S-1/A

As filed with the Securities and Exchange Commission on August ___, 2009

Registration No. 333-156936

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

Amendment No. 4 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 at a price of $10.00 per share 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.

     Our ability to complete this offering is subject to two conditions. First, a minimum of 4,505,000 shares of common stock must be sold to complete the offering. Second, a majority of the members of Penn Millers Mutual as of July 10, 2009 must approve Penn Millers Mutual’s plan of conversion. Until such time as these conditions are satisfied, all funds submitted to purchase shares will be held in escrow with Christina Bank & Trust Company.

      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 1-877-764-2743.

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		157
DESCRIPTION OF THE CAPITAL STOCK		161
TRANSFER AGENT AND REGISTRAR		162
LEGAL MATTERS		162
EXPERTS		162
ADDITIONAL INFORMATION		162
INDEX TO FINANCIAL STATEMENTS		F-1

(i)

CERTAIN IMPORTANT INFORMATION

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

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

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

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

• the “offering” and the “conversion offering” refer to the offering of up to 6,772,221 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 an “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 were 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 co-managed by Griffin Financial and Sterne Agee & Leach, Inc. (“Sterne Agee”). 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, all of the outstanding common stock of the converted Penn Millers Mutual will have been issued to Penn Millers Holding Corporation, making the converted Penn Millers Mutual the wholly owned subsidiary of Penn Millers Holding Corporation. We will then 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 we receive shareholder approval of our stock-based incentive plan within twelve months after the plan’s approval by our board of directors, 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. We may not seek our shareholders’ approval of the plan until at least six months after the offering has been completed.

     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 127,500 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 adopted a stock-based incentive plan on July 28, 2009 for the benefit of our directors, executive officers and other eligible employees. The stock-based incentive plan will be submitted to our shareholders for approval. However, the plan cannot be proposed to shareholders until at least six months after the offering has been completed and, under the terms of the plan, the plan must be approved by our shareholders within twelve months of the adoption of the plan by our board of directors.

     Under the proposed stock-based incentive plan, we may award options to purchase common stock or award shares of restricted stock or restricted stock units 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 or restricted stock units settled in our common 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, restricted stock, or restricted stock units will be issued under the stock-based incentive plan until the plan is approved by our shareholders. 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 and restricted stock unit 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 our offices 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 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 1-877-764-2743, Monday through Friday between 10:00 a.m. and 4:00 p.m., Eastern Time or write to us at Penn Millers Holding Corporation, P.O. Box 9800, Wilkes-Barre, Pennsylvania 18773. The Stock Information Center will be closed on weekends and bank holidays. Our Stock Information Center is located at our offices 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 have adopted a stock-based incentive plan that we will submit to our shareholders for approval no earlier than six months after the offering. Under this plan, we may award participants restricted shares of our common stock, restricted stock units denominated in shares of our common stock or options to purchase shares of our common stock. Restricted stock and restricted stock unit awards will be made at no cost to the participants. Restricted stock units are payable in shares of common stock or in cash in the discretion of the compensation committee. The number of shares of common stock that may be issued pursuant to restricted stock and restricted stock unit awards (to the extent that such restricted stock unit awards are not paid in cash) 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 costs associated with the grant of restricted stock awarded under the stock-based incentive plan will be recognized and expensed 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. The costs associated with the grant of restricted stock unit awards to be settled in cash will similarly be recognized and expensed over their vesting period at the fair market value of the shares on the date they are awarded. However, unlike awards of restricted stock, the fair market value will be remeasured on a quarterly basis until the award vests or is otherwise settled. Therefore, in addition to reducing our net income by recording this compensation and benefit expense, increases in our stock price will increase this expense for restricted stock unit awards settled in cash, thereby further reducing our net income.

     Finally, accounting rules require companies to recognize as compensation expense the award-date fair value of stock options. This compensation expense will be recognized over the appropriate service period. 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 or restricted stock unit 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 or restricted stock unit awards and upon exercise of stock option awards following the 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 insurance company’s surplus as regards policyholders as reported on its most recent annual statement filed with the Pennsylvania Insurance Department or the insurance 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.

Failure to achieve and maintain effective internal controls in accordance with Section 404 of the Sarbanes-Oxley Act could have a material adverse effect on our ability to accurately report our financial results or prevent fraud.

      Upon completion of the offering, we will become a public reporting company. The federal securities laws and regulations of the Exchange Act and the Sarbanes-Oxley Act will require that we file annual, quarterly and current reports, that we maintain effective disclosure controls and procedures and internal controls over financial reporting and that we certify the adequacy of our internal controls and procedures. Before this offering, we and our independent registered public accounting firm did not, and were not required to, perform an evaluation of our internal controls over financial reporting in accordance with the provisions of the Sarbanes-Oxley Act. In connection with the preparation of our interim June 30, 2009 financial statements, we identified a material weakness in our internal controls over financial reporting. A material weakness is a deficiency, or combination of deficiencies, in internal controls over financial reporting such that there is a reasonable possibility that a material misstatement of annual or interim financial statements will not be prevented or detected on a timely basis. The control deficiency identified was ineffective review of the accounting for a specific provision within the aggregate stop loss reinsurance calculation, which resulted in an error in our first quarter 2009 financial statements. For additional information on the correction of this immaterial error, please see note 18 in the Notes to the Consolidated Interim Financial Statements beginning on page F-6. Notwithstanding any additional expenditures and efforts to become compliant with the Sarbanes-Oxley Act, we may fail to promptly remediate the existing material weakness, or additional material weaknesses in our internal controls over financial reporting could be identified in the future that, if unresolved, could cause us or our independent registered public accounting firm to conclude that our internal controls over financial reporting are not effective. Further, the existing weakness, if not remediated, or a future material weakness could result in material errors or misstatements in our annual or interim financial statements, creating the need for a restatement.

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 June 30, 2009 and 2008 and the statement of operations data for the six months ended June 30, 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-31.

     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 six months ended						At or for the years ended
	June 30,						December 31,
	2009			2008			2008			2007			2006		2005(5)			2004
	(unaudited)						(Dollars in thousands)
Statement of Operations Data:
Direct premiums written	$	41,976		$	45,996		$	94,985		$	94,073		$	84,544	$	84,084		$	89,041
Net premiums written	$	33,384		$	37,979		$	77,367		$	74,119		$	67,525	$	62,057		$	67,036
Net premiums earned	$	36,926		$	39,369		$	78,737		$	70,970		$	64,645	$	64,723		$	63,090
Net investment income		2,769			2,723			5,335			5,324			4,677		4,444			4,278
Other net realized investment gains (losses)		64			1,876			(2,897	)		(82	)		349		565			936
Other-than-temporary impairment losses		(197	)		—			(2,922	)		(620	)		—		(141	)		—
Other revenue		111			221			411			508			345		277			301
Total revenue	$	39,673		$	44,189		$	78,664		$	76,100		$	70,016	$	69,868		$	68,605
Expenses
Loss and loss adjustment expense	$	25,866		$	28,692		$	57,390		$	49,783		$	43,766	$	40,242		$	42,910
Amortization of deferred acquisition costs		10,953			11,521			23,081			21,930			20,080		21,556			20,464
Underwriting and administrative expense		1,869			1,807			3,481			2,233			3,216		7,662			3,895
Interest expense		156			87			184			125			222		195			84
Other operating expenses		90			76			365			184			314		266			82
Total losses and expenses	$	38,934		$	42,183		$	84,501		$	74,255		$	67,598	$	69,921		$	67,435
Income (loss) from continuing operations, before income taxes	$	739		$	2,006		$	(5,837	)	$	1,845		$	2,418	$	(53	)	$	1,170
Income tax expense (benefit)		107			494			(1,378	)		396			506		(295	)		(21	)
Income (loss) from continuing operations	$	632		$	1,512		$	(4,459	)	$	1,449		$	1,912	$	242		$	1,191
Income (loss) on discontinued operations		(816	)		(14	)		(2,920	)		(363	)		168		47			199
Net income (loss)	$	(184	)	$	1,498		$	(7,379	)	$	1,086		$	2,080	$	289		$	1,390
Balance Sheet Data (at period end):
Total investments, cash and cash equivalents	$	146,878		$	134,484		$	133,873		$	136,312		$	126,655	$	116,898		$	117,002
Total assets		228,385			221,904			220,524			219,613			207,768		197,897			192,020
Unpaid loss and loss adjustment expenses		118,025			104,589			108,065			95,956			89,405		83,849			73,287
Unearned premiums		41,218			44,947			45,322			46,595			43,294		39,984			42,798
Total liabilities		176,413			162,767			169,769			158,212			147,238		140,128			132,114
Equity		51,972			59,137			50,755			61,401			60,530		57,769			59,906

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	At or for the six months ended						At or for the years ended
	June 30,						December 31,
	2009			2008			2008			2007			2006			2005(5)			2004
	(unaudited)						(Dollars in thousands)
U.S. GAAP Ratios:
Loss and loss adjustment expense ratio (1)		70.0	%		72.9	%		72.9	%		70.1	%		67.7	%		62.2	%		68.0	%
Underwriting expense ratio (2)		34.5	%		33.1	%		32.8	%		33.3	%		35.1	%		39.2	%		38.0	%
Combined ratio (3)		104.5	%		106.0	%		105.7	%		103.4	%		102.8	%		101.4	%		106.0	%
Return on average equity, continuing operations (4)		2.5	%		5.1	%		(8.0	)%		2.4	%		3.2	%		0.4	%		2.0	%
Return on average equity (4)		(1.0	)%		5.0	%		(13.2	)%		1.8	%		3.5	%		0.5	%		2.3	%
Statutory Data:
Statutory net income (loss)	$	2,111		$	1,510		$	(4,718	)	$	878		$	1,374		$	3,171		$	634
Statutory surplus		44,188			47,458			42,569			50,795			50,524			47,216			45,445
Ratio of net premiums written to statutory surplus (4)		151.1	%		160.1	%		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)	Calculated on an annualized basis.
(5)	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 August 18, 2009, the Company had $1.8 million outstanding under a line 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 this amount, 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 June 30, 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 June 30, 2009
(Dollars 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	$	2,959	$	1,276		$	1,276		$	1,276		$	1,276
Shareholders’ equity:
Common stock, $0.01 par value per share; authorized shares 10,000,000(1)	$	—	$	45		$	53		$	61		$	68
Additional paid in capital		—		41,759			49,582			57,405			64,068
Retained earnings		51,730		51,730			51,730			51,730			51,730
Accumulated other comprehensive income (loss), net of tax		242		242			242			242			242
Less: common stock to be acquired by ESOP(2)		—		(4,505	)		(5,300	)		(6,095	)		(6,772	)
Total shareholders’ equity	$	51,972	$	89,271		$	96,307		$	103,343		$	109,336

(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 awards of restricted stock and restricted stock unit awards settled in our common stock, 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 June 30, 2009, gives effect to the completion of the offering, including implementation of the ESOP, as if it had occurred as of June 30, 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 six months ended June 30, 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 June 30, 2009
(Dollars in thousands)

	Penn Millers					Penn Millers
	Historical		Pro Forma			Pro Forma
	Consolidated		Adjustments			Consolidated (4)
Assets
Cash and invested assets	$	146,878	$	35,616	(1)	$	182,494
Premiums and fees receivable		26,783		—			26,783
Reinsurance receivables and recoverables		25,950		—			25,950
Deferred policy acquisition costs		9,862		—			9,862
Prepaid reinsurance premiums		3,769		—			3,769
Accrued investment income		1,565		—			1,565
Property and equipment, net of accumulated depreciation		3,958		—			3,958
Income taxes receivable		738		—			738
Deferred income taxes		3,240		—			3,240
Other assets		4,011		—			4,011
Deferred offering costs		1,631		—			1,631
Assets held for sale		—		—			—
Total assets	$	228,385	$	35,616		$	264,001
Liabilities
Losses and loss adjustment expense reserves	$	118,025	$	—		$	118,025
Unearned premiums		41,218		—			41,218
Accounts payable and accrued expenses		14,211		—			14,211
Borrowings under line of credit		1,683		(1,683	)(2)		—
Long-term debt		1,276		—			1,276
Liabilities held for sale		—		—			—
Total liabilities	$	176,413	$	(1,683	)	$	174,730
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		51,730		—			51,730
Accumulated other comprehensive loss, net of deferred taxes		242		—			242
Total shareholders’ equity	$	51,972	$	37,299		$	89,271
Total liabilities and shareholders’ equity	$	228,385	$	35,616		$	264,001

(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.
(4)	No effect has been given to the issuance of additional shares in connection with the grant of options or awards of restricted stock or restricted stock units settled in our common stock 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 awards of restricted stock or restricted stock units settled in our common stock under the stock-based incentive plan. We expect to seek shareholder approval of the plan at least 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 approximately 12.3% at the midpoint of the offering range

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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
				(dollars 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
(dollars 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
Other realized investment losses, net		(2,897	)		—			(2,897	)
Total other-than-temporary impairment losses		(2,922	)		—			(2,922	)
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	(4)(5)

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Unaudited Pro Forma Condensed Statement of Operations
Six Months Ended June 30, 2009
(dollars in thousands, except share and per share data)

	Penn Millers						Penn Millers
	Historical			Pro Forma			Pro Forma
	Consolidated			Adjustments			Consolidated
Revenue:
Premiums earned	$	36,926		$	—		$	36,926
Investment income, net of investment expense		2,769			—	(1)		2,769
Other realized investment gains		64			—			64
Total other-than-temporary impairment losses		(197	)		—			(197	)
Other income		111			—			111
Total revenues		39,673			—			39,673
Losses and expenses:
Losses and loss adjustment expenses	$	25,866		$	—		$	25,866
Amortization of deferred policy acquisition costs		10,953			—			10,953
Underwriting and administrative expenses		1,869			—			1,869
Interest expense		156			—			156
Other expense, net		90			225	(2)		315
Total losses and expenses		38,934			225			39,159
Income from continuing operations before income taxes	$	739		$	(225	)	$	514
Income tax expense (benefit)		107			(77	)(3)		30
Income from continuing operations	$	632		$	(148	)	$	484
Earnings per share data:
Basic and diluted loss per common share from continuing operations	$	—					$	0.12
Weighted average basic and diluted common shares outstanding		—						4,065,763	(4)(5)

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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 3.52%.
(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 note (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 six months ended June 30, 2009 and for the year ended December 31, 2008, respectively; (ii) (A) that 22,525, 26,500, 30,475, and 33,861 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 six months ended June 30, 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 439,236, 516,749, 594,262, and 660,291 during the six months ended June 30, 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.

(5)

No effect has been given to the issuance of additional shares in connection with the grant of options or awards of restricted stock or restricted stock units settled in our common stock 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 awards of restricted stock or restricted stock units settled in our common stock under the stock-based incentive plan. We expect to seek shareholder approval of the plan at least 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 approximately 12.3% at the midpoint of the offering range

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 June 30, 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.

42

     The following table summarizes historical data and our pro forma data at June 30, 2009, 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 Six Months Ended June 30, 2009
	(dollars 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		51,972			51,972			51,972			51,972
Pro forma proceeds after ESOP shares		37,299			44,335			51,371			57,364
Pro forma shareholders’ equity (2)	$	89,271		$	96,307		$	103,343		$	109,336
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	$	19.82		$	18.17		$	16.96		$	16.14
Pro forma price-to-book value		50.45	%		55.04	%		58.96	%		61.96	%
Pro forma net income:
Historical income from continuing operations	$	632		$	632		$	632		$	632
Loss on discontinued operations		(816	)		(816	)		(816	)		(816	)
ESOP expense		(148	)		(175	)		(201	)		(223	)
Pro forma income	$	(332	)	$	(359	)	$	(385	)	$	(407	)
Weighted average shares outstanding (3)		4,065,763			4,783,251			5,500,738			6,111,931
Pro forma loss per share	$	(.08	)	$	(.08	)	$	(.07	)	$	(.07	)

(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 six months ended June 30, 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 awards of restricted stock or restricted stock units settled in our common stock 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 awards of restricted stock or restricted stock units settled in our common stock under the stock-based incentive plan. We expect to seek shareholder approval of the plan at least 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 six months ended June 30, 2009; (ii) that 22,525, 26,500, 30,475, and 33,861 shares at the minimum, midpoint, maximum and adjusted maximum of the offering range, respectively, were committed to be released at the end of the six months ended June 30, 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 439,236, 516,749, 594,262, and 660,291 and at the minimum, midpoint, maximum and adjusted maximum of the offering range during the six months ended June 30, 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 six months ended June 30, 2009, we had direct premiums written of $33.4 million, net premiums earned of $36.9 million and net income from continuing operations of $0.6 million. At June 30, 2009, we had total assets of $228.4 million and equity of $52.0 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); and

• 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 are summarized below (dollars in thousands):

	As of		As of		As of
	June 30,		December 31,		December 31,
	2009		2008		2007
Case reserves	$	60,430	$	57,976	$	48,957
IBNR reserves		28,397		27,464		28,272
Net unpaid loss and LAE		88,827		85,440		77,229
Reinsurance recoverables on unpaid loss and LAE		29,198		22,625		18,727
Reserves for unpaid loss and LAE	$	118,025	$	108,065	$	95,956

     At June 30, 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
(dollars in thousands)
Low End	Recorded	High End
$81,841	$88,827	$92,886

     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 judgment. In making these judgments the actuaries typically assumed, based on their experience, that the larger the reserve the less volatility and that property reserves would exhibit less volatility than casualty reserves. In addition, when selecting these low and high estimates, the actuaries considered:

• Historical industry development experience in our business lines;

• Historical company development experience;

• Trends in social and economic factors that may affect our loss experience, such as the impact of economic conditions on the speed in which injured workers return to their jobs;

• The impact of court decisions on insurance coverage issues, which can impact the ultimate cost of settling claims;

• Trends and risks in claim costs, such as risk that medical cost inflation could increase, or that increasing unemployment rates can impact workers compensation claim costs;

• The relatively small base of claims we have increases the risk that a few claims experiencing adverse developments could significantly impact our loss reserve levels; and

• The impact of changes in our net retention (i.e., reduction in reinsurance) over the past few years on the potential magnitude of reserve development.

     Actuaries are required to exercise a considerable degree of judgment in the evaluation of all of these and other factors in the analysis of our loss and LAE reserves, and related range of anticipated losses. Because of the level of uncertainty impacting the estimation process, it is reasonably possible that different actuaries would arrive at different conclusions. The method of determining the reserve range has not changed and 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 six months ended June 30, 2009 and 2008, we experienced favorable development of $1.3 million and $2.3 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 June 30, 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 June 30, 2009 and December 31, 2008, we had ceded reinsurance loss recoverable under this stop loss contract of $3.3 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 $13.1 million of adverse development up to a 92% loss ratio. As of June 30, 2009, the actual 2009 accident year loss ratio for business subject to the aggregate stop loss treaty is approximately 64%.

     The following table provides case and IBNR reserves for losses and loss adjustment expenses by major lines of business as of June 30, 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 June 30, 2009

							Actuarially Determined Range of Estimates
					Total
(dollars in thousands)	Case Reserves		IBNR Reserves		Reserves		Low		High
Commercial auto liability	$	9,167	$	4,193	$	13,360	$	12,386	$	13,553
Workers’ compensation		11,723		5,118		16,841		16,006		17,340
Commercial multi-peril		15,660		6,271		21,931		21,029		22,809
Liability		11,467		7,408		18,875		16,515		19,422
Fire & allied		6,147		767		6,914		6,734		7,093
Assumed		4,442		4,135		8,577		7,326		9,851
Other		1,824		505		2,329		1,845		2,818
Total net reserves		60,430		28,397		88,827	$	81,841	$	92,886
Reinsurance recoverables		13,382		15,816		29,198
Gross reserves	$	73,812	$	44,213	$	118,025

As of December 31, 2008

							Actuarially Determined Range of Estimates
					Total
(dollars 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
(dollars 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 - -6% to +7%, with the ranges around each of our core lines of business (excluding Assumed and Other lines) ranging from the widest being -8% to +8% (Liability) to the narrowest being -3% to +3% (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 June 30, 2009 (dollars in thousands):

Reserve Range for Unpaid	Aggregate Loss and		Percentage Change (1)
Loss and LAE	LAE Reserve		in Equity
Low End	$	81,841		8.9	%
Recorded	$	88,827		—
High End	$	92,886		(5.2	)%

(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 $4.1 million. This increase in reserves would have the effect of decreasing net income and equity as of June 30, 2009 by $2.7 million. If the loss and LAE reserves were recorded at the low end of the actuarially-determined range, the loss and LAE reserves at June 30, 2009 would be reduced by $7.0 million with corresponding increases in net income and equity of $4.6 million.

     If the loss and LAE reserves were to adversely develop to the high end of the range, approximately $4.1 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 June 30, 2009, the commercial multi-peril line of business had recorded reserves, net of reinsurance, of $21.9 million, which represented 24.7% 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 June 30, 2009, our liability line of business had recorded reserves, net of reinsurance of $18.9 million, which represented 21.2% 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 4.7%, 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 June 30, 2009, our workers’ compensation line of business had recorded reserves, net of reinsurance,

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of $16.8 million, or 19.0% of our total net reserves. This reserve is $0.5 million, or 2.7%, 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 June 30, 2009, our commercial automobile liability line of business had recorded reserves, net of reinsurance, of $13.4 million, which represented 15.0% of our total net reserves. This reserve is $0.4 million, or 3.1%, 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 June 30, 2009, our fire and allied lines of business had recorded reserves, net of reinsurance, of $6.9 million, which represented 7.8% of our total net reserves. These lines of business comprise a substantial 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 June 30, 2009, our assumed lines of business had recorded reserves, net of reinsurance, of $8.6 million, which represented 9.7% of our total net reserves. This reserve is $0.3 million, or 3.6%, 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 June 30, 2009, December 31, 2008 and December 31, 2007 are as follows:

	Less than 12 months				12 months or longer				Total
	(dollars in thousands)				(dollars in thousands)				(dollars in thousands)
	Fair		Unrealized		Fair		Unrealized		Fair		Unrealized
Description of securities	value		losses		value		losses		value		losses
June 30, 2009:
U.S. Treasuries	$	493	$	16	$	—	$	—	$	493	$	16
Agencies not backed by the full faith and credit of the U.S. government		3,036		44		—		—		3,036		44
State and political subdivisions		555		2		2,655		65		3,210		67
Commercial Mortgage-backed securities		—		—		3,523		344		3,523		344
Residential Mortgage-backed securities		2,470		44		—		—		2,470		44
Corporate securities		3,637		89		8,444		826		12,081		915
Total fixed maturities		10,191		195		14,622		1,235		24,813		1,430
Total temporarily impaired securities	$	10,191	$	195	$	14,622	$	1,235	$	24,813	$	1,430

	Less than 12 months				12 months or longer				Total
	(dollars in thousands)				(dollars in thousands)				(dollars 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
Commercial 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
	(dollars in thousands)				(dollars in thousands)				(dollars 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
Commercial Mortgage-backed securities		497		—		3,161		36		3,658		36
Residential Mortgage-backed securities		—		—		5,989		83		5,989		83
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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     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 six months ended June 30, 2009, our fixed maturity portfolio had net unrealized gains of $2.0 million due to increases in fair values. Unrealized gains in corporate securities, 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 expected. 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. When assessing whether the amortized cost basis of the security will be recovered, we compare the present value of the cash flows likely to be collected, based on an evaluation of all available information relevant to the collectability of the security, to the amortized cost basis of the security. The shortfall of the present value of the cash flows expected to be collected in relation to the amortized cost basis is referred to as the “credit loss.” If there is a credit loss, the impairment is considered to be other-than-temporary. If we identify that an other-than-temporary impairment loss has occurred, we then determine whether we intend to sell the security, or if it is more likely than not that we will be required to sell the security prior to recovering the amortized cost basis less any current-period credit losses. If we determine that we do not intend to sell, and it is not more likely than not that we will be required to sell the security, the amount of the impairment loss related to the credit loss will be recorded in earnings, and the remaining portion of the other-than-temporary impairment loss will be recognized in other comprehensive income (loss), net of tax. If we determine that we intend to sell the security, or that it is more likely than not that we will be required to sell the security prior to recovering its amortized cost basis less any current-period credit losses, the full amount of the other-than-temporary impairment will be recognized in earnings.

     As of June 30, 2009, we determined that one security in our portfolio had sustained a loss from which it was unlikely to recover. In July 2009 we sold our entire holdings in this security, which resulted in a pre-tax other-than-temporary impairment loss as of June 30, 2009 of approximately $197,000.

     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. 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.

      Should the independent pricing service be unable to provide a fair value estimate, we would attempt to obtain a non-binding fair value estimate from a number of broker-dealers and review this estimate in conjunction with a fair value estimate reported by an independent business news service or other sources. In instances where only one broker-dealer provides a fair value for a fixed maturity security, we use that estimate. In instances where we are able to obtain fair value estimates from more than one broker-dealer, we would review the range of estimates and would select the most appropriate value based on the facts and circumstances. Should neither the independent pricing service nor a broker-dealer provide a fair value estimate, we would develop a fair value estimate based on cash flow analyses and other valuation techniques that utilize certain unobservable inputs. Accordingly, we would classify such a security as a Level 3 investment.

      The fair value estimates of our investments provided by the independent pricing service at June 30, 2009 and December 31, 2008, were utilized, among other resources, in reaching a conclusion as to the fair value of our investments. As of June 30, 2009, all but one instrument (which had an amortized cost of $200,000 and a fair value of $205,000) of our fixed maturity investments were priced using this one primary service. The independent pricing service was unable to price this recently-issued bond so we utilized a non-binding fair value estimate provided by an independent broker-dealer and evaluated the estimate through a review of business news sources and other information pertaining to the issuer and recent trading activity in the security. The independent pricing service began pricing the bond on August 5, 2009, and management also utilized this information in its evaluation of the reasonableness of the price used at June 30, 2009. For the years ended December 31, 2008 and 2007, the independent pricing service provided fair value estimates for all 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 six months ended June 30, 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 six months ended June 30, 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-31. 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 June 30, 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 June 30, 2009, and December 31, 2008, 2007 and 2006, deferred acquisition costs and the related unearned premium reserves were as follows (dollars in thousands):

	June 30,		December 31,
	2009		2008		2007		2006
Agribusiness segment
Deferred acquisition costs	$	5,533	$	5,981	$	6,429	$	6,252
Unearned premium reserves	$	24,274	$	27,352	$	27,552	$	26,686
Commercial business segment
Deferred acquisition costs	$	4,308	$	4,616	$	4,579	$	4,120
Unearned premium reserves	$	16,859	$	17,957	$	19,021	$	16,573
Other
Deferred acquisition costs	$	21	$	4	$	6	$	9
Unearned premium reserves	$	85	$	13	$	22	$	35
Total
Deferred acquisition costs	$	9,862	$	10,601	$	11,014	$	10,381
Unearned premium reserves	$	41,218	$	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 $9.8 million at June 30, 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 realized capital losses will not be realized. At June 30, 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 June 30, 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 June 30, 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-31.

     In connection with our public offering, in July 2009 our board of directors approved a resolution to freeze the future accrual of benefits under the Company’s defined benefit pension plan effective October 31, 2009. Our financial statements and our results of operations do not reflect the effects of this planned event. To the extent our pension plan is underfunded, we will continue to make contributions to the pension plan. Our pension plan was underfunded by $3.6 million as of December 31, 2008. The amount of our future contributions to the pension plan may vary and is subject to a number of factors, including, the performance of the pension plan’s investments, interest rates, and the ongoing determinations of the Internal Revenue Service in regard to pension plan funding requirements.

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 (dollars in thousands):

	Six Months Ended June 30,						Years Ended December 31,
	2009			2008			2008			2007			2006
Revenues:
Premiums earned:
Agribusiness	$	21,939		$	22,470		$	45,298		$	40,245		$	35,889
Commercial Business		14,403			16,060			31,805			29,260			26,761
Other		584			839			1,634			1,465			1,995
Total premiums earned		36,926			39,369			78,737			70,970			64,645
Investment income, net of investment expense		2,769			2,723			5,335			5,324			4,677
Realized investment gains (losses), net		(133	)		1,876			(5,819	)		(702	)		349
Other income		111			221			411			508			345
Total revenues	$	39,673		$	44,189		$	78,664		$	76,100		$	70,016
Components of net income (loss):
Underwriting (loss) income:
Agribusiness	$	(1,702	)	$	(961	)	$	313		$	441		$	2
Commercial Business		(145	)		(1,157	)		(5,046	)		(1,913	)		(678	)
Other		166			(238	)		288			(998	)		(1,106	)
Total underwriting (losses) income		(1,681	)		(2,356	)		(4,445	)		(2,470	)		(1,782	)
Investment income, net of investment expense		2,769			2,723			5,335			5,324			4,677
Realized investment gains (losses), net		(133	)		1,876			(5,819	)		(702	)		349
Other income		111			221			411			508			345
Corporate expense		(81	)		(295	)		(770	)		(506	)		(635	)
Interest expense		(156	)		(87	)		(184	)		(125	)		(222	)
Other expense, net		(90	)		(76	)		(365	)		(184	)		(314	)
Income (loss) from continuing operations, before income taxes		739			2,006			(5,837	)		1,845			2,418
Income tax expense (benefit)		107			494			(1,378	)		396			506
Income (loss) from continuing operations		632			1,512			(4,459	)		1,449			1,912
Discontinued Operations:
(Loss) income from discontinued operations, before income taxes		(12	)		(21	)		(3,090	)		(489	)		292
Income tax expense (benefit)		804			(7	)		(170	)		(126	)		124
(Loss) income on discontinued operations		(816	)		(14	)		(2,920	)		(363	)		168
Net income (loss)	$	(184	)	$	1,498		$	(7,379	)	$	1,086		$	2,080

     Premiums Written and Premiums Earned

     For the six months ended June 30, 2009, we had $36.9 million of premiums earned compared to $39.4 million of premiums earned for the six months ended June 30, 2008. The 6.2% decrease is primarily due to a decrease in our commercial business segment’s written premiums of $4.5 million, offset by an increase in written premiums in our agribusiness segment of $0.5 million. The decline of $4.5 million in direct premiums written in our commercial business segment is primarily attributable to our strategic decisions to withdraw from certain unprofitable classes of business and terminate relationships with several underperforming producers. The $0.5 million increase in direct premiums written in our agribusiness segment is due primarily to improved premium retention and the impact of recent price increases on certain lines of business.

     Ceded premiums earned were $9.7 million and $9.1 million for the six months ended June 30, 2009 and 2008, respectively. Ceded premiums earned increased $2.0 million primarily from increased reinsurance rates and a change in our reinsurance program for 2009, whereby we lowered our participation rate on our per-risk reinsurance treaty. Losses between $500,000 and $1.0 million are retained at 52.5% in 2009 versus our 75% retention rate in 2008. Losses between $1.0 million and $5.0 million are retained at 0% in 2009 versus our 25% retention rate in 2008. This increase in ceded premiums earned was partially offset by a $0.6 million decrease in ceded premiums earned under our aggregate stop loss reinsurance contract from a lower current year accident loss ratio in 2009 and a reinstatement premium credit of $0.6 million.

     The effect of reinsurance, with respect to premiums, for the six month periods ended June 30, 2009 and 2008 is as follows (dollars in thousands):

	For the six months ended June 30,
	2009						2008
	Written			Earned			Written			Earned
Direct	$	41,976		$	46,164		$	45,996		$	47,727
Assumed		514			440			781			697
Ceded		(9,106	)		(9,678	)		(8,798	)		(9,055	)
Net	$	33,384		$	36,926		$	37,979		$	39,369

     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):

	Six Months Ended June 30,						Year Ended December 31,
	2009			2008			2008			2007			2006
Average cash and invested assets	$	140,376		$	135,398		$	135,093		$	131,484		$	121,777
Net investment income		2,769			2,723			5,335			5,324			4,677
Return on average cash and invested assets (1)		4.0	%		4.1	%		3.9	%		4.0	%		3.8	%

(1) Return on average cash and invested assets for interim periods is calculated on an annualized basis.

      Net investment income increased $46,000 for the six months ended June 30, 2009 as compared to the six months ended June 30, 2008. The overall increase was primarily due to higher average balances in cash and invested assets, offset by declines in interest rates and lower dividend income.

      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 maturity investments.

     Realized Investment (Losses) Gains, Net

      We had net realized investment losses of $0.1 million for the six months ended June 30, 2009 compared to net realized investment gains of $1.9 million for the same period ended June 30, 2008. As of June 30, 2009, we determined that one security in our portfolio had sustained a loss from which it was unlikely to recover. In July 2009 we sold our entire holdings in this security which resulted in a pre-tax other-than-temporary impairment loss as of June 30, 2009 of approximately $197,000. The net realized gains in the six month period ended June 30, 2008 were primarily due to sales of equity securities made in connection with our transition from an actively managed portfolio to investments in indexed mutual funds.

     On April 9, 2009, the FASB issued FASB Staff Position (FSP) FSP No. FAS 115-2 and FAS 124-2. Prior to the issuance of FSP FAS 115-2 and FAS 124-2, in order for us to conclude that a debt security was not other-than-temporarily impaired, we were required to assert that we had both the intent and ability to hold the security for a period of time sufficient to allow for any anticipated recovery in fair value in accordance with Securities and Exchange Commission Staff Accounting Bulletin Topic 5M. “Other than Temporary Impairment of Certain Investments in Debt and Equity Securities.” and other authoritative literature. FSP No. FAS 115-2 and 124-2 stipulates that we should assess whether we (a) have the intent to sell the debt security, or (b) it is more likely than not that we will be required to sell the security before its anticipated recovery. The FSP also modifies the trigger used to assess the collectability of cash flows from probable that we will be unable to collect all amounts due, to one where it is more likely than not that we cannot recover the entire amortized cost basis of the security. If the present value of the cash flows expected to be collected is less than the amortized cost basis of the security an other-than-temporary impairment is deemed to have occurred. We adopted the provisions of FSP No. 115-2 and 124-2 for the quarter ended June 30, 2009. With respect to a cumulative-effect transition adjustment upon adoption of FSP No. 115-2 and 124-2, the adoption of this FSP had no impact on our financial position since none of the securities in our portfolio at April 1, 2009 had previously been other-than-temporarily impaired.

      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.

     Our fixed maturity 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 June 30, 2009 and December 31, 2008, we had gross unrealized losses on fixed maturity securities of $1.4 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 foregoing declines in fair value in our existing portfolio are most likely attributable to the current market dislocation and there is no evidence that we will not recover the entire amortized cost basis. With regard to the corporate bond that we categorized as other-than-temporarily impaired as of June 30, 2009, the amount of unrealized losses pertaining to this security as of December 31, 2008 was $130,000.

     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 six months ended June 30, 2009 as compared to the six months ended June 30, 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 70.0% for the six months ended June 30, 2009, compared to 72.9% for the six months ended June 30, 2008. Loss and LAE was $25.9 million and $28.7 million for the six months ended June 30, 2009 and 2008, respectively. The decrease in loss and LAE in 2009 as compared to 2008 is primarily due to a lower level of new claim activity across most lines of business of $3.8 million. This lower level of claim activity included lower catastrophe losses of $2.2 million in 2009 compared to 2008. A lower level of favorable prior year development in 2009 versus 2008 partially offset the favorable effect of the decline in current accident year losses. The favorable impact on the loss and LAE ratio from lower loss and LAE was offset by lower earned premiums of $2.4 million, due mostly to the reduction in net premiums written.

     The net favorable development of $1.3 million for the six months ended June 30, 2009 was primarily attributable to favorable loss development in the fire and allied (approximately $0.9 million) and commercial multi-peril (approximately $0.2 million) lines. The fire and allied lines development was the result of favorable settlements on prior years’ claims and the commercial multi-peril development was attributable to lower level emergence of incurred losses, relative to expectations, for the 2006 accident year.

     The net favorable development of $2.3 million for the six months ended June 30, 2008 was primarily attributable to the favorable loss development trends experienced in the fire and allied (approximately $1.2 million), workers’ compensation (approximately $0.9 million), and commercial auto liability (approximately $0.4 million) lines of business throughout 2008. The factors contributing to this net favorable development are described in more detail in the discussion of 2008 loss and LAE that follows.

     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. Total underwriting and administrative expenses, including amortization of deferred policy acquisition costs, was $12.8 million for the six months ended June 30, 2009 and $13.3 million for the six months ended June 30, 2008. Amortization of deferred policy acquisition costs decreased $0.6 million for the six months ended June 30, 2009 as compared to the same period in 2008, as a result of the previously described decrease in earned premiums. Underwriting and administrative expenses increased $62,000 primarily from increased compliance costs in preparing to become a public company.

     The underwriting expense ratio increased from 33.1% for the six months ended June 30, 2008 to 34.5% for the same period in 2009. This increase was due primarily to the decrease in earned premiums 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 six months ended June 30, 2009 was $156,000 as compared to $87,000 in 2008. The increase of $69,000 is primarily due to increased interest expense on our aggregate stop loss reinsurance contract.

     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 increased in 2008, primarily due to increased write-offs and aging of receivables. Other expense increased from $76,000 at June 30, 2008 to $90,000 at June 30, 2009. The increase of $14,000 is due primarily to increased write-offs and aging of receivables.

     Income (Loss) from Continuing Operations, Before Income Taxes

     For the six months ended June 30, 2009, we had pre-tax income from continuing operations of $0.7 million compared to pre-tax income of $2.0 million for the six months ended June 30, 2008. This decrease was primarily attributable to realized gains of $1.9 million in 2008 from sales of investments and a $2.4 million decrease in net premiums earned, which were partially offset by decreased loss and LAE of $2.8 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 six months ended June 30, 2009, income tax expense for continuing operations was $107,000, or an effective rate of 14.5%, as compared to $494,000 of income tax expense, or an effective rate of 24.6% for the six month period ended June 30, 2008. The decrease in the effective rate is primarily 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 completed in July 2008, and the sale of the net assets of Eastern Insurance Group was completed in February 2009. For the six months ended June 30, 2009, the net loss from discontinued operations of $816,000 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 (Loss) Income

     For the six months ended June 30, 2009, we had a net loss of $184,000 compared to net income of $1,498,000 for the six months ended June 30, 2008. The decrease of $1.7 million is primarily due to a decline in realized investment gains of $2.0 million; a $2.4 million decrease in net premiums earned; and a net loss on discontinued operations of $0.8 million. These declines were partially offset by lower loss and LAE of $2.8 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:

	Six Months Ended June 30,						Years Ended December 31,
Dollars in thousands	2009			2008			2008			2007			2006
Direct premiums written	$	25,688		$	25,190		$	57,281		$	55,965		$	51,874
Net premiums written		19,354			19,472			45,110			41,402			38,350
Revenues:
Net premiums earned	$	21,939		$	22,470		$	45,298		$	40,245		$	35,889
Other income		12			98			182			245			115
Total revenues(1)	$	21,951		$	22,568		$	45,480		$	40,490		$	36,004
Operating income (loss):
Underwriting income (loss)	$	(1,702	)	$	(961	)	$	313		$	441		$	2
Other income		12			98			182			245			115
Interest & other expenses		(87	)		(43	)		(202	)		(77	)		(150	)
Total operating income (loss)(1)	$	(1,777	)	$	(906	)	$	293		$	609		$	(33	)
Loss and loss expense ratio		75.5	%		72.7	%		68.7	%		67.9	%		66.3	%
Underwriting expense ratio		32.3	%		31.6	%		30.6	%		31.0	%		33.7	%
GAAP combined ratio		107.8	%		104.3	%		99.3	%		98.9	%		100.0	%

(1) Revenues exclude net realized investment gains (losses) and net investment income. Operating income (loss) equals pre-tax 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 2008 and 2009. Direct premiums written increased from $25.2 million for the six months ended June 30, 2008 to $25.7 million for the six months ended June 30, 2009. This $0.5 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 $0.6 million or 10.8%. This increase in ceded premiums written offset the $0.5 million growth in direct premiums written. Net premiums earned declined from $22.5 million at June 30, 2008 to $21.9 million at June 30, 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 $86,000 in other income for the six months ended June 30, 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

     Our agribusiness segment incurred $16.6 million of loss and LAE for the six months ended June 30, 2009 as compared to $16.3 million of loss and LAE for the six months ended June 30, 2008. The increase of $0.3 million is due to a decrease in the amount of favorable prior year development in 2009 as compared to 2008 of $1.5 million, partially offset by $1.3 million of lower incurred losses on the current accident year due to a decrease in new claim activity in 2009, including lower catastrophe losses. The decrease in net premiums earned of $0.5 million together with the increase in loss and LAE resulted in the loss and loss adjustment expense ratio increasing from 72.7% for the six months ended June 30, 2008 to 75.5% for the six months ended June 30, 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 $7.1 million for each of the six month periods ending June 30, 2009 and 2008, respectively. Relatively flat underwriting expenses combined with the decline in net premiums earned resulted in our underwriting expense ratio increasing from 31.6% for the six months ended June 30, 2008 to 32.3% for the six months ended June 30, 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 104.3% for the six months ended June 30, 2008 to 107.8% for the six months ended June 30, 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 six months ended June 30, 2009 was $87,000 as compared to $43,000 for the six months ended June 30, 2008. The increase is due primarily to interest expense on our aggregate stop loss reinsurance contract and increased uncollectible premium write-offs and aging of receivables.

