorporation and bylaws.

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          If Penn Millers Mutual receives subscriptions in the Subscription Offering for more than 6,095,000 shares, which is the maximum number being offered to Eligible Members and directors, officers and employees of Penn Millers Mutual, the subscription of such Eligible Members, directors, officers and employees of Penn Millers Mutual may be reduced. In that event, no shares will be sold in the Community Offering (as defined below), and the shares of common stock will be allocated first to Eligible Members and then to directors, officers and employees of Penn Millers Mutual. The maximum number of shares being offered will be increased to the extent necessary to allow the ESOP to purchase 9.99% of the shares issued in the Conversion.

          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 Mutual (except in his or her capacity as an Eligible Member). The shares of common stock will be allocated so as to permit each subscribing Eligible Members 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.

          To the extent that shares remain available after satisfaction of all subscriptions in the Subscription Offering, shares of Holding Company common stock may be offered to the general public in a community offering (the “Community Offering”). The Community Offering, if any, will commence at the same time as, during, or promptly after the Subscription Offering and will not continue for more than ___days after the end of the Subscription Offering, unless extended by us with the approval of the Department.

          In the Community Offering, the Holding Company, in its sole and absolute discretion, may give preference to subscriptions received from the following categories of subscribers before proceeding to accept subscriptions from the general public:

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

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• members under policies of insurance issued by Penn Millers Mutual 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; and

     Subject to the priority categories described in the preceding paragraph, the Holding Company 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. 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.

          If the number of shares purchased in the Subscription and Community Offerings are collectively less than 4,505,000, then Penn Millers Mutual may choose to return all funds received in the Offerings promptly to purchasers, with any interest earned on such funds. Alternatively, Penn Millers Mutual may cause a new valuation of the pro forma market value of Penn Millers Mutual, as a subsidiary of LMI Holdings, to be performed, and based on this valuation commence a new offering of the common stock. In that event, people who submitted orders will be permitted to cancel, modify, or confirm their orders.

          The Subscription Offering and the Community Offering (collectively, the “Conversion Offerings”) will be managed by Griffin Financial. Any shares of Holding Company Common Stock not purchased in the Conversion Offerings may, in the absolute discretion of the Holding Company, be offered for sale to the general public through a syndicate of registered broker-dealers to be formed and managed by Griffin Financial on the Holding Company’s behalf (the “Syndicated Community Offering”). The Conversion Offerings and the Syndicated Community Offering, if any, are hereinafter collectively referred to as the “Offerings.”

          The common stock issued in the Offerings will be freely transferable under the 1933 Act; provided, however that shares issued to directors and officers of Penn Millers Mutual or of the Holding Company will be restricted as to transfer for a period of six months from the

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effective date of the Conversion pursuant to the provisions of the Act, and will be subject to additional transfer restrictions under the 1933 Act.

Valuation of the Company

          The Act requires that the aggregate purchase price of the Holding Company common stock to be issued in the Conversion be equal to the fair market value of such shares based upon an independent valuation of the estimated consolidated pro forma market value of Penn Millers Mutual. Curtis Financial, a firm experienced in corporate valuations, has made an independent appraisal of the estimated consolidated pro forma market value of Penn Millers Mutual (the “Valuation”) as a subsidiary of the Holding Company and has determined that, as of June 5, 2009, such estimated consolidated pro forma market value ranged from $45,050,000 to $60,950,000 (the “Estimated Valuation Range”). The Holding Company, in consultation with its advisors, has determined to offer the shares in the Conversion at a price of $10.00 per share (the “Purchase Price”). Accordingly, the Holding Company will offer between 4,505,000 and 6,095,000 shares of Holding Company common stock in the Offerings, except that the Holding Company may issue up to 6,772,221 shares if necessary to satisfy the ESOP’s subscription rights to purchase 9.99% of the shares issued in the Conversion.

          The Valuation is not intended and must not be construed as a recommendation of any kind as to the advisability of purchasing shares or as any form of assurance that, after the Conversion, the shares can be resold at or above the Purchase Price. The Valuation considered a number of factors and was based upon estimates derived from those factors, all of which are subject to change from time to time. In preparing the Valuation, Curtis Financial relied upon and assumed the accuracy and completeness of financial and statistical information provided by Penn Millers Mutual. Curtis Financial did not verify the audited financial statements of Penn Millers Mutual as of and for the years ended December 31, 2008, 2007, 2006 and 2005, or independently value the assets of Penn Millers Mutual. The Valuation will be further updated immediately prior to the completion of the Conversion.

          The total number of shares to be issued in the Conversion may be increased or decreased without a resolicitation of subscribers if the aggregate purchase price is not less than the minimum or more than the maximum of the Estimated Valuation Range, which maximum

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may be increased if necessary to satisfy the subscription rights of the ESOP. Based on the Purchase Price and excluding shares issued to the ESOP, the total number of shares of Holding Company Common Stock that may be issued without a resolicitation of subscribers is from 4,505,000 to 6,095,000 shares. If, subsequent to re-solicitation, if any, less than the minimum number of shares offered is sold, all subscriptions will be canceled and all funds will be returned to subscribers with any interest earned on such funds.

Amendment of Articles of Incorporation.

          The Conversion will be accomplished by the filing of amended and restated articles of incorporation for Penn Millers Mutual. 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 the shares of capital stock to the Holding Company, Penn Millers Mutual will become a wholly owned stock subsidiary of the Holding Company. The Conversion will be effected only if subscriptions are received for at least 4,505,000 shares of common stock. 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 financial statements.

Effect of the Conversion on Members

          General. Each member of Penn Millers Mutual is a policyholder of Penn Millers Insurance Company, and as such has certain interests in Penn Milers Mutual, including the right to vote for the election of directors and certain other corporate transactions, and the right to receive dividends if, as and when declared by the board of directors of the Company.