     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:

	Six Months Ended June 30,						Years Ended December 31,
Dollars in thousands	2009			2008			2008			2007			2006
Direct premiums written	$	16,144		$	20,664		$	37,458		$	37,860		$	32,365
Net premiums written		13,373			17,585			30,632			31,266			27,144
Revenues:
Net premiums earned	$	14,403		$	16,060		$	31,805		$	29,260		$	26,761
Other income		99			122			229			263			230
Total revenues (1)	$	14,502		$	16,182		$	32,034		$	29,523		$	26,991
Operating income (loss):
Underwriting income (loss)	$	(145	)	$	(1,157	)	$	(5,046	)	$	(1,913	)	$	(678	)
Other income		99			122			229			263			230
Interest & other expenses		(103	)		(72	)		(247	)		(113	)		(257	)
Operating income (loss)  (1)	$	(149	)	$	(1,107	)	$	(5,064	)	$	(1,763	)	$	(705	)
Loss and loss expense ratio		63.4	%		72.0	%		80.1	%		70.3	%		65.5	%
Underwriting expense ratio		37.6	%		35.2	%		35.8	%		36.2	%		37.0	%
GAAP Combined ratio		101.0	%		107.2	%		115.9	%		106.5	%		102.5	%

(1) Revenues exclude net realized investment gains (losses) and net investment income. Operating income (loss) equals pre-tax 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 $20.7 million for the six months ended June 30, 2008 to $16.1 million for the six months ended June 30, 2009. This decline of $4.5 million is primarily attributable to our strategic decisions to withdraw from certain unprofitable classes of business and terminate relationships with several underperforming producers.

      The decline in direct premiums written in 2008 and 2009 contributed to the $1.7 million decrease in net premiums earned from $16.1 million for the six months ended June 30, 2008 to $14.4 million for the six months ended June 30, 2009.

     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 six months ended June 30, 2009 as compared to the same period of 2008 of $23,000 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

      Our commercial business segment incurred $9.1 million of loss and LAE for the six month period ended June 30, 2009 as compared to $11.6 million for the same period in 2008. The $2.5 million decrease is due to $2.1 million of lower current year losses compared to 2008 because of decreases in new claim volume, and a higher level of favorable development on prior year losses of $0.3 million as compared to 2008. This decrease in loss and loss adjustment expenses relative to the smaller decrease in net premiums earned was responsible for the loss and LAE ratio declining from 72.0% for the six months ended June 30, 2008 to 63.4% for the six months ended June 30, 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 $5.4 million and $5.7 million for the six months ended June 30, 2009 and 2008, respectively. This decrease is primarily due to the reduction in our net premiums earned. Slightly lower underwriting expenses combined with a steeper decline in net premiums earned resulted in the underwriting expense ratio increasing from 35.2% for the first six months of 2008 to 37.6% 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 107.2% for the six months ended June 30, 2008 to 101.0% for the six months ended June 30, 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 six months ended June 30, 2009 was $103,000 as compared to $72,000 for the six months ended June 30, 2008. The increase is due primarily to interest expense on our aggregate stop loss reinsurance contract and increased aging of receivables and uncollectible premium write-offs.

     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:

	Six Months Ended June 30,						Years Ended December 31,
Dollars in thousands	2009			2008			2008			2007			2006
Assumed premiums written	$	657		$	922		$	1,625		$	1,451		$	2,031
Net premiums written		657			922			1,625			1,451			2,031
Revenues:
Net premiums earned	$	584		$	839		$	1,634		$	1,465		$	1,995
Total revenues	$	584		$	839		$	1,634		$	1,465		$	1,995
Underwriting income (loss)	$	166		$	(238	)	$	288		$	(998	)	$	(1,106	)
Operating income (loss)	$	166		$	(238	)	$	288		$	(998	)	$	(1,106	)
Loss and loss expense ratio		28.9	%		94.0	%		47.3	%		129.7	%		122.3	%
Underwriting expense ratio		42.6	%		34.3	%		35.1	%		38.4	%		33.1	%
GAAP Combined ratio		71.5	%		128.3	%		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 six months ended June 30, 2009 net premiums earned were $657,000 as compared to $922,000 for the six months ended June 30, 2008. Our total losses and expenses were $3.1 million in 2006, $2.5 million in 2007, and $1.3 million in 2008. For the six months ended June 30, 2009, losses and expenses were $418,000, compared to $1,077,000 for the six months ended June 30, 2008. The decrease is primarily due to the mandatory pools experiencing lower loss ratios for recent accident years and a lower level of adverse development in the voluntary 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 (dollars 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 six months ended June 30, 2009 the other segment produced operating income of $166,000, compared to an operating loss for the six months ended June 30, 2008 of $238,000. 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:

	Six Months Ended June 30,						Years Ended December 31,
Dollars in thousands	2009			2008			2008			2007			2006
Mandatory Assumed Reinsurance	$	221		$	(245	)	$	239		$	95		$	(332	)
Personal Lines — runoff		(6	)		126			335			(94	)		(98	)
Voluntary Assumed Reinsurance — runoff		(49	)		(119	)		(286	)		(999	)		(676	)
Operating income (loss)	$	166		$	(238	)	$	288		$	(998	)	$	(1,106	)

Financial Position

     At June 30, 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 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 June 30, 2009, we had total liabilities of $176.4 million, compared to $169.8 million at December 31, 2008. The increase is primarily due to an increase in loss and LAE reserves of $10.0 million, partly offset by a decline in unearned premiums of $4.1 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 $52.0 million at June 30, 2009. The increase is primarily due to net unrealized gains on fixed maturity investments of $1.3 million.

     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 $89.2 million and $109.3 million, an increase of approximately 71.8% to 110.4% over our equity at June 30, 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, 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 and stock-settled restricted stock unit 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 grant-date fair value of any common stock used for restricted stock and restricted stock unit 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 June 30, 2009 and as of December 31, 2008, we had a loan outstanding with a commercial bank in the amount of $1.3 million and $1.4 million, respectively which was due to mature in July 2010. The interest rate on the loan was based on the one month London Interbank Offered Rate (LIBOR) plus 105 basis points. We entered into an interest rate swap that fixed the interest rate at 5.55%. This loan was used for the acquisition of insurance agencies.

     In addition, we maintain two unsecured lines of credit with a commercial bank in the amount of $500,000 and $2.0 million, which allowed us to meet our short term cash needs as they arose. As of June 30, 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 were obligated to pay interest on the $500,000 line of credit, which was scheduled to expire on June 30, 2010, at a rate equal to LIBOR plus 105 basis points. The $2.0 million line of credit carried an interest rate of LIBOR plus 211 basis points and expired on July 31, 2009. Our credit agreements for these unsecured lines of credit are subject to certain covenants and restrictions, including limitations on additional borrowing, encumbrances, and sales of assets. The covenants in these agreements included the maintenance of various amounts and ratios, including debt to capital, risk based capital, combined financial debt service, and net premiums written to statutory capital and surplus ratios. We were in compliance with these covenants at December 31, 2008 and June 30, 2009.

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     On July 22, 2009, we consolidated our long-term loan and lines of credit by entering into a new, four year $3.0 million revolving line of credit with a commercial bank. On August 3, 2009, $1.8 million of this new line of credit and cash from operations of $1.1 million was used to pay off the long-term loan amount of $1,251,000 of principal and interest which was outstanding, and our two existing lines of credit, at an aggregate amount of principal and interest of $1,683,000. The interest rate swap tied to the loan was terminated, resulting in a pre-tax loss of $47,000. As of June 30, 2009, a loss of $53,000 was accrued based on the fair value of the interest rate swap.

     The new $3.0 million line of credit will require monthly payments of accrued interest, with principal due no later than the maturity of the loan agreement, which will be on July 22, 2013. 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. In addition, we will be charged an unused line fee on the available and unused borrowing capacity under this line of credit. This unused line fee will be 12.5 basis points for the first year of the line of credit, 25 basis points for the second year of the line of credit, and 37.5 basis points for each of the third and fourth years of the line of credit. This credit agreement includes certain covenants and restrictions, including limitations on additional borrowing, encumbrances, and sales of assets. The financial covenants that the Company must meet include debt to capital, risk based capital, debt service, and net premiums written to statutory capital and surplus ratios.

     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 six months ended June 30, 2009 and 2008 and years ended December 31, 2008, 2007, and 2006 were as follows (dollars in thousands):

	Six Months Ended June 30,						Year Ended December 31,
	2009			2008			2008			2007			2006
Cash flows provided by operating activities	$	9,386		$	2,550		$	7,383		$	11,017		$	11,711
Cash flows used in investing activities		(8,689	)		(6,144	)		(5,702	)		(13,373	)		(6,592	)
Cash flows provided by (used in) financing activities		(561	)		(157	)		144			(562	)		(2,087	)
Net increase (decrease) in cash and cash equivalents	$	136		$	(3,751	)	$	1,825		$	(2,918	)	$	3,032

      Cash flows from operating activities increased by $6.8 million for the six month period ended June 30, 2009 compared to the six month period ended June 30, 2008. 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 $8.7 million and $6.1 million of net cash for the six months ended June 30, 2009 and 2008, respectively. For the first six months of 2009, net purchases of investments classified as available for sale were $11.2 million, as compared to $5.9 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 six months ended June 30, 2009 include $1.1 million 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 in the first quarter of 2009.

     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 was 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 maturity 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
	(dollars 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 June 30, 2009, was 4.6 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 June 30, 2009:

Hypothetical Change in	Estimated Change
Interest Rates	in Fair Value			Fair Value
	(dollars in thousands)
200 basis point increase	$	(10,285	)	$	124,498
100 basis point increase		(5,071	)		129,712
No change		—			134,783
100 basis point decrease		4,748			139,531
200 basis point decrease		9,614			144,397

     The interest rate risk for our variable rate debt not subject to the interest rate swap is not material at June 30, 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 June 30, 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.

     During the second quarter of 2009, we discovered an error in the accrual of ceded premiums for the 2009 accident year under the aggregate stop loss contract in effect for 2008 and 2009. Our March 31, 2009 financial statements have been corrected to reflect the increase in ceded premiums. Pursuant to SAB No. 108, it was determined that the misstatements were not material to the financial statements issued as of and for the three months ended March 31, 2009. The effect on our March 31, 2009 financial statements is illustrated in note 18 in the Notes to the Consolidated Interim Financial Statements on page F-29.

     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 June 30, 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 outlined in SFAS 162 was not expected to change current practice but facilitated the FASB’s 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 was effective for interim and annual periods ending after June 15, 2009. Our adoption of FSP FAS 157-4 on April 1, 2009, had no 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 was effective for interim and annual periods ending after June 15, 2009. Our adoption of FSP FAS 115-2 and FAS 124-2 on April 1, 2009, did not 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 requires 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 was effective for interim and annual periods ending after June 15, 2009. We adopted FSP FAS 107-1 and APB 28-1 on April 1, 2009, and we have complied 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 have complied with the provisions of this Statement.

     In June 2009, the FASB issued SFAS No. 168, The FASB Accounting Standards Codification ä and the Hierarchy of Generally Accepted Accounting Principles—a replacement of FASB Statement No. 162. On the effective date of this Standard, FASB Accounting Standards Codificationä (ASC) will become the source of authoritative U.S. accounting and reporting standards for nongovernmental entities, in addition to guidance issued by the SEC. FASB ASC significantly changes the way financial statement preparers, auditors, and academics perform accounting research. This Statement is effective for financial statements issued for interim and annual periods ending after September 15, 2009. This new standard flattens the GAAP hierarchy to two levels: one that is authoritative (in FASB ASC) and one that is non-authoritative (not in FASB ASC). We will begin to use the new guidelines and numbering system prescribed by the Codification referring to GAAP in the third quarter of fiscal 2009. As the Codification was not intended to change or alter existing GAAP, we anticipate that the adoption of this Standard will not have any impact on our financial position or results of operations.

     All other Standards and Interpretations of those Standards issued during the six months ended June 30, 2009 did not relate to accounting policies and procedures applicable to us at this time.

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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 an “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. The Pennsylvania Insurance Department has approved our plan 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 Six Months Ended June 30,						For the Years Ended December 31,
	2009			2008			2008			2007			2006
Direct Premiums Written:
Property	$	9,492		$	9,203		$	20,831		$	20,263		$	18,961
Commercial Auto		5,481			5,710			12,919			14,055			13,334
Liability		4,955			4,438			9,615			8,635			8,029
Workers’ Compensation		3,443			3,380			8,064			7,394			6,610
Other		2,317			2,459			5,852			5,618			4,940
Total	$	25,688		$	25,190		$	57,281		$	55,965		$	51,874
Net Premiums Earned:
Property	$	7,933		$	8,055		$	16,412		$	13,772		$	12,620
Commercial Auto		5,543			6,078			12,119			11,859			11,189
Liability		4,593			4,341			8,795			7,540			6,768
Workers’ Compensation		3,536			3,667			7,310			6,394			5,166
Other		334			329			662			680			146
Total	$	21,939		$	22,470		$	45,298		$	40,245		$	35,889
Net Loss Ratios:
Property		100.6	%		108.8	%		86.1	%		84.9	%		60.4	%
Commercial Auto		71.6	%		41.7	%		41.9	%		48.5	%		62.7	%
Liability		52.8	%		61.3	%		90.1	%		102.6	%		46.4	%
Workers’ Compensation		59.6	%		65.0	%		51.4	%		54.2	%		113.8	%
Other		23.4	%		0.0	%		37.7	%		(196.2	)%		92.0	%
Total		75.5	%		72.7	%		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 June 30, 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 June 30, 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 June 30, 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 June 30, 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 Six Months Ended June 30,						For the Years Ended December 31,
	2009			2008			2008			2007			2006
Direct Premiums Written:
Property & Liability	$	8,771		$	11,625		$	21,056		$	22,474		$	20,567
Workers’ Compensation		3,156			4,382			8,031			7,716			5,825
Commercial Auto		2,578			2,875			5,068			4,914			3,983
Other		1,639			1,782			3,303			2,756			1,990
Total	$	16,144		$	20,664		$	37,458		$	37,860		$	32,365
Net Premiums Earned:
Property & Liability	$	8,878		$	9,934		$	19,428		$	18,301		$	18,076
Workers’ Compensation		3,105			3,694			7,451			6,524			5,077
Commercial Auto		2,271			2,303			4,659			4,194			3,564
Other		149			129			267			241			44
Total	$	14,403		$	16,060		$	31,805		$	29,260		$	26,761
Net Loss Ratios:
Property & Liability		56.0	%		81.7	%		99.0	%		87.0	%		59.9	%
Workers’ Compensation		91.4	%		39.7	%		54.5	%		37.1	%		74.0	%
Commercial Auto		63.9	%		83.6	%		45.9	%		54.9	%		78.2	%
Other		(88.8	)%		41.1	%		17.2	%		(35.3	)%		359.3	%
Total		63.4	%		72.0	%		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 June 30, 2009, our commercial business segment had approximately 4,900 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 June 30, 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 June 30, 2009, our commercial business segment had approximately 900 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 six months ended June 30, 2009, we ceded to reinsurers $9.1 million of written premiums as compared to $8.8 million of written premiums for the six months ended June 30, 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) and the current A.M. Best Rating of each as of July 31, 2009:

	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 $2.7 million at June 30, 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.

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     The following table provides a reconciliation of beginning and ending unpaid losses and LAE reserve balances of Penn Millers for the six month periods ended June 30, 2009 and 2008, and the years ended December 31, 2008, 2007 and 2006, prepared in accordance with GAAP.

	Six Months Ended June 30,						Years Ended December 31,
	2009			2008			2008			2007			2006
	(dollars in thousands)						(dollars 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	$	27,193		$	30,997		$	62,612		$	54,421		$	43,785
Prior years		(1,327	)		(2,305	)		(5,222	)		(4,638	)		(19	)
Total incurred loss and LAE		25,866			28,692			57,390			49,783			43,766
Less loss and LAE paid, net:
Current year	$	7,769		$	8,673		$	26,578		$	22,191		$	14,222
Prior years		14,710			14,555			22,601			19,679			21,260
Total loss and LAE expenses paid		22,479			23,228			49,179			41,870			35,482
Net liability for unpaid loss and LAE, at end of period	$	88,827		$	82,693		$	85,440		$	77,229		$	69,316
Reinsurance recoverable on unpaid losses and LAE		29,198			21,896			22,625			18,727			20,089
Reserve for unpaid losses and LAE at end of period	$	118,025		$	104,589		$	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
	(dollars 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
	(dollars 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) managing 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 (dollars in thousands).

	At June 30,				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	$	16,995	$	17,703	$	14,929	$	16,089	$	18,523	$	18,888
U.S. treasury securities		7,801		8,041		8,530		9,310		7,837		8,096
States, Territories and possessions		15,182		16,017		15,753		16,475		15,310		15,771
Special Revenue		16,472		17,146		16,022		16,482		15,011		15,363
Public Utilities		5,037		5,226		5,419		5,396		2,516		2,580
Industrial and Miscellaneous		43,487		43,905		34,511		32,857		31,337		31,545
Commercial Mortgage-Backed		4,428		4,090		4,600		3,932		4,816		4,838
Residential Mortgage-Backed		21,995		22,655		20,774		21,373		15,623		15,688
Total Debt Securities		131,397		134,783		120,538		121,914		110,973		112,769
Equity Securities		—		—		—		—		10,525		13,409
Total	$	131,397	$	134,783	$	120,538	$	121,914	$	121,498	$	126,178

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     The following table summarizes the distribution of our portfolio of fixed maturity investments as a percentage of total estimated fair value based on credit ratings assigned by Standard & Poor’s Corporation (S&P) at June 30, 2009 and at December 31, 2008 (dollars in thousands).

	June 30, 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	$	17,703		13.1	%	$	16,089		13.2	%
U.S. treasury securities		8,041		6.0	%		9,310		7.6	%
AAA		45,426		33.7	%		44,452		36.5	%
AA		22,777		16.9	%		17,866		14.7	%
A		33,498		24.9	%		29,409		24.1	%
BBB		6,582		4.9	%		4,788		3.9	%
BB		756		0.5	%		—		0.0	%
Total	$	134,783		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 June 30, 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 (dollars in thousands).

	June 30, 2009				December 31, 2008
	Amortized Cost		Estimated Fair Value (1)		Amortized Cost		Estimated Fair Value (1)
Less than one year	$	8,431	$	8,570	$	8,321	$	8,439
One though five years		49,238		51,078		42,747		43,356
Five through ten years		40,362		41,262		39,299		39,824
Greater than ten years		6,943		7,128		4,797		4,990
Commercial Mortgage-Backed (2)		4,428		4,090		4,600		3,932
Residential Mortgaged-Backed (2)		21,995		22,655		20,774		21,373
Total debt securities	$	131,397	$	134,783	$	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 June 30, 2009, the average maturity of our mortgage-backed securities was 3.6 years and the average effective duration was 3.1 years. The average maturity of our fixed maturity investment portfolio, excluding mortgage-backed securities, was 4.8 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 June 30, 2009, December 31, 2008 and December 31, 2007 (dollars in thousands).

	June 30, 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 RMBS	$	22,655		AAA	$	21,373	AAA		$	15,688	AAA
Non-Agency RMBS		—		—		—		—		—		—
Prime First Lien		—		—		—		—		—		—
Prime Second Lien		—		—		—		—		—		—
Alt-A Loans		—		—		—		—		—		—
Subprime Loans	—			—		—		—		—		—
Total	$	22,655		—	$	21,373		—	$	15,688		—

     At June 30, 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 maturity securities. After performing a detailed review of the information obtained from the pricing service, no adjustment was made to the values provided.

     At June 30, 2009 and December 31, 2008 approximately 17% 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)
	June 30, 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	$	22,438	AA+	$	22,864	AA+		$	23,258	AAA

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     The following table sets forth information with respect to the fair value at June 30, 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).

	Fair Value at		Fair Value at		Fair Value at
Insurer	June 30, 2009		December 31, 2008		December 31, 2007
AMBAC	$	3,286	$	3,259	$	3,274
FGIC		5,483		2,772		2,735
FSA		8,827		8,829		8,730
MBIA		4,842		8,004		8,519
Total	$	22,438	$	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 June 30, 2009 and with the guarantee at December 31, 2008 and 2007 (dollars in thousands).

	At June 30, 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	$	8,840	$	1,100	$	8,832	$	23,258
AA		11,423		15,964		11,868		—
A		2,175		5,374		2,164		—
Total	$	22,438	$	22,438	$	22,864	$	23,258

     Our average cash and invested assets, net investment income and return on average cash and invested assets for the six months ended June 30, 2009 and 2008, and for the years ended December 31, 2008, 2007 and 2006 were as follows (dollars in thousands):

	Six Months Ended June 30,						Year Ended December 31,
	2009			2008			2008			2007			2006
Average cash and invested assets	$	140,376		$	135,398		$	135,093		$	131,484		$	121,777
Net investment income		2,769			2,723			5,335			5,324			4,677
Return on average cash and invested assets (1)		4.0	%		4.1	%		3.9	%		4.0	%		3.8	%

(1) Return on average cash and invested assets for interim periods is calculated on an annualized basis.

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 July 31, 2009, we had 111 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 were required to obtain the approval of the Pennsylvania Insurance Commissioner prior to effecting a conversion of Penn Millers Mutual, which we received on August 19, 2009. 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.

     Upon the conversion, all of the outstanding common stock shares of the converted Penn Millers Mutual will be issued to Penn Millers Holding Corporation, and Penn Millers Mutual will then 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 and the issuance of all its outstanding common stock shares, Penn Millers Mutual will be a stock holding company and wholly owned subsidiary of Penn Millers Holding Corporation. 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 August 7, 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 six months ended June 30, 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 June 30, 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		76,288		62,937		37.2		-3.2		-8.1
Baldwin & Lyons, Inc.		765,742		345,853		176,997		45.2		1.3		3.0
CRM Holdings, Ltd.		452,951		101,677		134,533		22.4		-3.5		-13.5
Donegal Group Inc.		893,824		371,328		378,831		41.5		1.9		4.7
Eastern Insurance Holdings, Inc.		385,487		137,234		129,820		35.6		-5.4		-13.5
EMC Insurance Group Inc.		1,142,746		307,348		405,255		26.9		0.3		1.3
First Mercury Financial Corporation		1,045,694		286,838		251,615		27.4		2.4		8.5
Hallmark Financial Services, Inc.		551,279		190,555		267,758		34.6		2.3		6.5
Mercer Insurance Group, Inc.		580,809		148,430		155,403		25.6		1.6		6.5
National Interstate Corporation		969,243		243,547		295,525		25.1		2.2		9.8
National Security Group, Inc.		125,054		35,045		59,538		28.0		-3.4		-11.5
NYMAGIC, INC.		977,190		187,572		107,837		19.2		-7.1		-28.4
SeaBright Insurance Holdings, Inc.		911,125		341,811		275,243		37.5		2.4		6.3
Unico American Corporation		182,340		76,226		45,089		41.8		2.9		7.3
Comparative Group Mean		656,297		203,549		196,170		32.0		-0.4		-1.5
Comparative Group Median		673,276		189,064		166,200		31.3		1.4		3.9
Penn Millers		228,385		51,972		74,148		22.8		-2.4		-9.6

(1) LTM corresponds to last twelve months ended June 30, 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 June 30, 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 August 7, 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		37,345		49.0		49.0	Neg			0.59		18.2
Baldwin & Lyons, Inc.		311,288		89.8		89.8		29.69		1.75		40.6
CRM Holdings, Ltd.		18,280		18.1		18.7	Neg			0.14		4.1
Donegal Group Inc.		401,238		108.1		108.1		23.16		1.06		44.9
Eastern Insurance Holdings, Inc.		89,946		65.0		75.8	Neg			0.69		23.1
EMC Insurance Group Inc.		305,750		99.5		99.8	74.52			0.75		26.8
First Mercury Financial Corporation		223,907		78.1		100.3		9.85		0.89		21.4
Hallmark Financial Services, Inc.		139,640		73.3		115.2		11.53		0.52		25.3
Mercer Insurance Group, Inc.		116,521		78.5		81.5		12.85		0.75		20.1
National Interstate Corporation		359,109		147.4		147.4		16.71		1.22		37.1
National Security Group, Inc.		20,966		59.8		59.8	Neg			0.35		16.8
NYMAGIC, INC.		158,873		84.7		84.7	Neg			1.47		16.3
SeaBright Insurance Holdings, Inc.		210,058		61.5		62.4		10.33		0.76		23.1
Unico American Corporation		45,137		59.2		59.2		8.47		1.00		24.8
Comparative Group Mean		174,147		76.6		82.3		21.90		0.85		24.5
Comparative Group Median		149,256		75.7		83.1		12.85		0.76		23.1
Penn Millers (Fully Converted)
Pro Forma Minimum		45,050		50.5		50.5	Neg			0.60		17.0
Pro Forma Midpoint		53,000		55.0		55.0	Neg			0.70		19.4
Pro Forma Maximum		60,950		59.0		59.0	Neg			0.80		21.8

(1) LTM EPS corresponds to earnings per share for the last twelve months ended June 30, 2009. LTM revenue corresponds to total revenue for the last twelve months ended June 30, 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 August 7, 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 August 7, 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 at our offices or mailed to the Stock Information Center at P.O. Box 9800, 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 1-877-764-2743, Monday through Friday from 10:00 a.m. to 4:00 p.m., Eastern Time or write to us at Penn Millers Holding Corporation, P.O. Box 9800, Wilkes-Barre, Pennsylvania 18773. The Stock Information Center will be closed on weekends and bank holidays. Our Stock Information Center is located at our offices 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 $100,000 shall be deemed payable to Stevens & Lee for services as Griffin’s underwriters’ counsel. However, this $100,000 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.

      In the event of a syndicated offering , a syndicate of broker-dealers co-managed by Griffin Financial and Sterne Agee will be formed for purposes of completing the syndicated offering, with Sterne Agee acting as sole book running manager. We have agreed to pay our best efforts underwriters a fee of 5.5% of the aggregate dollar amount of stock sold in the syndicated offering. Of this amount, and in consideration of its role as sole book running manager in the syndicated offering, Sterne Agee will be paid 4.75% of the aggregate dollar amount of stock sold in the syndicated offering and Griffin will be paid 0.75% of the dollar amount of stock sold in the syndicated offering.

     In addition, all fees and commissions payable to Stevens & Lee, Griffin Financial, and Sterne Agee (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		20,000		2,000		*
Kevin Higgins		25,000		2,500		*
Joseph Survilla		10,000		1,000		*
All Directors and Executive Officers as a Group (16 persons)	$	1,275,000		127,500		2.83	%

*	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 upon 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 Tax 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, our chairman, has reached the age of 75 and, therefore, will not be eligible to stand for reelection when his term expires in 2012. Currently, the board of directors anticipates naming Mr. Ackerman, our Vice Chairman, Mr. Sproul’s successor. At this time, the board of directors, has not identified a successor for the Vice Chairman position and may chose to leave this position vacant.

     The following table sets forth certain information regarding our current directors.

	Age at August 18,
	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.		75		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 Chief Executive Officer and 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. Since November 2003, she has worked 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 and restricted stock unit 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 and Mr. Pizer each are 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 Committee. The Governance 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 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, age 43, 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 stock and restricted stock unit 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 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, and William A. Dine, Sr., our Vice President of Commercial Business, and Joseph J. Survilla, our Vice President of Agribusiness Marketing.

     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 for the 2008 calendar year was calculated based on achieving certain operating income targets established on a segment or company-wide basis. For 2009, bonus targets were established on a 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.

     Under the Success Sharing Bonus Plan, payouts of bonuses are conditioned on Penn Millers Insurance Company first meeting its operating income goals. We believe our operating income targets have a direct impact on our executives’ performance and the achievement of our strategic 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
Eastern Insurance Group, Inc.	$	351,000	$	454,000	$	620,000

(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. As a result of Mr. Joanlanne’s termination, he was not eligible for a bonus. 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 Presidents	20.0%	40.0%	60.0%
Vice Presidents	17.5%	35.0%	52.5%
Assistant Vice Presidents	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 Presidents		10.00	%		40.0	%		60.0	%
Vice Presidents		8.75	%		35.0	%		52.5	%
Assistant Vice Presidents		5.00	%		20.0	%		30.0	%
Manager, Assistant Manager and Supervisors		3.00	%		12.0	%		18.0	%
All Other 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, with the exception of Mr. Joanlanne whose employment with the Company was terminated in 2008, 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
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 provide our named executive officers, and in some circumstances our other employees, with certain retirement and other fringe benefits, as we describe below.

     We 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 and other employees are also eligible to participate in our defined benefit pension plan. 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. The pension plan will be frozen effective October 31, 2009.

     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, Roberts and Higgins participate in the SERP. Mr. Joanlanne was also eligible to participate in the SERP, but his benefits were forfeited as a result of his termination. By utilizing vesting schedules of substantial periods, we believe our 401(k), 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 adopted 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 adopted 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 stock and restricted stock units to directors and selected employees. We expect 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. The stock-based incentive plan has 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 our compensation committee, who will determine the vesting period and other terms for the option, restricted stock, and restricted stock unit 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 has decided to freeze the Company’s defined benefit pension plan effective October 31, 2009.

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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					Stock		Option				Incentive Plan		Compensation		Compensation
Principal Position	Year		Salary ($)		Awards ($)		Awards ($)		Bonus ($)		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		—		—		—		—		—		232,501		431,134
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. For Mr. Joanlanne, this amount includes $213,148 in severance payments accrued in 2008 and payable through December 31, 2009 and $3,000 of outplacement assistance accrued in 2008 pursuant to his Separation Agreement.
(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 adopted a stock-based incentive plan that must be approved by our shareholders at least twelve months from its adoption date. In addition, we have an existing 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 have adopted 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 completed at least six months of service with Penn Millers. As of July 31, 2009, there were 108 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 pro-rata among participants based upon a participant’s eligible compensation as a percentage of the eligible compensation of all participants in the ESOP, multiplied by a factor based upon a participant’s combined age plus years of service as of each December 31. Eligible compensation will include the participant’s annual wages within the meaning of Section 3401(a) of the Code and all other payments of compensation reported on the participant’s Form W-2, plus any amounts withheld under a plan qualified under Sections 125, 401(k), or 132(f)(4) of the Code and sponsored by Penn Millers Holding Corporation or one of its affiliates. Eligible compensation will be determined without regard to any rules under Section 3401(a) of the Code that limit wages based on the nature or location of the participant’s employment or services performed. Participants must have at least 1,000 hours of service 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 with Penn Millers (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), 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, through its board of directors, 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 accordance with the terms of the ESOP’s trust agreement.

     Stock-Based Incentive Plan. Our board of directors adopted a stock-based incentive plan on July 28, 2009. The plan is subject to shareholder approval within twelve months after the adoption date. The plan will not be submitted to our shareholders for approval until at least six months after the completion of 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. 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, restricted common stock, and restricted common stock units to directors and employees. Our non-employee directors will not be eligible to receive awards of incentive stock options under the plan, because, under the Internal Revenue Code, incentive stock options may only be granted to employees. The stock-based incentive plan will be administered by the compensation committee.

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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 stock awards or through the vesting of restricted stock unit awards. Under the stock-based incentive plan, the compensation committee will determine whether the participant will receive either common stock or cash upon the vesting of a restricted stock unit award.

     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, the vesting of a restricted stock unit award not paid in cash, 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, pre-established 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.

     Vesting of awards may accelerate upon a Change in Control (as defined in the stock-based incentive plan) and, in certain circumstances, upon a participant’s death or disability. In addition, the compensation committee may exercise its discretion to waive a vesting period (but not any performance goals) or forfeiture provision with respect to an award.

     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 closing sales price on the day the option is awarded, and if no such price is available for that day, the exercise price will be determined by reference to the closing sales price 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 be awarded under the stock-based incentive plan at no cost to the recipient. Restricted stock will be nontransferable and forfeitable until the holder’s interest in the stock vests. Upon vesting and release of the restricted stock, the holder will recognize ordinary income equal to the then fair market value of the shares received, 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.

     Restricted stock units are awards denominated in shares of our common stock that, upon vesting, are settled, in the discretion of the compensation committee, (a) in cash, based on the fair market value of our common stock on the date of vesting; (b) in our common stock; or (c) a combination of cash and our common stock. Upon vesting of the restricted stock units the holder will recognize ordinary income equal to the amount of cash received plus, the then fair market value of unrestricted shares received. When the holder sells shares acquired pursuant to the vesting of a restricted stock unit award, capital gain and loss rates will apply. Penn Millers will be entitled to a federal income tax deduction equal to the amount reportable 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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     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 final decision 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 July 31, 2009, 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 shareholder approval of the stock incentive plan.

     Pension Plan. We currently sponsor a defined benefit pension plan. The plan was 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 July 31, 2009, 105 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.

     Because we expect our named executive officers and other employees to participate in our ESOP, benefit accurals under our defined benefit pension plan will cease effective October 31, 2009 and the pension plan will be “frozen”. If a participant has completed five years of service with Penn Millers as of October 31, 2009, then the participant will be 100% vested in all of the benefits earned as of October 31, 2009. If a participant has not completed five years of service as of October 31, 2009, then the participant will continue to be credited with years of service while the participant continues to be employed by us. Therefore, a participant will not lose any of the benefits to which he or she is entitled under the pension plan as of October 31, 2009. Accrued benefits under the pension plan will not be distributed as a result of the freeze, but will be paid upon retirement or another event that triggers payment under the plan.

     As a result of the freeze, no participant will earn additional benefits under the pension plan after October 31, 2009 and no new employee will commence participation in (and no rehired former participant will recommence participation in) the pension plan after October 31, 2009. The freeze does not affect a former participant or beneficiary who is entitled to benefits under the pension plan. If a participant is currently receiving benefit payments, then the participant’s benefit payments will continue without interruption.

     Therefore, the freeze fixes the cost of the pension plan to Penn Millers, but does not terminate the pension plan. If we decide to terminate the pension plan, we would be required to contribute the amount necessary to fund the present value of all accrued benefits under the pension plan so that the accrued benefits could be distributed in the form of cash or guaranteed annuity contracts to participants. We have no plans at this time to terminate the pension plan.

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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)	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 August 14, 2009, has a three year term that expires on August 14, 2012. Messrs. Banks, Roberts, Higgins and Couch each have employment agreements dated August 14, 2009 with two year terms that expire on August 14, 2011. Unless either party has given the other party written notice at least 90 days prior to the anniversary date of the agreement that such party does not agree to renew the agreement, then the employment agreements automatically renew for an additional one year term. In addition, if a change in control occurs during the term of the agreements, the agreements will continue for at least two years after the change in control.

     The compensation committee enters 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 necessary and appropriate in light of the executive’s prior experience or with our practices with respect to similar situated employees.

     Base Salary. Messrs. Banks, Roberts, Higgins and Couch will each receive an annual base salary of $235,706, $186,589, $162,983, and $133,524, respectively, in 2009. Pursuant to his employment agreement, Mr. Gaudet will receive a base salary of $342,500 in 2009. The base salary of each of the named executive officers 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. Pursuant to the terms of his employment agreement, the base compensation paid to Mr. Gaudet in any calendar year may not be less than the base compensation paid to him in the previous year, except for a reduction which is proportionate to a company-wide reduction in executive or senior management pay, exclusive of eliminated or unfilled positions.

     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.

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     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 Plan 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 and based upon each employee’s position and base salary for that year. In addition to the claw-back provisions provided in the Success Sharing Plan and applicable to all employees, pursuant to their employment agreements, all bonuses paid to our named executive officers may be recovered by Penn Millers to the extent the bonus awarded was based on materially inaccurate financial statements or performance metric criteria no longer met as a result of the inaccuracy.

     Benefits and Perquisites. Messrs. Gaudet, Banks, Roberts, Higgins, and Couch are each entitled to participate in insurance, vacation, and other fringe benefit programs 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 was required under Mr. Gaudet’s previous employment agreement to provide Mr. Gaudet with a leased automobile. Expenses, including insurance and operating expenses, were 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 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 received 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.

     For 2009, Mr. Gaudet’s employment agreement provides that he will receive a stipend of $18,000 in lieu of reimbursement for country club or social club fees and any automobile allowance and, thereafter, any stipend shall be determined by our board of directors. The employment agreements for the other named executive officers do not specifically provide for the payment of an annual stipend, car allowance or other reimbursements or perquisites. Therefore, any such payments to our named executive officers other than Mr. Gaudet will be determined on a case by case basis by our board of directors.

     Benefits Provided in Connection with Termination or Change in Control. If Mr. Gaudet is terminated without Cause absent a Change in Control (as such terms are defined in his employment agreement), he will be entitled to receive his base compensation, health care benefits, and annual stipend as then in effect for two years. In addition, Mr. Gaudet is entitled to receive a lump-sum payment equal to two times his target annual bonus in the year of termination. If Messrs. Banks, Roberts or Higgins are terminated without Cause absent a Change in Control (as such terms are defined in their employment agreements), they will be entitled to receive the continuation of their base compensation and health care benefits as then in effect for a period of one year. If Mr. Couch is terminated without Cause absent a Change in Control (as such terms are defined in his employment agreement), he will be

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entitled to receive the continuation of his base compensation and healthcare benefits then in effect for six months. In addition to the foregoing, Messrs. Gaudet, Banks, Roberts, Higgins, and Couch shall be entitled to receive outplacement services in an amount not to exceed $10,000 (if terminated prior to age 62) and a pro-rata payment under the Success Sharing Plan based on actual performance

     Following their termination of employment, Penn Millers will provide Messrs. Gaudet, Banks, Roberts, Higgins, and Couch with their accrued but unpaid base salary and benefits and 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 and, if such termination occurs on or after age 65, they will be entitled to receive a pro-rata payment under the Success Sharing Plan and pro-rata vesting of all outstanding performance based equity awards, based on actual performance. Upon Mr. Roberts termination of employment for any reason other than for Cause, he is entitled to certain payments under the SERP, or if greater, certain payments designed to replace his benefits under the SERP.

          If Messrs. Gaudet, Banks, Roberts, or Higgins are terminated as a result of a disability or death, they will receive continuation of their base compensation for twelve months, less any amounts payable to them under any disability insurance plan or policy provided by Penn Millers, and continuation of their employee-provided healthcare benefits for twelve months at the level and cost to them and for their qualified dependents as in effect at the time of their disability or death, and a pro-rata payment under the Success Sharing Plan based on actual performance. If Mr. Couch is terminated as a result of disability or death, he will receive a pro-rata payment under the Success Sharing Plan based on actual performance.

          If Messrs. Gaudet, Banks, Roberts, or Higgins have reached age 55 or have 10 years of service in the year of their termination as a result of a disability or death, any unvested and outstanding equity awards will be payable in-kind based upon the number of full months that have elapsed from the grant date of the award and the termination date. The in-kind payment will be due within 60 days following the termination date. Any performance-based equity awards will be paid at target levels.

          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, unless they would receive in the aggregate greater value on an after-tax basis if all such compensation and benefits were not subject to such reduction.

          If any payment under an employment agreement for Messrs. Gaudet, Banks, Roberts, Higgins, or Couch 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 following such six-month period. All other remaining payments will be made as otherwise required by the employment agreements.

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          If Messrs. Gaudet, Banks, Roberts and Higgins are terminated without Cause or voluntarily terminate their employment for Good Reason on or within 24 months after a Change in Control (as such terms are defined in the employment agreements), they will each be entitled to receive a lump sum payment of one times their current base salary and the continuation of their base salary for a period of one year. They will also be entitled to employer-provided health care benefits for two years following their termination date. In addition to the foregoing, Messrs. Gaudet, Banks, Roberts, and Higgins shall be entitled to receive a lump sum payment equal to two times their annual stipend, outplacement services in an amount not to exceed $10,000 (if terminated prior to age 62), a pro-rata payment under the Success Sharing Plan based on actual performance, and immediate and full vesting of all outstanding equity awards (with performance-based awards paid at target levels). Messrs. Gaudet and Banks shall also receive a lump-sum payment equal to two times their target annual bonus in the year of termination.

          If Mr. Couch is terminated without Cause or voluntarily terminates his employment for Good Reason on or within 24 months, after a Change in Control, he will be entitled to receive a lump sum payment of 0.5 times his current base salary and the continuation of his base salary for a period of six months. He would also be entitled to employer-provided health care benefits for 12 months following his termination date, outplacement services in an amount not to exceed $10,000 (if terminated prior to 62), a success sharing payment based on actual performance, and immediate and full vesting of all outstanding equity awards (with performance based awards paid at target levels).

           The employment agreements further provide that during the employment period, and during the “Restricted Period” (as defined below) the named executive officers may not solicit or induce away from Penn Millers, any person who is an employee, customer, supplier of Penn Millers, or solicit or induce any entity doing business with Penn Millers to cease doing business with Penn Millers.

           During the employment period and Restricted Period, the named executive officers may not directly or indirectly, own, manage, operate, render services for (as a consultant or an advisor) or accept any employment with Nationwide Agribusiness Insurance Company, Michigan Millers Insurance Company or Westfield Insurance Company; the agribusiness insurance business of any other insurance company whose business has, or reasonably be expected to have, a material adverse effect on Penn Millers’ insurance business; and any other property and casualty insurance or reinsurance line of business within a 50 mile radius of Wilkes-Barre, Pennsylvania to the extent that such ownership, management, operating, rendering of services or employment (and the activities necessarily incident thereto) have, or could reasonably be expected to have, a material adverse effect on the Penn Millers’ insurance business.

          The term “Restricted Period” is described below as it applies to each named executive officer.

Reason for Termination	Mr. Gaudet	Mr. Banks	Mr. Roberts	Mr. Higgins	Mr. Couch
Involuntary termination for Cause	24-month period following termination	12-month period following termination	12-month period following termination	12-month period following termination	6-month period following termination
Voluntary termination without Good Reason	24-month period following termination	12-month period following termination	12-month period following termination	12-month period following termination	6-month period following termination
Voluntary termination prior to Change in Control that would amount to Good Reason*	Up to 24-month period following termination	Up to 12-month period following termination	Up to 12-month period following termination	Up to 12-month period following termination	Up to 6-month period following termination
Termination for Disability	Date of termination	Date of termination	Date of termination	Date of termination	Date of termination
Involuntary Termination without Cause prior to a Change in Control	24-month period following termination	12-month period following termination	12-month period following termination	12-month period following termination	6-month period following termination
Involuntary termination without Cause or voluntary termination for Good Reason on or within 24 months after a Change in Control	24-month period following termination	24-month period following termination	24-month period following termination	24-month period following termination	12-month period following termination

* In the event of a voluntary termination of employment that would amount to Good Reason but for the fact that it occurred prior to a Change in Control, we have the option to pay for a restrictive covenant.

          Prior to receiving any severance benefits, our executive officers have agreed to execute release agreements.

     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, loan 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;

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          (2) the short-term and long-term interests of the corporation, including benefits that may accrue to the corporation from its long-term plans and the possibility that these interests may be best served by the continued independence of the corporation;

          (3) the resources, intent and conduct (past, stated and potential) of any person seeking to acquire control of the corporation; and

          (4) all other pertinent factors;

     (b) the board of directors need not consider the interests of any particular group as dominant or controlling;

     (c) directors, absent any breach of fiduciary duty, bad faith or self-dealing, are presumed to be acting in the best interests in the corporation, including with respect to actions relating to an acquisition or potential acquisition of control, and therefore they need not satisfy any greater obligation or higher burden of proof with respect to such actions;

     (d) actions relating to acquisitions of control that are approved by a majority of disinterested directors are presumed to satisfy the directors’ fiduciary obligations unless it is proven by clear and convincing evidence that the directors did not assent to such action in good faith after reasonable investigation; and

     (e) the fiduciary duty of directors is solely to the corporation and not its shareholders, and may be enforced by the corporation or by a shareholder in a derivative action, but not by a shareholder directly.

     One of the effects of these fiduciary duty provisions may be to make it more difficult for a shareholder to successfully challenge the actions of our board of directors in a potential change in control context. Pennsylvania case law appears to provide that the fiduciary duty standard under the Pennsylvania Business Corporation Law grants directors the almost unlimited statutory authority to reject or refuse to consider any potential or proposed acquisition of the corporation.

Other Provisions of Pennsylvania Law

     The Pennsylvania Business Corporation Law also contains provisions that have the effect of impeding a change in control. As permitted by the Pennsylvania Business Corporation Law, we have elected to provide in our articles of incorporation that these provisions will not apply to us.

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.

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 has authorized 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 Registrar and Transfer Company.

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 June 30, 2009 and December 31, 2008)		F-2
Consolidated Statements of Operations (Six months ended June 30, 2009 and 2008)		F-3
Consolidated Statements of Equity (Six months ended June 30, 2009 and 2008)		F-4
Consolidated Statements of Cash Flows (Six months ended June 30, 2009 and 2008)		F-5
Notes to Consolidated Interim Financial Statements		F-6
Report of Independent Accounting Firm		F-30
Financial Statements
Consolidated Balance Sheets (As of December 31, 2009 and 2008)		F-31
Consolidated Statements of Operations (Years ended December 31, 2009, 2008 and 2007)		F-32
Consolidated Statements of Equity (Years ended December 31, 2009, 2008 and 2007)		F-33
Consolidated Statements of Cash Flows (Years ended December 31, 2009, 2008 and 2007)		F-34
Notes to Consolidated Financial Statements		F-35
Schedules to Consolidated Financial Statements		F-73

PENN MILLERS MUTUAL HOLDING COMPANY AND SUBSIDIARY

Consolidated Balance Sheets

June 30, 2009 and December 31, 2008

(Dollars in thousands)

	June 30,		December 31,
	2009		2008
	(Unaudited)
Assets
Investments:
Fixed maturities investments:
Available for sale, at fair value (amortized cost $131,397 in 2009 (unaudited) and $120,538 in 2008)	$	134,783		121,914
Cash and cash equivalents		12,095		11,959
Premiums and fees receivable		26,783		31,080
Reinsurance receivables and recoverables		25,950		20,637
Deferred policy acquisition costs		9,862		10,601
Prepaid reinsurance premiums		3,769		4,342
Accrued investment income		1,565		1,431
Property and equipment, net of accumulated depreciation		3,958		4,231
Income taxes receivable		738		1,508
Deferred income taxes		3,240		4,728
Other		4,011		3,864
Deferred offering costs		1,631		1,015
Assets held for sale		—		3,214
Total assets	$	228,385		220,524
Liabilities and Equity
Liabilities:
Losses and loss adjustment expense reserves	$	118,025		108,065
Unearned premiums		41,218		45,322
Accounts payable and accrued expenses		14,211		13,353
Borrowings under line of credit		1,683		950
Long-term debt		1,276		1,432
Liabilities held for sale		—		647
Total liabilities		176,413		169,769
Equity:
Retained earnings		51,730		51,914
Accumulated other comprehensive income (loss)		242		(1,159	)
Total equity		51,972		50,755
Total liabilities and equity	$	228,385		220,524

See accompanying notes to consolidated financial statements.

(Continued)

F-2

PENN MILLERS MUTUAL HOLDING COMPANY AND SUBSIDIARY

Consolidated Statements of Operations

(Unaudited)

Six months ended June 30, 2009 and 2008

(Dollars in thousands)

	2009			2008
Revenues:
Premiums earned	$	36,926			39,369
Investment income, net of investment expense		2,769			2,723
Realized investment gains (losses), net:
Other realized investment gains		64			1,876
Other-than-temporary impairment losses		(197	)		—
Portion of loss recognized in other comprehensive income		—			—
Net impairment losses recognized in earnings		(197	)		—
Other income		111			221
Total revenues		39,673			44,189
Losses and expenses:
Losses and loss adjustment expenses		25,866			28,692
Amortization of deferred policy acquisition costs		10,953			11,521
Underwriting and administrative expenses		1,869			1,807
Interest expense		156			87
Other expense, net		90			76
Total losses and expenses		38,934			42,183
Income from continuing operations, before income taxes		739			2,006
Income tax expense		107			494
Income from continuing operations		632			1,512
Discontinued Operations:
Loss on discontinued operations, before income taxes		(12	)		(21	)
Income tax expense (benefit)		804			(7	)
Loss on discontinued operations		(816	)		(14	)
Net (loss) income	$	(184	)		1,498

See accompanying notes to consolidated financial statements.

(Continued)

F-3

PENN MILLERS MUTUAL HOLDING COMPANY AND SUBSIDIARY

Consolidated Statements of Equity

(Unaudited)

Six months ended June 30, 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		1,498			—			1,498
Other comprehensive loss, net of taxes:
Unrealized investment holding loss arising during period, net of related income tax benefit of $1,310		—			(2,543	)		(2,543	)
Reclassification adjustment for realized gains included in net income, net of related income tax expense of $640		—			(1,243	)		(1,243	)
Net unrealized investment loss								(3,786	)
Defined benefit pension plan, net of related income tax expense of $12		—			24			24
Comprehensive loss								(2,264	)
Balance at June 30, 2008		60,791			(1,654	)		59,137
Balance at December 31, 2008	$	51,914			(1,159	)		50,755
Net loss		(184	)		—			(184	)
Other comprehensive income, net of taxes:
Unrealized investment holding gain arising during period, net of related income tax expense of $636		—			1,235			1,235
Reclassification adjustment for realized losses included in net income, net of related income tax benefit of $50		—			96			96
Net unrealized investment gain								1,331
Defined benefit pension plan, net of related income tax expense of $36		—			70			70
Comprehensive income								1,217
Balance at June 30, 2009	$	51,730			242			51,972

See accompanying notes to consolidated financial statements.

(Continued)

F-4

PENN MILLERS MUTUAL HOLDING COMPANY AND SUBSIDIARY

Consolidated Statements of Cash Flows

(Unaudited)

Six months ended June 30, 2009 and 2008

(Dollars in thousands)

	2009			2008
Cash flows from operating activities:
Net (loss) income	$	(184	)		1,498
Loss on discontinued operations		816			14
Adjustments to reconcile net (loss) income to net cash provided by operating activities:
Change in receivables, unearned premiums, and prepaid reinsurance		(4,127	)		(5,159	)
Increase in losses and loss adjustment expense reserves		9,960			8,633
Change in accounts payable and accrued expenses		964			(1,942	)
Deferred income taxes		766			(79	)
Change in deferred acquisition costs		739			355
Amortization and depreciation		342			346
Realized investment gains, net		133			(1,876	)
Other, net		(23	)		760
Cash provided by operating activities — continuing operations		9,386			2,550
Cash provided by operating activities — discontinued operations		—			270
Net cash provided by operating activities		9,386			2,820
Cash flows from investing activities:
Available-for-sale investments:
Purchases		(19,132	)		(32,673	)
Sales		4,136			17,651
Maturities		3,800			9,105
Proceeds on sale of net assets of subsidiary		2,576			—
Purchases of property and equipment, net		(69	)		(227	)
Cash used in investing activities — continuing operations		(8,689	)		(6,144	)
Cash provided by (used in) investing activities — discontinued operations		285			(30	)
Net cash used in investing activities		(8,404	)		(6,174	)
Cash flows from financing activities:
Initial public offering costs paid		(1,138	)		—
Net borrowings on line of credit		733			—
Repayment of long-term debt		(156	)		(157	)
Net cash used in financing activities — continuing operations		(561	)		(157	)
Net cash used in financing activities — discontinued operations		(285	)		(260	)
Net cash used in financing activities		(846	)		(417	)
Net increase (decrease) in cash		136			(3,771	)
Cash and cash equivalents at beginning of period		11,959			10,462
Cash and cash equivalents at end of period		12,095			6,691
Less cash of discontinued operations at end of period		—			269
Cash and cash equivalents of continuing operations at end of period	$	12,095			6,422

See accompanying notes to consolidated financial statements.

(Continued)

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. Management has evaluated subsequent events up to and including August 20, 2009, which is the date the statements were issued.
	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. As indicated in note 18, the Company discovered an immaterial error in the accrual of ceded premiums as of and for the three months ended March 31, 2009. The financial statements included within the Form S-1 have been corrected for this error.
(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 25% of the Company’s direct premium writings for the six months ended June 30, 2009. Consequently, changes in the New Jersey or Pennsylvania legal, regulatory, or economic environment could adversely affect the Company.

(Continued)

F-6

PENN MILLERS MUTUAL HOLDING COMPANY AND SUBSIDIARY

(Unaudited)

Notes to Consolidated Financial Statements

(Dollars in thousands)

	Additionally, one producer, Arthur J. Gallagher Risk Management Services, which writes business for the Company through nine offices, accounted for 10.9% of the Company’s direct premiums written for the six months ended June 30, 2009. Only one other producer 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.
(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 $1,631 and $1,015 are reported separately on the consolidated balance sheets at June 30, 2009 and December 31, 2008.
(5)	Recent Accounting Pronouncements
	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. The Company still evaluating the provisions of FSP FAS 132R-1 and intends to comply with its disclosure requirements.
	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, and the Company has complied with this Standard’s disclosure requirement.
	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. The Company’s adoption of FSP FAS 157-4 on April 1, 2009 did not result in any significant financial statement impact.
	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. The Company’s adoption of FSP FAS 115-2 and FAS 124-2 on April 1, 2009 did not result in any significant financial statement impact.
	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

(Continued)

F-7

PENN MILLERS MUTUAL HOLDING COMPANY AND SUBSIDIARY

(Unaudited)

Notes to Consolidated Financial Statements

(Dollars in thousands)

	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. The Company’s adoption of FSP FAS 107-1 on April 1, 2009 did not result in any significant financial statement impact, and the Company has complied 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. The adoption of SFAS No. 165 did not have a material impact on the Company’s results of operations or financial position, and the Company has complied with the provisions of this Statement in note 1.
	In June 2009, the FASB issued SFAS No. 168, The FASB Accounting Standards Codification™ and the Hierarchy of Generally Accepted Accounting Principles—a replacement of FASB Statement No. 162. On the effective date of this standard, FASB Accounting Standards Codification™ (ASC) will become the source of authoritative U.S. accounting and reporting standards for nongovernmental entities, in addition to guidance issued by the Securities and Exchange Commission (SEC). FASB ASC significantly changes the way financial statement preparers, auditors, and academics perform accounting research. This statement is effective for financial statements issued for interim and annual periods ending after September 15, 2009. This new standard flattens the GAAP hierarchy to two levels: one that is authoritative (in FASB ASC) and one that is non-authoritative (not in FASB ASC). The Company will begin to use the new guidelines and numbering system prescribed by the Codification referring to GAAP in the third quarter of fiscal 2009. As the Codification was not intended to change or alter existing GAAP, it will not have any impact on the Company’s consolidated financial statements.
	All other Standards and Interpretations of those Standards issued during the six months ended June 30, 2009 did not relate to accounting policies and procedures pertinent to the Company at this time.
(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

(Continued)

F-8

PENN MILLERS MUTUAL HOLDING COMPANY AND SUBSIDIARY

(Unaudited)

Notes to Consolidated Financial Statements

(Dollars in thousands)

non-financial assets and liabilities. The company has no non-financial assets or liabilities measured at fair value at June 30, 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 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.

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 June 30, 2009.

	Level 1		Level 2		Level 3		Total
Fixed maturities, available for sale
U.S. treasuries	$	8,041		—		—		8,041
Agencies not backed by the full faith and credit of the U.S. government		—		17,703		—		17,703
State and political subdivisions		—		33,163		—		33,163
Commercial Mortgage-backed securities		—		4,090		—		4,090
Residential Mortgage-backed securities		—		22,655		—		22,655
Corporate securities		—		49,131		—		49,131
Total assets	$	8,041		126,742		—		134,783
Accounts payable and accrued expenses	$	—		53		—		53
Total liabilities	$	—		53		—		53

(Continued)

F-9

PENN MILLERS MUTUAL HOLDING COMPANY AND SUBSIDIARY

(Unaudited)

Notes to Consolidated Financial Statements

(Dollars in thousands)

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. 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 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.

Should the independent pricing service be unable to provide a fair value estimate, the Company would attempt to obtain a non-binding fair value estimate from a number of broker-dealers and review this estimate in conjunction with a fair value estimate reported by an independent business news service or other sources. In instances where only one broker-dealer provides a fair value for a fixed maturity security, the Company uses that estimate. In instances where the Company is able to obtain fair value estimates from more than one broker-dealer, the Company would review the range of estimates and would select the most appropriate value based on the facts and circumstances. Should neither the independent pricing service nor a broker-dealer provide a fair value estimate, the Company would develop a fair value estimate based on cash flow analyses and other valuation techniques that utilize certain unobservable inputs. Accordingly, the Company would classify such a security as a Level 3 investment.

(Continued)

F-10

PENN MILLERS MUTUAL HOLDING COMPANY AND SUBSIDIARY

(Unaudited)

Notes to Consolidated Financial Statements

(Dollars in thousands)

The fair value estimates of the Company’s investments provided by the independent pricing service at June 30, 2009, were utilized, among other resources, in reaching a conclusion as to the fair value of investments. As of June 30, 2009, all but one instrument, which had an amortized cost of $200 and a fair value of $205, of the Company’s fixed maturity investments were priced using this one primary service. The independent pricing service was unable to price this recently-issued bond so the Company utilized a non-binding fair value estimate provided by an independent broker-dealer and evaluated the estimate through a review of business news sources and other information pertaining to the issuer and recent trading activity in the security. The independent pricing service began pricing the bond on August 5, 2009, and management also utilized this information in its evaluation of the reasonableness of the price used at June 30, 2009.

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 or its asset manager. 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 June 30, 2009.

The fair value of other financial instruments, principally receivables, accounts payable and accrued expenses, borrowings under lines of credit, and long-term debt approximates their June 30, 2009 and December 31, 2008 carrying values. 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 also considers the prevailing interest rate environment as a key input into the valuation of the swap.

(Continued)

F-11

PENN MILLERS MUTUAL HOLDING COMPANY AND SUBSIDIARY

(Unaudited)

Notes to Consolidated Financial Statements

(Dollars in thousands)

(7)	Investments
	The amortized cost and fair value of investments in fixed maturity and equity securities, which are all available for sale, at June 30, 2009 and December 31, 2008, are as follows:

			Gross		Gross
	Amortized		unrealized		unrealized		Estimated
	cost		gains		losses		fair value
June 30, 2009:
U.S. treasuries	$	7,801		256		16		8,041
Agencies not backed by the full faith and credit of the U.S. government		16,995		752		44		17,703
State and political subdivisions		31,654		1,576		67		33,163
Commercial mortgage-backed securities		4,428		6		344		4,090
Residential mortgage-backed securities		21,995		704		44		22,655
Corporate securities		48,524		1,522		915		49,131
Total fixed maturities	$	131,397		4,816		1,430		134,783
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
Commercial mortgage-backed securities		4,600		3		670		3,933
Residential mortgage-backed securities		20,774		598		—		21,372
Corporate securities		39,930		414		2,091		38,253
Total fixed maturities	$	120,538		4,247		2,871		121,914

At June 30, 2009 and December 31, 2008, the Company had gross unrealized losses of $1,430 and $2,871, respectively, on investment securities. The decreases in unrealized losses were primarily attributable to decreased credit and liquidity risk discounts in the pricing of financial assets. Although these changes affected the broad financial markets, specific factors, security issuers and security issues were affected

(Continued)

F-12

PENN MILLERS MUTUAL HOLDING COMPANY AND SUBSIDIARY

(Unaudited)

Notes to Consolidated Financial Statements

(Dollars in thousands)

differently. Prior to the adoption of FSP 115-2 and FAS 124-2, the Company did not have any previously-recorded other-than-temporary impairments of debt securities, so it did not need to develop an estimate of the portion of such impairments that were not due to credit.

The amortized cost and estimated fair value of fixed maturity securities at June 30, 2009, by contractual maturity, are shown below:

	Amortized		Estimated
	cost		fair value
Due in one year or less	$	8,431		8,570
Due after one year through five years		49,238		51,078
Due after five years through ten years		40,362		41,262
Due after ten years		6,943		7,128
		104,974		108,038
Commercial mortgage-backed securities		4,428		4,090
Residential mortgage-backed securities		21,995		22,655
	$	131,397		134,783

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 June 30, 2009 and December 31, 2008, investments with a fair value of $4,434 and $4,543, respectively, were on deposit with regulatory authorities, as required by law.

Major categories of net investment income are as follows:

	For the six months
	ended June 30,
	2009			2008
Interest on fixed maturities	$	3,024			2,706
Dividends on equity securities		9			141
Interest on cash and cash equivalents		—			141
Total investments income		3,033			2,988
Investment expense		(264	)		(265	)
Investment income, net of investment expense	$	2,769			2,723

(Continued)

F-13

PENN MILLERS MUTUAL HOLDING COMPANY AND SUBSIDIARY

(Unaudited)

Notes to Consolidated Financial Statements

(Dollars in thousands)

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:

	For the six months
	ended June 30,
	2009			2008
Fixed maturity securities:
Available for sale:
Gross gains	$	51			76
Gross losses on sales		—			—
Other-than-temporary impairment losses		(197	)		—
Equity securities:
Gross gains		—			1,807
Gross losses on sales		—			—
Realized investment (losses) gains, net		(146	)		1,883
Change in value of interest rate swap		13			(7	)
Realized investment (losses) gains after change in value of interest rate swap, net	$	(133	)		1,876
Change in difference between fair value and cost of investments:
Fixed maturity securities for continuing operations	$	2,010			(1,463	)
Equity securities for continuing operations		—			(4,272	)
Total for continuing operations		2,010			(5,735	)
Equity securities for discontinued operations		7			(1	)
Total including discontinued operations	$	2,017			(5,736	)

(Continued)

F-14

PENN MILLERS MUTUAL HOLDING COMPANY AND SUBSIDIARY

(Unaudited)

Notes to Consolidated Financial Statements

(Dollars in thousands)

Income tax (benefit) expense on net realized investment (losses) gains was $(50) and $640 for the period ended June 30, 2009 and year ended December 31, 2008, respectively. Deferred income tax expense (benefit) applicable to net unrealized investment gains (losses) included in equity was $1,151 and $(358) at June 30, 2009 and December 31, 2008, respectively.

The fair value and unrealized losses for securities temporarily impaired as of June 30, 2009 and December 31, 2008 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
2009:
U.S. Treasuries	$	493		16		—		—		493		16
Agencies not backed by the full faith and credit of the U.S. government		3,036		44		—		—		3,036		44
State and political subdivisions		555		2		2,655		65		3,210		67
Commercial Mortgage-backed securities		—		—		3,523		344		3,523		344
Residential Mortgage-backed securities		2,470		44		—		—		2,470		44
Corporate securities		3,637		89		8,444		826		12,081		915
Total fixed maturities	$	10,191		195		14,622		1,235		24,813		1,430
2008:
State and political subdivisions	$	2,934		56		515		54		3,449		110
Commercial 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

The Company invests in high credit quality bonds. These fixed maturity investments are classified as available for sale because the Company will, from time to time, sell securities that are not impaired, consistent with its investment goals and policies. 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

(Continued)

F-15

PENN MILLERS MUTUAL HOLDING COMPANY AND SUBSIDIARY

(Unaudited)

Notes to Consolidated Financial Statements

(Dollars in thousands)

credit markets. There are $14,622 in fixed maturity securities, at fair value, that at June 30, 2009, had been below cost for over 12 months. $1,235 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. There are $12,067 in fixed maturity securities, at fair value, that at December 31, 2008, had been below cost for over 12 months. $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 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 recovering all of the amortized cost basis is expected.

Per the Company’s current policy, a fixed maturity security is other-than-temporarily impaired if the present value of the cash flows expected to be collected is less than the amortized cost of the security or where the Company intends to sell or more likely than not will be required to sell the security before recovery of its value. The Company believes, based on its analysis, that these securities arc not other-than-temporarily impaired. However, depending on developments involving both the issuers and overall economic conditions, these investments may be written down in the income statement in the future.

During the second quarter of 2009, the Company incurred impairment charges of $197 related to one security. As of June 30, 2009, the Company intended to sell the security. The security was sold in July 2009, and therefore, the carrying value of the security was written down to fair value as of June 30, 2009.

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 June 30, 2009, fixed maturity securities issued by banks accounted for 5.99% of the bond portfolio’s book value. Except for the aforementioned security which was written down, none of the Company’s fixed maturity securities have defaulted or required an impairment charge due to the subprime credit crisis.

(Continued)

F-16

PENN MILLERS MUTUAL HOLDING COMPANY AND SUBSIDIARY

(Unaudited)

Notes to Consolidated Financial Statements

(Dollars in thousands)

(8)	Comprehensive Income (Loss)
	Comprehensive income for the six months ended June 30, 2009 and 2008 consisted of the following:

	For the six months
	ended June 30,
	2009			2008
Net (loss) income	$	(184	)		1,498
Other comprehensive income (loss):
Unrealized gains (losses) on securities:
Unrealized investment holding gains (losses) arising during period		1,235			(2,543	)
Less:
Reclassification adjustment for losses (gains) included in net income		96			(1,243	)
Net unrealized investment gains (losses)		1,331			(3,786	)
Defined benefit pension plans:
Amortization		70			24
Other comprehensive income (loss)		1,401			(3,762	)
Comprehensive income (loss)	$	1,217			(2,264	)

Accumulated other comprehensive gain (loss) at June 30, 2009 and December 31, 2008 consisted of the following amounts:

	June 30,			December 31,
	2009			2008
Unrealized investment gains for continuing operations, net of tax	$	2,234			908
Unrealized investment losses for discontinued operations, net of tax		—			(5	)
Defined benefit pension plan — net actuarial loss, net of tax		(1,992	)		(2,062	)
Accumulated other comprehensive gain (loss)	$	242			(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

(Continued)

F-17

PENN MILLERS MUTUAL HOLDING COMPANY AND SUBSIDIARY

(Unaudited)

Notes to Consolidated Financial Statements

(Dollars in thousands)

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.

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

	For the six months
	ended June 30,
	2009			2008
Components of net periodic pension cost:
Service cost	$	340			358
Interest cost		295			309
Expected return on plan assets		(185	)		(259	)
Amortization of prior service costs		20			31
Amortization of net loss		85			5
Net periodic pension expense	$	555			444

	The Company expects to contribute $547 to the plans in 2009. As of June 30, 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.
	On July 28, 2009, the Company’s board of directors approved a resolution to freeze the future accrual of benefits under the pension plan, effective October 31, 2009. Upon successful implementation of the stock offering (see note 17), the Company plans to replace the pension plan with an employee stock ownership 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 assets of EIG, whose book basis exceeded their tax basis. 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 benefit recognized. The maximum favorable impact of this deduction is estimated to be $900, with reasonable possibility that the tax return position will not be taken.
	As of June 30, 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 June 30, 2009.
	Cash tax payments of $326 and $1,040 were made in the first six months of 2009 and 2008, respectively.

(Continued)

F-18

PENN MILLERS MUTUAL HOLDING COMPANY AND SUBSIDIARY

(Unaudited)

Notes to Consolidated Financial Statements

(Dollars in thousands)

(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 continues to 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 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 six months ended June 30,
	2009						2008
	Written			Earned			Written			Earned
Direct	$	41,976			46,164			45,996			47,727
Assumed		514			440			781			697
Ceded		(9,106	)		(9,678	)		(8,798	)		(9,055	)
Net	$	33,384			36,926			37,979			39,369

(b) Losses and Loss Adjustment Expenses

	For the six months
	ended June 30,
	2009			2008
Direct	$	36,361			34,399
Assumed		82			847
Ceded		(10,577	)		(6,554	)
Net	$	25,866			28,692

(Continued)

F-19

PENN MILLERS MUTUAL HOLDING COMPANY AND SUBSIDIARY

(Unaudited)

Notes to Consolidated Financial Statements

(Dollars in thousands)

(c) Unearned Premiums

	June 30,			December 31,
	2009			2008
Direct	$	41,134			45,310
Assumed		84			12
Prep aid reinsurance (ceded)		(3,769	)		(4,342	)
	$	37,449			40,980

(d) Loss and Loss Adjustment Expense Reserves

	June 30,		December 31,
	2009		2008
Direct	$	108,888		98,366
Assumed		9,137		9,699
Gross	$	118,025		108,065

(12)	Borrowings
	At June 30, 2009, the Company maintained two unsecured lines of credit.
	The first unsecured line of credit is available for general corporate purposes. No additional borrowings were made after year-end. The balance of $500 at June 30, 2009 was paid in full on August 3, 2009.
	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 June 30, 2009 and December 31, 2008, a total of $1,183 and $450, respectively, was outstanding. The balance was paid in full on August 3, 2009.
	On July 22, 2009, the Company refinanced its long-term debt and lines of credit by entering into a new, four year $3,000 revolving line of credit with a commercial bank. The new line of credit note 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 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. On August 3, 2009, $1,800 of this new line of credit and cash from operations of $1,100 was used to pay off the long-term debt amount of $1,251 of principal and interest due at the settlement date, and the two then-existing lines of credit, at an aggregate amount of principal and interest of $1,683. The interest rate swap tied to the loan was also terminated, resulting in a pre-tax loss of $47 (see note 13).

(Continued)

F-20

PENN MILLERS MUTUAL HOLDING COMPANY AND SUBSIDIARY

(Unaudited)

Notes to Consolidated Financial Statements

(Dollars in thousands)

(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 $1,276 and $1,432 at June 30, 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 $13 and loss of $7 were recorded within net realized investment gains on the consolidated statements of operations for the six months ended at June 30, 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.
	A summary of the fair value of the interest rate swap outstanding as of June 30, 2009 and December 31, 2008 follows:

	June 30, 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	$	53	Accounts payable and accrued expenses	$	66
Total derivatives		$	53		$	66

(Continued)

F-21

PENN MILLERS MUTUAL HOLDING COMPANY AND SUBSIDIARY

(Unaudited)

Notes to Consolidated Financial Statements

(Dollars in thousands)

A summary of the effect of the interest rate swap on the consolidated statements of operations for the six months ended June 30, 2009 and 2008 follows:

	For the six months ended June 30,
	2009			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	$	13	Realized investment losses	$	(7	)
Total derivatives		$	13		$	(7	)

(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.

(Continued)

F-22

PENN MILLERS MUTUAL HOLDING COMPANY AND SUBSIDIARY

(Unaudited)

Notes to Consolidated Financial Statements

(Dollars in thousands)

Segment information for the six months ended June 30, 2009 and 2008 is as follows:

	For the six months
	ended June 30,
	2009			2008
Revenues:
Premiums earned:
Agribusiness	$	21,939			22,470
Commercial business		14,403			16,060
Other		584			839
Total premiums earned		36,926			39,369
Investment income, net of investment expense		2,769			2,723
Realized investment (losses) gains, net		(133	)		1,876
Other income		111			221
Total revenues	$	39,673			44,189
Components of net (loss) income:
Underwriting (loss) income:
Agribusiness	$	(1,702	)		(961	)
Commercial business		(145	)		(1,157	)
Other		166			(238	)
Total underwriting losses		(1,681	)		(2,356	)
Investment income, net of investment expense		2,769			2,723
Realized investment (losses) gains, net		(133	)		1,876
Other income		111			221
Corporate expense		(81	)		(295	)
Interest expense		(156	)		(87	)
Other expense, net		(90	)		(76	)
Income from continuing operations, before income taxes		739			2,006
Income tax expense		107			494
Income from continuing operations	$	632			1,512

(Continued)

F-23

PENN MILLERS MUTUAL HOLDING COMPANY AND SUBSIDIARY

(Unaudited)

Notes to Consolidated Financial Statements

(Dollars in thousands)

	For the six months
	ended June 30,
	2009			2008
Discontinued operations:
Loss on discontinued operations, before income taxes	$	(12	)		(21	)
Income tax expense (benefit)		804			(7	)
Loss on discontinued operations		(816	)		(14	)
Net (loss) income	$	(184	)		1,498

The following table sets forth the net premiums earned by major lines of business for our core insurance products for the six months ended June 30, 2009 and 2008:

	For the six months
	ended June 30,
	2009		2008
Net premiums earned:
Agribusiness
Property	$	7,933		8,055
Commercial auto		5,543		6,078
Liability		4,593		4,341
Workers’ compensation		3,536		3,667
Other		334		329
Agribusiness subtotal		21,939		22,470
Commercial lines
Property & liability		8,878		9,934
Workers’ compensation		3,105		3,694
Commercial auto		2,271		2,303
Other		149		129
Commercial lines subtotal		14,403		16,060
Other		584		839
Total net premiums earned	$	36,926		39,369

(Continued)

F-24

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 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.
(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 contingent portion of the sale price will be determined in the third quarter of 2009 and will be recognized at that time. 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 six months ended June 30, 2009 and 2008 are as follows:

	For the six months
	ended June 30,
	2009		2008
Net revenue	$	—		523
Loss on discontinued operations, before income taxes	$	—		(51	)
Income tax benefit		—		(18	)
Loss from discontinued operations	$	—		(33	)

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.

(Continued)

F-25

PENN MILLERS MUTUAL HOLDING COMPANY AND SUBSIDIARY

(Unaudited)

Notes to Consolidated Financial Statements

(Dollars in thousands)

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 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. The Company recorded a pretax loss of $12 for the six months ended June 30, 2009. 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 six months ended June 30, 2009 and 2008 are as follows:

	For the six months
	ended June 30,
	2009			2008
Net revenue	$	—			1,751
(Loss) income on discontinued operations, before income taxes	$	(12	)		30
Income tax expense		804			11
(Loss) income from discontinued operations	$	(816	)		19

(Continued)

F-26

PENN MILLERS MUTUAL HOLDING COMPANY AND SUBSIDIARY

(Unaudited)

Notes to Consolidated Financial Statements

(Dollars in thousands)

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

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 six months ended June 30, 2009 and 2008 are presented below.

	For the six months
	ended June 30,
	2009			2008
Net revenue	$	—			2,274
Loss on discontinued operations, before income taxes	$	(12	)		(21	)
Income tax expense (benefit)		804			(7	)
Loss from discontinued operations	$	(816	)		(14	)

(Continued)

F-27

PENN MILLERS MUTUAL HOLDING COMPANY AND SUBSIDIARY

(Unaudited)

Notes to Consolidated Financial Statements

(Dollars in thousands)

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-28

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.

(18)	Correction of Immaterial Error
	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. SAB No. 108 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.
	During the second quarter of 2009, the Company discovered an error in the accrual of ceded premium for the 2009 accident year under the aggregate stop loss contract in effect for 2008 and 2009. The March 31, 2009 financial statements have been corrected to reflect the increase of ceded premium. Pursuant to SAB No. 108, it was determined that the misstatements were not material to the financial statements issued as of and for the three months ended March 31, 2009.

The following table presents the effect of the correction on the Company’s previously reported consolidated statement of operations for the three months ended March 31, 2009.

	As previously
	reported		Adjustment			As revised
Premiums earned	$	18,457	$	(400	)	$	18,057
Total revenues		19,865		(400	)		19,465
Underwriting and administrative expenses		1,126		(150	)		976
Total losses and expenses		18,725		(150	)		18,575
Income from continuing operations, before income taxes		1,140		(250	)		890
Income tax expense		289		(84	)		205
Income from continuing operations		851		(166	)		685
Net income (loss)		31		(166	)		(135	)

The following table presents the effect of the correction on the Company’s previously reported consolidated balance sheet as of March 31, 2009.

	As previously
	reported		Adjustment			As revised
Reinsurance receivables and recoverables	$	25,064	$	(400	)	$	24,664
Income taxes receivable		1,294		84			1,378
Total assets		228,415		(316	)		228,099
Accounts payable and accrued expenses		12,631		(150	)		12,481
Total liabilities		177,254		(150	)		177,104
Retained earnings		51,945		(166	)		51,779
Total equity		51,161		(166	)		50,995

F-29

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-30

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-31

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-32

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-33

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-34

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-35

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-36

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-37

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-38

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-39

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-40

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-41

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-42

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-43

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-44

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 interpretation 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-45

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-46

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-47

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-48

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-49

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-50

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-51

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-52

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-53

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-54

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-55

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-56

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-57

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-58

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-59

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-60

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-61

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-62

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-63

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-64

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-65

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-66

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-67

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-68

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-69

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-70

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-71

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-72

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-73

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-74

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-75

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-76

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-77

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-78

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-79

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-80

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	Penn Millers Stock Incentive Plan
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 August 7, 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 and statements to prospective purchasers of stock in offering
99.6	Form of Escrow Agreement between Penn Millers Holding Corporation and Christiana Bank & Trust Company
99.7	Form of Penn Millers Mutual Holding Company Member Proxy Materials
99.8	Power of Attorney by Donald A. Pizer*

* Previously filed.

(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. 4 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 August 20, 2009.