          Mutual members also have rights in the unlikely event of a solvent dissolution of a mutual company. Under Pennsylvania law, it is unclear how mutual members are treated in this case. One provision of Pennsylvania law applies to all nonstock corporations. Under this provision, unless otherwise provided in the articles, bylaws or the documents evidencing membership in the nonstock corporation, upon a solvent dissolution, members have the right to receive a pro rata distribution of any surplus remaining after the satisfaction of all claims and other liabilities of the company. A more recent provision of Pennsylvania law, specifically applicable to mutual insurance companies, states that any surplus of a mutual insurance company

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remaining after satisfaction of all claims and liabilities escheats to the Commonwealth of Pennsylvania. In the view of the Department, the more recent statute is controlling.

          A member of Penn Millers Mutual, a mutual company must have an effective insurance policy issued by its insurance subsidiary, Penn Millers Insurance Company. However, this membership interest has no market value because it cannot be separated from the underlying policy and in any event is not transferable. A policyholder whose policy is terminated loses the membership interest. As of the completion of the Conversion, all member interests in Penn Millers Mutual described herein will terminate. However, the termination of your membership interest will not change your insurance coverage or premiums.

          If the Plan of Conversion is not approved by Penn Millers Mutual’s Record Date Members or if the Conversion fails to be completed for any other reason, Penn Millers Mutual will continue as a mutual holding company. In this case, the Record Date Members will retain the rights described above.

          Continuity of Insurance Coverage and Business Operations. The 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 Penn Millers Insurance Company of issuing insurance policies in exchange for premium payments and processing and paying claims will continue without change or interruption. After the Conversion, Penn Millers Insurance Company will continue to provide services for members under current policies and by its present management and staff.

          The Board of Directors serving Penn Millers Mutual at the time of the Conversion will serve as the Board of Directors of Penn Millers Mutual after the Conversion. The Board of Directors of the Holding Company will consist of the following persons, each of whom is an existing director of Penn Millers Mutual: 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., Donald A. Pizer, James M. Revie, J. Harvey Sproul, Jr. All officers of Penn Millers Mutual at the time of the Conversion will retain their positions with Penn Millers Mutual after the Conversion.

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          Voting Rights. After the Conversion, the voting rights of all members in Penn Millers Mutual will cease. Members 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 the Holding Company, which will own all the capital stock of Penn Millers Mutual. Voting rights in the Holding Company will be held by the shareholders of the Holding Company. Each holder of common stock will be entitled to vote on any matter to be considered by the shareholders of the Holding Company, subject to the terms of the Holding Company’s articles of incorporation and bylaws and to the provisions of Pennsylvania and federal law.

          Dividends. The Conversion will not affect the reasonable expectation of a member to receive dividends from Penn Millers Mutual. Currently, dividends will be paid only if, as and when declared by the board of directors of Penn Millers Mutual. Penn Millers Mutual has never declared a member dividend. Regarding the Holding Company, its shareholders will have the exclusive right to receive any dividends paid by the Holding Company.

          Rights Upon Dissolution. As discussed above, it is unclear what right members would have if there were a solvent dissolution of Penn Millers Mutual. However, it is clear that after the Conversion, members will no longer have the right to receive a pro rata distribution of any remaining surplus of Penn Millers Mutual. Instead, this right will vest in the Holding Company as the sole shareholder of Penn Millers Mutual. In the event of a liquidation, dissolution or winding up of the Holding Company, shareholders of the Holding Company would be entitled to receive, after payment of all debts and liabilities of the Holding Company, a pro rata portion of all assets of the Holding Company.

     Tax Effects.

          In General.

          Penn Millers Mutual has obtained from Stevens & Lee an opinion concerning certain material tax consequences of the Conversion and the Subscription Offering to Penn Millers Mutual and the Eligible Members to the effect that, on the basis of certain facts and customary representations and assumptions that are set forth or referred to in such opinion and

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must be consistent with the facts existing at the closing date of the Conversion, for federal income tax purposes:

• the Conversion of Penn Millers Mutual from mutual to stock form will constitute a reorganization within the meaning of Section 368(a)(1)(E) of the Internal Revenue Code of 1986, as amended (the “Code”);

• no gain or loss will be recognized by Penn Millers Mutual in its pre-Conversion mutual or post-Conversion stock form solely as a result of the reorganization;

• Penn Millers Mutual’s basis in its assets, holding period for its assets, earnings and profits and accounting methods will not be affected by the reorganization, nor will Penn Millers Mutual’s net operating loss carryforward, if any, and capital loss carryforward, if any, be affected by the reorganization, except for possible limitations on the rate at which such carryforwards may be used after the reorganization;

• as discussed below, Eligible Members will be required to recognize gain upon the receipt of subscription rights if and to the extent that the subscription rights that are allocated to an Eligible Member are determined to have fair market value;

• the basis of the common stock purchased by an Eligible Member pursuant to the exercise of subscription rights will equal the sum of the purchase price of the stock, plus the gain, if any, recognized by the Eligible Member on the subscription rights that are exercised; and

• the holding period of the common stock purchased by an Eligible Member through the exercise of subscription rights will begin on the date on which the subscription rights are exercised. In all other cases, the holding period of common stock purchased by an Eligible Member will begin on the date following the date on which the stock is purchased.

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          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 addressed by any direct authorities. Nevertheless, Stevens & Lee has opined that:

• any gain realized by an Eligible Member as a result of the receipt of subscription rights with a fair market value must be recognized, whether or not such rights are exercised; and

• the amount of gain recognized by each Eligible Member should equal the fair market value of subscription rights received by the Eligible Member.

     Although not free from doubt, if an Eligible Member is required to recognize gain on the receipt of subscription rights and does not exercise some or all of such subscription rights, the Eligible Member should recognize a corresponding loss upon the expiration or lapse of his or her unexercised subscription rights. The amount of that loss should equal the gain previously recognized upon receipt of the unexercised subscription rights, although the loss may not have the same character as the corresponding gain.

     Although not free from doubt, if the membership interests in Penn Millers Mutual that are held by an Eligible Member are capital assets in the hands of that Eligible Member on the effective date of the Conversion, then any gain resulting from the receipt of the subscription rights should constitute a capital gain. If the common stock that an Eligible Member would have received upon exercise of the lapsed subscription rights would have constituted a capital asset in the hands of that Eligible Member, the resulting loss upon expiration of the subscription rights should constitute a capital loss. For purposes of determining gain, it is unclear how the subscription rights should be valued or how to determine the number of subscription rights that may be allocated to each Eligible Member during the Subscription Offering.