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

II-6

     Pursuant to the requirements of the Securities Act of 1933, this Amendment No. 4 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)	August 20, 2009
/s/ J. Harvey Sproul, Jr. * J. Harvey Sproul, Jr.	Director and Chairman	August 20, 2009
/s/ F. Kenneth Ackerman, Jr. * F. Kenneth Ackerman, Jr.	Director and Vice Chairman	August 20, 2009
/s/ Heather M. Acker * Heather M. Acker	Director	August 20, 2009
/s/ Dorrance R. Belin, Esq. * Dorrance R. Belin, Esq.	Director	August 20, 2009
/s/ John L. Churnetski * John L. Churnetski	Director	August 20, 2009
/s/ John M. Coleman * John M. Coleman	Director	August 20, 2009
/s/ Kim E. Michelstein * Kim E. Michelstein	Director	August 20, 2009
/s/ Robert A. Nearing, Jr. * Robert A. Nearing, Jr.	Director	August 20, 2009
/s/ Donald A. Pizer * Donald A. Pizer	Director	August 20, 2009
/s/ James M. Revie * James M. Revie	Director	August 20, 2009
/s/ Michael O. Banks Michael O. Banks	Treasurer and Chief Financial Officer and Chief Accounting Officer (Principal Financial and Accounting Officer)	August 20, 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	Penn Millers Stock Incentive Plan
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 August 7, 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 and statements to prospective purchasers of stock in offering
99.6	Form of Escrow Agreement between Penn Millers Holding Corporation and Christiana Bank & Trust Company.
99.7	Form of Penn Millers Mutual Holding Company Member Proxy Materials
99.8	Power of Attorney by Donald A. Pizer*

* Previously filed.

II-9

EX-1.1

Exhibit 1.1

PENN MILLERS HOLDING CORPORATION

Up to 6,772,221 Shares
COMMON STOCK ($0.01 Par Value)
Subscription Price $10.00 Per Share

AGENCY AGREEMENT

August ___, 2009

Griffin Financial Group, LLC
620 Freedom Business Center, Suite 210
King of Prussia, Pennsylvania 19406

Ladies and Gentlemen:

     Penn Millers Holding Corporation, a Pennsylvania corporation (“HoldCo”), Penn Millers Mutual Holding Company, a Pennsylvania mutual insurance holding company (in both mutual and converted stock form, “PMMHC”), PMHC Corp., a Pennsylvania corporation (“PMHC”), and Penn Millers Insurance Company, a Pennsylvania corporation (“PMIC,” and together with HoldCo, PMMHC and PMHC, the “Primary Parties”), hereby confirm, jointly and severally, their agreement (the “Agreement”) with Griffin Financial Group, LLC (the “Agent”), as follows:

     1. The Offering. On April 22, 2009, the Board of Directors of PMMHC adopted a Plan of Conversion (the “Plan”), which provides for the conversion of PMMHC from mutual to stock form (the “Conversion”), the formation of HoldCo as a holding company that will own 100% of the common stock of PMMHC, and the issuance of all of PMMHC’s outstanding common stock to HoldCo.

     In connection with the Conversion, HoldCo is offering up to 6,772,221 shares (the “Shares”) of common stock, par value $0.01 per share (the “Common Stock”), in (i) a subscription offering (the “Subscription Offering”), and, if necessary, (ii) a direct community offering (the “Community Offering”), and (iii) a syndicated community offering (the “Syndicated Community Offering”). The Subscription Offering, the Community Offering and the Syndicated Community Offering are herein sometimes collectively referred to as the “Offering.”

     HoldCo will issue the Shares at a purchase price of $10.00 per share (the “Purchase Price”). If the number of Shares is increased or decreased in accordance with the Plan, the term “Shares” shall mean such greater or lesser number, where applicable.

1

     The shares of Common Stock to be offered in the Subscription Offering will be offered pursuant to nontransferable subscription rights in the following order of priority (subject to limitations set forth in the Plan):

• eligible members of PMMHC, who are the policyholders under individual policies of insurance issued by PMIC and in force on April 22, 2009 (“Eligible Members”);

• an employee stock ownership plan to be established as a tax-qualified plan of HoldCo; and

• directors, officers and employees of the Primary Parties as of the commencement of the Offering.

     HoldCo may offer shares of Common Stock for which subscriptions have not been received in the Subscription Offering in the Community Offering to the following categories of subscribers (listed in order of priority) before offering them to the general public:

• licensed insurance agencies and/or brokers that have been appointed by or otherwise are under contract with PMIC to market and distribute policies of insurance; and

• named insureds under policies of insurance issued by PMIC after April 22, 2009; and

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

     In the event a Community Offering is held, it may be held at any time during or immediately after the Subscription Offering. Depending on market conditions, shares not subscribed for in the Subscription Offering or in the Community Offering may be offered in the Syndicated Community Offering to selected members of the general public through a syndicate of registered broker-dealers who are members of the Financial Industry Regulatory Authority (“FINRA”). The Syndicated Community Offering will be co-managed by the Agent and Sterne, Agee & Leach, Inc. (“Sterne Agee”).

     It is acknowledged that the number of Shares to be sold in the Offering may be increased or decreased as described in the Prospectus (as hereinafter defined), that the purchase of Shares in the Offering is subject to maximum and minimum purchase limitations as described in the Prospectus, and that HoldCo may reject, in whole or in part, any subscription received in the Community Offering or Syndicated Community Offering.

     HoldCo has filed with the U.S. Securities and Exchange Commission (the “Commission”) a Registration Statement on Form S-1 (File No. 333-156936) in order to register the Shares under the Securities Act of 1933, as amended (the “1933 Act”), and the regulations promulgated thereunder (the “1933 Act Regulations”) and has filed such amendments thereto as have been required to the date hereof (the “Registration Statement”). The prospectus, as amended, included in the Registration Statement at the time it initially becomes effective is hereinafter called the “Prospectus,” except that if any prospectus is filed by HoldCo pursuant to Rule 424(b) or (c) of the regulations of the Commission under the 1933 Act differing from the

2

prospectus included in the Registration Statement at the time it initially becomes effective, the term “Prospectus” shall refer to the prospectus filed pursuant to Rule 424(b) or (c) from and after the time said prospectus is filed with the Commission and shall include any supplements and amendments thereto from and after their dates of effectiveness or use, respectively.

     Concurrently with the execution of this Agreement, HoldCo is delivering to the Agent copies of the Prospectus, dated                     , 2009, of HoldCo to be used in the Subscription Offering and Community Offering (if any), and, if necessary, will deliver copies of the Prospectus and any prospectus supplement for use in a Syndicated Community Offering as defined in the Prospectus.

     2. Appointment of the Agent. Subject to the terms and conditions of this Agreement, the Primary Parties hereby appoint the Agent to consult with and to advise and assist the Primary Parties with respect to the sale of the Shares in the Offering.

     On the basis of the representations and warranties of the Primary Parties contained in, and subject to the terms and conditions of, this Agreement, the Agent accepts such appointment and agrees to consult with and advise the Primary Parties as to the matters set forth in the letter agreement, dated May 12, 2009, between the PMMHC and the Agent (“Letter Agreement”) (a copy of which is attached hereto as Exhibit A). It is acknowledged by the Primary Parties that the Agent shall not be obligated to purchase any Shares and shall not be obligated to take any action which is inconsistent with any applicable law, regulation, decision or order. Except as provided in the last Paragraph of this Section 2 and Section 13, the appointment of the Agent hereunder shall terminate upon consummation of the Offering.

     If selected broker-dealers are used to assist in the sale of Shares in the Syndicated Community Offering, the Primary Parties hereby, subject to the terms and conditions of this Agreement, appoint the Agent to co-manage with Sterne Agee such broker-dealers in the Syndicated Community Offering. On the basis of the representations and warranties of the Primary Parties contained in, and subject to the terms and conditions of, this Agreement, the Agent accepts such appointment and agrees to co-manage with Sterne Agee the selling group of broker-dealers in the Syndicated Community Offering.

     3. Refund of Purchase Price. In the event that the Offering is not consummated for any reason, including but not limited to the inability to sell a minimum of 4,505,000 Shares during the Offering (including any permitted extension thereof) or such other minimum number of Shares as shall be established consistent with the Plan, this Agreement shall terminate and any persons who have subscribed for any of the Shares shall have refunded to them the full amount that has been received from such person, without interest, as provided in the Prospectus.

     4. Fees. In addition to the expenses specified in Section 9 hereof, as compensation for the Agent’s services under this Agreement, the Agent has received or will receive the following fees from the Primary Parties:

(a) An advisory and marketing services fee in the amount of $100,000, paid as follows: (i) $50,000 was paid upon execution of the Letter Agreement, and (ii) $50,000 was paid upon the initial filing of the Registration Statement.

3

(b)

A fee of 1.5% of the dollar amount of the Shares sold in the Subscription Offering and Community Offering less the $100,000 amount previously paid pursuant to Section 4(a) upon the successful completion of the Offering.

(c)

If any of the Shares remain unsubscribed after the Subscription Offering and Community Offering, at the request of the Primary Parties, the Agent and Sterne Agee will form a group of approved broker-dealer firms (the “Assisting Brokers”) in accordance with Section 2 hereof for purposes of the Syndicated Community Offering. The Primary Parties, in consultation with the Agent and Sterne Agee, will determine which FINRA member firms will participate in the Syndicated Community Offering and the extent of their participation. The fees payable by the Primary Parties pursuant to this Section 4(c) will not exceed 5.5% of the aggregate dollar amount of the Shares sold in the Syndicated Community Offering. Of such fee, the Agent will receive 0.75% and Sterne Agee will receive 4.75% of the aggregate dollar amount of the Shares sold pursuant to this Section 4(c) as a management fee, as set forth in the letter agreement, dated June 24, 2009, between PMMHC, the Agent and Sterne Agee (a copy of which is attached hereto as Exhibit B). The Agent and Sterne Agee will be responsible for compensating any Assisting Brokers in amounts relating to the number of Shares sold by such Assisting Brokers pursuant to this Section 4(c). All such fees payable under this Section 4(c) shall be in addition to all fees payable under Sections 4(a) and 4(b) and shall be paid at Closing (as defined in Section 5).

     The fees to be paid to Griffin, Sterne Agee, Stevens & Lee, which is serving as counsel to Griffin and the Primary Parties, and any other broker-dealers participating in the Offering collectively will not exceed an amount equal to six percent (6%) of the gross Offering proceeds. To the extent the total fees payable to Stevens & Lee, Griffin, Sterne Agee and other broker-dealers participating in the Offering would exceed an amount equal to six percent (6%) of the Offering proceeds, Stevens & Lee has agreed to reduce its fees by an amount such that the total amount paid by the Primary Parties will not exceed an amount equal to six percent (6%) of the Offering proceeds.

     In the event that HoldCo resolicits subscribers for Shares in the Subscription and Community Offering and the Agent is required to provide significant additional services in connection with such a resolicitation, the Primary Parties and the Agent shall mutually agree to the dollar amount of additional fees due to the Agent, if any. Until any agreement called for by this paragraph is reached, the Agent shall not accrue expenses relating to any resolicitation in an amount that would cause the total expenses incurred by the Agent to be greater than as set forth in Section 9 hereof without the prior written consent of the Primary Parties, which consent shall not be unreasonably withheld.

     If this Agreement is terminated in accordance with the provisions of Sections 3, 10, or 14, and the sale of Shares is not consummated, the Agent shall not be entitled to receive the fees set forth in Sections 4(b) and(c), and the Agent will return to the Primary Parties any amounts advanced to the Agent to the extent not actually incurred by the Agent in accordance with FINRA Rule 5110(f)(2)(C). Any amount paid pursuant to Section 4(a) above shall be applied to any fees due upon termination.

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     5. Closing. If the minimum number of Shares required to be sold in the Offering on the basis of the most recently updated evaluation of the pro forma market value of PMMHC, on a consolidated basis (the “Appraisal”) are subscribed for at or before the termination of the Offering, and the other conditions to the completion of the Offering are satisfied, HoldCo agrees to issue the Shares at the Closing Time (as hereinafter defined) against payment therefor by the means authorized by the Plan and to deliver certificates evidencing ownership of the Shares in such authorized denominations and registered in such names as may be indicated on the subscription order forms directly to the purchasers thereof as promptly as practicable after the Closing Time. The Closing (the “Closing”) shall be held at the offices of Stevens & Lee in King of Prussia, Pennsylvania, or at such other place as shall be agreed upon among the Primary Parties and the Agent, at 10:00 a.m., prevailing Eastern Time, on the business day selected by HoldCo or PMMHC, which business day shall be no less than two business days following the giving of prior notice by HoldCo or PMMHC to the Agent or at such other time as shall be agreed upon by HoldCo or PMMHC and the Agent. At the Closing, HoldCo shall deliver to the Agent by wire transfer in same-day funds the commissions, fees and expenses owing as set forth in Sections 4 and 9 hereof and the opinions and other documents required hereby shall be executed and delivered to effect the sale of the Shares as contemplated hereby and pursuant to the terms of the Prospectus; provided, however, that all out-of-pocket expenses to which the Agent is entitled under Section 9 hereof shall be due and payable upon receipt by HoldCo of a written accounting therefor setting forth in reasonable detail the expenses incurred by the Agent. The hour and date upon which HoldCo shall release the Shares for delivery in accordance with the terms hereof is referred to herein as the “Closing Time.”

     The Agent shall have no liability to any party for the records or other information provided by the Primary Parties (or their agents) to the Agent for use in allocating the Shares. Subject to the limitations of Section 11 hereof, the Primary Parties shall indemnify and hold harmless the Agent for any liability arising out of the allocation of the Shares in accordance with (i) the Plan generally, and (ii) the records or other information provided to the Agent by the Primary Parties (or their respective agents).

     6. Representations and Warranties of the Primary Parties. The Primary Parties jointly and severally represent and warrant to the Agent that, except as disclosed in the Prospectus:

(a) Each of the Primary Parties has and, as of the Closing Time, will have all such power, authority, authorizations, approvals and orders as may be required to enter into this Agreement, to carry out the provisions and conditions hereof and to issue and sell the Shares as provided herein and as described in the Prospectus. Subject to the receipt of regulatory approval, the execution, delivery and performance of this Agreement and the Letter Agreement and the consummation of the transactions herein contemplated have been duly and validly authorized by all necessary corporate action on the part of each of the Primary Parties. This Agreement has been validly executed and delivered by each of the Primary Parties, and is a valid, legal and binding obligation of each of the Primary Parties, enforceable in accordance with its terms, except as the legality, validity, binding nature and enforceability thereof may be limited by (i) bankruptcy, insolvency,

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	moratorium, conservatorship, receivership or other similar laws relating to or affecting the enforcement of creditors’ rights generally; (ii) general equity principles regardless of whether such enforceability is considered in a proceeding in equity or at law; and (iii) the extent, if any, that the provisions of Sections 11 or 12 hereof may be unenforceable as against public policy.
(b)	The Registration Statement was declared effective by the Commission on                     , 2009, and no stop order has been issued with respect thereto and no proceedings therefor have been initiated or, to the knowledge of the Primary Parties, threatened by the Commission. At the time the Registration Statement (including the Prospectus contained therein) became effective, the Registration Statement (including the Prospectus contained therein) complied as to form in all material respects with the 1933 Act and the regulations promulgated thereunder, and the Registration Statement (including the Prospectus contained therein) did not contain an untrue statement of a material fact or omit to state a material fact required to be stated therein or necessary to make the statements therein, in light of the circumstances under which they were made, not misleading. At the time any Rule 424(b) or (c) Prospectus was filed with the Commission and at the Closing Time referred to in Section 5, the Registration Statement, including the Prospectus contained therein (including any amendment or supplement thereto), and any state securities law application or any sales information authorized by the Primary Parties for use in connection with the Offering did not and will not contain an untrue statement of a material fact or omit to state a material fact necessary in order to make the statements therein, in light of the circumstances under which they were made, not misleading; provided, however, that the representations and warranties in this Section 6(b) shall not apply to statements or omissions made in reliance upon and in conformity with written information furnished to the Primary Parties by the Agent regarding the Agent or the method of conducting the Offering expressly for use in the Registration Statement or Prospectus or written statements or omissions from any sales information or information filed pursuant to state securities or blue sky laws or regulations.
(c)	At the time of filing the Registration Statement and at the date hereof, HoldCo was not, and is not, an ineligible issuer, as defined in Rule 405. At the time of the filing of the Registration Statement and at the time of the use of any issuer free writing prospectus, as defined in Rule 433(h), HoldCo met the conditions required by Rules 164 and 433 for the use of a free writing prospectus. If required to be filed, HoldCo has filed any issuer free writing prospectus related to the offered Shares at the time it is required to be filed under Rule 433 and, if not required to be filed, will retain such free writing prospectus in HoldCo’s records pursuant to Rule 433(g) and if any issuer free writing prospectus is used after the date hereof in connection with the offering of the Shares, HoldCo will file or retain such free writing prospectus as required by Rule 433.
(d)	As of the Applicable Time (as hereinafter defined), neither (i) the Issuer-Represented General Free Writing Prospectus(es) issued at or prior to the

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Applicable Time and the Statutory Prospectus, all considered together (collectively, the “General Disclosure Package”), nor (ii) any individual Issuer-Represented Limited-Use Free Writing Prospectus, when considered together with the General Disclosure Package, included any untrue statement of a material fact or omitted to state any material fact necessary in order to make the statements therein, in the light of the circumstances under which they were made, not misleading. The preceding sentence does not apply to statements in or omissions from any Prospectus included in the Registration Statement relating to the offered Shares or any Issuer-Represented Free Writing Prospectus based upon and in conformity with written information furnished to any of the Primary Parties by the Agent specifically for use therein. As used in this Paragraph and elsewhere in this Agreement:

(i)	“Applicable Time” means each and every date when a potential purchaser submitted a subscription or otherwise committed to purchase Shares.
(ii)	“Statutory Prospectus” as of any time, means the Prospectus relating to the offered Shares that is included in the Registration Statement relating to the offered Shares immediately prior to that time, including any document incorporated by reference therein.
(iii)	“Issuer-Represented Free Writing Prospectus” means any “issuer free writing prospectus,” as defined in Rule 433(h), relating to the offered Shares that is required to be filed with the Commission by HoldCo or required to be filed with the Commission. The term does not include any writing exempted from the definition of prospectus pursuant to clause (g) of Section 2(a)(10) of the 1933 Act, without regard to Rule 172 or Rule 173 under the 1933 Act Regulations.
(iv)	“Issuer-Represented General Free Writing Prospectus” means any Issuer-Represented Free Writing Prospectus that is intended for general distribution to prospective investors.
(v)	“Issuer-Represented Limited-Use Free Writing Prospectus” means any Issuer-Represented Free Writing Prospectus that is not an Issuer-Represented General Free Writing Prospectus. The term Issuer-Represented Limited-Use Free Writing Prospectus also includes any “bona fide electronic road show,” as defined in Rule 433 under the 1933 Act Regulations, that is made available without restriction pursuant to Rule 433(d)(8)(ii) under the 1933 Act Regulations or otherwise, even though not required to be filed with the Commission.

(e) Each Issuer-Represented Free Writing Prospectus, as of its date of first use and at all subsequent times through the completion of the Offering and sale of the offered Shares or until any earlier date that HoldCo notified or notifies the Agent (as described in the next sentence), did not, does not and will not include any information that conflicted, conflicts or will conflict with the information

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contained in the Registration Statement, including any document incorporated by reference therein that has not been superseded or modified. If at any time following the date of first use of an Issuer-Represented Free Writing Prospectus there occurred or occurs an event or development as a result of which such Issuer-Represented Free Writing Prospectus conflicted or would conflict with the information contained in the Registration Statement relating to the offered Shares or included or would include an untrue statement of a material fact or omitted or would omit to state a material fact necessary in order to make the statements therein, in the light of the circumstances prevailing at that subsequent time, not misleading, HoldCo has notified or will notify promptly the Agent so that any use of such Issuer-Represented Free-Writing Prospectus may cease until it is amended or supplemented, and HoldCo has promptly amended or will promptly amend or supplement such Issuer-Represented Free Writing Prospectus to eliminate or correct such conflict, untrue statement or omission. The foregoing two sentences do not apply to statements in or omissions from any Issuer-Represented Free Writing Prospectus based upon and in conformity with written information furnished to any of the Primary Parties by the Agent specifically for use therein.

(f)	Pursuant to a 1998 Order from the Pennsylvania Insurance Commissioner (the “1998 Order”), PMMHC is required to obtain the approval of the Commissioner prior to effecting a conversion of PMMHC. PMMHC requested a letter from the Commissioner approving the conversion. At the date of such approval and at the Closing Time, the Plan will comply in all material respects with the 1998 Order.
(g)	HoldCo will promptly file the Prospectus and any supplemental sales literature with the Commission. The Prospectus and all supplemental sales literature, as of the date the Registration Statement became effective and at the Closing Time referred to in Section 5, will have received all required authorizations for use in final form.
(h)	Except for the 1998 Order, no order has been issued by the Department, the Commission, or any other state or federal regulatory authority, preventing or suspending the use of the Registration Statement, the Prospectus or any supplemental sales literature, and no action by or before any such government entity to revoke any approval, authorization or order of effectiveness related to the Offering is pending or, to the knowledge of the Primary Parties, threatened.
(i)	The Plan has been duly adopted by the Board of Directors of PMMHC. To the knowledge of the Primary Parties, no person has, or at the Closing Time will have, sought to obtain review of the final action of any state or federal regulatory authority with respect to the Plan or the Offering.
(j)	Curtis Financial Group LLC which prepared the valuation of PMMHC in connection with the Offering, has advised the Primary Parties in writing that it is independent with respect to each of the Primary Parties. The Primary Parties believe that Curtis Financial Group LLC is an expert in preparing appraisals of insurance companies.

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(k)	KPMG LLP, which certified the financial statements included in the Registration Statement, has advised the Primary Parties that it is an independent registered public accounting firm within the meaning of the Code of Ethics of the American Institute of Certified Public Accountants (the “AICPA”), that it is registered with the Public Company Accounting Oversight Board (“PCAOB”), and that it is, with respect to each of the Primary Parties, an independent certified public accountant within the meaning of, and is not in violation of the auditor independence requirements of the 1933 Act, the 1933 Act Regulations, the regulations of the PCAOB and the Sarbanes Oxley Act of 2002 (the “Sarbanes-Oxley Act”).
(l)	The consolidated financial statements and the notes thereto which are included in the Registration Statement and which are a part of the Prospectus present fairly the financial condition and retained earnings of PMMHC and its subsidiaries as of the dates indicated and the results of operations and cash flows for the periods specified. The financial statements comply in all material respects with the applicable accounting requirements of the 1933 Act Regulations, Regulation S-X of the Commission and accounting principles generally accepted in the United States of America (“GAAP”) applied on a consistent basis during the periods presented except as otherwise noted therein, and present fairly in all material respects the information required to be stated therein. The other financial, statistical and pro forma information and related notes included in the Prospectus present fairly the information shown therein on a basis consistent with the audited and unaudited financial statements included in the Prospectus, and as to the pro forma adjustments, the adjustments made therein have been properly applied on the basis described therein.
(m)	Since the respective dates as of which information is given in the Registration Statement, including the Prospectus, other than disclosed therein: (i) there has not been any material adverse change in the financial condition or in the earnings, capital, properties or business affairs of any of the Primary Parties or of the Primary Parties taken as a whole, whether or not arising in the ordinary course of business (“Material Adverse Effect”); (ii) there has not been any material change in total assets of the Primary Parties, nor have any of the Primary Parties issued any securities or incurred any liability or obligation for borrowings other than in the ordinary course of business; and (iii) there have not been any material transactions entered into by any of the Primary Parties, other than those in the ordinary course of business. The capitalization, liabilities, assets, properties and business of the Primary Parties conform in all material respects to the descriptions thereof contained in the Prospectus, and none of the Primary Parties has any material liabilities of any kind, contingent or otherwise, except as disclosed in Registration Statement or the Prospectus.
(n)	HoldCo is a corporation duly incorporated and validly existing under the laws of the Commonwealth of Pennsylvania, with corporate power and authority to own its properties and to conduct its business as described in the Prospectus, and will be qualified to transact business and in good standing in each jurisdiction in

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	which the conduct of business requires such qualification unless the failure to qualify in one or more of such jurisdictions would not have a Material Adverse Effect. As of the Closing Time, HoldCo will be in good standing under the laws of the Commonwealth of Pennsylvania and will have obtained all licenses, permits and other governmental authorizations required for the conduct of its business, except those that individually or in the aggregate would not have a Material Adverse Effect; and all such licenses, permits and governmental authorizations are in full force and effect, and HoldCo will be in compliance therewith in all material respects.
(o)	PMMHC is a corporation duly incorporated and validly existing under the laws of the Commonwealth of Pennsylvania in mutual form, with corporate power and authority to own its properties and to conduct its business as described in the Prospectus, and will be qualified to transact business and in good standing in each jurisdiction in which the conduct of business requires such qualification unless the failure to qualify in one or more of such jurisdictions would not have a Material Adverse Effect. As of the Closing Time, PMMHC will be in good standing under the laws of the Commonwealth of Pennsylvania and will have obtained all licenses, permits and other governmental authorizations required for the conduct of its business, except those that individually or in the aggregate would not have a Material Adverse Effect; and all such licenses, permits and governmental authorizations are in full force and effect, and PMMHC will be in compliance therewith in all material respects.
(p)	PMHC is a corporation duly incorporated and validly existing under the laws of the Commonwealth of Pennsylvania, with corporate power and authority to own its properties and to conduct its business as described in the Prospectus, and will be qualified to transact business and in good standing in each jurisdiction in which the conduct of business requires such qualification unless the failure to qualify in one or more of such jurisdictions would not have a Material Adverse Effect. As of the Closing Time, PMHC will be in good standing under the laws of the Commonwealth of Pennsylvania and will have obtained all licenses, permits and other governmental authorizations required for the conduct of its business, except those that individually or in the aggregate would not have a Material Adverse Effect; and all such licenses, permits and governmental authorizations are in full force and effect, and PMHC will be in compliance therewith in all material respects. All of the issued and outstanding shares of capital stock of PMHC are duly and validly issued and fully paid and nonassessable, and, as of the Closing Time, all capital stock of PMHC will be free and clear of any mortgage, pledge, lien, encumbrance, claim or restriction. PMHC does not own equity securities or any equity interest in any other business enterprise except as otherwise described in the Prospectus.
(q)	PMIC is a duly incorporated and validly existing Pennsylvania insurance company duly authorized to conduct its business as described in the Prospectus; the activities of PMIC as of the date hereof are and as of the Closing Time will be

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	permitted by the rules and regulations of the Department; PMIC has obtained all licenses, permits and other governmental authorizations currently required for the conduct of its business except those that individually or in the aggregate would not have a Material Adverse Effect; all such licenses, permits and other governmental authorizations are and, as of the Closing Time will be, in full force and effect and PMIC is and, as of the Closing Time will be, in good standing under the laws of the Commonwealth of Pennsylvania; all of the issued and outstanding capital stock of PMIC is duly and validly issued and fully paid and nonassessable; and as of the Closing Time, HoldCo will directly own all of such capital stock free and clear of any mortgage, pledge, lien, encumbrance, claim or restriction. PMIC does not own equity securities or any equity interest in any other business enterprise except as otherwise described in the Prospectus.
(r)	American Millers is a duly incorporated and validly existing Pennsylvania insurance company duly authorized to conduct its business as described in the Prospectus; the activities of American Millers as of the date hereof are and as of the Closing Time will be permitted by the rules and regulations of the Department; American Millers has obtained all licenses, permits and other governmental authorizations currently required for the conduct of its business except those that individually or in the aggregate would not have a Material Adverse Effect; all such licenses, permits and other governmental authorizations are and, as of the Closing Time will be, in full force and effect and American Millers is and, as of the Closing Time will be, in good standing under the laws of the Commonwealth of Pennsylvania; all of the issued and outstanding capital stock of American Millers is duly and validly issued and fully paid and nonassessable; and as of the Closing Time, PMIC will directly own all of such capital stock free and clear of any mortgage, pledge, lien, encumbrance, claim or restriction. American Millers does not own equity securities or any equity interest in any other business enterprise except as otherwise described in the Prospectus.
(s)	The authorized capital stock of HoldCo consists of 10,000,000 shares of Common Stock, par value $0.01 per share, and 1,000,000 shares of preferred stock, with a par value, if any, to be fixed by the board of directors. Upon consummation of the Offering, the issued and outstanding Common Stock of HoldCo will be within the range set forth in the Prospectus under the caption “Capitalization” (except for subsequent issuances, if any, pursuant to reservations, agreements or employee benefit plans referred to in the Prospectus); and the shares of Common Stock to be subscribed for in the Offering have been duly and validly authorized for issuance and, when issued and delivered by HoldCo pursuant to the Plan against payment of the consideration calculated as set forth in the Plan and the Prospectus, will be duly and validly issued and fully paid and nonassessable; the issuance of the Shares are not subject to preemptive rights, except for the Subscription Rights granted pursuant to the Plan; and the terms and provisions of the shares of Common Stock will conform in all material respects to the description thereof contained in the Prospectus. Upon issuance of the Shares, good title to the Shares

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	will be transferred from HoldCo to the purchasers of Shares against payment therefor in the Offering as set forth in the Plan and the Prospectus.
(t)	Upon consummation of the Conversion, the authorized capital stock of PMMHC will be 1,000,000 shares of common stock, par value $0.01 per share (the “PMMHC Common Stock”), and no shares of PMMHC Common Stock have been or will be issued prior to the Closing Time. The shares of PMMHC Common Stock to be issued to HoldCo will have been duly authorized for issuance and, when issued and delivered by PMMHC, will be duly and validly issued and fully paid and nonassessable, and all such PMMHC Common Stock will be owned beneficially and of record by HoldCo and free and clear of any security interest, mortgage, pledge, lien, encumbrance or legal or equitable claim; the certificates representing the shares of PMMHC Common Stock will conform with the requirements of applicable laws and regulations.
(u)	None of the Primary Parties is and, as of the Closing Time, none of the Primary Parties will be, in violation of their respective articles of incorporation or their respective bylaws, or in material default in the performance or observance of any obligation, agreement, covenant, or condition contained in any contract, lease, loan agreement, indenture or other instrument to which they are a party or by which they, or any of their respective property, may be bound which would result in a Material Adverse Effect. The consummation of the transactions herein contemplated will not (i) conflict with or constitute a breach of, or default under, the articles of incorporation or bylaws of any of the Primary Parties, or materially conflict with or constitute a material breach of, or default under, any material contract, lease or other instrument to which any of the Primary Parties is a party or bound, or any applicable law, rule, regulation or order that is material to the financial condition of the Primary Parties, on a consolidated basis; (ii) violate any authorization, approval, judgment, decree, order, statute, rule or regulation applicable to the Primary Parties except for such violations which would not have a Material Adverse Effect; or (iii) result in the creation of any material lien, charge or encumbrance upon any property of the Primary Parties.
(v)	No default exists, and no event has occurred which with notice or lapse of time, or both, would constitute a material default on the part of any of the Primary Parties, in the due performance and observance of any term, covenant or condition of any indenture, mortgage, deed of trust, note, bank loan or credit agreement or any other material instrument or agreement to which any of the Primary Parties is a party or by which any of them or any of their property is bound or affected in any respect which, in any such case, is material to the Primary Parties individually or considered as one enterprise, and such agreements are in full force and effect; and no other party to any such agreements has instituted or, to the knowledge of the Primary Parties, threatened any action or proceeding wherein any of the Primary Parties is alleged to be in default thereunder under circumstances where such action or proceeding, if determined adversely to any of the Primary Parties, would have a Material Adverse Effect.

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(w)	The Primary Parties have good and marketable title to all assets which are material to the businesses of the Primary Parties and to those assets described in the Prospectus as owned by them, free and clear of all material liens, charges, encumbrances, restrictions or other claims, except such as are described in the Prospectus or which do not have a Material Adverse Effect and all of the leases and subleases which are material to the businesses of the Primary Parties, as described in the Registration Statement or Prospectus, are in full force and effect.
(x)	The Primary Parties are not in material violation of any directive from the Department, the Commission, or any other agency to make any material change in the method of conducting their respective businesses; the Primary Parties have conducted and are conducting their respective businesses so as to comply in all respects with all applicable statutes and regulations (including, without limitation, regulations, decisions, directives and orders of the Department and the Commission), except where the failure to so comply would not reasonably be expected to result in any Material Adverse Effect, and there is no charge, investigation, action, suit or proceeding before or by any court, regulatory authority or governmental agency or body pending or, to the knowledge of any of the Primary Parties, threatened, which would reasonably be expected to materially and adversely affect the Offering, the performance of this Agreement, or the consummation of the transactions contemplated in the Plan as described in the Registration Statement, or which would reasonably be expected to result in a Material Adverse Effect.
(y)	The Primary Parties have received an opinion of their special counsel, Stevens & Lee, with respect to the federal income tax consequences of the Offering, as described in the Registration Statement and the Prospectus, and the facts and representations upon which such opinions are based are truthful, accurate and complete, and none of the Primary Parties will take any action inconsistent therewith. All material aspects of the aforesaid opinion are accurately summarized in the Prospectus.
(z)	The Primary Parties have timely filed all required federal and state tax returns, have paid all taxes that have become due and payable in respect of such returns, except where permitted to be extended, have made adequate reserves for similar future tax liabilities, and no deficiency has been asserted with respect thereto by any taxing authority.
(aa)	No approval, authorization, consent or other order of any regulatory or supervisory or other public authority is required for the execution and delivery by the Primary Parties of this Agreement and the issuance of the Shares, except (i) for the approval of the Pennsylvania Insurance Commissioner (which will have been received as of the Closing Time), (ii) the non-objection of FINRA, and (iii) any necessary qualification, notification, or registration or exemption under the securities or blue sky laws of the various states in which the Shares are to be offered for sale.

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(bb)	None of the Primary Parties has: (i) issued any securities within the last 18 months (except for notes to evidence bank loans or other liabilities in the ordinary course of business or as described in the Prospectus); (ii) had any dealings with respect to sales of securities within the 18 months prior to the date hereof with any member of FINRA, or any person related to or associated with such member, other than discussions and meetings relating to the Offering and purchases and sales of U.S. government and agency and other securities in the ordinary course of business; (iii) entered into a financial or management consulting agreement except for the Letter Agreement and as contemplated hereunder; or (iv) engaged any intermediary between the Agent and the Primary Parties in connection with the Offering, and no person is being compensated in any manner for such services.
(cc)	Neither the Primary Parties nor, to the knowledge of the Primary Parties, any employee of the Primary Parties, has made any payment of funds of the Primary Parties as a loan to any person for the purchase of Shares, except for HoldCo’s loan to its employee stock ownership plan (“ESOP”), the proceeds of which will be used by the ESOP to purchase Shares, or has made any other payment of funds prohibited by law, and no funds have been set aside to be used for any payment prohibited by law.
(dd)	PMMHC and its subsidiaries comply in all material respects with any applicable financial record keeping and reporting requirements of the Currency and Foreign Transactions Reporting Act of 1970, as amended, and the regulations and rules thereunder.
(ee)	The membership records of PMMHC, including, without limitation, as to Eligible Members, are accurate and complete in all material respects.
(ff)	The Primary Parties comply in all material respects with all laws, rules and regulations relating to environmental protection, and none of them has been notified or is otherwise aware that any of them is potentially liable, or is considered potentially liable, under the Comprehensive Environmental Response, Compensation and Liability Act of 1980, as amended, or any other federal, state or local environmental laws and regulations; no action, suit, regulatory investigation or other proceeding is pending, or to the knowledge of the Primary Parties, threatened against the Primary Parties relating to environmental protection, nor do the Primary Parties have any reason to believe any such proceedings may be brought against any of them; and no disposal, release or discharge of hazardous or toxic substances, pollutants or contaminants, including petroleum and gas products, as any of such terms may be defined under federal, state or local law, has occurred on, in, at or about any facilities or properties owned or leased by any of the Primary Parties.
(gg)	Each of the Primary Parties has fulfilled, in all material respects, its obligations, if any, under the minimum funding standards of Section 302 of the United States Employee Retirement Income Security Act of 1974, as amended (“ERISA”), and the regulations promulgated thereunder with respect to any “plan” (as defined in

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	Section 3(3) of ERISA and the regulations thereunder), which is maintained by any of the Primary Parties for their employees, and any such plan is in compliance in all material respects with the presently applicable provisions of ERISA and the regulations thereunder. None of the Primary Parties has incurred any unpaid liability under Title IV of ERISA to the Pension Benefit Guaranty Corporation (other than for the payment of premiums in the ordinary course) or to any such plan.
(hh)	HoldCo has applied for approval, subject to completion of the Offering, to have the Shares listed on the NASDAQ Global Market effective as of the Closing Time.
(ii)	Except as disclosed in the Prospectus, all material reinsurance treaties or agreements to which PMIC is a party or is a named reinsured are in full force and effect. Neither PMIC, nor, to the knowledge of the Primary Parties, any other party thereto, is in default under any such agreement, and no party may terminate any such agreement by reason of the transactions contemplated by the Plan.
(jj)	HoldCo has filed a registration statement on Form 8-A to register the Common Stock under Section 12(g) of the Securities Exchange Act of 1934, as amended (the “Exchange Act”), and pursuant to Form 8-A such registration statement shall be effective concurrent with the effectiveness of the Registration Statement.
(kk)	There is no contract or other document of a character required to be described in the Registration Statement or the Prospectus or to be filed as an exhibit to the Registration Statement which is not described or filed as required.
(ll)	The Primary Parties maintain a system of internal accounting controls sufficient to provide reasonable assurances that (i) transactions are executed in accordance with management’s general or specific authorizations, (ii) transactions are recorded as necessary to permit preparation of financial statements in conformity with generally accepted accounting principles and to maintain accountability for assets, (iii) access to cash and other liquid assets is permitted only in accordance with management’s general or specific authorization, and (iv) the recorded ledger assets are compared with existing assets at reasonable intervals and appropriate action is taken with respect to any differences.
(mm)	Except as described in the Prospectus, (i) there are no contractual encumbrances or contractual restrictions or regulatory restrictions on the ability of the Primary Parties to pay dividends or make any other distributions on its capital stock, and (ii) there are no contractual encumbrances or contractual restrictions on the ability of the Primary Parties (A) to pay any indebtedness owed to the Primary Parties or (B) to make any loans or advances to, or investments in, the Primary Parties, or (C) to transfer any of its property or assets to the Primary Parties.
(nn)	None of the Primary Parties are required to be registered as an investment company under the Investment Company Act of 1940.

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(oo) The Primary Parties have taken all actions necessary to obtain at the Closing Time a blue sky memorandum from Stevens & Lee.

     Any certificates signed by an officer of any of the Primary Parties and delivered to the Agent or its counsel that refer to this Agreement shall be deemed to be a representation and warranty by the Primary Parties to the Agent as to the matters covered thereby with the same effect as if such representation and warranty were set forth herein.

     7. Representations and Warranties of the Agent. The Agent represents and warrants to the Primary Parties that:

(a)	The Agent is a limited liability company and is validly existing in good standing under the laws of the Commonwealth of Pennsylvania, with full power and authority to provide the services to be furnished to the Primary Parties hereunder.
(b)	The execution and delivery of this Agreement and the consummation of the transactions contemplated hereby have been duly and validly authorized by all necessary action on the part of the Agent, and this Agreement and the Letter Agreement are the legal, valid and binding agreement of the Agent, enforceable in accordance with their terms except as the legality, validity, binding nature and enforceability thereof may be limited by (i) bankruptcy, insolvency, moratorium, conservatorship, receivership or other similar laws relating to or affecting the enforcement of creditors’ rights generally; (ii) general equity principles regardless of whether such enforceability is considered in a proceeding in equity or at law; and (iii) the extent, if any, that the provisions of Sections 11 or 12 hereof may be unenforceable as against public policy.
(c)	Each of the Agent and its employees, agents and representatives who shall perform any of the services hereunder has, and until the Offering is completed or terminated shall maintain, all licenses, approvals and permits necessary to perform such services.
(d)	No action, suit, charge or proceeding before the Commission, FINRA, any state securities commission or any court is pending, or to the knowledge of Agent threatened, against the Agent which, if determined adversely to Agent, would have a material adverse effect upon the ability of the Agent to perform its obligations under this Agreement.
(e)	The Agent is registered as a broker/dealer pursuant to Section 15(b) of the 1934 Act, as amended (the “1934 Act”) and is a member of FINRA.
(f)	Any funds received in the Offering by the Agent will be handled by the Agent in accordance with Rule 15c2-4 under the 1934 Act to the extent applicable.

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     8. Covenants of the Primary Parties. The Primary Parties hereby jointly and severally covenant with the Agent as follows:

(a)	HoldCo will not, at any time after the date the Registration Statement is declared effective, file any amendment or supplement to the Registration Statement without providing the Agent and its counsel an opportunity to review such amendment or supplement or, except as may be required by law, file any amendment or supplement to which amendment or supplement the Agent or its counsel shall reasonably object. HoldCo will furnish promptly to the Agent and its counsel copies of all correspondence from the Commission with respect to the Registration Statement and HoldCo’s responses thereto.
(b)	HoldCo represents and agrees that, unless it obtains the prior consent of the Agent, and the Agent represents and agrees that, unless it obtains the prior consent of HoldCo, it has not made and will not make any offer relating to the offered Shares that would constitute an “issuer free writing prospectus,” as defined in Rule 433, or that would constitute a “free writing prospectus,” as defined in Rule 405, required to be filed with the Commission. Any such free writing prospectus consented to by HoldCo and the Agent is hereinafter referred to as a “Permitted Free Writing Prospectus.” HoldCo represents that it has treated or agrees that it will treat each Permitted Free Writing Prospectus as an “issuer free writing prospectus,” as defined in Rule 433, and has complied and will comply with the requirements of Rule 433 applicable to any Permitted Free Writing Prospectus, including timely Commission filing where required, legending and record keeping. HoldCo need not treat any communication as a free writing prospectus if it is exempt from the definition of prospectus pursuant to Clause (a) of Section 2(a)(10) of the 1933 Act without regard to Rule 172 or 173.
(c)	The Primary Parties will use commercially reasonable efforts to cause any post-effective amendment to the Registration Statement to be declared effective by the Commission and will immediately upon receipt of any information concerning the events listed below notify the Agent (i) when the Registration Statement, as amended, has become effective; (ii) of any request by the Commission or any other governmental entity for any amendment or supplement to the Registration Statement, or of any request for additional information; (iii) of the issuance by the Commission or any other governmental agency of any order or other action suspending the Offering or the use of the Registration Statement or the Prospectus or any other filing of the Primary Parties under the 1933 Act, the 1933 Act Regulations, the 1934 Act, the 1934 Act Regulations or other applicable law, or the threat of any such action; or (iv) of the issuance by the Commission of any stop order suspending the effectiveness of the Registration Statement or of the initiation or threat of initiation or threat of any proceedings for that purpose.
(d)	The Primary Parties will comply in all material respects with any and all terms, conditions, requirements and provisions with respect to the Offering and the transactions contemplated thereby imposed by the Commission, by applicable

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	state law and regulations, and by the 1933 Act, the 1933 Act Regulations, the 1934 Act, and the rules and regulations of the Commission promulgated under the 1934 Act (the “1934 Act Regulations”), FINRA, and the NASDAQ Global Market, to be complied with prior to or subsequent to the Closing Time; and when the Prospectus is required to be delivered, the Primary Parties will comply in all material respects, at their own expense, with all material requirements imposed upon them by the Commission, by applicable state law and regulations and by the 1933 Act, the 1933 Act Regulations, the 1934 Act, and the 1934 Act Regulations, in each case as from time to time in force, so far as necessary to permit the continuance of sales or dealing in shares of Common Stock during such period in accordance with the provisions hereof and the Prospectus. If the updated valuation of the Company prepared by Curtis Financial Group, LLC following the Offering is not within the valuation range set forth in the Prospectus at the time of effectiveness and HoldCo decides to resolicit subscriptions, HoldCo will promptly prepare and file with the Commission a post-effective amendment to the Registration Statement relating to the results of the updated valuation prior to any resolicitation of subscriptions.
(e)	Each of the Primary Parties will inform the Agent of any event or circumstances of which it is or becomes aware as a result of which the Registration Statement and/or Prospectus, as then supplemented or amended, would include an untrue statement of a material fact or omit to state a material fact necessary in order to make the statements therein not misleading. If it is necessary, in the reasonable opinion of counsel for the Primary Parties, to amend or supplement the Registration Statement or the Prospectus in order to correct such untrue statement of a material fact or to make the statements therein not misleading in light of the circumstances existing at the time of their use, the Primary Parties will, at their expense, prepare and file with the Commission, as necessary under applicable federal and state rules and regulations, and furnish to the Agent, a reasonable number of copies of an amendment or amendments of, or a supplement or supplements to, the Registration Statement and the Prospectus (in form and substance reasonably satisfactory to counsel for the Agent after a reasonable time for review) which will amend or supplement the Registration Statement and/or the Prospectus so that as amended or supplemented it will not contain an untrue statement of a material fact or omit to state a material fact necessary in order to make the statements therein, in light of the circumstances existing at the time, not misleading. For the purpose of this subsection, each of the Primary Parties will furnish such information with respect to itself as the Agent may from time to time reasonably request.
(f)	Pursuant to the terms of the Plan, HoldCo will endeavor in good faith, in cooperation with the Agent, to register or to qualify the Shares for offer and sale or to exempt such Shares from registration and to exempt HoldCo and its officers, directors and employees from registration as broker-dealers, under the applicable securities laws of the jurisdictions in which the Offering will be conducted; provided, however, that HoldCo shall not be obligated to file any general consent

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	to service of process or to qualify as a foreign corporation to do business in any jurisdiction in which it is not so qualified. In each jurisdiction where any of the Shares shall have been registered or qualified as above provided, HoldCo will make and file such statements and reports as are or may be required by the laws of such jurisdiction as a result of, or in connection with, such registration or qualification.
(g)	HoldCo will not sell or issue, contract to sell or otherwise dispose of, for a period of 180 days after the date hereof, without the Agent’s prior written consent, which consent shall not be unreasonably withheld, any shares of Common Stock other than in connection with any plan or arrangement described in the Prospectus.
(h)	For the period of three years from the date of this Agreement, HoldCo will furnish to the Agent upon request (i) a copy of each report of HoldCo furnished to or filed with the Commission under the 1934 Act or any national securities exchange or system or the NASDAQ Global Market on which any class of securities of HoldCo is listed or quoted, (ii) a copy of each report of HoldCo mailed to holders of Common Stock or non-confidential report filed with the Commission, the Department, or any other supervisory or regulatory authority or any national securities exchange or system or the NASDAQ Global Market on which any class of the securities of HoldCo is listed or quoted, (iii) each press release and material news item and article released by the Primary Parties, and (iv) from time-to-time, such other publicly available information concerning the Primary Parties as the Agent may reasonably request; provided that, any information or documents available on the Commission’s Electronic Data Gathering, Analysis and Retrieval System shall be considered furnished for purposes of this Section 8(h).
(i)	The Primary Parties will use the net proceeds from the sale of the Common Stock in the manner set forth in the Prospectus under the caption “USE OF PROCEEDS.”
(j)	HoldCo will distribute the Prospectus or other offering materials in connection with the offering and sale of the Common Stock only in accordance with the 1933 Act, the 1933 Act Regulations, the 1934 Act and the 1934 Act Regulations, and the laws of any state in which the shares are qualified for sale.
(k)	Prior to the Closing Time, HoldCo shall register its Common Stock under Section 12(b) of the 1934 Act, as amended, and will request that such registration statement be effective as of the Closing Time. HoldCo will use commercially reasonable efforts to list, subject to notice of issuance, the Shares on the NASDAQ Global Market.
(l)	For so long as the Common Stock is registered under the 1934 Act, HoldCo will furnish to its stockholders after the end of each fiscal year, in the time periods prescribed by applicable law and regulations, such reports and other information as are required to be furnished to its stockholders under the 1934 Act (including

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	consolidated financial statements of PMMHC and its subsidiaries, certified by independent public accountants).
(m)	HoldCo will report the use of proceeds of the Offering in accordance with Rule 463 under the 1933 Act.
(n)	The Primary Parties will maintain appropriate arrangements for depositing all funds received from persons mailing subscriptions for or orders to purchase Shares on a non-interest bearing basis as described in the Prospectus until the Closing Time and satisfaction of all conditions precedent to the release of HoldCo’s obligation to refund payments received from persons subscribing for or ordering Shares in the Offering, in accordance with the Plan as described in the Prospectus, or until refunds of such funds have been made to the persons entitled thereto or withdrawal authorizations canceled in accordance with the Plan and as described in the Prospectus. The Primary Parties will maintain, together with the Agent, such records of all funds received to permit the funds of each subscriber to be separately insured by the FDIC (to the maximum extent allowable) and to enable the Primary Parties to make the appropriate refunds of such funds in the event that such refunds are required to be made in accordance with the Plan and as described in the Prospectus.
(o)	The Primary Parties will take such actions and furnish such information as are reasonably requested by the Agent in order for the Agent to ensure compliance with Rule 2790 of FINRA.
(p)	The Primary Parties will conduct their businesses in compliance in all material respects with all applicable federal and state laws, rules, regulations, decisions, directives and orders including, all decisions, directives and orders of the Commission and the Department.
(q)	The Primary Parties shall comply with any and all terms, conditions, requirements and provisions with respect to the Plan and the transactions contemplated thereby imposed by the Commission, the 1933 Act, the 1933 Act Regulations, the 1934 Act and the 1934 Act Regulations to be complied with subsequent to the Closing Time. HoldCo will comply with all provisions of all undertakings contained in the Registration Statement.
(r)	The Primary Parties will not amend the Plan without notifying the Agent prior thereto.
(s)	HoldCo shall provide the Agent with any information necessary to assist with the allocation of the Shares in the Offering in the event of an oversubscription, and such information shall be accurate and reliable in all material respects.
(t)	HoldCo will not deliver the Shares until the Primary Parties have satisfied or caused to be satisfied each condition set forth in Section 10 hereof, unless such condition is waived in writing by the Agent.

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(u)	Immediately upon completion of the sale by HoldCo of the Shares contemplated by the Plan and the Prospectus, all of the issued and outstanding shares of capital stock of PMMHC shall be owned by HoldCo.
(v)	Prior to the Closing Time, the Plan shall have been approved by the eligible voting members of PMMHC in accordance with the provisions of PMMHC’s articles and bylaws.
(w)	On or before the Closing Time, the Primary Parties will have completed all conditions precedent to the Offering specified in the Plan and the offer and sale of the Shares will have been conducted in all material respects in accordance with the Plan and with all other applicable laws, regulations, decisions and orders, including all terms, conditions, requirements and provisions precedent to the Offering imposed upon any of the Primary Parties by the Department, the Commission or any other regulatory authority and in the manner described in the Prospectus.
(x)	HoldCo shall notify the Agent when funds shall have been received for the minimum number of Shares.

     9. Payment of Expenses. The Primary Parties will pay for all expenses incident to the performance of this Agreement, including without limitation: (a) the preparation, printing, filing, delivery and shipment of the Registration Statement, including the Prospectus, and all amendments and supplements thereto, and all filing fees related thereto; (b) all filing fees and expenses in connection with the qualification or registration of the Shares for offer and sale by HoldCo under the securities or “blue sky” laws, including without limitation filing fees, reasonable legal fees and disbursements of counsel in connection therewith, and in connection with the preparation of a blue sky law survey; (c) the filing fees of FINRA related to the Agent’s fairness filing under Rule 2710 (or any successor rule of FINRA); (e) fees and expenses related to the preparation of the Appraisal; (f) fees and expenses related to auditing and accounting services; (g) all expenses relating to advertising, postage, temporary personnel, investor meetings and the operation of the stock information center; (h) transfer agent fees and costs of preparation and distribution of stock certificates; and (i) fees and expenses of the Primary Parties relating to presentations or meetings undertaken in connection with the marketing of the Syndicated Community Offering and sale of the Shares in the Syndicated Community Offering to prospective investors and the Agent’s sales forces, including expenses associated with travel, lodging, and other expenses incurred by the officers of the Primary Parties; provided, however, that the Agent shall pay the fees and expenses of the Agent and any of its affiliates relating to presentations or meetings undertaken in connection with the marketing and sale of the Shares to prospective investors and the Agent’s sales forces, including expenses associated with the production of road show slides and graphics, fees and expenses of any consultants engaged in connection with the road show presentations, travel, lodging and other expenses incurred by the officers of the Agent and any such consultants. In the event that the Agent incurs any expenses on behalf of the Primary Parties, the Primary Parties will pay or reimburse the Agent for such expenses regardless of whether the Offering are successfully completed, and such reimbursements will not be included in the expense limitations set forth above. The Primary Parties also agree to reimburse the Agent for reasonable out-of-pocket expenses, including legal

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fees and expenses, in an amount up to $150,000 incurred by the Agent in connection with the services hereunder. In the Subscription and Community Offering, the Agent will not incur actual accountable reimbursable out-of-pocket expenses in excess of $5,000 without the consent of PMMHC or HoldCo. The Primary Parties and the Agent acknowledge, however, that expense caps may be increased by the mutual consent of PMMHC or HoldCo and the Agent, including in the event of a material delay in the Offering requiring more than two updates of the financial information contained in the Registration Statement, as amended or supplemented, to reflect a period later than that set forth in the original filing of the Registration Statement on January 26, 2009. Not later than two days prior to the Closing Time, the Agent will provide the Primary Parties with a detailed accounting of all reimbursable expenses to be paid at the Closing.

     10. Conditions to the Agent’s Obligations. The obligations of the Agent hereunder and the occurrence of the Closing are subject to the condition that all representations and warranties and other statements of the Primary Parties herein contained are, at and as of the commencement of the Offering and at and as of the Closing Time, true and correct in all material respects, the Primary Parties shall have performed all of their obligations hereunder to be performed on or before such dates, and to the following further conditions:

(a)

The Registration Statement shall have been declared effective by the Commission, and no stop order or other action suspending the effectiveness of the Registration Statement shall have been issued under the 1933 Act or proceedings therefor initiated or, to any of the Primary Parties’ knowledge, threatened by the Commission or any state authority and no order or other action suspending the authorization for use of the Prospectus or the consummation of the Reorganization shall have been issued or proceedings therefor initiated or, to any of the Primary Parties’ knowledge, threatened by the Department, the Commission, or any other governmental body.

(b)

At the Closing Time, the Agent shall have received:

               (1) The opinion, dated as of the Closing Time, of Morgan, Lewis & Bockius LLP, as special counsel to the independent directors of PMMHC, in form and substance satisfactory to counsel for the Agent, to the effect that:

(i)

HoldCo is a corporation duly incorporated and validly subsisting under the laws of the Commonwealth of Pennsylvania, with corporate power and authority to own its properties and to conduct its business as described in the Prospectus, and will be duly qualified to transact business and will be in good standing in each jurisdiction in which the conduct of its business requires such qualification and in which the failure to qualify would have a Material Adverse Effect.

(ii)

PMMHC is a duly incorporated and validly subsisting Pennsylvania mutual holding company with corporate power and authority to conduct its business as described in the Prospectus and to enter into this Agreement and perform its obligations hereunder, and is duly qualified to transact business and in good standing in each jurisdiction in which the conduct of

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	its business requires such qualification and in which the failure to qualify would have a Material Adverse Effect (as defined in Section 6(m)).
(iii)	PMHC is a duly incorporated and validly subsisting corporation under the laws of the Commonwealth of Pennsylvania, with corporate power and authority to own its properties and to conduct its business as described in the Prospectus and to enter into this Agreement and perform its obligations hereunder, and is duly qualified to transact business and in good standing in each jurisdiction in which the conduct of its business requires such qualification and in which the failure to qualify would have a Material Adverse Effect.
(iv)	PMIC is a property and casualty insurance company duly incorporated and validly subsisting under the laws of the Commonwealth of Pennsylvania with corporate power and authority to own its properties and to conduct its business as described in the Prospectus and to enter into this Agreement and perform its obligations hereunder, and is duly qualified to transact business and in good standing in each jurisdiction in which the conduct of its business requires such qualification and in which the failure to qualify would have a Material Adverse Effect. PMIC has the requisite corporate power and authority to enter into and perform its obligations under this Agreement and to carry on an insurance business pursuant to and to the extent of the certificates of authority issued under the laws of the Commonwealth of Pennsylvania and each other jurisdiction in which it is licensed to carry on an insurance business.
(v)	American Millers is a property and casualty insurance company duly incorporated and validly subsisting under the laws of the Commonwealth of Pennsylvania with corporate power and authority to own its properties and to conduct its business as described in the Prospectus and to enter into this Agreement and perform its obligations hereunder, and is duly qualified to transact business and in good standing in each jurisdiction in which the conduct of its business requires such qualification and in which the failure to qualify would have a Material Adverse Effect. American Millers has the requisite corporate power and authority to carry on an insurance business pursuant to and to the extent of the certificates of authority issued under the laws of the Commonwealth of Pennsylvania and each other jurisdiction in which it is licensed to carry on an insurance business.
(vi)	The authorized capital stock of HoldCo consists of 10,000,000 shares of Common Stock and 1,000,000 shares of preferred stock, having such par value, if any, as the board of directors shall fix and determine; HoldCo has no shares of capital stock issued and outstanding. Immediately upon consummation of the Offering, (a) the issued and outstanding capital stock of HoldCo will be within the range set forth in the Prospectus under the caption “Capitalization”; (b) the shares of Common Stock of HoldCo to be

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	subscribed for in the Offering will have been duly and validly authorized for issuance, and when issued and delivered by HoldCo pursuant to the Plan against payment of the consideration calculated as set forth in the Plan, will be fully paid and nonassessable; and (c) the issuance of the shares of Common Stock of HoldCo will not be subject to preemptive rights under the articles of incorporation or bylaws of HoldCo, or arising or outstanding by operation of law or, to the knowledge of such counsel, under any contract, indenture, agreement, instrument or other document, except for the subscription rights under the Plan and restrictions arising under the 1998 Order.
(vii)	The execution and delivery of this Agreement and the consummation of the transactions contemplated hereby have been duly authorized by all necessary corporate action on the part of the Primary Parties; and this Agreement constitutes a valid, legal and binding obligation of each of the Primary Parties, enforceable in accordance with its terms, except to the extent that the provisions of Sections 11 and 12 hereof may be unenforceable as against public policy, and except to the extent that such enforceability may be limited by bankruptcy laws, insolvency laws, or other laws affecting the enforcement of creditors’ rights generally.
(viii)	The Plan has been duly adopted by the Board of Directors of PMMHC in the manner required by PMMHC’s articles of incorporation and bylaws.
(ix)	Upon consummation of the Offering, to the knowledge of such counsel, (a) the Offering was made in all material respects in accordance with the Plan, (b) all terms, conditions, requirements and provisions with respect to the Conversion and Offering imposed by the Commission, the Department, or any other Pennsylvania governmental agency, if any, were complied with by the Primary Parties in all material respects or appropriate waivers were obtained, and (c) all notice and waiting periods were satisfied or waived; provided, however, that no opinion need be expressed concerning the state securities or blue sky laws or foreign securities laws of various jurisdictions in which the Shares will be offered.
(x)	The Registration Statement has become effective under the 1933 Act and, to such counsel’s knowledge after making inquiry of the Commission, and based upon representations made by staff of the Commission, no stop order suspending the effectiveness of the Registration Statement has been issued, and, to such counsel’s knowledge, no proceedings for that purpose have been instituted or threatened.
(xi)	The description of the shares of Common Stock of HoldCo contained in the Registration Statement and the Prospectus, insofar as such statements purport to summarize certain provisions of the articles of incorporation and bylaws of HoldCo, provide a fair summary thereof, and the forms of certificates proposed to be used to evidence the shares of Common Stock

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	of HoldCo comply in all material respects with all applicable laws and regulations, including, without limitation, as to form.
(xii)	At the time that the Registration Statement became effective, the Registration Statement, including the Prospectus contained therein, as amended or supplemented (other than the financial statements, notes to financial statements, financial tables or other financial and statistical data included therein and the appraisal valuation and the business plan as to which counsel need express no opinion), complied as to form in all material respects with the requirements of the 1933 Act and the 1933 Act Regulations.
(xiii)	To such counsel’s knowledge, there are no legal or governmental proceedings pending or threatened (i) asserting the invalidity of this Agreement or (ii) seeking to prevent the offer, sale or issuance of the Shares.
(xiv)	The information in the Prospectus under the captions “BUSINESS — “ Regulation,” “RESTRICTIONS ON ACQUISITION OF THE HOLDING COMPANY,” and “DESCRIPTION OF CAPITAL STOCK,” to the extent that it constitutes summaries of legal matters, documents or proceedings, or legal conclusions, fairly presents in all material respects the information required to be presented in Form S-1.
(xv)	None of the Primary Parties are required to be registered as an investment company under the Investment Company Act of 1940, as amended.
(xvi)	To such counsel’s knowledge, none of the Primary Parties is in violation of its articles of incorporation or its bylaws as in effect at the Closing Time. In addition, to such counsel’s knowledge, the execution and delivery of and performance under this Agreement by the Primary Parties, the incurrence of the obligations set forth herein and the consummation of the transactions contemplated herein will not result in any material violation of the provisions of the articles of incorporation or the bylaws (or other constituent documents) of any of the Primary Parties or any material violation of any applicable law, act, regulation, or to such counsel’s knowledge, order or court order, writ, injunction or decree.

     In rendering such opinion, such counsel may rely as to matters of fact, without independent investigation, on certificates of responsible officers of the Primary Parties (to the extent relevant) and public officials, provided copies of any such certificates are delivered to Agent together with the opinion to be rendered hereunder. Such opinion may be limited to the laws of the Commonwealth of Pennsylvania and the federal securities laws of the United States of America, and such opinion will not be deemed to be rendering any opinion or any other statements regarding the regulatory laws of any other state.

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               (2) A letter of Morgan, Lewis & Bockius LLP addressed to the Agent to the effect that during the preparation of the Registration Statement and the Prospectus, representatives of Morgan, Lewis & Bockius LLP participated in conferences with certain officers of and other representatives of the Primary Parties, counsel to the Agent, representatives of the independent public accounting firm for the Primary Parties and representatives of the Agent at which the contents of the Registration Statement and the Prospectus and related matters were discussed, and although (without limiting the opinions provided pursuant to Section 10(b)(1)) Morgan, Lewis & Bockius LLP has not independently verified the accuracy, completeness or fairness of the statements contained in the Registration Statement and Prospectus, on the basis of the information obtained in the course of engagement as special counsel, nothing has come to the attention of the representatives of Morgan, Lewis & Bockius LLP providing services to the Company that caused them to believe that (i) the Registration Statement at the time it was ordered effective by the Commission, (ii) the General Disclosure Package as of the Closing Time, or (iii) the Prospectus, as of its date and as of the Closing Time, contained or contains any untrue statement of a material fact or omitted to state any material fact necessary to make the statements therein, in light of the circumstances under which they were made, not misleading (it being understood that counsel need not assume any responsibility for the accuracy, completeness or fairness of the statements contained in the Registration Statement, the General Disclosure Package and the Prospectus, and counsel need not express any belief with respect to the financial statements, schedules and other financial and statistical data included, statistical or appraisal methodology employed, or information concerning internal controls over financial reporting contained in, the Registration Statement, Prospectus or General Disclosure Package).

               (3) The favorable opinion, dated as of the Closing Time, of counsel for the Agent, with respect to such matters as the Agent may reasonably require; such opinion may rely, as to matters of fact, upon certificates of officers and directors of the Primary Parties delivered pursuant hereto or as such counsel may reasonably request and upon the opinion of counsel to the Primary Parties or other counsel acceptable to the Agent.

               (4) A blue sky memorandum from Stevens & Lee addressed to the Primary Parties and the Agent relating to the Offering, including the Agent’s participation therein. The Blue Sky Memorandum will address the necessity of obtaining or confirming exemptions, qualifications or the registration of the Common Stock under applicable state securities law.

(c)	Concurrently with the execution of this Agreement, the Agent shall receive a letter from KPMG LLP, dated the date hereof and addressed to the Agent, in the form set forth in Exhibit C hereto.
(d)	At the Closing Time, the Agent shall receive a letter from KPMG LLP dated the Closing Time, addressed to the Agent, confirming the statements made by its letter delivered by it pursuant to subsection (c) above, the “specified date” referred to in clause (iii)(C) and (D) thereof to be a date specified in such letter, which shall not be more than three business days prior to the Closing Time.
(e)	At the Closing Time, the Shares shall have been approved for listing on the NASDAQ Global Market.

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(f)	At the Closing Time, counsel to the Agent shall have been furnished with such documents and opinions as counsel for the Agent may reasonably require for the purpose of enabling them to advise the Agent with respect to the issuance and sale of the Shares as herein contemplated and related proceedings, or in order to evidence the accuracy of any of the representations and warranties, or the fulfillment of any of the conditions herein contained.
(g)	At the Closing Time, the Agent shall receive a certificate of the Chief Executive Officer and Chief Financial Officer of each of the Primary Parties, dated as of the Closing Time, without personal liability to the effect that: (i) they have examined the Prospectus and at the time the Prospectus became authorized for final use, the Prospectus did not contain an untrue statement of a material fact or omit to state a material fact necessary in order to make the statements therein, in the light of the circumstances under which they were made, not misleading; (ii) there has not been, since the respective dates as of which information is given in the Prospectus, any Material Adverse Effect (as defined in Section 6(m)), whether or not arising in the ordinary course of business other than as disclosed in the Prospectus; (iii) the representations and warranties contained in Section 6 of this Agreement are true and correct with the same force and effect as though made at and as of the Closing Time; (iv) each of the Primary Parties has complied in all material respects with all material agreements and satisfied all conditions on its part to be performed or satisfied at or prior to the Closing Time including the conditions contained in this Section 10; (v) no stop order has been issued or, to their knowledge, is threatened, by the Commission or any other governmental body; and (vi) no order suspending the Offering, or the effectiveness of the Registration Statement has been issued and, to their knowledge, no proceedings for any such purpose have been initiated or threatened by the Department, the Commission, or any other federal or state authority.
(h)	At the Closing Time, the Agent shall receive a letter from Curtis Financial Group dated as of the Closing Time, stating that its opinion of the aggregate pro forma market value of PMMHC expressed in the Appraisal as most recently updated, remains in effect.
(i)	Prior to and at the Closing Time, none of the Primary Parties shall have sustained, since the date of the latest audited financial statements included in the Registration Statement and Prospectus, any material loss or interference with its business from fire, explosion, flood or other calamity, whether or not covered by insurance, or from any labor dispute or court or governmental action, order or decree, otherwise than as set forth in the Registration Statement and the Prospectus, and since the respective dates as of which information is given in the Registration Statement and the Prospectus, there shall not have been any material change, or any development involving a prospective Material Adverse Effect, otherwise than as set forth or contemplated in the Registration Statement and the Prospectus, the effect of which, in any such case described above, is in the Agent’s reasonable judgment sufficiently material and adverse as to make it

27

	impracticable or inadvisable to proceed with the Offering or the delivery of the Shares on the terms and in the manner contemplated in the Prospectus.
(j)	At or prior to the Closing Time, the Pennsylvania Insurance Commissioner shall have issued a letter or order to PMMHC, which shall have the force of (i) amending or rescinding the 1998 Order, (i) approving the Conversion and Offering, (ii) approving the establishment of an employee stock ownership plan and stock compensation plan, and (iv) approving the loan to the employee stock ownership plan to purchase Shares in the Offering.
(k)	Subsequent to the date hereof, there shall not have occurred any of the following: (i) a suspension or limitation in trading in securities generally on the New York Stock Exchange or American Stock Exchange or in the over-the-counter market, or quotations halted generally on the Nasdaq Stock Market, or minimum or maximum prices for trading have been fixed, or maximum ranges for prices for securities have been required by either of such exchanges or FINRA or by order of the Commission or any other governmental authority other than temporary trading halts (A) imposed as a result of intraday changes in the Dow Jones Industrial Average, (B) lasting no longer than until the regularly scheduled commencement of trading on the next succeeding business-day, and (C) which, when combined with all other such halts occurring during the previous five business days, total less than three; (ii) a general moratorium on the operations of federally-insured financial institutions or general moratorium on the withdrawal of deposits from federally-insured financial institutions declared by either federal or state authorities; or (iii) any outbreak of hostilities or escalation thereof or other calamity or crisis, including, without limitation, terrorist activities after the date hereof, the effect of any of (i) through (iii) herein, in the judgment of the Agent, is so material and adverse as to make it impracticable to market the Shares or to enforce contracts, including subscriptions or purchase orders, for the sale of the Shares.

     All such opinions, certificates, letters and documents will be in compliance with the provisions hereof only if they are reasonably satisfactory in form and substance to the Agent and to counsel for the Agent. Any certificate signed by an officer of PMMHC and delivered to the Agent or to counsel for the Agent shall be deemed a representation and warranty by PMMHC to the Agent as to the statements made therein. If any condition to the Agent’s obligations hereunder to be fulfilled prior to or at the Closing Time is not fulfilled, the Agent may terminate this Agreement (provided that if this Agreement is so terminated but the sale of Shares is nevertheless consummated, the Agent shall be entitled to the reimbursement of all expenses to the extent contemplated by Section 14 hereof but shall not be entitled to any compensation provided for in Section 4(b) or (c) hereof) or, if the Agent so elects, may waive any such conditions which have not been fulfilled or may extend the time of their fulfillment.

     11. Indemnification.

(a) The Primary Parties jointly and severally agree to indemnify and hold harmless the Agent, its officers, directors, agents, and employees and each person, if any,

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who controls the Agent within the meaning of Section 15 of the 1933 Act or Section 20(a) of the 1934 Act, against any and all loss, liability, claim, damage or expense whatsoever (including but not limited to settlement expenses, subject to the limitation set forth in the last sentence of Paragraph (c) below), joint or several, that the Agent or any of such officers, directors, agents, employees and controlling Persons (collectively, the “Related Persons”) may suffer or to which the Agent or the Related Persons may become subject under all applicable federal and state laws or otherwise, and to promptly reimburse the Agent and any Related Persons upon written demand for any reasonable expenses (including reasonable fees and disbursements of counsel) incurred by the Agent or any Related Persons in connection with investigating, preparing or defending any actions, proceedings or claims (whether commenced or threatened) to the extent such losses, claims, damages, liabilities or actions: (i) arise out of or are based upon any untrue statement or alleged untrue statement of a material fact contained in the Registration Statement (or any amendment or supplement thereto), the Prospectus (or any amendment or supplement thereto), any Issuer-Represented Free Writing Prospectus or any blue sky application or other instrument or document of the Primary Parties or based upon written information supplied by any of the Primary Parties filed in any state or jurisdiction to register or qualify any or all of the Shares under the securities laws thereof (collectively, the “Blue Sky Applications”), or any application or other document, advertisement, or communication (“Sales Information”) prepared, made or executed by or on behalf of any of the Primary Parties with its consent or based upon written information furnished by or on behalf of any of the Primary Parties, whether or not filed in any jurisdiction in order to qualify or register the Shares under the securities laws thereof, (ii) arise out of or are based upon the omission or alleged omission to state in any of the foregoing documents or information, a material fact required to be stated therein or necessary to make the statements therein, in light of the circumstances under which they were made, not misleading; (iii) arise from any theory of liability whatsoever relating to or arising from or based upon the Registration Statement (or any amendment or supplement thereto), the Prospectus (or any amendment or supplement thereto), any Issuer-Represented Free Writing Prospectus, or any Blue Sky Applications or sales information or other documentation distributed in connection with the Offering; or (iv) result from any claims made with respect to the accuracy, reliability and completeness of the records of policy holders, including without limitation, Eligible Members, or for any denial or reduction of a subscription or order to purchase Common Stock, whether as a result of a properly calculated allocation pursuant to the Plan or otherwise, based upon such records; provided, however, that no indemnification is required under this Paragraph (a) to the extent such losses, claims, damages, liabilities or actions arise out of or are based upon any untrue material statements or alleged untrue material statements in, or material omission or alleged material omission from, the Registration Statement (or any amendment or supplement thereto) or the Prospectus (or any amendment or supplement thereto), any Issuer-Represented Free Writing Prospectus, the Blue Sky Applications or Sales Information or other documentation distributed in connection with the Offering

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	made in reliance upon and in conformity with written information furnished to the Primary Parties by the Agent or its representatives (including counsel) with respect to the Agent expressly for use in any such document (or any amendment or supplement thereto); provided, further, that the Primary Parties will not be responsible for any loss, liability, claim, damage or expense to the extent that a court of competent jurisdiction finds that they result primarily from material oral misstatements by the Agent to a purchaser of Shares which are not based upon information in the Registration Statement or Prospectus, and the Agent agrees to repay to the Primary Parties any amounts advanced to it by the Primary Parties in connection with matters as to which it is found by a court of competent jurisdiction not to be entitled to indemnification hereunder.
(b)	The Agent agrees to indemnify and hold harmless the Primary Parties, their directors and officers, agents, and employees and each person, if any, who controls any of the Primary Parties within the meaning of Section 15 of the 1933 Act or Section 20(a) of the 1934 Act against any and all loss, liability, claim, damage or expense whatsoever (including but not limited to settlement expenses, subject to the limitation set forth in the last sentence of Paragraph (c) below), joint or several which they, or any of them, may suffer or to which they, or any of them, may become subject under all applicable federal and state laws or otherwise, and to promptly reimburse the Primary Parties and any such persons upon written demand for any reasonable expenses (including fees and disbursements of counsel) incurred by them in connection with investigating, preparing or defending any actions, proceedings or claims (whether commenced or threatened) to the extent such losses, claims, damages, liabilities or actions arise out of or are based upon any untrue statement or alleged untrue statement of a material fact contained in the Registration Statement (or any amendment of supplement thereto), any Issuer-Represented Free Writing Prospectus, or any Blue Sky Applications or Sales Information or are based upon the omission or alleged omission to state in any of the foregoing documents a material fact required to be stated therein or necessary to make the statements therein, in the light of the circumstances under which they were made, not misleading; provided, however, that the Agent’s obligations under this Section shall exist only if and only to the extent that such untrue statement or alleged untrue statement was made in, or such material fact or alleged material fact was omitted from, the Registration Statement (or any amendment or supplement thereto), the Prospectus (or any amendment or supplement thereto), the Blue Sky Applications or Sales Information in reliance upon and in conformity with written information furnished to any of the Primary Parties by the Agent or its representatives (including counsel) with respect to the Agent expressly for use therein.
(c)	Each indemnified party shall give prompt written notice to each indemnifying party of any action, proceeding, claim (whether commenced or threatened), or suit instituted against it in respect of which indemnity may be sought hereunder, but failure to so notify an indemnifying party shall not relieve it from any liability which it may have on account of this Section, Section 12 or otherwise, except to

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the extent that such failure or delay causes actual harm to the indemnifying party with respect to such action, proceeding, claim or suit. An indemnifying party may participate at its own expense in the defense of such action. In addition, if it so elects within a reasonable time after receipt of such notice, an indemnifying party, jointly with any other indemnifying parties receiving such notice, may assume the defense of such action with counsel chosen by it reasonably acceptable to the indemnified parties that are defendants in such action, unless such indemnified parties reasonably object to such assumption on the ground that there may be legal defenses available to them that are different from or in addition to those available to such indemnifying party. If an indemnifying party assumes the defense of such action, the indemnifying parties shall not be liable for any fees and expenses of counsel for the indemnified parties incurred thereafter in connection with such action, proceeding or claim, other than reasonable costs of investigation. In no event shall the indemnifying parties be liable for the fees and expenses of more than one separate firm of attorneys (unless an indemnified party or parties shall have reasonably concluded that there may be defenses available to it or them which are different from or in addition to those of other indemnified parties) for all indemnified parties in connection with any one action, proceeding or claim or separate but similar or related actions, proceedings or claims in the same jurisdiction arising out of the same general allegations or circumstances. The indemnifying party shall be liable for any settlement of any claim against the indemnified party (or its directors, officers, employees, affiliates or controlling persons) made with the indemnifying party’s consent, which consent shall not be unreasonably withheld. The indemnifying party shall not, without the written consent of indemnified party, settle or compromise any claim against the indemnified party based upon circumstances giving rise to an indemnification claim against the indemnifying party hereunder unless such settlement or compromise provides that indemnified party and the other indemnified parties shall be unconditionally and irrevocably released from all liability in respect of such claim.

(d)

The agreements contained in this Section and in Section 12 hereof and the representations and warranties of the Primary Parties set forth in this Agreement shall remain operative and in full force and effect regardless of (i) any investigation made by or on behalf of the Agent or its officers, directors, controlling persons, agents or employees or by or on behalf of any of the Primary Parties or any officers, directors, controlling persons, agents or employees of any of the Primary Parties; (ii) delivery of and payment hereunder for the Shares; or (iii) any termination of this Agreement.

     12. Contribution.

(a) In order to provide for just and equitable contribution in circumstances in which the indemnification provided for in Section 11 is due in accordance with its terms but is found in a final judgment by a court to be unavailable from the Primary Parties or the Agent, the Primary Parties and the Agent shall contribute to the

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aggregate losses, claims, damages and liabilities of the nature contemplated by such indemnification in such proportion so that (i) the Agent is responsible for that portion represented by the percentage that the fees paid to the Agent pursuant to Section 4 of this Agreement (not including expenses) (“Agent’s Fees”) bear to the total proceeds received by the Primary Parties from the sale of the Shares in the Offering, net of the Agent’s Fees, and (ii) the Primary Parties shall be responsible for the balance. If, however, the allocation provided above is not permitted by applicable law, then each indemnifying party shall contribute to such amount paid or payable by such indemnified party in such proportion as is appropriate to reflect not only such relative fault of the Primary Parties on the one hand and the Agent on the other in connection with the statements or omissions which resulted in such losses, claims, damages or liabilities (or actions, proceedings or claims in respect thereof), but also the relative benefits received by the Primary Parties on the one hand and the Agent on the other from the Offering, as well as any other relevant equitable considerations. The relative benefits received by the Primary Parties on the one hand and the Agent on the other hand shall be deemed to be in the same proportion as the total proceeds from the Offering, net of the Agent’s Fees, received by the Primary Parties bear to the Agent’s Fees. The relative fault shall be determined by reference to, among other things, whether the untrue or alleged untrue statement of a material fact or the omission or alleged omission to state a material fact relates to information supplied by the Primary Parties on the one hand or the Agent on the other and the parties relative intent, good faith, knowledge, access to information and opportunity to correct or prevent such statement or omission. The Primary Parties and the Agent agree that it would not be just and equitable if contribution pursuant to this Section 12 were determined by pro-rata allocation or by any other method of allocation which does not take account of the equitable considerations referred to above in this Section 12. The amount paid or payable by an indemnified party as a result of the losses, claims, damages or liabilities (or action, proceedings or claims in respect thereof) referred to above in this Section 12 shall be deemed to include any legal or other expenses reasonably incurred by such indemnified party in connection with investigating or defending any such action, proceeding or claim. It is expressly agreed that the Agent shall not be liable for any loss, liability, claim, damage or expense or be required to contribute any amount which in the aggregate exceeds the amount paid (excluding reimbursable expenses) to the Agent under this Agreement. It is understood and agreed that the above-stated limitation on the Agent’s liability is essential to the Agent and that the Agent would not have entered into this Agreement if such limitation had not been agreed to by the parties to this Agreement. No person found guilty of any fraudulent misrepresentation (within the meaning of Section 11(f) of the 1933 Act) shall be entitled to contribution from any person who was not found guilty of such fraudulent misrepresentation. For purposes of this Section 12, each of the Agent’s and the Primary Parties’ officers and directors and each person, if any, who controls the Agent or any of the Primary Parties within the meaning of the 1933 Act and the 1934 Act shall have the same rights to contribution as the Primary Parties and the Agent. Any party entitled to

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contribution, promptly after receipt of notice of commencement of any action, suit, claim or proceeding against such party in respect of which a claim for contribution may be made against another party under this Section 12, will notify such party from whom contribution may be sought, but the omission to so notify such party shall not relieve the party from whom contribution may be sought from any other obligation it may have hereunder or otherwise than under this Section 12, except to the extent that such failure or delay causes actual harm to the indemnifying party with respect to such action, proceeding, claim or suit.