     In the opinion of Curtis Financial, the subscription rights do not have any fair market value, for a number of reasons. These rights are nontransferable, personal rights of short duration. They are provided without charge, and give the holder only the right to purchase shares of common stock in the Subscription Offering at a price equal to its estimated fair market

15

value. This price is the same price at which such stock will be sold to purchasers in the Community Offering or the Syndicated Community Offering, if any. Nevertheless, Eligible Members are encouraged to consult with their tax advisors about the tax consequences of the Conversion and the Subscription Offering.

THE FEDERAL INCOME TAX DISCUSSION SET FORTH ABOVE DOES NOT PURPORT TO CONSIDER ALL ASPECTS OF FEDERAL INCOME TAXATION THAT MAY BE RELEVANT TO EACH ELIGIBLE POLICYHOLDER, INCLUDING MEMBERS THAT MAY BE SUBJECT TO SPECIAL TREATMENT UNDER THE CODE, SUCH AS TRUSTS, INDIVIDUAL RETIREMENT ACCOUNTS, OTHER EMPLOYEE BENEFIT PLANS, INSURANCE COMPANIES, FINANCIAL INSTITUTIONS AND ELIGIBLE MEMBERS WHO ARE EMPLOYEES OF AN INSURANCE COMPANY OR WHO ARE NOT CITIZENS OR RESIDENTS OF THE UNITED STATES. DUE TO THE INDIVIDUAL NATURE OF TAX CONSEQUENCES, EACH ELIGIBLE POLICYHOLDER IS URGED TO CONSULT HIS, HER OR ITS TAX AND FINANCIAL ADVISOR AS TO THE EFFECT OF SUCH FEDERAL INCOME TAX CONSEQUENCES ON HIS, HER OR ITS OWN PARTICULAR FACTS AND CIRCUMSTANCES, INCLUDING THE RECEIPT, EXERCISE AND LAPSE OF SUBSCRIPTION RIGHTS, AND ALSO AS TO ANY STATE, LOCAL, FOREIGN OR OTHER TAX CONSEQUENCES ARISING OUT OF THE CONVERSION.

Interpretation of the Plan of Conversion

     All interpretations of the Plan by a majority of the board of directors of Penn Millers Mutual and the board of directors of the Holding Company will be final, subject to the limitations of applicable law.

Amendment and Termination

     This Plan may be substantively amended at any time by the Board of Directors of Penn Millers Mutual as a result of comments from regulatory authorities, including the Pennsylvania Insurance Department, or for any other reason. This Plan may be terminated at any time by and in the sole discretion of the Board of Directors of Penn Millers Mutual

Certain Benefits to Employees & Directors

          The ESOP is expected to purchase 9.99% of the shares of Holding Company common stock sold in the Conversion, which will be awarded to substantially all employees without payment by such persons of cash consideration. Under the ESOP, shares of Holding Company common stock will be allocated annually to employees of the Company and its

16

subsidiaries over a 10 year period on the basis of their respective annual wages. Employees must be employed at least 1,000 hours in a calendar year in order to receive an allocation. In addition, the Holding Company intends to adopt a Stock-Based Incentive Plan pursuant to which the Holding Company intends: (i) to award to employees and directors of the Holding Company and its affiliates up to 4% of the number of shares of Holding Company common stock sold in the Conversion without payment, and (ii) grant options to acquire Holding Company common stock to employees and directors of the Holding Company and its affiliates, in an amount up to 10% of the number of shares of Holding Company common stock sold in the Conversion. The Stock-Based Incentive Plan is subject to approval by the Holding Company’s shareholders at the first meeting of shareholders to be held no sooner than six months after the consummation of the Conversion. No decisions concerning the number of shares to be awarded or options to be granted to any director or employee have been made at this time. For a more detailed description of the benefits to employees and directors, see the accompanying prospectus.

AMENDED AND RESTATED ARTICLES OF INCORPORATION OF COMPANY

          The following is a summary of certain provisions of the Amended and Restated Articles of Incorporation of Penn Millers Mutual attached hereto as Exhibit B. The amended and restated articles of incorporation will become effective upon the completion of the Conversion.

          Penn Millers Mutual’s Amended and Restated Articles of Incorporation will authorize Penn Millers Mutual to issue                      shares of common stock, $___ par value per share. All of Penn Millers Mutual’s outstanding common stock will be issued to and owned by the Holding Company. Accordingly, exclusive voting rights with respect to the affairs of Penn Millers Mutual after the Conversion will be vested in the Board of Directors of the Holding Company. Penn Millers Mutual’s Amended and Restated Articles of Incorporation will provide that such Articles may be amended only if such amendment is approved by the Board of Directors of Penn Millers Mutual, and, if and to the extent required by law, approved by the Department and the shareholders of Penn Millers Mutual (i.e., the Holding Company).

17

          A vote in favor of the Plan also will constitute a vote to approve the Amended and Restated Articles of Incorporation of Penn Millers Mutual.

RECOMMENDATION OF THE BOARD OF DIRECTORS

          THE BOARD OF DIRECTORS OF PENN MILLERS MUTUAL UNANIMOUSLY RECOMMENDS THAT YOU VOTE “FOR” APPROVAL OF THE PLAN AND THE RELATED AMENDED AND RESTATED ARTICLES OF INCORPORATION. VOTING IN FAVOR OF THE PLAN WILL NOT OBLIGATE YOU TO PURCHASE COMMON STOCK IN THE OFFERING.