     13. Survival. All representations, warranties and indemnities and other statements contained in this Agreement or contained in certificates of officers of the Primary Parties or the Agent submitted pursuant hereto, shall remain operative and in full force and effect, regardless of any termination or cancellation of this Agreement or any investigation made by or on behalf of the Agent or its controlling persons, or by or on behalf of the Primary Parties and shall survive the issuance of the Shares, and any legal representative, successor or assign of the Agent, any of the Primary Parties, and any indemnified person shall be entitled to the benefit of the respective agreements, indemnities, warranties and representations.

     14. Termination. Agent may terminate this Agreement by giving the notice indicated below in this Section at any time after this Agreement becomes effective as follows:

(a)

In the event that (i) the Plan is abandoned or terminated by PMMHC or HoldCo, (ii) HoldCo fails to consummate the sale of the minimum number of the Shares by December 31, 2009, in accordance with the provisions of the Plan, or (iii) the Agent terminates this relationship because there has been a Material Adverse Effect, this Agreement shall terminate and no party to this Agreement shall have any obligation to the other hereunder, except that (i) the Primary Parties shall remain liable for any amounts due pursuant to Sections 3, 4, 9, 11 and 12 hereof, unless the transaction is not consummated due to the breach by the Agent of a warranty, representation or covenant and (ii) the Agent shall remain liable for any amount due pursuant to Sections 11 and 12 hereof, unless the transaction is not consummated due to the breach by the Primary Parties of a warranty representation or covenant.

(b)

If any of the conditions specified in Section 10 shall not have been fulfilled when and as required by this Agreement, or by the Closing Time, or waived in writing by the Agent, this Agreement and all of the Agent’s obligations hereunder may be canceled by the Agent by notifying PMMHC or HoldCo of such cancellation in writing at any time at or prior to the Closing Time, and any such cancellation shall be without liability of any party to any other party except that (i) the Primary Parties shall remain liable for any amounts due pursuant to Sections 3, 4, 9, 11 and 12 hereof, unless the transaction is not consummated due to breach by the Agent of a warrant, representation or covenant, and (ii) the Agent shall remain liable for any amount due pursuant to Sections 11 and 12 hereof, unless the transaction is not consummated due to the breach by the Primary Parties of a warranty representation or covenant.

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(c)	If Agent elects to terminate this Agreement as provided in this Section, PMMHC or HoldCo shall be notified by the Agent as provided in Section 15 hereof.
(d)	If this Agreement is terminated in accordance with the provisions of this Agreement, the Primary Parties shall pay the Agent the fees earned pursuant to Section 4 and will reimburse the Agent for its reasonable expenses pursuant to Section 9.

     15. Notices. All notices and other communications hereunder shall be in writing and shall be deemed to have been duly given if mailed by United States certified mail, return receipt requested, or sent by a nationally recognized commercial courier promising next business day delivery (such as Federal Express) or transmitted by any standard form of telecommunication (such as facsimile or email) with confirming copy sent by regular U.S. mail. Notices shall be sent as follows:

If to Agent:	Griffin Financial Group, LLC 620 Freedom Business Center, Suite 210 King of Prussia, Pennsylvania 19406 Attention:  Jeffrey P. Waldron, Senior Managing Director Facsimile:  610-371-7974 Email:  jpw@go2griffin.com
If to the Primary Parties:	Penn Millers Mutual Holding Company 72 North Franklin Street, P.O. Box P Wilkes-Barre, Pennsylvania 18773-0016 Attention:  Douglas A. Gaudet,                    President and Chief Executive Officer Facsimile:  570-829-4568 Email:  dgaudet@pennmillers.com
With a copy to:	Morgan, Lewis & Bockius LLP 1701 Market Street Philadelphia, Pennsylvania 19103 Attention:  David L. Harbaugh, Esquire Facsimile:  215-963-5001 Email:  dharbaugh@morganlewis.com

     Any party may change the address or other information for notices set forth above by written notice to the other parties, which notice shall be given in accordance with this Section 15.

     16. Parties. This Agreement shall inure to the benefit of and be binding upon the Agent and the Primary Parties and their respective successors. Nothing expressed or mentioned in this Agreement is intended or shall be construed to give any person, firm or corporation, other than the parties hereto and their respective successors and the controlling persons and officers, directors, agents and employees referred to in Sections 11 and 12 and their heirs and legal representatives, any legal or equitable right, remedy or claim under or in respect of this Agreement or any provisions herein contained. It is understood and agreed that this Agreement

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is the exclusive agreement among the parties, supersedes any prior Agreement among the parties and may not be varied except by a writing signed by all parties, except for Section 11 of this Agreement, which may not be so amended.

     17. Partial Invalidity. In the event that any term, provision or covenant herein or the application thereof to any circumstances or situation shall be invalid or unenforceable, in whole or in part, the remainder hereof and the application of said term, provision or covenant to any other circumstance or situation shall not be affected thereby, and each term, provision or covenant herein shall be valid and enforceable to the full extent permitted by law.

     18. Construction. This Agreement shall be construed in accordance with the laws of the Commonwealth of Pennsylvania applicable to contracts executed and to be wholly performed therein without giving effects to its conflicts of laws principles or rules.

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     If the foregoing is in accordance with your understanding of our agreement, please sign and return to us a counterpart hereof, whereupon this instrument along with all counterparts will become a binding agreement between you and us in accordance with its terms.

Very truly yours, PENN MILLERS INSURANCE COMPANY
By:
	Douglas A. Gaudet, President and
	Chief Executive Officer
PMHC CORP.
By:
	Douglas A. Gaudet, President and
	Chief Executive Officer
PENN MILLERS HOLDING CORPORATION
By:
	Douglas A. Gaudet, President and
	Chief Executive Officer
PENN MILLERS MUTUAL HOLDING COMPANY
By:
	Douglas A. Gaudet, President and
	Chief Executive Officer

[COUNTERPART SIGNATURE OF GRIFFIN FINANCIAL ON FOLLOWING PAGE]

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     The foregoing Agency Agreement is hereby confirmed and accepted as of the date first set and above written.

GRIFFIN FINANCIAL GROUP, LLC
By:
	Senior Managing Director

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EX-10.1

Exhibit 10.1

PENN MILLERS
STOCK INCENTIVE PLAN

PENN MILLERS
STOCK INCENTIVE PLAN

TABLE OF CONTENTS

ARTICLE	PAGE
ARTICLE 1. PURPOSE OF THE PLAN; TYPES OF AWARDS		1
ARTICLE 2. DEFINITIONS		1
ARTICLE 3. ADMINISTRATION		5
ARTICLE 4. COMMON STOCK SUBJECT TO THE PLAN		6
ARTICLE 5. ELIGIBILITY		7
ARTICLE 6. STOCK OPTIONS IN GENERAL		8
ARTICLE 7. TERM, VESTING AND EXERCISE OF OPTIONS		9
ARTICLE 8. EXERCISE OF OPTIONS FOLLOWING TERMINATION OF EMPLOYMENT OR SERVICE		10
ARTICLE 9. RESTRICTED STOCK		11
ARTICLE 10. RESTRICTED STOCK UNITS		13
ARTICLE 11. ADJUSTMENT PROVISIONS		14
ARTICLE 12. GENERAL PROVISIONS		14

ARTICLE 1. PURPOSE OF THE PLAN; TYPES OF AWARDS

     1.1 Purpose. The Penn Millers Stock Incentive Plan, effective as of                                         , 2009, is intended to provide selected employees and non-employee directors of Penn Millers Holding Corporation (the “Corporation”) and its Subsidiaries (as hereinafter defined) with an opportunity to acquire Common Stock of the Corporation. The Plan is designed to help the Corporation attract, retain, and motivate employees and non-employee directors to make substantial contributions to the success of the Corporation’s business and the businesses of its Subsidiaries. Awards made under the Plan are based upon, among other things, a participant’s level of responsibility and performance within the Corporation and its Subsidiaries.

     1.2 Authorized Plan Awards. Incentive Stock Options, Nonqualified Stock Options, Restricted Stock and Restricted Stock Units may be awarded within the limitations of the Plan herein described.

ARTICLE 2. DEFINITIONS

     2.1 “Agreement.” A written or electronic agreement between the Corporation and a Participant evidencing an Award. A Participant may be issued one or more Agreements from time to time, reflecting one or more Awards.

     2.2 “Award.” The award of a Stock Option, Restricted Stock, or Restricted Stock Unit.

     2.3 “Board.” The Board of Directors of the Corporation.

     2.4 “Change in Control.” Except as otherwise provided in an Agreement, 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 Exchange Act), except for any of the Corporation’s employee benefit plans, or any entity holding the Corporation’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 Corporation’s securities representing 25% or more of the combined voting power of the Corporation’s then outstanding securities other than pursuant to a transaction excepted in Clause (b);

          (b) the shareholders of the Corporation approve a merger, consolidation, or other reorganization of the Corporation, unless:

          (i) under the terms of the agreement providing for such merger, consolidation, or reorganization, the shareholders of the Corporation immediately before such merger, consolidation, or reorganization, will own, directly or indirectly immediately following such merger, consolidation, or reorganization, at least 60% of the combined voting power of the outstanding voting securities of the Corporation resulting from such merger, consolidation, or reorganization (the “Surviving Corporation”) in substantially the same proportion as their ownership of the voting securities immediately before such merger, consolidation, or reorganization;

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          (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 a majority of the members of the board of directors of the Surviving Corporation 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 Corporation or any Subsidiary of the Corporation, (B) any Benefit Plan, (C) the Surviving Corporation or any Subsidiary of the Surviving Corporation, or (D) any Person who, immediately prior to such merger, consolidation, or reorganization had beneficial ownership of 25% or more of the then outstanding voting securities) will have beneficial ownership of 25% or more of the combined voting power of the Surviving Corporation’s then outstanding voting securities;

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

          (d) 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 Corporation’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 Corporation’s securities representing 25% or more of the combined voting power of the Corporation’s then outstanding securities solely as a result of an acquisition by the Corporation of its voting securities which, by reducing the number of shares outstanding, increases the proportionate number of shares beneficially owned by such Person to 25% or more of the combined voting power of the Corporation’s then outstanding securities; provided, however, that if a Person becomes a beneficial owner of 25% or more of the combined voting power of the Corporation’s then outstanding securities by reason of share purchases by the Corporation and shall, after such share purchases by the Corporation, become the beneficial owner, directly or indirectly, of any additional voting securities of the Corporation (other than as a result of a stock split, stock dividend or similar transaction), then a Change in Control of the Corporation shall be deemed to have occurred with respect to such Person under Clause (a). In no event shall a Change in Control of the Corporation be deemed to occur under Clause (a) by virtue of the acquisition of the Corporation’s securities by Benefit Plans.

     2.5 “Code.” The Internal Revenue Code of 1986, as amended.

     2.6 “Code of Conduct.” The policies and procedures related to employment of employees by the Corporation or a Subsidiary set forth in the Corporation’s employee handbook or any similar document. The Code of Conduct may be amended and updated at any time. The term “Code of Conduct” shall also include any other policy or procedure that may be adopted by the Corporation or a Subsidiary and communicated to Employees and Non-Employee Directors.

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     2.7 “Committee.” The Compensation Committee of the Board which Committee shall be composed of two or more members of the Board, all of whom are (a) “non-employee directors” as such term is defined under the rules and regulations adopted from time to time by the Securities and Exchange Commission pursuant to Section 16(b) of the Exchange Act, (b) “outside directors” within the meaning of Code Section 162(m), and (c) independent under any applicable stock listing agreement with, or rules of, any exchange or electronic trading system. The Board may from time to time remove members from, or add members to, the Committee. Vacancies on the Committee, however caused, shall be filled by the Board.

     2.8 “Common Stock.” The common stock of the Corporation (par value $0.01 per share) as described in the Corporation’s Articles of Incorporation, or such other stock as shall be substituted therefor.

     2.9 “Corporation.” Penn Millers Holding Corporation, a Pennsylvania corporation.

     2.10 “Disability.” “Permanent and total disability” (as defined in Code Section 22(e)(3)).

     2.11 “Employee.” Any common law employee of the Corporation or a Subsidiary. An Employee does not include any individual who: (i) does not receive payment for services directly from the Corporation’s or a Subsidiary’s payroll; (ii) is employed by an employment agency that is not a Subsidiary; or (iii) who renders services pursuant to a written arrangement that expressly provides that the service provider is not eligible for participation in the Plan, regardless if such person is later determined by the Internal Revenue Service or a court of law to be a common law employee.

     2.12 “Exchange Act.” The Securities Exchange Act of 1934, as amended.

     2.13 “Incentive Stock Option.” A Stock Option intended to satisfy the requirements of Code Section 422(b).

     2.14 “Non-Employee Director.” A member of the Board or the board of directors of a Subsidiary who is not an Employee.

     2.15 “Nonqualified Stock Option.” A Stock Option which does not satisfy the requirements of Code Section 422(b).

     2.16 “Optionee.” A Participant who is awarded a Stock Option pursuant to the provisions of the Plan.

     2.17 “Participant.” An Employee or Non-Employee Director to whom an Award has been made and remains outstanding.

     2.18 “Performance Criteria.” Any objective determination based on one or more of the following areas of performance of the Corporation, a Subsidiary, or any division, department or group of either which includes, but is not limited to: (a) earnings, (b) cash flow, (c) revenue, (d) financial ratios, (e) market performance, (f) shareholder return, (g) operating income or profits (including earnings before interest, taxes, depreciation and amortization), (h) earnings per share, (i) return on assets, (j) return on equity, (k) return on investment, (l) stock price,

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(m) expense reduction, (n) systems conversion, (o) special projects as determined by the Committee, (p) increases in book value, and (q) acquisition integration initiatives. Performance Criteria shall be established by the Committee prior to the issuance of a Performance Award.

     2.19 “Performance Goal.” One or more goals established by the Committee, with respect to an Award intended to constitute a Performance Award, that relate to one or more Performance Criteria. A Performance Goal shall relate to such period of time as may be specified by the Committee and set forth in an applicable Agreement at the time a Performance Award is made.

     2.20 “Performance Award.” An Award, the vesting or receipt without restriction of which is conditioned on the satisfaction of one or more Performance Goals.

     2.21 “Plan.” The Penn Millers Stock Incentive Plan.

     2.22 “Restricted Stock.” An Award of Common Stock pursuant to the provisions of the Plan, which award is subject to such restrictions and other conditions, as may be specified by the Committee at the time of such award and set forth in an applicable Agreement.

     2.23 “Restricted Stock Unit.” An Award of a right to receive, in Common Stock, the market value of one share of Common Stock, the vesting of which right is subject to such terms and conditions as may be provided by the Committee at the time of such award and set forth in an applicable Agreement. A Restricted Stock Unit Award may be payable in Common Stock or in cash as determined by the Committee in its sole discretion.

     2.24 “Securities Act.” The Securities Act of 1933, as amended.

     2.25 “Stock Option” or “Option.” An Award of a right to purchase Common Stock pursuant to the provisions of the Plan.

     2.26 “Subsidiary.” A subsidiary corporation, as defined in Code Section 424(f), that is a subsidiary of a relevant corporation.

     2.27 “Termination or Dismissal For Cause.” Termination of an Employee by the Corporation or a Subsidiary or dismissal of a Non-Employee Director after:

          (a) any government regulatory agency recommends or orders in writing that the Corporation or a Subsidiary terminate the employment of such Employee or relieve him or her of his or her duties;

          (b) such Employee or Non-Employee Director is convicted of or enters a plea of guilty or nolo contendere to a felony, a crime of falsehood, or a crime involving fraud or moral turpitude, or the actual incarceration of the Employee or Non-Employee Director for a period of 45 consecutive days;

          (c) a determination by the Committee that such Employee willfully failed to follow the lawful instructions of the Board or any officer of the Corporation or a Subsidiary after such Employee’s receipt of written notice of such instructions, other than a failure resulting from the Employee’s incapacity because of physical or mental illness;

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          (d) a determination by the Committee that the willful or continued failure by such Employee or Non-Employee Director to substantially and satisfactorily perform his duties with the Corporation or a Subsidiary (other than any such failure resulting from the Employee’s or Non-Employee Director’s Disability), within a reasonable period of time after a demand for substantial performance or notice of lack of substantial or satisfactory performance is delivered to the Employee or Non-Employee Director, which demand identifies the manner in which the Employee or Non-Employee Director has not substantially or satisfactorily performed his or her duties; or

          (e) a determination by the Committee that such Employee or Non-Employee Director has failed to conform to an applicable Code of Conduct.

     For purposes of the Plan, no act, or failure to act, on an Employee’s or Non-Employee Director’s part shall be deemed “willful” unless done, or omitted to be done, by such Employee or Non-Employee Director not in good faith and without reasonable belief that such Employee’s or Non-Employee Director’s action or omission was in the best interest of the Corporation or a Subsidiary.

ARTICLE 3. ADMINISTRATION

     3.1 The Committee. The Plan shall be administered by the Committee.

     3.2 Powers of the Committee.

          (a) The Committee shall be vested with full authority to make such rules and regulations as it deems necessary or desirable to administer the Plan and to interpret the provisions of the Plan, unless otherwise determined by a majority of the disinterested members of the Board. Any determination, decision, or action of the Committee in connection with the construction, interpretation, administration, or application of the Plan shall be final, conclusive, and binding upon all Participants and any person claiming under or through a Participant, unless otherwise determined by a majority of the disinterested members of the Board.

          (b) Subject to the terms, provisions and conditions of the Plan and subject to review and approval by a majority of the disinterested members of the Board, the Committee shall have exclusive jurisdiction to:

          (i) determine and select the Employees and Non-Employee Directors to receive Awards (it being understood that more than one Award may be made to the same person);

          (ii) determine the number of shares subject to each Award;

          (iii) determine the date or dates when the Awards will be made;

          (iv) determine the exercise price of shares subject to an Option in accordance with Article 6;

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          (v) determine the date or dates when an Option may be exercised within the term of the Option specified pursuant to Article 7;

          (vi) determine whether an Option constitutes an Incentive Stock Option or a Nonqualified Stock Option;

          (vii) determine the Performance Criteria and establish Performance Goals with respect thereto, to be applied to an Award; and

          (viii) prescribe the form, which shall be consistent with the Plan document, of the Agreement evidencing any Awards made under the Plan.

     3.3 Liability. No member of the Board or the Committee shall be liable for any action or determination made in good faith by the Board or the Committee with respect to this Plan or any Awards made under this Plan.

     3.4 Establishment and Certification of Performance Goals. The Committee shall establish, prior to award, Performance Goals with respect to each Award intended to constitute a Performance Award. Except as may otherwise be provided in Articles 6 and 7 hereof, as applicable, no Option that is intended to constitute a Performance Award may be exercised until the Performance Goal or Goals applicable thereto is or are satisfied, nor shall any Restricted Stock Unit Award that is intended to constitute a Performance Award be released to a Participant until the Performance Goal or Goals applicable thereto is or are satisfied.

     3.5 No Waiver of Performance Goals. The Committee or the Board shall not waive any Performance Goals with respect to any Award hereunder.

     3.6 Performance Awards Not Mandatory. Nothing herein shall be construed as requiring that any Award be made a Performance Award.

ARTICLE 4. COMMON STOCK SUBJECT TO THE PLAN

     4.1 Common Stock Authorized.

          (a) The total aggregate number of shares of Common Stock that Awards may be made under the Plan shall not exceed                      shares. The limitation established by the preceding sentence shall be subject to adjustment as provided in Article 11 and Section 4.1(f).

          (b) The maximum aggregate number of shares of Common Stock that may be issued under the Plan pursuant to the vesting of Awards of Restricted Stock or Restricted Stock Units shall not exceed                      shares. The limitation established by the preceding sentence shall be subject to adjustment as provided in Article 11 and Section 4.1(f).

          (c) The maximum aggregate number of shares of Common Stock that may be awarded under the Plan as Options shall not exceed                     . The limitation established by the preceding sentence shall be subject to adjustment as provided in Article 11 and Section 4.1(f).

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          (d) The maximum aggregate number of shares of Common Stock for which Awards may be made under the Plan to non-employee directors shall not exceed ___% of the number of shares authorized under the Plan (as adjusted as provided in Article 11 and Section 4.1(f)).

          (e) If any Option is exercised by tendering Common Stock, either actually or by attestation, to the Corporation as full or partial payment in connection with the exercise of such Option under the Plan, or if the tax withholding requirements are satisfied through such tender, only the number of shares of Common Stock issued net of the Common Stock tendered shall be deemed delivered for purposes of determining the maximum number of shares available for Awards under the Plan.

          (f) The number of shares of Common Stock for which Awards may be made under the Plan shall automatically increase on the first trading day of January of each calendar year during the term of the Plan, beginning with calendar year 2010, by an amount equal to one percent of the shares of Common Stock outstanding on the last trading day in December of the immediately preceding calendar year. Awards from shares of Common Stock available under the Plan as a result of the operation of this Section 4.1(f) may be awarded as either Nonqualified Stock Options, Restricted Stock, or Restricted Stock Units (but not as Incentive Stock Options), subject to the limitations of Sections 4.1(b), (c), and (d).

     4.2 Shares Available. The Common Stock to be issued under the Plan shall be the Corporation’s Common Stock, which shall be made available at the discretion of the Board, either from authorized but unissued Common Stock, treasury shares, or shares acquired by the Corporation, including shares purchased on the open market. In the event that any outstanding Award under the Plan for any reason expires, terminates, or is forfeited, the shares of Common Stock allocable to such expiration, termination, or forfeiture may thereafter again be made subject to an Award under the Plan.

ARTICLE 5. ELIGIBILITY

     5.1 Participation. Awards shall be made by the Committee only to persons who are Employees or Non-Employee Directors.

     5.2 Incentive Stock Option Eligibility. Incentive Stock Option Awards may only be made to Employees of the Corporation. Notwithstanding any other provision of the Plan to the contrary, an individual who owns more than ten percent of the total combined voting power of all classes of outstanding stock of the Corporation shall not be eligible for the award of an Incentive Stock Option, unless the special requirements set forth in Sections 6.1 and 7.1 are satisfied. For purposes of this section, in determining stock ownership, an individual shall be considered as owning the stock owned, directly or indirectly, by or for his brothers and sisters (whether by the whole or half blood), spouse, ancestors, and lineal descendants. Stock owned, directly or indirectly, by or for a corporation, partnership, estate, or trust shall be considered as being owned proportionately by or for its shareholders, partners, or beneficiaries. “Outstanding stock” shall include all stock actually issued and outstanding immediately before the award of the Option. “Outstanding stock” shall not include shares authorized for issue under outstanding Options held by the Optionee or by any other person.

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ARTICLE 6. STOCK OPTIONS IN GENERAL

     6.1 Exercise Price. The exercise price of an Option to purchase a share of Common Stock shall be, in the case of an Incentive Stock Option, not less than 100% of the fair market value of a share of Common Stock on the date the Option is awarded, except that the exercise price shall be not less than 110% of such fair market value in the case of an Incentive Stock Option awarded to any individual described in the second sentence of Section 5.2. The exercise price of an Option to purchase a share of Common Stock shall be, in the case of a Nonqualified Stock Option, not less than 100% of the fair market value of a share of Common Stock on the date the Option is awarded. The exercise price shall be subject to adjustment pursuant to the limited circumstances set forth in Article 11.

     6.2 Limitation on Incentive Stock Options. The aggregate fair market value (determined as of the date an Option is awarded) of the Common Stock with respect to which Incentive Stock Options are exercisable for the first time by any individual in any calendar year (under the Plan and all other plans maintained by the Corporation and Subsidiaries) shall not exceed $100,000.

     6.3 Determination of Fair Market Value.

          (a) If the Common Stock is not listed on an established stock exchange or exchanges but is listed on Nasdaq, the fair market value per share shall be the closing sale price for the Common Stock on the relevant day. If no sale of Common Stock has occurred on that day, the fair market value shall be determined by reference to such price for the next preceding day on which a sale occurred.

          (b) If the Common Stock is not listed on an established stock exchange or on Nasdaq, fair market value per share shall be the mean between the closing dealer “bid” and “asked” prices for the Common Stock for the day an Option is awarded, and if no “bid” and “asked” prices are quoted for the day an Option is awarded, the fair market value shall be determined by reference to such prices on the next preceding day on which such prices were quoted.

          (c) If the Common Stock is listed on an established stock exchange or exchanges, the fair market value shall be deemed to be the closing price of Common Stock on such stock exchange or exchanges on the day an Option is awarded. If no sale of Common Stock has been made on any stock exchange on that day, the fair market value shall be determined by reference to such price for the next preceding day on which a sale occurred.

          (d) In the event that the Common Stock is not traded on an established stock exchange or on Nasdaq, and no closing dealer “bid” and “asked” prices are available on the day an Option is awarded, then fair market value will be the price established by the Committee in good faith through the reasonable application of a reasonable valuation method and as required by Code Section 409A.

     In connection with determining the fair market value of a share of Common Stock on any relevant day, the Committee may use any source deemed reliable; and its determination shall be final and binding on all affected persons, absent clear error.

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     6.4 Limitation on Option Awards. Stock Option Awards under this Plan (and any other plan of the Corporation or a Subsidiary providing for stock option awards) to any individual shall not exceed, in the aggregate, Options to acquire                      shares of Common Stock during any period of 12 consecutive months. Such limitation shall be subject to adjustment in the manner described in Article 11.

     6.5 Transferability of Options.

          (a) Except as provided in Subsection (b), an Option awarded hereunder shall not be transferable other than by will or the laws of descent and distribution, and such Option shall be exercisable, during the Optionee’s lifetime, only by him or her.

          (b) An Optionee may, with the prior approval of the Committee, transfer a Nonqualified Stock Option for no consideration to or for the benefit of one or more members of the Optionee’s “immediate family” (including a trust, partnership, or limited liability company for the benefit of one or more of such members), subject to such limits as the Committee may impose, and the transferee shall remain subject to all terms and conditions applicable to the Option prior to its transfer. The term “immediate family” shall mean an Optionee’s spouse, parents, children, stepchildren, adoptive relationships, sisters, brothers, and grandchildren (and, for this purpose, shall also include the Optionee).

ARTICLE 7. TERM, VESTING AND EXERCISE OF OPTIONS

     7.1 Term and Vesting. Each Option awarded under the Plan shall terminate on the date determined by the Committee, and specified in the Agreement; provided, however, that (i) each intended Incentive Stock Option awarded to an individual described in the second sentence of Section 5.2 shall terminate not later than five years after the date of the Award, (ii) each other intended Incentive Stock Option shall terminate not later than ten years after the date of the Award, and (iii) each Option awarded under the Plan which is intended to be a Nonqualified Stock Option shall terminate not later than ten years and one month after the date of the Award. Each Option awarded under the Plan shall be subject to such terms and conditions as may be provided by the Committee and set forth in the Agreement issued to a Optionee to evidence such Option; provided, however, that, unless otherwise provided by the Committee and set forth in an applicable Agreement, each Option shall be fully exercisable (i.e., become 100% vested) after the earlier of the date on which, (i) a Change in Control occurs or (ii) the Optionee terminates employment or service by reason of death or Disability). Except as provided in Article 8, an Option may be exercised only during the continuance of the Optionee’s employment or service with the Corporation or a Subsidiary.

     7.2 Exercise.

          (a) A person electing to exercise an Option shall give notice to the Corporation of such election and of the number of shares he or she has elected to purchase and shall at the time of exercise tender the full exercise price of the shares he or she has elected to purchase. The exercise notice shall be delivered to the Corporation in person, by certified mail, or by such other method (including electronic transmission) and in such form as determined by the Committee. The exercise price shall be paid in full, in cash, upon the exercise of the Option; provided,

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however, that in lieu of cash, with the approval of the Committee at or prior to exercise, an Optionee may exercise an Option by tendering to the Corporation shares of Common Stock owned by him or her and having a fair market value equal to the cash exercise price applicable to the Option (with the fair market value of such stock to be determined in the manner provided in Section 6.3) or by delivering such combination of cash and such shares as the Committee in its sole discretion may approve; further provided, however, that no such manner of exercise shall be permitted if such exercise would violate Section 402 of the Sarbanes-Oxley Act of 2002. Notwithstanding the foregoing, Common Stock acquired pursuant to the exercise of an Incentive Stock Option may not be tendered as payment unless the holding period requirements of Code Section 422(a)(1) have been satisfied, and Common Stock not acquired pursuant to the exercise of an Incentive Stock Option may not be tendered as payment unless it has been held, beneficially and of record, for at least six months (or such longer time as may be required by applicable securities law or accounting principles to avoid adverse consequences to the Corporation or a Participant).

          (b) At the request of the Participant and to the extent permitted by applicable law, the Committee may, in its sole discretion, selectively approve an arrangement whereby the Participant irrevocably authorizes a third party to sell shares of Common Stock (or a sufficient portion of the shares) acquired upon the exercise of an Option and to remit to the Corporation a sufficient portion of the sales proceeds to pay the entire exercise price and any tax withholding required as a result of such exercise.

          (c) At the request of the Participant and to the extent permitted by applicable law, the Committee may, in its sole discretion, selectively approve a “net exercise” arrangement whereby the Corporation will reduce the number of shares of Common Stock issued upon exercise of a Nonqualified Stock Option by the largest whole number of shares of Common Stock with a fair market value that does not exceed the exercise price of the Option; provided, however, that the Optionee provide cash to the Corporation to the extent of any remaining balance of the exercise price. Shares of Common Stock will no longer be subject to such Option and such Option will no longer be exercisable thereafter to the extent of the number of shares used to pay the exercise price pursuant to the net exercise, the number of shares delivered to the Optionee as a result of such net exercise and the number of shares, if any withheld to satisfy any tax withholding obligations.

          (d) A person holding more than one Option at any relevant time may, in accordance with the provisions of the Plan, elect to exercise such Options in any order.

ARTICLE 8. EXERCISE OF OPTIONS FOLLOWING TERMINATION
OF EMPLOYMENT OR SERVICE

     8.1 Other Termination by Corporation or Subsidiary; Change in Control. In the event of an Optionee’s termination of employment or service (i) by the Corporation or a Subsidiary other than Termination for Cause or (ii) due to a Change in Control, such Optionee’s Option shall lapse at the earlier of the expiration of the term of such Option or:

          (a) in the case of an Incentive Stock Option, three months from the date of such termination of employment; and

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          (b) in the case of a Nonqualified Stock Option, 12 months from the date of such termination of employment or service.

     8.2 Death or Total Disability. In the event of an Optionee’s termination of employment or service by reason of death or Disability, such Optionee’s Option shall lapse at the earlier of the expiration of the term of such Option or:

          (a) in the case of an Incentive Stock Option, one year from the date of such termination of employment; and

          (b) in the case of a Nonqualified Stock Option, 12 months from the date of such termination of employment or service.

     8.3 Termination or Dismissal For Cause; Other Termination by Optionee. In the event of an Optionee’s Termination or Dismissal For Cause, or in the event of termination of employment at the election of an Optionee, such Optionee’s Option shall lapse upon such termination.

     8.4 Special Termination Provisions for Options.

          (a) In the event that an Optionee’s employment or service is terminated and the Committee deems it equitable to do so, the Committee may, in its discretion and subject to the approval of a majority of the disinterested members of the Board, waive any continuous service requirement for vesting (but not any Performance Goal or Goals) specified in an applicable Agreement pursuant to Section 7.1 and permit exercise of an Option held by such Optionee prior to the satisfaction of such continuous service requirement. Any such waiver may be made with retroactive effect, provided it is made within 60 days following the Optionee’s termination of employment or service.

          (b) In the event the Committee waives the continuous service requirement with respect to an Option as set forth in Section 8.4(a) above and the circumstance of an Optionee’s termination of employment or service is described in Section 8.1, the affected Option will lapse as otherwise provided in the relevant section.

          (c) In the event the Committee waives the continuous service requirement with respect to an Option as set forth in Section 8.4(a) above, such Option shall lapse at the earlier of the expiration of the term of such Option or:

          (i) in the case of an Incentive Stock Option, three months from the date of termination of employment; and

          (ii) in the case of a Nonqualified Stock Option, 12 months from the date of termination of employment or service.

ARTICLE 9. RESTRICTED STOCK

     9.1 In General. Each Restricted Stock Award shall be subject to such terms and conditions as may be specified in the Agreement issued to a Participant to evidence such Award.

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Subject to Section 3.6, a Restricted Stock Award shall be subject to a vesting schedule or Performance Goals, or both.

     9.2 Vesting. Each Restricted Stock Award shall vest under such terms and conditions as may be provided by the Committee and set forth in an applicable Agreement; provided, however, that, unless otherwise provided by the Committee and set forth in an applicable Agreement, each Restricted Stock Award shall become fully vested upon the earlier of the date on which: (i) a Change in Control occurs; or (ii) the Participant terminates employment or service by reason of death or Disability.

     9.3 Waiver of Vesting Period for Certain Restricted Stock Awards. In the event that a Participant’s employment or service is terminated and the Committee deems it equitable to do so, the Committee may, in its discretion and subject to the approval of a majority of the disinterested members of the Board, waive any minimum vesting or holding period (but not any Performance Goal or Goals) or forfeiture provision with respect to a Restricted Stock Award held by such Participant. Any such waiver may be made with retroactive effect, provided it is made within 60 days following such Participant’s termination of employment or service.

     9.4 Issuance and Retention of Share Certificates By Corporation. One or more share certificates shall be issued upon the award of Restricted Stock; but until such time as the Restricted Stock shall vest or otherwise become distributable by reason of satisfaction of one or more Performance Goals, the Corporation shall retain such share certificates.

     9.5 Stock Powers. At the time of the award of Restricted Stock, the Participant to whom the award is made shall deliver such stock powers, endorsed in blank, as may be requested by the Corporation.

     9.6 Release of Shares. Within 30 days following the date on which a Participant becomes entitled under an Agreement to receive shares of previously Restricted Stock, the Corporation shall deliver to him or her a certificate evidencing the ownership of such shares.

     9.7 Forfeiture of Restricted Stock Awards. In the event of the forfeiture of a Restricted Stock Award, by reason of a Participant’s termination of employment or termination of service (including termination of service as a director emeritus) prior to vesting, the failure to achieve a Performance Goal or otherwise, the Corporation shall take such steps as may be necessary to cancel the affected shares and return the same to its treasury.

     9.8 Assignment, Transfer, Etc. of Restricted Stock Rights. The potential rights of a Participant to shares of Restricted Stock may not be assigned, transferred, sold, pledged, hypothecated, or otherwise encumbered or disposed of until such time as the Participant receives unrestricted certificates for such shares.

     9.9 Shareholder Rights. Unless otherwise provided by the Committee and set forth in an applicable Agreement, Participants who have been awarded shares of Restricted Stock shall not have voting or dividend rights until such time as the Participant receives unrestricted certificates for such shares.

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     9.10 Additional Holding Periods. Nothing in this Article 9 shall preclude the Committee from providing additional (a) restrictions on the transfer or assignment of Common Stock acquired by reason of the vesting of a Restricted Stock Award or (b) forfeiture provisions with respect to Common Stock acquired by reason of the vesting of a Restricted Stock Award.

ARTICLE 10. RESTRICTED STOCK UNITS

     10.1 In General. Each Restricted Stock Unit Award shall be subject to such terms and conditions as may be provided by the Committee and set forth in the Agreement issued to a Participant to evidence such Award. Subject to Section 3.6, a Restricted Stock Unit Award shall be subject to a vesting schedule or Performance Goals, or both.

     10.2 Vesting. Each Restricted Stock Unit Award shall vest under such terms and conditions as may be provided by the Committee and set forth in an applicable Agreement; provided, however, that, unless otherwise provided by the Committee and set forth in an applicable Agreement, each Restricted Stock Unit Award shall become fully vested upon the earlier of the date on which: (i) a Change in Control occurs; or (ii) the Participant terminates employment or service by reason of death or Disability.

     10.3 Waiver of Vesting Period for Certain Restricted Stock Unit Awards. In the event that a Participant’s employment or service is terminated and the Committee deems it equitable to do so, the Committee may, in its discretion and subject to the approval of a majority of the disinterested members of the Board, waive any minimum vesting or holding period (but not any Performance Goal or Goals) or forfeiture provision specified in the applicable Agreement with respect to a Restricted Stock Unit Award held by such Participant. Any such waiver may be made with retroactive effect, provided it is made within 60 days following such Participant’s termination of employment or service.

     10.4 Release of Shares. Within 30 days following the date on which a Participant becomes entitled under an Agreement to receive shares of Common Stock pursuant to the vesting of a Restricted Stock Unit Award, the Corporation shall deliver to him or her a certificate evidencing the ownership of such shares of Common Stock.

     10.5 Assignment, Transfer, Etc. of Restricted Stock Unit Rights. The potential rights of a Participant to shares of Common Stock or cash pursuant to a Restricted Stock Unit Award may not be assigned, transferred, sold, pledged, hypothecated, or otherwise encumbered or disposed of until such time as until such time as the Participant receives, with respect to such Award, cash or an unrestricted certificate for such Common Stock, as applicable.

     10.6 Shareholder Rights. A Participant who receives a Restricted Stock Unit Award that is paid in shares of Common Stock shall not have voting or, unless otherwise provided by the Committee and set forth in an applicable Agreement, dividend rights until such time as the Participant receives an unrestricted certificate for such shares.

     10.7 Additional Holding Periods. Nothing in this Article 10 shall preclude the Committee from providing additional (a) restrictions on the transfer or assignment of Common Stock acquired by reason of the vesting of a Restricted Stock Unit Award or (b) forfeiture provisions

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with respect to Common Stock acquired by reason of the vesting of a Restricted Stock Unit Award.

ARTICLE 11. ADJUSTMENT PROVISIONS

     11.1 Share Adjustments.

          (a) In the event that the shares of Common Stock of the Corporation, as presently constituted, shall be changed into or exchanged for a different number or kind of shares of stock or other securities of the Corporation, or if the number of such shares of Common Stock shall be changed through the payment of a stock dividend, stock split or reverse stock split, then (i) the shares of Common Stock authorized hereunder to be made the subject of Awards, (ii) the shares of Common Stock then subject to outstanding Awards and the exercise price thereof (where relevant), (iii) the maximum number of Awards that may be made within a 12-month period and (iv) the nature and terms of the shares of stock or securities subject to Awards hereunder shall be increased, decreased or otherwise changed to such extent and in such manner as may be necessary or appropriate to reflect any of the foregoing events, provided that any such adjustment shall be made in a manner to avoid adverse tax consequences to any Participant under Code Section 409A.

          (b) An Award pursuant to the Plan shall not affect in any way the right or power of the Corporation to make adjustments, reclassifications, reorganizations or changes of its capital or business structure, to merge, to consolidate, to dissolve, to liquidate, or to sell or transfer all or any part of its business or assets.

     11.2 Corporate Changes. A liquidation or dissolution of the Corporation, a merger or consolidation in which the Corporation is not the surviving Corporation or a sale of all or substantially all of the Corporation’s assets, shall cause each outstanding Award to terminate, except to the extent that another corporation may and does, in the transaction, assume, and continue the Award or substitute its own awards.

     11.3 Fractional Shares. Fractional shares resulting from any adjustment in Awards pursuant to this article may be settled as the Committee shall determine.

     11.4 Binding Determination. To the extent that the foregoing adjustments relate to stock or securities of the Corporation, such adjustments shall be made by a majority of the disinterested members of the Board, whose determination in that respect shall be final, binding, and conclusive. Notice of any adjustment shall be given by the Corporation to each holder of an Award which shall have been so adjusted.

ARTICLE 12. GENERAL PROVISIONS

     12.1 Effective Date. The Plan shall become effective upon the adoption of the Plan by the Board, provided that any Award made hereunder shall be subject to the approval of the Plan by the shareholders of the Corporation within 12 months of adoption of the Plan by the Board.

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     12.2 Termination of the Plan. Unless previously terminated by the Board, the Plan shall terminate on, and no Award shall be made after, the day immediately preceding the tenth anniversary of its adoption by the Board.

     12.3 Limitation on Termination, Amendment, or Modification.

          (a) The Board may at any time terminate, amend, modify or suspend the Plan, provided that, without the approval of the shareholders of the Corporation, no amendment or modification shall be made solely by the Board which:

          (i) increases the maximum number of shares of Common Stock subject to Awards under the Plan (except as provided in Section 11.1);

          (ii) changes the class of eligible Participants; or

          (iii) otherwise requires the approval of shareholders under applicable state law or under applicable federal law to avoid potential liability or adverse consequences to the Corporation or a Participant.

          (b) No amendment, modification, suspension, or termination of the Plan shall in any manner adversely affect any Award theretofore made under the Plan without the consent of the Participant. Notwithstanding the foregoing, the Committee may, in its sole and absolute discretion and without the consent of such Participant, amend, modify, suspend, or terminate the Plan or any Agreement hereunder, to take effect retroactively or otherwise, as the Committee deems necessary or advisable for the purpose of conforming the Plan or such Agreement to any present or future law, regulation, or rule applicable to the Plan, including, but not limited to, Code Section 409A.

     12.4 No Right to an Award or Continued Employment or Service. Nothing contained in this Plan or otherwise shall be construed to (a) require that an Award be made to an individual who qualifies as an Employee or Non-Employee Director, or (b) confer upon a Participant any right to continue in the employ or service of the Corporation or any Subsidiary or limit in any respect the right of the Corporation or of any Subsidiary to terminate the Participant’s employment or service at any time and for any reason.

     12.5 No Obligation. No exercise of discretion under this Plan with respect to an event or person shall create an obligation to exercise such discretion in any similar or same circumstance, except as otherwise provided or required by law.

     12.6 Withholding Taxes.

          (a) Subject to the provisions of Subsection (b), the Corporation will require, where sufficient funds are not otherwise available, that a Participant who is an Employee pay or reimburse to it any withholding taxes when withholding is required by law.

          (b) With the permission of the Committee, a Participant who is an Employee may satisfy the withholding obligation described in Subsection (a), in whole or in part, by electing to have the Corporation withhold shares of Common Stock (otherwise issuable to him or her)

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having a fair market value equal to the amount required to be withheld. An election by a Participant who is an Employee to have shares withheld for this purpose shall be subject to such conditions as may then be imposed thereon by any applicable securities law.

     12.7 Listing and Registration of Shares.

          (a) No Option awarded pursuant to the Plan shall be exercisable in whole or in part, and no share certificate with respect to any Award shall be delivered, if at any relevant time the Committee determines in its discretion that the listing, registration, or qualification of the shares of Common Stock subject to an Award on any securities exchange or under any applicable law, or the consent or approval of any governmental regulatory body, is necessary or desirable as a condition of, or in connection with, such Award, until such listing, registration, qualification, consent, or approval shall have been effected or obtained free of any conditions not acceptable to the Committee.

          (b) If a registration statement under the Securities Act with respect to the shares issuable under the Plan is not in effect at any relevant time, as a condition of the issuance of the shares, a Participant (or any person claiming through a Participant) shall give the Committee a written or electronic statement, satisfactory in form and substance to the Committee, that he or she is acquiring the shares for his or her own account for investment and not with a view to their distribution. The Corporation may place upon any stock certificate for shares issued under the Plan the following legend or such other legend as the Committee may prescribe to prevent disposition of the shares in violation of the Securities Act or other applicable law:

‘THE SHARES REPRESENTED BY THIS CERTIFICATE HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933 (“ACT”) AND MAY NOT BE SOLD, PLEDGED, HYPOTHECATED OR OTHERWISE TRANSFERRED OR OFFERED FOR SALE IN THE ABSENCE OF AN EFFECTIVE REGISTRATION STATEMENT WITH RESPECT TO THEM UNDER THE ACT OR A WRITTEN OPINION OF COUNSEL FOR THE CORPORATION THAT REGISTRATION IS NOT REQUIRED.’

     12.8 Disinterested Director. For purposes of this Plan, a director shall be deemed “disinterested” if such person could qualify as a member of the Committee under Section 3.1.

     12.9 Gender; Number. Words of one gender, wherever used herein, shall be construed to include each other gender, as the context requires. Words used herein in the singular form shall include the plural form, as the context requires, and vice versa.

     12.10 Applicable Law. Except to the extent preempted by federal law, this Plan document, and the Agreements issued pursuant hereto, shall be construed, administered, and enforced in accordance with the domestic internal law of the Commonwealth of Pennsylvania.

     12.11 Headings. The headings of the several articles and sections of this Plan document have been inserted for convenience of reference only and shall not be used in the construction of the same.

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EX-10.2

Exhibit 10.2

AMENDED AND RESTATED EXECUTIVE EMPLOYMENT AGREEMENT

     THIS AMENDED AND RESTATED EXECUTIVE EMPLOYMENT AGREEMENT (this “Agreement”) is made and entered into this 14th day of August 2009, by and between PMMHC CORPORATION, a Pennsylvania business corporation (the “MHC”), PENN MILLERS HOLDING CORPORATION, a Pennsylvania business corporation (the “Holding Corporation”), and PENN MILLERS INSURANCE COMPANY, a Pennsylvania property and casualty stock insurance company (the “Insurance Company”) (the Holding Corporation and the Insurance Company herein shall be referred to as the “Company,” collectively or each of them individually, as the context so requires) all with offices at 72 North Franklin Street, Wilkes-Barre, PA 18773-0016 (the MHC, the Holding Corporation, and the Insurance Company, and their direct and indirect subsidiaries, are sometimes referred to collectively herein as the “Penn Millers System”), and DOUGLAS GAUDET, an adult individual residing at 325 Bulford Road, Shavertown, PA 18798 (“Executive”).

     WHEREAS, the Company and Executive entered into an executive employment agreement dated November 21, 2005 (the “Prior Agreement”); and

     WHEREAS, the Company wishes to continue to employ Executive as its President and Chief Executive Officer and Executive wishes to continue such employment; and

     WHEREAS, the parties have determined that it is necessary and appropriate to amend and restate the Prior Agreement in connection with the Company’s initial public offering; and

     NOW, THEREFORE, in consideration of the mutual covenants herein contained, and upon the other terms and conditions hereinafter provided, the parties hereby agree as follows:

1. Employment. The Company agrees to employ Executive, and Executive agrees to serve the Company on the terms and conditions set forth in this Agreement.

2. Term of Agreement. Executive’s term of employment under this Agreement shall commence on the date of this Agreement (the “Effective Date”) and shall continue for a period of three (3) years thereafter. Commencing on the first anniversary of the Effective Date and on each anniversary thereafter (“Anniversary Date”), this Agreement shall automatically be renewed for one (1) additional year beyond the term otherwise established, unless one party provides written notice to the other party, at least ninety (90) days in advance of an Anniversary Date, of its intent not to renew this Agreement for an additional one year term. Nothing in this provision shall preclude termination as otherwise provided or permitted under this Agreement. Notwithstanding the foregoing, if a Change in Control occurs after the Effective Date and during the term of this Agreement, this Agreement shall continue in effect for a period of not less than two (2) years beyond the date of such Change in Control.

3. Position and Duties. Executive shall devote substantially all of his working time to the Company to the exclusion of any other business activity. Executive shall serve as President and Chief Executive Officer of the Company and shall report directly to the Chairman of the Board of Directors of the Company (the “Board”). Executive shall submit such direct reports as are needed, from time to time, and shall be responsible for the day-to-day operations of the Company and shall perform all reasonable duties assigned by the Board.

4. Covenant Not to Compete; Nonsolicitation; Confidential Information.

     4.1 During Executive’s employment with the Company and during the Restricted Period (as defined below), Executive shall not directly or indirectly, either for Executive’s own account or as an agent, consultant, employee, partner, officer, director, proprietor, investor (except as an investor owning less than 5% of the stock of a publicly owned company) or otherwise, of any person, firm, corporation, or enterprise:

a.

solicit or hire any employees of the Company or induce any of such employees to terminate their employment relationship with the Company; or

b.

solicit, induce or attempt to solicit or induce any customer, supplier or other entity doing business with the Company to cease doing business with the Company or, in the case of a customer, to place agribusiness insurance, as that term is commonly understood in the industry, with any competitor of the Company. For purposes of the foregoing provision, the term “customer” shall mean a business that the Company insures on the date that Executive’s employment terminates (or has insured during the previous twelve months) and a broker who has placed business with the Company on the date that Executive’s employment terminates but only with respect to those clients of the broker for which the broker has placed business with the Company in the twelve-month period preceding the date that Executive’s employment terminates.

     4.2 In addition to the limitations described in Section 4.1, during the Restricted Period Executive shall not, directly or indirectly, own, manage, operate, render services for (as a consultant or an advisor) or accept any employment with (a) Nationwide Agribusiness Insurance Company, Michigan Millers Insurance Company or Westfield Insurance Company, or any of their successors in interest or (b) the agribusiness insurance business of any other insurance company whose business has, or could reasonably be expected to have, a material adverse effect on the Company’s business insurance business. In addition, Executive shall not, directly or indirectly, own, manage, operate, render services for (as a consultant or an adviser) or accept any employment with, within a fifty (50) mile radius of Wilkes-Barre, Pennsylvania, any other property and casualty insurance or reinsurance line of business to the extent that such ownership, management, operating, rendering of services or employment (and the activities necessarily incident thereto) have, or could reasonably be expected to have, a material adverse effect on the Company’s business insurance business.

     4.3 Executive agrees that he will not at any time during the term of this Agreement (as determined under Section 2 hereof) or at any time thereafter for any reason, in any fashion, form or manner, either directly or indirectly, divulge, disclose or communicate to any person, firm, corporation or other business entity, in any manner whatsoever, any confidential information or trade secrets concerning the business of the Company, including, without limiting the generality of the foregoing, any customer lists or other customer identifying information, the techniques, methods or systems of the Company’s operation or management, any information regarding its financial matters, or any other material information concerning the business of the Company, its manner of operation, its plan or other material data. The provisions of this Section 4.3 shall not

2

apply to (i) information that is public knowledge other than as a result of disclosure by Executive in breach of this Section 4.3; (ii) information disseminated by the Company to third parties in the ordinary course of business; (iii) information lawfully received by Executive from a third party who, based upon inquiry by Executive, is not bound by a confidential relationship to the Company, or (iv) information disclosed under a requirement of law or as directed by applicable legal authority having jurisdiction over Executive.

     4.4 Although Executive and the Company consider the restrictions contained in Sections 4.1, 4.2 and 4.3 to be the minimum restriction reasonable for the purposes of preserving the Company’s goodwill and other proprietary rights, if a final determination is made by a court that the time or territory, or any other restriction contained in Sections 4.1, 4.2 and 4.3 is an unreasonable or otherwise unenforceable restriction against Executive, the provisions of Sections 4.1, 4.2 and 4.3 will not be rendered void, but will be deemed amended to apply as to such maximum time and territory and to such other extent as the court may determine to be reasonable.

     4.5 Executive agrees that the covenants contained in this Section 2 may be assigned by the Company, as needed, to affect its purpose and intent and that the Company’s assignee shall be entitled to the full benefit of the restrictions enjoyed by the Company under the terms of these covenants.

     4.6 The term “Restricted Period” shall mean:

a.	In the event Executive is terminated by the Company for Cause, the twenty-four (24) month period following Executive’s termination of employment;
b.	In the event of a termination pursuant to Section 7.1, the twenty-four (24) month period following Executive’s termination of employment;
c.	Notwithstanding Section 4.6.b., in the event of a termination pursuant to Section 7.1 and such termination would amount to Good Reason but for the fact that it occurred prior to a Change in Control, a period up to twenty-four (24) months following Executive’s termination of employment, with the number of months, if any, selected by the Company in its sole discretion by providing written notice of such number to Executive within ten (10) days following the date on which Executive gives notice of his termination of employment;
d.	In the event of a termination pursuant to Section 7.2, the date of Executive’s termination of employment; or
e.	In the event of a termination pursuant to Sections 7.3 or 7.4, the twenty-four (24) month period following Executive’s termination of employment.

5. Compensation and Related Matters.

     5.1 Base Compensation. During the period of Executive’s employment, the Company shall pay to him annual base compensation of $342,500 (“Base Compensation”). The Board shall periodically review Executive’s employment performance, in accordance with policies

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generally in effect from time to time, for possible merit or cost-of-living increases in such Base Compensation. Except for a reduction which is proportionate to a company-wide reduction in executive or senior management pay, not including eliminated positions or unfilled positions, the annual Base Compensation paid to Executive in any calendar year shall not be less than the annual Base Compensation paid to him in the immediately preceding calendar year. The frequency and manner of payment of such Base Compensation shall be in accordance with the Company’s executive payroll practices, as in effect from time to time. Nothing in this Agreement shall be construed as precluding Executive from entering into any salary reduction or deferral plan or arrangement during the term of this Agreement.

     5.2 Incentive Compensation. During the period of Executive’s employment with the Company, he shall be eligible to participate in any incentive plans or programs such as stock programs, options programs, long term cash plans, etc., that may be developed from time to time for the Company. Actual participation will be at the sole and final determination of the Board.

     5.3 Employee Benefit Plans and Other Plans or Arrangements. Executive shall be entitled to participate in any Penn Millers System benefit or incentive plans on the same basis as other executive officers of the Company. The Company may provide Executive with those perquisites that are reasonable and customary for similar positions.

     5.4 Expenses. During the period of Executive’s employment hereunder, he shall be entitled to receive reimbursement for reasonable and necessary expenses related to the business of the Company, in accordance with the general policies and procedures established by the Company.

     5.5 Annual Stipend. Executive shall be entitled to receive, in lieu of any other reimbursement for or payment of country club or social club membership fees, dues or other fees and any automobile allowance, an annual reimbursement allowance of $18,000 for 2009, and thereafter as determined by the Board. This annual reimbursement allowance will be paid quarterly, in arrears within thirty (30) days following the end of each quarter, provided that Executive provides the Company with such verification of his actual expenses paid for the purposes described above or similar purposes as approved by the Board in its discretion, as the Company shall reasonably request.

6. Termination for Cause.

     6.1 In General. The Company shall be entitled to terminate Executive’s employment for Cause in any of the following circumstances:

• Breach of Executive’s fiduciary duty to the Company or Executive’s duty of loyalty to the Company;

• Willful act of material dishonesty with respect to any material matter involving the Company;

• Theft or material misuse of Company property;

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• Engaging in personal conduct that would constitute grounds for liability for discrimination or sexual harassment (as proscribed by the U.S. Equal Employment Opportunity Commission Guidelines or any other applicable state or local regulatory body);

• Fraternization which affects Executive’s objectivity in the treatment of fellow employees or abusive or threatening behavior, after a warning by the Board or Human Resources to cease;

• Excessive absenteeism (which shall not include authorized absences for leave pursuant to the Family and Medical Leave Act, the Americans With Disabilities Act, or the Company’s vacation, paid time off, or short-term disability leave plans, policies, or arrangements) having a material adverse effect on Company business operations;

• Conviction of, or plea of guilty or nolo contendere to, a felony, any criminal charge involving moral turpitude, or illegal substance abuse charges;

• Illegal substance abuse or being under the influence of illegal substances during working time;

• Continuing neglect of management duties and responsibilities that has a material adverse effect on the Company; or

• Willful failure to timely report to the Board information having a material adverse effect on Company business operations.

     6.2 Compensation. Within a reasonable time after termination for Cause, the Company shall pay Executive, in one lump sum, Executive’s accrued but unpaid Base Compensation earned through the date of Executive’s termination and any accrued but unpaid or otherwise vested benefits to which Executive is entitled in the event of a termination for Cause under the terms of any Penn Millers System benefit or incentive plan. In the event of termination for Cause hereunder, Executive shall forfeit any right to any unvested long-term incentive or deferred awards and shall be entitled to no Success Sharing (or other annual incentive) awards for the year of Executive’s termination or for any award cycle that remains uncompleted at the date of Executive’s termination.

7. Termination without Cause.

     7.1 Termination by Executive on Voluntary Basis. In the event that Executive voluntarily terminates employment hereunder without Good Reason, as defined below, Executive shall be, subject to Section 7.5, entitled to receive:

a. Executive’s accrued but unpaid Base Compensation and any accrued but unpaid or otherwise vested benefits to which Executive is entitled in the event of such a termination under the terms of any Penn Millers System benefit or incentive plan;

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b. If Executive’s voluntary termination of employment is by reason of his normal retirement at or after age 65:

i.

A pro-rata payment from the Success Sharing Plan (or other annual incentive plan in effect) based on the number of full months that have elapsed from the start of the current annual performance period to the date of Executive’s termination of employment and actual annual performance through the end of the current annual performance period to the extent that at the conclusion of such period, such award is deemed earned, payable at the time such award would otherwise have been paid had Executive’s employment not terminated, but in no event later than March 15 of the calendar year following the end of such performance period; and

ii.

pro-rata vesting of any unvested and outstanding performance-based equity awards granted to Executive, based on the number of full months that have elapsed from the date of grant of such award to the date of Executive’s termination of employment and actual performance through the end of the applicable performance period to the extent that at the conclusion of such period, such awards are deemed earned, payable in-kind at the time such award would otherwise have been paid had Executive’s employment not terminated, but in no event later than March 15 of the calendar year following the end of the applicable performance period; provided, however, that (i) to the extent the benefits provided in this Subsection conflict with the terms of any plan or other agreement under or pursuant to which any equity awards were granted, the terms of such plan or other agreement shall control, and (ii) this Subsection shall not apply to payments or awards made or granted under any plan or other agreement designed to replace Executive’s benefits under the Penn Millers Holding Corporation Supplemental Executive Retirement Plan (the “SERP”), if any (with any such payments or awards shall be subject to the terms and conditions of any such plan or agreement); and

c. If Executive’s voluntary termination of employment would amount to Good Reason but for the fact that it occurred prior to a Change in Control, a lump sum cash payment within sixty (60) days following termination of Executive’s employment equal to the product of (i) the number of months selected by the Company pursuant to Section 4.6.c. and (ii) Executive’s Base Compensation, divided by twelve (12).

     7.2 Termination By Reason of Death or Permanent Disability: In the event Executive’s employment is terminated by reason of death or permanent disability (defined for this purpose as a condition by reason of which Executive is entitled to and receiving disability benefits under the Company’s long-term disability plan, if any, and if none, under the U.S. Social Security Act) Executive, or Executive’s estate, shall be, subject to Section 7.5, entitled to receive:

a. Executive’s accrued but unpaid Base Compensation and any accrued but unpaid or otherwise vested benefits to which Executive is entitled in the event of such

6

	a termination under the terms of any Penn Millers System benefit or incentive plan;
b.	Continuation of Executive’s Base Compensation then in effect for one (1) year (commencing on the next payroll date following the date of Executive’s termination of employment), offset by any amounts payable to Executive under any disability insurance plan or policy provided by the Company;
c.	Continuation of employer-provided healthcare benefits for one (1) year at the levels and cost to Executive and his qualified dependents in effect on the date of Executive’s termination, and thereafter to elect, at Executive’s or his qualified dependents’ cost, COBRA continuation for the remainder of Executive’s or his qualified dependents’ COBRA eligibility, if any, it being understood that Executive’s and his dependents’ COBRA eligibility period will include the period during which the Company is providing benefits under this Section 7.2.c.; and,
d.	If Executive is age 55 or has 10 years of service in the year of his termination of employment:

i.

Pro-rata vesting of any unvested and outstanding performance-based equity awards granted to Executive, based on the number of full months that have elapsed from the date of grant of such award to the date of Executive’s termination of employment, with all such awards payable in-kind at target levels for the applicable performance period within (60) days following the date Executive’s employment terminates; and

ii.

Pro-rata vesting of any unvested and outstanding non-performance-based equity awards granted to Executive, based on the number of full months that have elapsed from the date of grant of such award to the date of termination of Executive’s employment, payable in-kind within sixty (60) days following the date Executive’s employment terminates.

Notwithstanding the foregoing, (i) to the extent the benefits provided in this Subsection d. conflict with the terms of any plan or other agreement under or pursuant to which any equity awards were granted, the terms of such plan or other agreement shall control; and (ii) this Subsection d. shall not apply to awards granted under any plan or other agreement designed to replace Executive’s benefits under the SERP, if any (with any such awards subject to the terms and conditions of any such plan or agreement).

e.

A pro-rata payment from the Success Sharing Plan (or other annual incentive plan then in effect) as set forth in Section 7.1.b.i., without regard to the age requirements contained in Section 7.1.b.i.

     7.3 Termination by the Company without Cause prior to a Change in Control: In the event that Executive’s employment hereunder is terminated by the Company without Cause (as

7

defined in Section 6.1), before a Change in Control (as defined in Section 7.7 below), Executive shall be, subject to Section 7.5, entitled to receive:

a.	Executive’s accrued but unpaid Base Compensation and any accrued but unpaid or otherwise vested benefits to which Executive is entitled in the event of such a termination under the terms of any Penn Millers System benefit or incentive plan;
b.	Continuation of Executive’s Base Compensation then in effect for two (2) years (commencing on the next payroll date following the date of Executive’s termination of employment);
c.	Continuation of employer-provided healthcare benefits for two (2) years at the levels and cost to Executive and his qualified dependents in effect on the date of Executive’s termination, and thereafter to elect, at Executive’s or his qualified dependents’ cost, COBRA continuation for the remainder of Executive’s or his qualified dependents’ COBRA eligibility, if any, it being understood that Executive’s and his dependents’ COBRA eligibility period will include the period during which the Company is providing benefits under this Section 7.3.c.;
d.	Continuation of the annual stipend described in Section 5.5 (the “Annual Stipend”) then in effect for two (2) years; provided that such amount shall be paid in accordance with the Company’s executive payroll practices, commencing on the next payroll date following the date of Executive’s termination of employment;
e.	If Executive’s termination of employment occurs prior to his attaining age 62, payment of all fees and expenses related to the provision of outplacement services through a firm of Executive’s choice, not to exceed $25,000; provided, however, that such outplacement expenses: (i) must be incurred no later than the end of the second full calendar year following the year of Executive’s termination of employment; and (ii) must be paid no later than the end of the third full calendar year following the year of Executive’s termination of employment;
f.	A pro-rata payment from the Success Sharing Plan (or other annual incentive plan then in effect) as set forth in Section 7.1.b.i., without regard to the age requirements contained in Section 7.1.b.i.; and
g.	A lump sum cash payment within sixty (60) days following Executive’s termination of employment equal to two (2) times Executive’s target annual bonus for the year of termination.

     7.4 Termination by the Company Without Cause or by Executive with Good Reason on or after a Change in Control: If a Change in Control (as defined in Section 7.7 below) shall occur and concurrently therewith or during a period of twenty-four (24) months thereafter Executive’s employment hereunder is terminated by the Company without Cause (as defined in

8

Section 6.1) or by Executive with Good Reason (as defined in Section 7.6 below), Executive shall be, subject to Section 7.5, entitled to receive:

a.	Executive’s accrued but unpaid Base Compensation and any accrued but unpaid or otherwise vested benefits to which Executive is entitled in the event of such a termination under the terms of any Penn Millers System benefit or incentive plan;
b.	A lump sum cash payment within sixty (60) days following Executive’s termination of employment equal to one (1) times Executive’s Base Compensation then in effect (or immediately prior to any reduction resulting in a termination for Good Reason);
c.	Continuation of Executive’s Base Compensation then in effect (or immediately prior to any reduction resulting in a termination for Good Reason) for one (1) year (commencing on the next payroll date following the date of Executive’s termination of employment);
d.	Continuation of employer-provided healthcare benefits for two (2) years at the levels and cost to Executive and his qualified dependents in effect on the date of Executive’s termination (or immediately prior to any reduction resulting in a termination for Good Reason), and thereafter to elect, at Executive’s or his qualified dependents’ cost, COBRA continuation for the remainder of Executive’s or his qualified dependents’ COBRA eligibility, if any, it being understood that Executive’s and his dependents’ COBRA eligibility period will include the period during which the Company is providing benefits under this Section 7.4.d.;
e.	A lump sum cash payment within sixty (60) days following Executive’s termination of employment equal to two (2) times the Annual Stipend then in effect (or immediately prior to any reduction resulting in a termination for Good Reason);
f.	If Executive’s termination of employment occurs prior to his attaining age 62, payment of outplacement services as set forth in Section 7.3.e.;
g.	A pro-rata payment from the Success Sharing Plan (or other annual incentive plan then in effect) as set forth in Section 7.1.b.i., without regard to the age requirements contained in Section 7.1.b.i.;
h.	A lump sum cash payment within sixty (60) days following Executive’s termination of employment equal to two (2) times Executive’s target annual bonus for the year of termination; and
i.	Immediate and full vesting of equity awards as follows:

i. Immediate and full vesting of any unvested and outstanding performance-based equity awards granted to Executive, with all such awards payable

9

	in-kind at target levels for the applicable performance period within sixty (60) days following the date Executive’s employment terminates; and
ii.	Immediate and full vesting of any unvested and outstanding non-performance-based equity awards granted to Executive, payable in-kind within sixty (60) days following the date Executive’s employment terminates.

Notwithstanding the foregoing, (i) to the extent the benefits provided in this Subsection i. conflict with the terms of any plan or other agreement under or pursuant to which any equity awards were granted, the terms of such plan or other agreement shall control; and (ii) this Subsection i. shall not apply to awards granted under any plan or other agreement designed to replace Executive’s benefits under the SERP, if any (with any such awards subject to the terms and conditions of any such plan or agreement).

     7.5 Requirement of Release; Cessation and Recovery on Competition.

a.

Notwithstanding anything to the contrary in Sections 7.2, 7.3, or 7.4, Executive’s entitlement to any payments other than Executive’s accrued but unpaid Base Compensation and any accrued but unpaid or otherwise vested benefits under any Penn Millers System benefit or incentive plan determined at the time of Executive’s termination of employment shall be contingent upon Executive’s prior agreement with and signature to a complete release agreement substantially in the form of Exhibit A attached hereto.

b.

Notwithstanding anything to the contrary in Sections 7.3 or 7.4, in the event that Executive breaches any of the covenants contained in Section 4 of this Agreement:

i.	Any remaining payments or benefits to be provided under Sections 7.3 or 7.4 shall not be paid or shall cease immediately upon such breach; and
ii.	The Company shall be entitled to the immediate repayment of all payments and benefits provided under Sections 7.3 and 7.4.

     7.6 Good Reason: Executive shall be considered to have terminated employment hereunder for Good Reason if such termination of employment occurs on or within twenty-four (24) months after a Change in Control and is on account of any of the following actions by the Company without Executive’s express written consent:

a.	A material reduction in Executive’s Base Compensation as in effect immediately prior to a Change in Control;
b.	Any material diminution of Executive’s positions, duties or responsibilities or the assignment to Executive of duties or responsibilities that are materially inconsistent with Executive’s then position, in effect immediately prior to a Change in Control;

10

c.	A failure by the Company to continue Executive as a participant in any incentive plan or program (whether annual or long-term and whether paid in cash or in equity) on at least the same basis with respect to the potential amount of incentives thereunder immediately prior to a Change in Control;
d.	Any exclusion from full participation in or any material diminution in the benefits Executive is entitled to receive under any of the employee benefit plans of the Company in effect immediately prior to a Change in Control to the extent such exclusion or reduction is not imposed on executive officers of the Company generally;
e.	Any change in Executive’s principal place of work (other than a temporary change occasioned by the Company’s business needs) that would increase Executive’s commute by 50 miles or more as of the date of the Change in Control; or
f.	A material breach by the Company of its obligations under this Agreement.

     Notwithstanding the foregoing, a termination by Executive shall not be for “Good Reason,” unless Executive shall have given the Company at least ten (10) business days written notice specifying the grounds upon which Executive intends to terminate his employment hereunder for “Good Reason” and such notice is received by the Company within ninety (90) days of the date the event of “Good Reason” occurred. In addition, any action or inaction by the Company which is remedied within thirty (30) days following such written notice shall not constitute “Good Reason” for termination hereunder.

     7.7 Change in Control: Change in Control shall have the same meaning as a “Change in Control” under the Penn Millers Stock Incentive Plan, as such term may be amended from time to time.

     7.8 Exclusive Remedy. Except for any explicit rights and remedies Executive may have under any other contract, plan or arrangement with the Company, the compensation and benefits payable under this Agreement and the remedy for enforcement shall constitute Executive’s exclusive rights and remedy in the event of the termination of his employment.

8. Best Net Benefit Limitation. Anything contained in this Agreement to the contrary notwithstanding, if any of the payments or benefits received or to be received by Executive pursuant to this Agreement (which the parties agree will not include any portion of payments allocated to the non-solicitation and non-compete provisions of Section 4 which are classified as payments of reasonable compensation for purposes of Code Section 280G), when taken together with payments and benefits provided to Executive under any other plans, contracts, or arrangements with the Penn Millers System (all such payments and benefits being hereinafter referred to as the “Total Payments”), will be subject to any excise tax imposed under Section 4999 of the Internal Revenue Code of 1986, as amended (the “Code”) (together with any interest or penalties, the “Excise Tax”), then such Total Payments shall be reduced to the extent necessary so that no portion thereof shall be subject to the Excise Tax; provided, however, that if Executive would receive in the aggregate greater value (as determined under Code Section 280G

11

and the regulations thereunder) on an after tax basis if the Total Payments were not subject to such reduction, then no such reduction shall be made. To effectuate the reduction described above, if applicable, the Company shall first reduce or eliminate the payments and benefits provided under this Agreement. All calculations required to be made under this Section, including the portion of the payments hereunder to be allocated to the restrictive covenants set forth in Section 4, will be made by the Company’s independent public accountants, subject to the right of Executive’s representative to review the same. The parties recognize that the actual implementation of the provisions of this Section are complex and agree to deal with each other in good faith to resolve any questions or disagreements arising hereunder.

9. Withholding Taxes. All compensation and benefits provided in this Agreement shall, to the extent required by law, be subject to federal, state, and local tax withholding.

10. Applicable Law and Jurisdiction. This Agreement shall be governed by and construed in accordance with the domestic laws of the Commonwealth of Pennsylvania without regard to its conflict of laws principles, unless and to the extent preempted by the laws of the United States of America. Any controversy or dispute arising out of or relating to this Agreement, including an alleged breach, shall be subject to the jurisdiction of Court of Common Pleas of Luzerne County.

11. Additional Equitable Remedy. Executive acknowledges and agrees that the Company’s remedy at law for a breach or a threatened breach of the provisions of this Agreement would be inadequate. In recognition of this fact, in the event of such a breach or threatened breach by Executive, it is agreed that the Company shall be entitled to request equitable relief in the form of specific performance, temporary restraining order, temporary or permanent injunction, or any other equitable remedy which may then be available. Nothing in this Section shall be construed as prohibiting the Company from pursuing any other remedy available under this Agreement for such a breach or threatened breach.

12. Indemnification.

     12.1 The Company shall indemnify Executive in the event Executive is made a party or is threatened to be made a party to any threatened, pending, or completed action, suit, or proceeding, whether civil, criminal, administrative, or investigative (including, without limitation, actions by or in the right of the Company), by reason of the fact that Executive is or was a director or officer of the Company, or such director or officer of the Company is or was serving at the request of the Company as a director, officer, employee, or agent of another corporation, partnership, joint venture, trust or other enterprise, against expenses (including attorneys’ fees), amounts paid in settlement, judgments, and fines actually and reasonably incurred by Executive in connection with such action, suit, or proceeding; provided, however, that no indemnification shall be made in any case where the act or failure to act giving rise to the claim for indemnification is determined by a court to have constituted willful misconduct or recklessness.

     12.2 Expenses (including attorneys’ fees) incurred in defending a civil or criminal action, suit, or proceeding, under Section 12.1 shall be paid by the Company in advance of the final disposition of such action, suit, or proceeding upon receipt of an undertaking by or on behalf of

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Executive to repay such amount if it shall be ultimately determined that Executive is not entitled to be indemnified by the Company as authorized in this Section 12.

     12.3 The Company shall purchase and maintain directors’ and officers’ liability insurance on behalf of Executive, at the Company’s expense, consistent with the amounts and terms provided to other directors and officers of the Company.

13. Notices. Any notice required or permitted under this Agreement shall be sufficient if it is in writing and shall be deemed given (i) at the time of personal delivery to the addressee, or (ii) at the time sent First Class U.S. Mail, with form 3817 requested, addressed as follows:

To the Company:
72 North Franklin St.
Wilkes-Barre, PA 18773-0016

To Executive:
25 Bulford Road
Shavertown, PA 18798

14. No Waiver. The failure by any party to this Agreement at any time or times to require strict performance by any other party of any of the provisions, terms, or conditions contained in this Agreement shall not waive, affect, or diminish any right of the first party at any time or times to demand strict performance therewith and with any other provision, term, or condition contained in this Agreement. Any actual waiver of a provision, term, or condition contained in this Agreement shall not constitute a waiver of any other provision, term, or condition, whether prior or subsequent to such actual waiver and whether of the same or a different type. The failure of the Company to promptly terminate Executive’s employment for Cause shall not be construed as a waiver of the right of termination, and such right may be exercised at any time following the occurrence of the event giving rise to such right.

15. Survival. Notwithstanding the termination of this Agreement, the provisions which specify continuing obligations, compensation and benefits, and rights shall remain in effect until such time as all such obligations are discharged, all such compensation and benefits are received, and no party or beneficiary has any remaining actual or contingent rights under this Agreement.

16. Severability. In the event any provision in this Agreement shall be held illegal or invalid for any reason, such illegal or invalid provision shall not affect the remaining provisions and this Agreement shall be construed, administered and enforced as though such illegal or invalid provision were not contained in this Agreement.

17. Mutual Waiver of Jury Trial. The Company and Executive each waives its/his respective rights to a trial by jury of any claim or cause of action based upon or arising out of or related to this Agreement in any action, proceeding or other litigation of any type brought by any of the parties against any other party or any affiliate of any other such party, whether with respect to contract claims, tort claims or otherwise. The Company and Executive each agree that any such claim or cause of action shall be tried by a court trial without a jury. Without limiting

13

the foregoing, the parties further agree that their respective right to a trial by jury is waived by operation of this Section as to any action, counterclaim or other proceeding which seeks, in whole or in part, to challenge the validity or enforceability of this Agreement or any provision hereof. This waiver shall apply to any subsequent amendments, renewals, supplements or modifications to this Agreement.

18. Binding Effect and Benefit.

     18.1 The Company shall require any successor (whether direct or indirect, by purchase, merger, consolidation, or otherwise) to all or substantially all of the business or assets of the Company to expressly assume and agree to perform this Agreement in the same manner and to the same extent that the Company would be required to perform it if no such succession had taken place. Failure by the Company to obtain such assumption and agreement prior to the effectiveness of any such succession shall constitute a material breach of this Agreement. As used in this Agreement, “the Company” shall mean the Company as hereinbefore defined and any successor to the respective business or assets of the Company as aforesaid which assumes and agrees to perform this Agreement by operation of law, or otherwise.

     18.2 This Agreement shall inure to the benefit of and be enforceable by Executive’s personal or legal representatives, executors, administrators, heirs, distributees, devisees, and legatees. If Executive should die while any amount is payable to him under this Agreement if he had continued to live, all such amounts, unless otherwise provided herein, shall be paid in accordance with the terms of this Agreement to his devisee, legatee, or other designee, or, if there is no such designee, to his estate.

19. Entire Agreement; Reservation. This Agreement embodies the entire agreement among the parties with respect to the subject matter of this Agreement, and it supersedes all prior discussions and oral understandings of the parties with respect thereto.

20. Review of Agreement. The Company and Executive hereby acknowledge and agree that the parties shall review the terms and conditions contained in this Agreement on a triennial basis and engage in discussions regarding possible amendments to this Agreement; provided, however, no party hereto shall be obligated to amend this Agreement at any time.

21. Assignment. This Agreement shall not be assignable by either party hereto, except as provided in Section 4.5 and by the Company to any successor in interest to the business of the Company, provided that the Company (if it remains a separate entity) shall remain fully liable under this Agreement for all obligations, payments and otherwise.

22. No Mitigation or Offset. In the event of termination of Executive’s employment, Executive will be under no obligation to seek other employment and there will be no offset against any payment or benefit provided for in this Agreement on account of any remuneration or benefits from any subsequent employment that he may obtain.

23. Captions. The captions of the several sections and subsections of this Agreement have been inserted for convenience of reference only. They constitute no part of this Agreement and are not to be considered in the construction of this Agreement.

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24. Counterparts. This Agreement may be executed in any number of counterparts, each of which shall be deemed one and the same instrument which may be sufficiently evidenced by any one counterpart.

25. Number. Wherever any words are used in the singular form, they shall be construed as though they were used in the plural form, as the context requires, and vice versa.

26. Legal Fees. In the event of a dispute following a Change in Control, the Company, or its successor, shall reimburse Executive for all reasonable legal fees and expenses incurred by Executive in attempting to obtain or enforce rights or benefits provided by this Agreement, if, with respect to any such right or benefit, Executive is successful in obtaining or enforcing such right or benefit (including by negotiated settlement).

27. Application of Code Section 409A.

     27.1 Notwithstanding anything in this Agreement to the contrary, the receipt of any benefits under this Agreement as a result of a termination of employment shall be subject to satisfaction of the condition precedent that Executive undergo a “separation from service” within the meaning of Treas. Reg. § 1.409A-1(h) or any successor thereto. In addition, if Executive is deemed to be a “specified employee” within the meaning of that term under Code Section 409A(a)(2)(B), then with regard to any payment or the provisions of any benefit that is required to be delayed pursuant to Code Section 409A(a)(2)(B), such payment or benefit shall not be made or provided prior to the earlier of (i) the expiration of the six (6) month period measured from the date of Executive’s “separation from service” (as such term is defined in Treas. Reg. § 1.409A-1(h)), or (ii) the date of Executive’s death (the “Delay Period”). Within ten (10) days following the expiration of the Delay Period, all payments and benefits delayed pursuant to this Section (whether they would have otherwise been payable in a single sum or in installments in the absence of such delay) shall be paid or reimbursed to Executive in a lump sum, and any remaining payments and benefits due under this Agreement shall be paid or provided in accordance with the normal payment dates specified for them herein. Notwithstanding the foregoing, to the extent that the foregoing applies to the provision of any ongoing welfare benefits to Executive that would not be required to be delayed if the premiums therefore were paid by Executive, Executive shall pay the full costs of premiums for such welfare benefits during the Delay Period and the Company shall pay Executive an amount equal to the amount of such premiums paid by Executive during the Delay Period within ten (10) days after the conclusion of such Delay Period.