ADDITIONAL INFORMATION

          YOUR BOARD OF DIRECTORS URGES YOU TO CONSIDER CAREFULLY THIS PROXY MATERIAL AND, WHETHER OR NOT YOU PLAN TO BE PRESENT IN PERSON AT THE SPECIAL MEETING, TO FILL IN, DATE, SIGN AND PROMPTLY RETURN THE ENCLOSED PROXY CARD(S) AS SOON AS POSSIBLE TO ASSURE THAT YOUR VOTES WILL BE COUNTED. THIS WILL NOT PREVENT YOU FROM VOTING IN PERSON IF YOU ATTEND THE SPECIAL MEETING. YOU MAY REVOKE YOUR PROXY BY WRITTEN INSTRUMENT DELIVERED TO THE SECRETARY OF PENN MILLERS MUTUAL AT ANY TIME PRIOR TO OR AT THE SPECIAL MEETING OR BY ATTENDING THE SPECIAL MEETING AND VOTING IN PERSON.

          THIS PROXY STATEMENT IS NOT AN OFFER TO SELL OR THE SOLICITATION OF AN OFFER TO BUY THE HOLDING COMPANY COMMON STOCK. SUCH OFFERS MAY BE MADE ONLY BY THE PROSPECTUS.

BY ORDER OF THE BOARD OF DIRECTORS
 

Douglas A. Gaudet 

President, Chief Executive Officer and Director 

                    , 2009
Wilkes-Barre, Pennsylvania

18

IF YOU HAVE ANY QUESTIONS, PLEASE CONTACT ___ AT PENN MILLERS MUTUAL AT (800) XXX-XXXX, BETWEEN THE HOURS OF 10:00 A.M. AND 4:00 P.M.

19

PENN MILLERS MUTUAL HOLDING COMPANY

          I/We hereby appoint                     , or any one of them acting in the absence of the other, as proxyholders, each with the power to appoint his or her substitute, and hereby authorize them to represent me/us and to vote for me/us as designated on the reverse side, at the Special Meeting of Members to be held on October 15, 2009, or any adjournment thereof.

          This proxy, if properly signed, will be voted in the manner directed on the reverse side. IF NO DIRECTION IS MADE, THIS PROXY WILL BE VOTED FOR THE APPROVAL OF THE PLAN OF CONVERSION AND THE RELATED AMENDMENT AND RESTATEMENT OF PENN MILLERS MUTUAL’S ARTICLES OF INCORPORATION. VOTING IN FAVOR OF THE PLAN WILL NOT OBLIGATE YOU TO PURCHASE COMMON STOCK IN THE OFFERING. This proxy will be voted, in the discretion of the proxyholders, upon such other business as may properly come before the Special Meeting of Members or any adjournment thereof.

          THIS PROXY IS SOLICITED ON BEHALF OF THE BOARD OF DIRECTORS OF PENN MILLERS MUTUAL.

Please vote and sign on the other side.

          þ      Please mark your vote as in this example.

          THE BOARD OF DIRECTORS RECOMMENDS A VOTE “FOR” THE FOLLOWING:

          Approval of the Plan of Conversion and the related Amendment and Restatement of Penn Millers Mutual’s Articles of Incorporation.

          FOR    o       AGAINST     o

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The undersigned hereby acknowledges receipt of the Proxy Statement dated ___________, 2009 and hereby revokes any proxy or proxies heretofore given
to vote at said meeting or any adjournment thereof.

(PLEASE DATE, SIGN AND RETURN THIS PROXY IN THE ENCLOSED PROXY REPLY ENVELOPE)

Signature                                                                                   Date                     , 2009

Only one signature is required in the case of joint members. Please sign exactly as name appears hereon.

21

EXHIBIT “A”
PLAN OF CONVERSION

EXHIBIT “B”
ARTICLES OF INCORPORATION

[Penn Millers Mutual Holding Company]

A REQUEST THAT YOU VOTE

Dear Member:

As a follow-up to our recent mailing, this is to remind you that your vote is very important.

The Board of Directors of Penn Millers Mutual Holding Company has voted unanimously in favor of a plan to convert from a Pennsylvania mutual holding company to a Pennsylvania stock holding company. As part of this plan, we have formed Penn Millers Holding Corporation, which will become the parent holding company of Penn Millers Mutual, and Penn Millers Mutual will become the stock holding company of Penn Millers Insurance Company. We are converting Penn Millers Mutual so that we may obtain capital to support and grow our operations and so that members/policyholders, directors, officers and employees may purchase our stock and share in our success.

To accomplish the conversion, your participation is extremely important. On behalf of the Board, I ask that you help us meet our goal by casting your vote in favor of the plan of conversion and mailing your signed proxy card immediately in the enclosed [COLOR] postage-paid envelope marked “PROXY RETURN.” Should you choose to attend the special meeting of members and vote in person, you may do so by giving written notice of revocation to the Secretary of Penn Millers Mutual. If you have multiple policies at Penn Millers Insurance Company, you may receive more than one mailing. If you do receive more than one proxy card, please vote, sign and return each one.

If the plan of conversion is approved let me assure you that:

• Existing insurance coverage under your policy with Penn Millers Insurance Company will not undergo any change as a result of the conversion.

• Voting for approval of the plan will not obligate you to buy any shares of common stock.

If you have any questions after reading the enclosed material, please call our Stock Information Center at (xxx) xxx-xxxx, Monday through Friday, between the hours of 10:00 a.m. and 4:00 p.m.

Sincerely,

Douglas A. Gaudet
President and Chief Executive Officer

PROXY REQUEST

WE NEED YOUR VOTE

Dear Member:

Your vote on our plan of conversion has not yet been received. Your vote is very important to us. Please vote, sign and mail the enclosed proxy card today.

Remember: Voting does not obligate you to buy shares of common stock. Your Board of Directors has approved the plan of conversion and urges you to vote in favor of the plan of conversion. Your existing insurance coverage under your policy will not undergo any change as a result of the conversion.

A postage-paid envelope is enclosed with the proxy card. If you have any questions, please call our conversion center at (xxx) xxx-xxxx.

Sincerely,

Douglas A. Gaudet
President and Chief Executive Officer

Please vote today by returning all proxy cards received.

EX-99.8

Exhibit 99.8

POWER OF ATTORNEY

                 KNOW ALL PERSONS BY THESE PRESENTS, that each person whose signature appears below hereby constitutes and appoints Douglas A. Gaudet, Michael O. Banks, Jeffrey P. Waldron and Wesley R. Kelso, and each of them acting individually, his true and lawful attorney-in-fact and agent, each with full power of substitution and resubstitution, for him and in his name, place and stead, in any and all capacities, to sign any and all amendments (including post-effective amendments) to this Registration Statement and to sign any and all registration statements relating to the same offering of securities as this Registration Statement that are filed pursuant to Rule 462(b) of the Securities Act of 1933, as amended, and to file the same, with all exhibits thereto, and other documents in connection therewith, with the Securities and Exchange Commission and any other regulatory authority, granting unto said attorney-in-fact and agent, full power and authority to do and perform each and every act and thing requisite and necessary to be done in connection therewith, as fully to all intents and purposes as such person might or could do in person, hereby ratifying and confirming all that said attorney-in-fact and agent, his substitute or substitutes, may lawfully do or cause to be done by virtue hereof.

Signature	Capacity	Date
/s/ Donald A. Pizer
Donald A. Pizer	Director	June 25, 2009

CORRESP

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

June 29, 2009

VIA EDGAR

Mr. Michael Rosenthal
Division of Corporation Finance
U.S. Securities and Exchange Commission
100 F Street, NE
Washington, D.C. 20549-6010
Phone: (202) 551-3674
Fax:      (202) 772-9217

Re: Penn Millers Holding Corporation
Registration Statement on Form S-1/A
Filed April 30, 2009
File No. 333-156936

Dear Mr. Rosenthal:

     On behalf of Penn Millers Holding Corporation (the “Company”), we are writing to respond to the comments set forth in the letter of the staff of the U.S. Securities and Exchange Commission (the “Staff”) dated May 15, 2009, related to the above-referenced Registration Statement (the “Registration Statement”). In response to the comments in the Staff’s letter, the Company has amended the Registration Statement and the Company is filing via EDGAR Amendment No. 2 to the Registration Statement (“Amendment No. 2”) together with this response letter.

     We have reproduced below in italics the Staff’s comments in the order in which they were set out in your letter, numbered correspondingly, and have provided the Company’s response immediately below each comment. Page references in the Company’s responses reference Amendment No. 2.

General

1. We note your statement on the cover page that you are offering shares in a subscription offering and that you will simultaneously conduct a community offering and may

Philadelphia     •     Reading     •     Valley Forge     •     Lehigh Valley     •     Harrisburg     •     Lancaster     •     Scranton
Williamsport     •     Wilkes-Barre     •     Princeton     •     Cherry Hill     •     New York     •     Wilmington

A PROFESSIONAL CORPORATION

U.S. Securities and Exchange Commission
Division of Corporate Finance
June 29, 2009
Page 2

simultaneously conduct a syndicated offering. The disclosure relating to these offerings is unclear. In some discussions in your document, it appears that you are conducting three separate offerings. In other discussions, it appears that the minimum and maximum for the subscription offering are actually the minimum and maximum for all three offerings. Thereby indicating that the three offerings are actually the same offering but that there will be different marketing efforts directed towards the different potential investor classes. Please revise your document to clarify whether this registration statement is intended to be used for all three offerings and whether the minimum and maximum apply to the number of shares sold in the combined offerings. If you are conducting one offering with three different marketing plans or phases, please refrain from calling any one “the offering.” Additionally, note that statements that one of the offerings may occur subsequent to the subscription offering may be interpreted to mean that such offering will be conducted after the subscription offering has closed and funds have been released from escrow.

         Response: We have revised the disclosure in the Registration Statement to clarify that (i) the subscription, community and syndicated offerings are all part of the same offering, (ii) the three phases of the offering may be conducted concurrently, (iii) the only differences in the phases of the offering are which purchasers will be given priority in the event of an oversubscription and the commission paid to brokers, and (iv) the minimum and maximum number of shares to be sold apply to all three phases of the offering in the aggregate. We have also revised the disclosure to clarify that no funds will be released from escrow until all of the offerings have been completed.

2. Please disclose the relationship between Stevens & Lee, P.C. and Griffin Financial Group. Please describe the material terms of the engagement letters with Stevens & Lee and Griffin Financial for legal services and advisory services. Also, include a risk factor which highlights, quantifies and explains any conflicts and risks posed to investors by the affiliations and agreements between the Registrant, Stevens & Lee and Griffin Financial.

         Response: The relationship between Stevens & Lee and Griffin Financial Group and the material terms of the engagement letters between Penn Millers and Stevens & Lee and Griffin Financial Group are described on pages 123 and 124 of the prospectus under “THE CONVERSION AND OFFERING – Marketing and Underwriting Arrangements” We have added a risk factor titled “Because Stevens & Lee is acting as legal counsel to us and to its affiliate, Griffin Financial, in this transaction, a conflict of interest exists which may adversely

U.S. Securities and Exchange Commission
Division of Corporate Finance
June 29, 2009
Page 3

affect us.” at page 27 describing the potential risks and conflicts of interest posed to investors by the affiliations and agreements between Stevens & Lee, Griffin Financial Group, and the Company.

3. We note your response that you have had a conversation with the Pennsylvania Insurance Department in which you were assured there were no objections to your company’s conversion and offering. Please provide us with copies of and comment and response letters you have submitted or received from the Pennsylvania Department or other regulators in connection with the conversion.

         Response: Hard copies of our exemption order request to the Pennsylvania Insurance Department (the “Department”) have been sent to the Staff. No written response materials from the Department have been received as this time. However, when we receive this response from the Department, it will be sent to the Staff. We anticipate a written response approving the conversion from the Department on or around July 3, 2009.

4. Do you plan to use any supplemental or additional material or disclosure in connection with the community and syndicated offerings? If you do, please file these materials.

         Response: The materials that we plan to use in connection with the subscription and community offerings have been filed with this Amendment No. 2 as Exhibits 99.3, 99.4 and 99.5. At this time, we anticipate that the same materials will be used in the syndicated community offering. In the event of a syndicated community offering, a post-effective amendment will be filed to disclose the identity of any best efforts underwriters participating in the syndicated community offering and to disclose the compensation that would be paid to any such underwriters.

5. Supplementally, tell us what you plan to file if you decide to proceed with the syndicated offering, and generally what disclosures you will make in additional filings. This should include and notice you will provide to purchasers in the subscription and community offerings, as well as solicitation materials you will file or deliver to potential purchasers in the syndicated offering.

         Response: In the event that the Company elects to conduct a syndicated offering, the Company will file a post-effective amendment to the Registration Statement to include the name of any participating best efforts underwriters in the prospectus and to disclose the

U.S. Securities and Exchange Commission
Division of Corporate Finance
June 29, 2009
Page 4

compensation that will be paid to any participating underwriters. No notice will be provided to purchasers in the subscription or community offerings that the Company has elected to sell additional shares in a syndicated offering, and no other solicitation materials will be filed or delivered to potential purchasers in the syndicated offering.

6. We note that you are proposing to conduct the subscription and community offerings simultaneously. Given the priorities among the different offerees, supplementally, tell us why you are conducting the offerings at the same time and not consecutively. It appears that all of the funds from each offering will be held in escrow until the offering is complete and if filled, then returned without interest.

         Response: Traditionally, the subscription offering and the community offering are conducted at the same time in connection with the conversion of both mutual savings banks and mutual insurance companies. This reduces the total time that the offering remains open while providing sufficient time for the potential purchasers in the subscription offering to make an informed investment decision. Unlike conversions of mutual savings banks, the purchasers eligible to purchase in the subscription offering phase of mutual insurance company conversions never purchase a sufficient number of shares to complete the offering. You are correct that, excluding funds received from purchasers whose orders are rejected, all of the funds received in connection with both the subscription offering and the community offering are held in escrow until the offering is completed. If orders for the minimum number of shares are not received and accepted and all other conditions to closing the conversion are not satisfied, the funds are returned to the people who submitted orders, without interest.

7. We note your response to our prior comment 4. Please note our staff position is that Rule 10b-9 of the Exchange Act requires that in the event of:

• an extension of the offering period;

• a change in the offering price;

• a change in the minimum purchase required of an individual investor;

• a sale of sufficient securities to affiliates or the underwriter to meet the minimum;

• a change in the amount of proceeds necessary to break escrow; or

• a change in the application of proceeds,

U.S. Securities and Exchange Commission
Division of Corporate Finance
June 29, 2009
Page 5

the proceeds received by the issuer must be returned to the purchasers at least contemporaneously with the institution of the new offer to be made by means of a post-effective amendment. The only exception to this position is a situation in which the original date by which the minimum must be received and escrow broken is extended by the latest extension contemplated in the original prospectus. In this one instance, we will not raise any objection if you file a post effective amendment for the purpose of notifying all persons who have subscribed to the offering of the extension of the offering period and informing purchasers that their money will be refunded pursuant to the terms described in the prospectus unless the purchasers make an affirmative statement to the issuer that they wish to subscribe to the extended offer. This exception is conditioned on either receipt of the affirmative reconfirmation prior to the date upon which the original offering would terminate or the prompt refund of such funds to the subscribers. Therefore, in the event of any other change your company would be required to return the funds to all subscribers, and then resolicit those funds under the new terms of the offer using the revised prospectus. Please revise your disclosure to reflect this position.

         Response: We agree with the Staff’s position regarding the necessity of returning the proceeds to the purchasers contemporaneously with the filing of a post-effective amendment to the Registration Statement and the commencement of a new offering upon the occurrence of any of the events that are described above. We have revised the disclosure in the Registration Statement at pages 9, 11, 115 and 121 of the prospectus to clarify that the proceeds will be returned to the purchasers unless the extension of the offering period is contemplated in the original prospectus and the Company receives an affirmative statement that the purchaser wishes to subscribe to the extended offer.

8. We note your response to comment 20. Your registration statement now states that your common stock is being offered for sale in connection with the conversion of Penn Millers Mutual from the mutual to the stock form. In an appropriate location in your document, please explain the differences between the two forms such that an investor can understand them and explain the implications of the conversion to the company and to the shareholders.

         Response: This disclosure appears on pages 5 and 110 of the prospectus.

U.S. Securities and Exchange Commission
Division of Corporate Finance
June 29, 2009
Page 6

9. We note that your conversion involves the issuance of subscription rights to your eligible members, ESOP and officers, directors and employees. Please tell us what exemption from registration you are relying on and provide us with an analysis supporting your determination that this exemption is available for this issuance.

         Response: No subscription rights are being issued by the Company to any eligible member of the Company. The subscription rights of eligible members are granted under the Pennsylvania Mutual to Stock Conversion Act. Even if the Staff takes the position that subscription rights are being distributed to the ESOP and directors, officers and employees of the Company, no registration of such distribution is required under the Securities Act of 1933, as amended, because no value is being given for such subscription rights so no “sale” is occurring.

10. Please update the financial information as required by Rule 3-12 of Regulation S-X.

         Response: We have updated the financial statements of the Company included in the Registration Statement to include the March 31, 2009 and 2008 unaudited financial statements of the Company. We have also updated such other financial information of the Company as is included in the Registration Statement as required under Regulation S-K and the instructions for Form S-1.

Prospectus Summary, page 2

11. Please revise the disclosure related to your A.M. Best rating on page 2 to state that the A-rating is the fourth highest of fifteen possible ratings.

         Response: This disclosure has been added to page 2 of the prospectus as requested.

12. We note your revised disclosure in response to comment 8. This disclosure should be as prominent as the disclosure relating to your strategies. Please revise to include this discussion following a separate heading similar to “Our Business Strategies and Offering Rationale.”

         Response: This disclosure has been revised on page 5 of the prospectus to include a heading titled “Risks Related to Our Business.”

U.S. Securities and Exchange Commission
Division of Corporate Finance
June 29, 2009
Page 7

Risk Factors, page 13

13. Please consider including a risk factor discussing the possibility of tax implications of receiving and exercising subscription rights. Your risk factor should discuss the court’s opinion in Eugeen A, Fisher, Trustee, Seymore P. Nagan Irrevocable Trust, Plaintiff v. The United States, Defendant (No. 04-1726T), if you believe a risk factor is not warranted, please provide us with an analysis supporting your determination.

         Response: We have revised the risk factor at page 25 of the prospectus, that appears under the heading, “We believe that subscription rights have no value, but the Internal Revenue Service may disagree,” to highlight the possibility of tax implications of receiving subscription rights. We do not believe the risk factor should discuss the court’s opinion in Eugene A. Fisher, Trustee, Seymore P. Nagan Irrevocable Trust, Plaintiff v. The United States, Defendant (No. 04-1726T), because:

(a) as stated on page 131 under “Federal Income Tax Implications – Recent Developments” —

(i) the plan of conversion and the law considered by the court in Fisher were substantially different than the Penn Millers Mutual plan of conversion and the corresponding law of Pennsylvania, and

(ii) we believe the application to the Penn Millers Mutual conversion of the principles that were articulated by the court in Fisher would mitigate, and possibly eliminate, the risk of adverse tax consequences to eligible members upon the receipt of subscription rights in exchange for membership rights, and

(b) we understand that the decision of the court in Fisher has been appealed by the government and, while not free from doubt, we believe the decision may be reversed on appeal.

Unaudited Pro Forma Financial Information

Unaudited Pro Forma Condensed Balance Sheet, page 37

U.S. Securities and Exchange Commission
Division of Corporate Finance
June 29, 2009
Page 8

14. Please revise to reference the line item “borrowings under line of credit” to pro forma adjustment (1) to clarify that the amount outstanding as of the latest balance sheet date will be paid with the proceeds from the offering. Revise your assumptions under the “Use of Proceeds” section as appropriate.

         Response: We have added a footnote to the adjustment to the line item “borrowings under line of credit” in the Company’s pro forma balance sheet on page 37 of the prospectus to clarify that the Company intends to use a portion of the proceeds of the offering to repay in full the outstanding principal balance of the Company’s lines of credit. We have expanded the disclosure in the “Use of Proceeds” section on page 32 of the prospectus to clarify the Company’s intention to use a portion of the proceeds from the offering to repay the outstanding principal balance on the Company’s lines of credit.

Unaudited Pro Forma Condensed Statements of Operations, page 39

15. It appears that pro forma adjustment (1) for investment income on net proceeds is not factually supportable or may not have a continuing impact. Please remove this adjustment or tell us how this adjustment meets the requirement of Rule 11-02(b)(6) of Regulation S-X. This comment also applies to additional pro forma data presented on page 42. Please note you may disclose such amounts in the footnotes.

         Response: We have removed the pro forma adjustment for investment income on net proceeds from the condensed statements of operations on pages 39 and 40 of the prospectus and from the additional pro forma data on page 42 of the prospectus. We have elected to disclose the amount in a footnote to the condensed statements of operations.

Management’s Discussion and Analysis of Financial Condition and Results of Operations

Critical Accounting Policies

Loss and Loss Adjustment Expense Reserves, page 48

16. Please clarify your disclosure in response to prior comment 25(e)-(g) by stating, if that the actuarial ranges as provided on page 51 are reasonably likely changes in the loss and LAE estimates. Otherwise, disclose the range of reasonably likely changes. In addition, identify and quantify the key assumptions utilized in calculating the low and

U.S. Securities and Exchange Commission
Division of Corporate Finance
June 29, 2009
Page 9

high points of the ranges and, discuss how and why these assumptions have changed over the periods presented.

         Response: The disclosure to clarify that the actuarial ranges provided on page 51 of the prospectus are reasonably likely changes has been added to page 51 of the prospectus. The disclosure to clarify how our actuaries determine the low and high points of the ranges has also been added to page 51 of the prospectus. Our actuaries determine a range of reasonable reserve estimates which reflect the uncertainty inherent in the loss reserve process. This range does not represent the range of all possible outcomes. The range was determined by line of business and accident year after a review of the output generated by the various actuarial methods utilized. The actuaries reviewed the variance around the select loss reserve estimates for each of the actuarial methods and selected reasonable low and high estimates based on their knowledge and judgment. The method of determining the reserve range has not changed. As disclosed on page 51 of the prospectus, the reserve range generated by our actuaries is consistent with the observed development of the loss reserves over the last few years.

Investments, page 53

17. Consistent with your response to prior comment 26(b), please clarify that you only receive one quote per instrument from the pricing service.

         Response: The disclosure has been added to page 54 of the prospectus, as requested.

Pension Benefit Obligation, page 57

18. Please revise your discussion that was provided in response to prior comment 24 to clarify that the potential changes in pension expense provided on page 57 are changes that are reasonably likely.

         Response: We have added to page 58 of the prospectus the requested clarification that we believe that a one half of one percent change in the discount rate and/or the return on pension plan assets has a reasonable likelihood of occurrence.

Recent Accounting Pronouncements, page 78

U.S. Securities and Exchange Commission
Division of Corporate Finance
June 29, 2009
Page 10

19. Please expand your disclosure to clarify the effective date of FASB Staff Position No. FAS 115-2 and FAS 124-2.

         Response: We have corrected the disclosure on page 81 of the prospectus to clarify the effective dates of FSP FAS 115-2 and FAS 124-2.

Federal Income Tax Considerations, page 127

20. Revise the statement “This is a general discussion of the material United States federal income tax considerations...” on page 127 to indicate that this is Stevens & Lee’s opinion as to the tax considerations. Similarly revise the statements “we intend to take the position that...” to states that the discussion is Stevens & Lee’s opinion. These statements appear in the paragraphs following the headings “The Conversion” and “Tax Consequences of Subscription Rights” on page 128. Please also revise the tax opinion filed as exhibit 8.1 to clarify that the discussion in the registration statement is Stevens & Lee’s opinion.

         Response: We have revised the disclosure on pages 128 to 129 of the prospectus to indicate that the statements of United States federal income tax law, or legal conclusions with respect to United States federal income tax law in the Registration Statement constitute the opinion of Stevens & Lee. We have not changed the disclosure at page 129 of prospectus following the heading “Tax Consequences of Subscription Rights” because we do not believe that the change that the Staff has requested is consistent with our opinion regarding the uncertainty of existing federal income tax law with respect to the receipt of subscription rights in connection with the conversion of a mutual insurance company, which we believe we are obligated to communicate to eligible members of Penn Millers and other potential purchasers to whom this section of the Registration Statement is addressed. Accordingly, we have changed the third sentence of this section at page 129 to read as follows: “Nevertheless, based on the advice of Stevens & Lee, we believe, and we intend to take the position that. . . .”

         We have revised the tax opinion filed as Exhibit 8.1 to clarify that the statements of United States federal income tax law, or legal conclusions with respect to United States federal income tax law in the Registration Statement constitute the opinion of Stevens & Lee.

21. Please revise the discussion on page 129 to provide Stevens & Lee’s opinion as to whether or not the subscription rights will have a fair market value.

U.S. Securities and Exchange Commission
Division of Corporate Finance
June 29, 2009
Page 11

         Response: We believe it would be inappropriate and misleading for Stevens & Lee to provide an opinion as to whether or not the subscription rights will have a fair market value. Stevens & Lee is a law firm. It has no expertise in financial accounting or valuation matters, and law firms do not express opinions regarding the fair market value of any property right.

Management

Compensation Discussion and Analysis, page 140

22. We note your response to comment 36. Please note that disclosure of targets is required regardless of whether or not bonuses are paid. Please revise to disclose the segment and company wide targets.

         Response: We have added the disclosures requested to page 144 of the prospectus.

Exhibits

23. Please file the Employee Stock Ownership Plan as an exhibit to the registration statement.

         Response: The Employee Stock Ownership Plan has been filed as exhibit 10.19 with this Amendment No. 2.

24. Please file all remaining exhibits as soon as practicable. We will need to review these exhibits once they have been filed and may have additional comments.

         Response: We have filed all of the remaining exhibits with this Amendment No. 2 except Exhibits 10.2 -10.5, 10.8, and 99.6.

Consolidated Financial Statements

Notes to Consolidated Financial Statements

(2) Summary of Significant Accounting Policies

U.S. Securities and Exchange Commission
Division of Corporate Finance
June 29, 2009
Page 12

(o) Goodwill, page F-15

25. Please revise your discussion on page F-14 that was provided in response to prior comment 39 to describe the types of information obtained during the selling process indicating that goodwill was impaired.

         Response: We have revised the discussion on page F-35 and F-62 to clarify that non-binding offers received during the selling process at prices less than the carrying amount, and the further deterioration of economic conditions indicated to us that the EIG reporting unit was below its carrying amount.

(12) Liability for Losses and Loss Adjustment Expenses, page F-34

26. Refer to your response to prior comment 41. Please separately quantify the favorable or unfavorable development that is attributable to each factor, frequency and severity. If you are unable to separately quantify these factors, please state this fact and disclose why you are unable to quantify.

         Response: We have revised our disclosure on page F-55 to explain that it is impracticable to definitively quantify the frequency and severity factors that impact the favorable or unfavorable development. A significant portion of our loss and loss adjustment expense reserves is attributable to losses that impact all major lines of business, and are not directly associated with claim counts, primarily our Other segment and the Adjusting and Other category of loss adjustment expenses. When evaluating the incremental changes in estimates from year to year, the specific quantification of the relative impact of frequency and severity on the development may be statistically skewed by changes in the estimates of ultimate incurred losses for these portions of the business. Further segmentation and analysis of our data to properly identify and adjust for any such anomalies would create an undue administrative burden without providing any material added value to the reader of the financial statements. Therefore, our evaluation of the significant drivers behind our loss development focuses on the broad accident year trends in frequency and severity that have developed on claim-specific losses in the major lines of business. Our disclosure has been revised as follows:

Our evaluation of the significant drivers behind our loss development focuses on the broad accident year trends in frequency and severity that have developed on claim-specific losses in the major lines of business. A significant portion of our ultimate loss and loss adjustment reserve estimates are not directly associated

U.S. Securities and Exchange Commission
Division of Corporate Finance
June 29, 2009
Page 13

with claim counts, primarily our Other segment and the Adjusting and Other category of loss adjustment expenses. Therefore, the definitive quantification of the relative impact of changes in frequency and severity on our development is impracticable.

(18) Segment Information, page F-37

27. Based on your earned premium disclosure provided in the Business Section, it appears that you have information on revenue by product or group of similar products. Please revise your disclosure to provide revenue for each product or group of similar products as previously requested in prior comment 42.

         Response: We have revised our disclosure on page F-59 to provide revenue for the major lines of business that we market and sell as a packaged offering.

(20) Discontinued Operations, page F-39

28. Please revise your disclosure to clarify how the income tax benefit on EIG’s loss for the year ending December 31, 2008 was computed. Tell us how you allocated income tax expense or benefit among continuing and discontinued operations in 2008. Please refer to paragraph 35 of SFAS 109.

         Response: In accordance with paragraph 35 of SFAS 109, income tax expense or benefit for the year was allocated among continuing operations and discontinued operations. The amount allocated to continuing operations was the tax effect of the pretax loss from continuing operations that occurred during the year, adjusted for changes in circumstances that caused a change in judgment about the realization of deferred tax assets in future years. The remainder was allocated to discontinued operations in accordance with the provisions of paragraph 38 of SFAS 109. We have revised our disclosure on F-63 to clarify how the income tax benefit on EIG’s loss for the year ending December 31, 2008 was computed. Please note that the effective tax rate on the loss from discontinued operations in 2008 was lowered due to a permanent difference related to the goodwill write off.

U.S. Securities and Exchange Commission
Division of Corporate Finance
June 29, 2009
Page 14

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     If you have any questions or require any additional information with respect to the above, please do not hesitate to contact me at (717) 399-6632 or my or my colleague John Talbot at (610) 205-6029.

Very truly yours,

STEVENS & LEE

/s/ Wesley R. Kelso

Wesley R. Kelso