     27.2 Except as otherwise expressly provided herein, to the extent any expense reimbursement or other in-kind benefit is determined to be subject to Code Section 409A, the amount of any such expenses eligible for reimbursement or in-kind benefits in one calendar year shall not affect the expenses eligible for reimbursement or in-kind benefits in any other taxable year (except under any lifetime limit applicable to expenses for medical care), in no event shall any expenses be reimbursed or in-kind benefits be provided after the last day of the calendar year following the calendar year in which Executive incurred such expenses or received such benefits, and in no event shall any right to reimbursement or in-kind benefits be subject to liquidation or exchange for another benefit.

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     27.3 Any payments made pursuant to this Sections 7.3 and 7.4, to the extent of payments made from the date of termination through March 15th of the calendar year following such date, are intended to constitute separate payments for purposes of Treas. Reg. §1.409A-2(b)(2) and thus payable pursuant to the “short-term deferral” rule set forth in Treas. Reg. §1.409A-1(b)(4); to the extent such payments are made following said March 15th, they are intended to constitute separate payments for purposes of Treas. Reg. §1.409A-2(b)(2) made upon an involuntary termination from service and payable pursuant to Treas. Reg. §1.409A-1(b)(9)(iii), to the maximum extent permitted by said provision. Notwithstanding the foregoing, if the Company determines that any other payments hereunder fail to satisfy the distribution requirement of Section 409A(a)(2)(A) of the Internal Revenue Code of 1986, as amended (the “Code”), the payment of such benefit shall be delayed to the minimum extent necessary so that such payments are not subject to the provisions of Code Section 409A(a)(1).

     27.4 To the extent it is determined that any benefits described in Sections 7.3.c and 7.4.d. are taxable to Executive, they are intended to be payable pursuant to Treas. Reg. §1.409A-1(b)(9)(v), to the maximum extent permitted by said provision.

28. Recovery of Bonuses and Incentive Compensation. Notwithstanding anything in this Agreement to the contrary, all bonuses and incentive compensation paid hereunder (whether in equity or in cash) shall be subject to recovery by the Company in the event that such bonuses or incentive compensation are based on materially inaccurate financial statements (which includes, but is not limited to, statements of earnings, revenues, or gains) or other materially inaccurate performance metric criteria; provided that a determination as to the recovery of a bonus or incentive compensation shall be made within twelve (12) months following the date such bonus or incentive compensation was paid. In the event that the Board determines by at least a majority vote that a bonus or incentive compensation payment to Executive is recoverable, Executive shall reimburse all or a portion of such bonus or incentive compensation, to the fullest extent permitted by law, as soon as practicable following written notice to Executive by the Company of the same.

     IN WITNESS WHEREOF, the parties have executed this Agreement, or caused it to be executed, as of the date first above written.

For: PMMHC Corporation
By:	/s/ J. Harvey Sproul	DATE: 8/14/09
For: Penn Millers Holding Corporation
By:	/s/ J. Harvey Sproul	DATE: 8/14/09
For: Penn Millers Insurance Company
By:	/s/ J. Harvey Sproul	DATE: 8/14/09

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/s/ Douglas Gaudet	DATE: 8/14/09
Douglas Gaudet

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EXHIBIT A
RELEASE AGREEMENT

THIS RELEASE AGREEMENT (this “Release Agreement”) is made as of this ___ day of ____________, 20__, by and between PMMHC Corporation, Penn Millers Holding Corporation, Penn Millers Insurance Company (collectively, the “Employer”) and Douglas Gaudet (the “Executive”). Capitalized terms not defined in this Release Agreement shall have the meanings ascribed to them in the Employment Agreement (as defined below). In consideration of the mutual agreements set forth below, the Executive and the Employer hereby agree as follows:

     1. General Release.

          a. In consideration of the payments and benefits required to be provided to the Executive under the agreement between the Employer and the Executive, dated August 14, 2009, (the “Employment Agreement”) and after consultation with counsel, the Executive, for himself and on behalf of each of the Executive’s heirs, executors, administrators, representatives, agents, successors and assigns (collectively, the “Releasors”), hereby irrevocably and unconditionally releases and forever discharges the Employer, its majority owned subsidiaries and affiliated companies, and each of its officers, employees, directors, shareholders, and agents (collectively, the “Releasees”) from any and all claims, actions, causes of action, rights, judgments, obligations, damages, demands, accountings, or liabilities of whatever kind or character (collectively, “Claims”), including, without limitation, any Claims under any federal, state, local, or foreign law, that the Releasors may have, or in the future may possess, arising out of (i) the Executive’s employment relationship with and service as an employee, officer, or director of the Employer and any of its majority-owned subsidiaries and affiliates, or the termination of the Executive’s service in any and all of such relevant capacities, (ii) the Employment Agreement, or (iii) any event, condition, circumstance, or obligation that occurred, existed, or arose on or prior to the date hereof; provided, however, that the release set forth in this Section shall not apply to (iv) the payment and/or benefit obligations of the Employer or any of its affiliates, (collectively, the “Employer Group”) under the Employment Agreement, (v) any Claims the Executive may have under any plans or programs not covered by the Employment Agreement in which the Executive participated and under which the Executive has accrued and become entitled to a benefit, and (vi) any indemnification or other rights the Executive may have under the Employment Agreement or in accordance with the governing instruments of any member of the Employer Group or under any director and officer liability insurance maintained by the Employer or any such group member with respect to liabilities arising as a result of the Executive’s service as an officer and employee of any member of the Employer Group or any predecessor thereof. Except as provided in the immediately preceding sentence, the Releasors further agree that the payments and benefits as required by the Employment Agreement shall be in full satisfaction of any and all Claims for payments or benefits, whether express or implied, that the Releasors may have against the Employer or any member of the Employer Group arising out of the Executive’s employment relationship under the Employment Agreement and the Executive’s service as an employee, officer or director of the Employer or a member of the Employer Group under the Employment Agreement or the termination thereof, as applicable.

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     2. Specific Release of Claims. In further consideration of the payments and benefits provided to the Executive under the Employment Agreement, the Releasors hereby unconditionally release and forever discharge the Releasees from any and all Claims that the Releasors may have in connection with the Executive’s employment or termination of employment, arising under:

          a. Title VII of the Civil Rights Act of 1964, the Age Discrimination in Employment Act (“ADEA”), the Americans With Disabilities Act of 1990 (“ADA”), the Rehabilitation Act of 1973, and any similar federal, state or local laws, including without limitation, the Pennsylvania Human Relations Act, as amended and any other non-discrimination and fair employment practices laws of any state and/or locality in which the Executive works or resides, all as amended;

          b. the Fair Credit Reporting Act (“FCRA”), the Employee Retirement Income Security Act of 1974 (“ERISA”), the Worker Adjustment and Retraining Notification Act (“WARN”); and

          c. all common law Claims including, but not limited to, actions in tort and for breach of contract, including, without limitation, Claims for incentive payments and/or commissions, including but not limited to, Claims for incentive and/or commission payments under any Employer incentive or commission plan, Claims for severance benefits, all Claims to any non-vested ownership interest in the Employer, contractual or otherwise, including but not limited to Claims to stock or stock options.

               This release applies to any and all Claims that the Executive may have relating to rights, known or unknown to him, resulting from a change in ownership control of the Employer, including, without limitation, rights pursuant to severance agreements, severance plans, incentive plans, equity compensation plans, or any other plan or agreement relating to the Executive’s employment.

               Notwithstanding anything contained herein to the contrary, no portion of any release contained in any Section of this Release Agreement shall release the Employer or the Employer Group from any Claims the Executive may have for breach of the provisions of this Release Agreement or to enforce this Release Agreement, that arise after the date of this Release Agreement, or to challenge the validity of the Executive’s release of ADEA Claims.

               By signing this Release Agreement, the Executive hereby acknowledges and confirms the following: (i) the Executive was advised by the Employer or his then employer in connection with his termination of employment or retirement to consult with an attorney of his choice prior to signing this Release Agreement and to have such attorney explain to the Executive the terms of this Release Agreement, including, without limitation, the terms relating to the Executive’s release of Claims arising under this Section, and the Executive has in fact consulted with an attorney; (ii) the Executive was given a period of not fewer than 21 days to consider the terms of this Release Agreement prior to its signing; and (iii) the Executive knowingly and voluntarily accepts the terms of this Release Agreement.

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     3. No Assignment of Claims. The Executive represents and warrants that he has not assigned any of the Claims being released hereunder.

     4. Complaints. The Executive affirms that he has not filed any complaint against any Releasee with any local, state or federal court and agrees not to do so in the future, except for Claims challenging the validity of the release of ADEA Claims. The Executive affirms further that he has not filed any claim, charge or complaint with the United States Equal Employment Opportunity Commission (“EEOC”) or any state or local agency authorized to investigate charges or complaints of unlawful employment discrimination (together, “Agency”). The Executive understands that nothing in this Release Agreement prevents him from filing a charge or complaint of unlawful employment discrimination with any Agency or assisting in or cooperating with an investigation of a charge or complaint of unlawful employment discrimination by an Agency, provided however that, the Executive acknowledges that he may not be able to recover any monetary benefits in connection with any such claim, charge, complaint or proceeding and disclaim entitlement to any such relief. Furthermore, if any Agency or court has now assumed or later assumes jurisdiction of any claim, charge or complaint on the Executive’s behalf against any Releasee, the Executive will disclaim entitlement to any relief.

     5. Revocation. This Release Agreement may be revoked by the Executive within the seven-day period commencing on the date the Executive signs this Release Agreement (the “Revocation Period”). In the event of any such revocation by the Executive, all obligations of the parties under this Release Agreement shall terminate and be of no further force and effect as of the date of such revocation. No such revocation by the Executive shall be effective unless it is in writing and signed by the Executive and received by the Employer prior to the expiration of the Revocation Period. In the event of revocation, the Executive shall not be entitled to the payments and benefits under the Employment Agreement, the receipt of which is conditioned on the Executive’s execution of this Release Agreement.

     6. Non-Disparagement. The Executive agrees not to disparage or criticize the Releasees, or any of them, or otherwise speak of Releasees, or any of them, in any negative or unflattering way to anyone with regard to any matters relating to the Executive’s employment by the Employer Group or the business or employment practices of such business entities. The Employer agrees, on behalf of itself, and the Employer Group, not to disparage or criticize the Executive or otherwise speak of the Executive in any negative or unflattering way to anyone with regard to any matters relating to the Executive’s employment with the Employer Group. The parties understand that this entire provision is a material provision of this Release Agreement. This Section shall not operate as a bar to (i) statements reasonably necessary to be made in any judicial, administrative or arbitral proceeding, or (ii) internal communications between and among the employees of the Employer Group with a job-related need to know about this Release Agreement or matters related to the administration of this Release Agreement.

     7. Cooperation. The Executive agrees to cooperate with the Employer with respect to all matters arising during or related to his employment about which he has personal knowledge because of his employment with the Employer, including but not limited to all matters (formal or informal) in connection with any government investigation, internal Employer investigation, litigation (potential or ongoing), administrative, regulatory, or other proceeding which currently exists, or which may have arisen prior to or arise following the signing of this

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Release Agreement. The Executive understands that the Employer agrees to reimburse Executive for his reasonable out-of-pocket expenses (not including attorney’s fees, legal costs, or lost time or opportunity) incurred in connection with such cooperation.

     8. No Admission of Liability. The Executive agrees that this Release Agreement does not constitute, nor should it be construed to constitute, an admission by the Employer of any violation of federal, state, or local law, regulation, or ordinance, nor as an admission of liability under the common law or for any breach of duty the Employer owed or owes to the Executive.

     9. Representations and Warranties. The Executive acknowledges and agrees that (i) he is not aware of nor has he reported any conduct by any of the Releasees that violates any federal, state, or local law, rule, or regulation, (ii) he has not been denied any rights or benefits under the Family and Medical Leave Act of 1993 (“FMLA”) or any state or local law, act, or regulation providing for family and/or medical leave or been discriminated against in any way for exercising his rights under these laws, and (iii) in connection with offering the payments and benefits provided under the Employment Agreement, the Employer has not provided to the Executive, and has no obligation to provide to the Executive, any material non-public information as defined in applicable federal securities laws, concerning the Employer.

     10. Confidentiality. The Executive agrees to maintain as confidential, the terms and contents of this Release Agreement, and the contents of the negotiations and discussions resulting in this Release Agreement, except (i) as needed to obtain legal counsel, financial, or tax advice, (ii) to the extent required by federal, state, or local law or by order of court (iii) as needed to challenge the release of ADEA Claims or to participate in an Agency investigation, or (iv) as otherwise agreed to in writing by an officer of the Employer. The Executive agrees that before he seeks legal counsel or financial or tax advice, he will secure an agreement from such counsel or advisors to adhere to the same confidentiality obligations that apply to him. The Executive agrees not to discuss either the existence of or any aspect of this Release Agreement with any employee or ex-employee of the Employer.

     11. Successors. This Release Agreement is for the benefit of and is binding upon the Executive and his heirs, administrators, representatives, executors, successors, beneficiaries and assigns, and is also for the benefit of the Releasees and their successors and assigns.

     12. Violation. If the Executive violates any provisions of this Release Agreement, the Employer will be entitled to the immediate repayment of all payments and benefits paid pursuant to the Employment Agreement. The Executive agrees that repayment will not invalidate this Release Agreement and acknowledges that he will be deemed conclusively to be bound by the terms of this Release Agreement and to waive any right to seek to overturn or avoid it. If the Executive violates any provisions of this Release Agreement before all of the payments and benefits under the Employment Agreement have been provided, the Employer may discontinue any unpaid conditional payments and benefits.

     13. Additional Damages Available for Violation. The Executive agrees that the Employer will maintain all rights and remedies available to it at law and in equity in the event the Executive violates any provision of this Release Agreement. These rights and remedies may include, but may not be limited to, the right to bring court action to recover all consideration paid

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to the Executive pursuant to this Release Agreement and any additional damages the Employer may suffer as a result of such a breach.

     14. Entire Agreement and Amendment. This Release Agreement contains and constitutes the entire understanding and agreement between the parties hereto with respect to the Executive’s severance benefits and waiver and release of Claims against the Employer and cancels all previous oral and written negotiations, agreements, commitments and writings in connection therewith. This Release Agreement shall be binding upon the parties and may not be modified in any manner, except by an instrument in writing of concurrent or subsequent date signed by a duly authorized representative of the parties and their respective agents, assign, heirs, executors, successors, and administrators. No delay or omission by the Employer in exercising any right under this Release Agreement shall operate as a waiver of that or any other right. A waiver or consent given by the Employer on any one occasion shall be effective only in that instance and shall not be construed as a bar or waiver of any right on any other occasion. The parties acknowledge and agree that Sections 12 and 15 of the Employment Agreement shall survive the execution of this Release Agreement and the termination of the Employment Agreement.

     15. Applicable Law. This Release Agreement shall be governed by and construed in accordance with the laws of the Commonwealth of Pennsylvania without regard to choice of law principles, and except as preempted by federal law. Should any provision of this Release Agreement be declared or be determined by any court of competent jurisdiction to be illegal or invalid, the validity of the remaining parts, terms or provisions shall not be affected thereby and the illegal or invalid part, term, or provision will be deemed not to be a part of this Release Agreement.

     16. Assignment. The Executive’s rights and obligations under this Release Agreement shall inure to the Executive’s benefit and shall bind the Executive, his heirs and representatives. The Employer’s rights and obligations under this Release Agreement shall inure to the benefit of and shall bind the Employer, its successors and assigns. The Executive may not assign this Release Agreement. The Employer may assign this Release Agreement, but it may not delegate the duty to make any payments hereunder without the Executive’s written consent, which shall not be unreasonably withheld.

     17. Severability. If any provision of this Release Agreement is held unenforceable by a court of competent jurisdiction, all remaining provisions shall continue in full force and effect without being impaired or invalidated in any way.

     18. Notices. All notices required by this Release Agreement shall be in writing and shall be deemed to have been duly delivered in person or when mailed by certified mail, return receipt requested, as follows:

a.	If to the Executive: 25 Bulford Road, Shavertown, PA 18798
b.	If to the Employer: 72 North Franklin St., Wilkes-Barre, PA 18773-0016

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The Executive is hereby advised that the Executive has up to twenty-one (21) calendar days to review this Release Agreement and that the Executive should consult with an attorney of the Executive’s choice prior to execution of this Release Agreement.

     The Executive agrees that any modifications, material or otherwise, made to this Release Agreement do not restart or affect in any manner the original twenty-one (21) calendar day consideration.

     Having elected to execute this Release Agreement, to fulfill the promises and to receive the payments and benefits under the Employment Agreement, the Executive freely and knowingly, after due consideration, enters into this Release Agreement intending to waive, settle and release all claims the Executive has or might have against the Employer.

Statement by the Executive who is signing below. By signing this Release Agreement, I acknowledge that the Employer has advised and encouraged me to consult with an attorney prior to executing this Release Agreement. I have carefully read and fully understand the provisions of this Release Agreement and have had sufficient time and opportunity (over a period of 21 days) to consult with my personal tax, financial and legal advisors prior to executing this Release Agreement, and I intend to be legally bound by its terms.

     IN WITNESS WHEREOF, the Employer (on its behalf and on behalf of the members of the Employer Group) and the Executive, intending to be legally bound have executed this Release Agreement on the day and year first above written.

PENN MILLERS HOLDING CORPORATION
By
	Title
EXECUTIVE
Douglas Gaudet

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EX-10.3

Exhibit 10.3

August 14, 2009

Michael O. Banks
6 Bridle Path
Dallas, PA 18612

Re: Letter Agreement

Dear Michael:

     It is with great pleasure that we extend an offer setting forth the following terms for your continued employment with PMMHC Corporation, (the “MHC”), Penn Millers Holding Corporation (the “Holding Corporation”), and Penn Millers Insurance Company, (the “Insurance Company”) (the Holding Corporation and the Insurance Company are sometimes referred to collectively or individually, as the context requires, as the “Company,” and the MHC, the Holding Corporation, and the Insurance Company, and their direct and indirect subsidiaries, are sometimes referred to collectively as the “Penn Millers System”).

1. Term of Agreement. The term of this agreement (the “Agreement”) shall commence on the date above (the “Effective Date”) and shall continue for a period of two (2) years thereafter. Commencing on the first anniversary of the Effective Date and on each anniversary thereafter (“Anniversary Date”), this Agreement shall automatically be renewed for one (1) additional year beyond the term otherwise established, unless one party provides written notice to the other party, at least ninety (90) days in advance of an Anniversary Date, of its intent not to renew this Agreement for an additional one year term. Nothing in this provision shall preclude termination as otherwise provided or permitted under this Agreement. Notwithstanding the foregoing, if a Change in Control occurs after the Effective Date and during the term of this Agreement, this Agreement shall continue in effect for a period of not less than two (2) years beyond the date of such Change in Control.

2. Covenant Not to Compete; Nonsolicitation; Confidential Information.

     2.1 During your employment with the Company and during the Restricted Period (as defined below), you shall not directly or indirectly, either for your own account or as an agent, consultant, employee, partner, officer, director, proprietor, investor (except as an investor owning less than 5% of the stock of a publicly owned company) or otherwise, of any person, firm, corporation, or enterprise:

a. solicit or hire any employees of the Company or induce any of such employees to terminate their employment relationship with the Company; or

b. solicit, induce or attempt to solicit or induce any customer, supplier or other entity doing business with the Company to cease doing business with the Company or, in the case of a customer, to place agribusiness insurance, as that term is commonly understood in the industry, with any competitor of the Company. For purposes of the foregoing provision, the term “customer” shall mean a business that the Company insures on the date that your employment terminates (or has insured during the previous twelve months) and a broker who has placed business with the Company on the date that your employment terminates but only with respect to those clients of the broker for which the broker has placed business with the Company in the twelve-month period preceding the date that your employment terminates.

     2.2 In addition to the limitations described in Section 2.1, during the Restricted Period you shall not, directly or indirectly, own, manage, operate, render services for (as a consultant or an advisor) or accept any employment with (a) Nationwide Agribusiness Insurance Company, Michigan Millers Insurance Company or Westfield Insurance Company or any of their successors in interest or (b) the agribusiness insurance business of any other insurance company whose business has, or could reasonably be expected to have, a material adverse effect on the Company’s business insurance business. In addition, you shall not, directly or indirectly, own, manage, operate, render services for (as a consultant or an adviser) or accept any employment with, within a fifty (50) mile radius of Wilkes-Barre, Pennsylvania, any other property and casualty insurance or reinsurance line of business to the extent that such ownership, management, operating, rendering of services or employment (and the activities necessarily incident thereto) have, or could reasonably be expected to have, a material adverse effect on the Company’s business insurance business.

     2.3 You agree that you will not at any time during the term of this Agreement (as determined under Section 1 hereof) or at any time thereafter for any reason, in any fashion, form or manner, either directly or indirectly, divulge, disclose or communicate to any person, firm, corporation or other business entity, in any manner whatsoever, any confidential information or trade secrets concerning the business of the Company, including, without limiting the generality of the foregoing, any customer lists or other customer identifying information, the techniques, methods or systems of the Company’s operation or management, any information regarding its financial matters, or any other material information concerning the business of the Company, its manner of operation, its plan or other material data. The provisions of this Section 2.3 shall not apply to (i) information that is public knowledge other than as a result of disclosure by you in breach of this Section 2.3; (ii) information disseminated by the Company to third parties in the ordinary course of business; (iii) information lawfully received by you from a third party who, based upon inquiry by you, is not bound by a confidential relationship to the Company, or (iv) information disclosed under a requirement of law or as directed by applicable legal authority having jurisdiction over you.

     2.4 Although you and the Company consider the restrictions contained in Sections 2.1, 2.2 and 2.3 to be the minimum restriction reasonable for the purposes of preserving the Company’s goodwill and other proprietary rights, if a final determination is made by a court that the time or territory, or any other restriction contained in Sections 2.1, 2.2 and 2.3 is an unreasonable or otherwise unenforceable restriction against you, the provisions of Sections 2.1,

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2.2 and 2.3 will not be rendered void, but will be deemed amended to apply as to such maximum time and territory and to such other extent as the court may determine to be reasonable.

     2.5 Notwithstanding anything to the contrary in Sections 3.3 or 3.4, in the event that you breach any of the covenants contained in this Section 2:

a.	Any remaining payments or benefits to be provided under Sections 3.3 or 3.4 shall not be paid or shall cease immediately upon such breach; and
b.	The Company shall be entitled to the immediate repayment of all payments and benefits provided under Sections 3.3 and 3.4.

     2.6 You agree that the covenants contained in this Section 2 may be assigned by the Company, as needed, to affect its purpose and intent and that the Company’s assignee shall be entitled to the full benefit of the restrictions enjoyed by the Company under the terms of these covenants.

     2.7 The term “Restricted Period” shall mean:

a.	In the event you are terminated by the Company for Cause, the twelve (12) month period following your termination of employment;
b.	In the event of a termination pursuant to Section 3.1, the twelve (12) month period following your termination of employment;
c.	Notwithstanding Section 2.7.b., in the event of a termination pursuant to Section 3.1 and such termination would amount to Good Reason but for the fact that it occurred prior to a Change in Control, a period up to twelve (12) months following your termination of employment, with the number of months, if any, selected by the Company in its sole discretion by providing written notice of such number to you within ten (10) days following the date on which you give notice of your termination of employment;
d.	In the event of a termination pursuant to Section 3.2, the date of your termination of employment;
e.	In the event of a termination pursuant to Section 3.3, the twelve (12) month period following your termination of employment; or
f.	In the event of a termination pursuant to Section 3.4, the twenty-four (24) month period following your termination of employment.

3. Severance Benefits.

     3.1 Termination by You on Voluntary Basis. In the event that you voluntarily terminate your employment hereunder without Good Reason, you shall be entitled to receive:

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a.	If such termination occurs on or after age 65, a pro-rata payment from the Success Sharing Plan (or other annual incentive plan in effect) based on the number of full months that have elapsed from the start of the current annual performance period to the date of your termination of employment and actual annual performance through the end of the current annual performance period to the extent that at the conclusion of such period, such award is deemed earned, payable at the time such award would otherwise have been paid had your employment not terminated, but in no event later than March 15 of the calendar year following the end of such performance period;
b.	If such termination occurs on or after age 65, pro-rata vesting of any unvested and outstanding performance-based equity awards granted to you, based on the number of full months that have elapsed from the date of grant of such award to the date of your termination of employment and actual performance through the end of the applicable performance period to the extent that at the conclusion of such period, such awards are deemed earned, payable in-kind at the time such award would otherwise have been paid had your employment not terminated, but in no event later than March 15 of the calendar year following the end of the applicable performance period; provided, however, that (i) to the extent the benefits provided in this Subsection conflict with the terms of any plan or other agreement under or pursuant to which any equity awards were granted, the terms of such plan or other agreement shall control, and (ii) this Subsection shall not apply to payments or awards made or granted under any plan or other agreement designed to replace your benefits under the Penn Millers Holding Corporation Supplemental Executive Retirement Plan (the “SERP”), if any (with any such payments or awards shall be subject to the terms and conditions of any such plan or agreement); and
c.	If your voluntary termination of employment would amount to Good Reason but for the fact that it occurred prior to a Change in Control, a lump sum cash payment within sixty (60) days following termination of your employment equal to the product of (i) the number of months selected by the Company pursuant to Section 2.7.c. and (ii) your annual base compensation, divided by twelve (12).

     3.2 Termination By Reason of Death or Permanent Disability: In the event your employment is terminated by reason of your death or permanent disability (defined for this purpose as a condition by reason of which you are entitled to and receiving disability benefits under the Company’s long-term disability plan, if any, and if none, under the U.S. Social Security Act) you, or your estate, shall be entitled to receive:

a. Continuation of your annual base compensation then in effect for one (1) year (commencing on the next payroll date following the date of your termination of employment), offset by any amounts payable to you under any disability insurance plan or policy provided by the Company;

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b.

Continuation of employer-provided healthcare benefits for one (1) year at the levels and cost to you and your qualified dependents in effect on the date of your termination, and thereafter to elect, at your or your qualified dependents’ cost, COBRA continuation for the remainder of your or your qualified dependents’ COBRA eligibility, if any, it being understood that your and your dependents’ COBRA eligibility period will include the period during which the Company is providing benefits under this Section 3.2.b.; and

c.

If you are age 55 or have 10 years of service in the year of your termination of employment:

i.	Pro-rata vesting of any unvested and outstanding performance-based equity awards granted to you, based on the number of full months that have elapsed from the date of grant of such award to the date of your termination of employment, with all such awards payable in-kind at target levels for the applicable performance period within sixty (60) days following the date your employment terminates; and
ii.	Pro-rata vesting of any unvested and outstanding non-performance-based equity awards granted to you, based on the number of full months that have elapsed from the date of grant of such award to the date of termination of your employment, payable in-kind within sixty (60) days following the date your employment terminates.

Notwithstanding the foregoing, (i) to the extent the benefits provided in this Subsection c. conflict with the terms of any plan or other agreement under or pursuant to which any equity awards were granted, the terms of such plan or other agreement shall control and (ii) this Subsection c. shall not apply to awards granted under any plan or other agreement designed to replace your benefits under the SERP, if any (with any such awards subject to the terms and conditions of any such plan or agreement).

d.

A pro-rata payment from the Success Sharing Plan (or other annual incentive plan then in effect) as set forth in Section 3.1.a., without regard to the age requirements contained in Section 3.1.a.

     3.3 Termination by the Company without Cause prior to a Change in Control: In the event that your employment hereunder is terminated by the Company without Cause (as defined in Section 3.7), before a Change in Control (as defined in Section 3.6 below), you shall be entitled to receive:

a.	Continuation of your annual base compensation then in effect for one (1) year (commencing on the next payroll date following the date of your termination of employment);
b.	Continuation of employer-provided healthcare benefits for one (1) year at the levels and cost to you and your qualified dependents in effect on the date of your termination, and thereafter to elect, at your or your qualified dependents’

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	cost, COBRA continuation for the remainder of your or your qualified dependents’ COBRA eligibility, if any, it being understood that your and your dependents’ COBRA eligibility period will include the period during which the Company is providing benefits under this Section 3.3.b.;
c.	Continuation of the annual reimbursement allowance received in lieu of reimbursement for or payment of country club or social club membership fees, dues or other fees and any automobile allowance (the “Annual Stipend”), then in effect for one (1) year; provided that such amount shall be paid in accordance with the Company’s executive payroll practices, commencing on the next payroll date following the date of your termination of employment;
d.	If your termination of employment occurs prior to your attaining age 62, payment of all fees and expenses related to the provision of outplacement services through a firm of your choice, not to exceed $10,000; provided, however, that such outplacement expenses: (i) must be incurred no later than the end of the second full calendar year following the year of your termination of employment; and (ii) must be paid no later than the end of the third full calendar year following the year of your termination of employment; and
e.	A pro-rata payment from the Success Sharing Plan (or other annual incentive plan then in effect) as set forth in Section 3.1.a., without regard to the age requirements contained in Section 3.1.a.

     3.4 Termination by the Company Without Cause or by You with Good Reason on or after a Change in Control: If a Change in Control (as defined in Section 3.6 below) shall occur and concurrently therewith or during a period of twenty-four (24) months thereafter your employment hereunder is terminated by the Company without Cause (as defined in Section 3.7) or by you with Good Reason (as defined in Section 3.5 below), you shall be entitled to receive:

a.	A lump sum cash payment within sixty (60) days following your termination of employment equal to one (1) times your annual base compensation then in effect (or immediately prior to any reduction resulting in a termination for Good Reason);
b.	Continuation of your annual base compensation then in effect (or immediately prior to any reduction resulting in a termination for Good Reason) for one (1) year (commencing on the next payroll date following the date of your termination of employment);
c.	Continuation of employer-provided healthcare benefits for two (2) years at the levels and cost to you and your qualified dependents in effect on the date of your termination (or immediately prior to any reduction resulting in a termination for Good Reason), and thereafter to elect, at your or your qualified dependents’ cost, COBRA continuation for the remainder of your or your qualified dependents’ COBRA eligibility, if any, it being understood that your

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	and your dependents’ COBRA eligibility period will include the period during which the Company is providing benefits under this Section 3.4.c.;
d.	A lump sum cash payment within sixty (60) days following your termination of employment equal to two (2) times the Annual Stipend then in effect (or immediately prior to any reduction resulting in a termination for Good Reason);
e.	If your termination of employment occurs prior to your attaining age 62, payment of outplacement services as set forth in Section 3.3.d.;
f.	A pro-rata payment from the Success Sharing Plan (or other annual incentive plan then in effect) as set forth in Section 3.1.a., without regard to the age requirements contained in Section 3.1.a.;
g.	A lump sum cash payment within sixty (60) days following your termination of employment equal to two (2) times your target annual bonus for the year of termination; and
h.	Immediate and full vesting of equity awards as follows:

i.	Immediate and full vesting of any unvested and outstanding performance-based equity awards granted to you, with all such awards payable in-kind at target levels for the applicable performance period within sixty (60) days following the date your employment terminates; and
ii.	Immediate and full vesting of any unvested and outstanding non-performance-based equity awards granted to you, payable in-kind within sixty (60) days following the date your employment terminates.

Notwithstanding the foregoing, (i) to the extent the benefits provided in this Subsection h. conflict with the terms of any plan or other agreement under or pursuant to which any equity awards were granted, the terms of such plan or other agreement shall control and (ii) this Subsection h. shall not apply to awards granted under any plan or other agreement designed to replace your benefits under the SERP, if any (with any such awards subject to the terms and conditions of any such plan or agreement).

     3.5 Good Reason: You shall be considered to have terminated employment hereunder for Good Reason if such termination of employment occurs on or within twenty-four (24) months after a Change in Control and is on account of any of the following actions by the Company without your express written consent:

a.	A material reduction in your annual base compensation as in effect immediately prior to a Change in Control;
b.	Any material diminution of your positions, duties or responsibilities or the assignment to you of duties or responsibilities that are materially inconsistent with your then position, in effect immediately prior to a Change in Control;

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c.	A failure by the Company to continue you as a participant in any incentive plan or program (whether annual or long-term and whether paid in cash or in equity) on at least the same basis with respect to the potential amount of incentives thereunder immediately prior to a Change in Control;
d.	Any exclusion from full participation in or any material diminution in the benefits you are entitled to receive under any of the employee benefit plans of the Company in effect immediately prior to a Change in Control to the extent such exclusion or reduction is not imposed on executive officers of the Company generally;
e.	Any change in your principal place of work (other than a temporary change occasioned by the Company’s business needs) that would increase your commute by 50 miles or more as of the date of the Change in Control; or
f.	A material breach by the Company of its obligations under this Agreement.

     Notwithstanding the foregoing, a termination by you shall not be for “Good Reason,” unless you shall have given the Company at least ten (10) business days written notice specifying the grounds upon which you intend to terminate your employment hereunder for “Good Reason” and such notice is received by the Company within ninety (90) days of the date the event of “Good Reason” occurred. In addition, any action or inaction by the Company which is remedied within thirty (30) days following such written notice shall not constitute “Good Reason” for termination hereunder.

     3.6 Change in Control. Change in Control shall have the same meaning as a “Change in Control” under the Penn Millers Stock Incentive Plan, as such term may be amended from time to time.

     3.7 Cause. “Cause” means any of the following events: (a) breach of your fiduciary duty to the Company or your duty of loyalty to the Company; (b) willful act of material dishonesty with respect to any material matter involving the Company; (c) theft or material misuse of Company property; (d) engaging in personal conduct that would constitute grounds for liability for discrimination or sexual harassment (as proscribed by the U.S. Equal Employment Opportunity Commission Guidelines or any other applicable state or local regulatory body); (e) fraternization which affects your objectivity in the treatment of fellow employees or abusive or threatening behavior, after a warning by the Board of Directors of the Company (the “Board”), the Chief Executive Officer, or Human Resources to cease; (f) excessive absenteeism (which shall not include authorized absences for leave pursuant to the Family and Medical Leave Act, the Americans With Disabilities Act, or the Company’s vacation, paid time off, or short-term disability leave plans, policies, or arrangements) having a material adverse effect on Company business operations; (g) conviction of, or plea of guilty or nolo contendere to, a felony, any criminal charge involving moral turpitude, or illegal substance abuse charges; (h) illegal substance abuse or being under the influence of illegal substances during working time; (i) continuing neglect of management duties and responsibilities that has a material adverse effect on the Company; or (j) willful failure to timely report to the Board or direct supervisor information having a material adverse effect on Company business operations.

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     3.8 Accrued Benefits. Upon your termination of employment for any reason, you, or your estate, as applicable, shall receive your accrued but unpaid annual base compensation and any accrued but unpaid or otherwise vested benefits under any Penn Millers System benefit or incentive plan.

4. Best Net Benefit Limitation. Anything contained in this Agreement to the contrary notwithstanding, if any of the payments or benefits received or to be received by you pursuant to this Agreement (which the parties agree will not include any portion of payments allocated to the non-solicitation and non-compete provisions of Section 2 which are classified as payments of reasonable compensation for purposes of Code Section 280G), when taken together with payments and benefits provided to you under any other plans, contracts, or arrangements with the Penn Millers System (all such payments and benefits being hereinafter referred to as the “Total Payments”), will be subject to any excise tax imposed under Section 4999 of the Internal Revenue Code of 1986, as amended (the “Code”) (together with any interest or penalties, the “Excise Tax”), then such Total Payments shall be reduced to the extent necessary so that no portion thereof shall be subject to the Excise Tax; provided, however, that if you would receive in the aggregate greater value (as determined under Code Section 280G and the regulations thereunder) on an after tax basis if the Total Payments were not subject to such reduction, then no such reduction shall be made. To effectuate the reduction described above, if applicable, the Company shall first reduce or eliminate the payments and benefits provided under this Agreement. All calculations required to be made under this Section, including the portion of the payments hereunder to be allocated to the restrictive covenants set forth in Section 2, will be made by the Company’s independent public accountants, subject to the right of your representative to review the same. The parties recognize that the actual implementation of the provisions of this Section are complex and agree to deal with each other in good faith to resolve any questions or disagreements arising hereunder.

5. Binding Effect and Benefit.

     5.1 The Company shall require any successor (whether direct or indirect, by purchase, merger, consolidation, or otherwise) to all or substantially all of the business or assets of the Company to expressly assume and agree to perform this Agreement in the same manner and to the same extent that the Company would be required to perform it if no such succession had taken place. Failure by the Company to obtain such assumption and agreement prior to the effectiveness of any such succession shall constitute a material breach of this Agreement. As used in this Agreement, “the Company” shall mean the Company as hereinbefore defined and any successor to the respective business or assets of the Company as aforesaid which assumes and agrees to perform this Agreement by operation of law, or otherwise.

     5.2 This Agreement shall inure to the benefit of and be enforceable by your personal or legal representatives, executors, administrators, heirs, distributees, devisees, and legatees. If you should die while any amount is payable to you under this Agreement if you had continued to live, all such amounts, unless otherwise provided herein, shall be paid in accordance with the terms of this Agreement to your devisee, legatee, or other designee, or, if there is no such designee, to your estate.

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6. Assignment. This Agreement shall not be assignable by either party hereto, except as provided in Section 2.6 and by the Company to any successor in interest to the business of the Company, provided that the Company (if it remains a separate entity) shall remain fully liable under this Agreement for all obligations, payments and otherwise.

7. No Mitigation or Offset. In the event of termination of your employment, you will be under no obligation to seek other employment and there will be no offset against any payment or benefit provided for in this Agreement on account of any remuneration or benefits from any subsequent employment that he may obtain.

8. Application of Code Section 409A.

     8.1 Notwithstanding anything in this Agreement to the contrary, the receipt of any benefits under this Agreement as a result of a termination of employment shall be subject to satisfaction of the condition precedent that you undergo a “separation from service” within the meaning of Treas. Reg. § 1.409A-1(h) or any successor thereto. In addition, if you are deemed to be a “specified employee” within the meaning of that term under Code Section 409A(a)(2)(B), then with regard to any payment or the provisions of any benefit that is required to be delayed pursuant to Code Section 409A(a)(2)(B), such payment or benefit shall not be made or provided prior to the earlier of (i) the expiration of the six (6) month period measured from the date of your “separation from service” (as such term is defined in Treas. Reg. § 1.409A-1(h)), or (ii) the date of your death (the “Delay Period”). Within ten (10) days following the expiration of the Delay Period, all payments and benefits delayed pursuant to this Section (whether they would have otherwise been payable in a single sum or in installments in the absence of such delay) shall be paid or reimbursed to you in a lump sum, and any remaining payments and benefits due under this Agreement shall be paid or provided in accordance with the normal payment dates specified for them herein. Notwithstanding the foregoing, to the extent that the foregoing applies to the provision of any ongoing welfare benefits to you that would not be required to be delayed if the premiums therefore were paid by you, you shall pay the full costs of premiums for such welfare benefits during the Delay Period and the Company shall pay you an amount equal to the amount of such premiums paid by you during the Delay Period within ten (10) days after the conclusion of such Delay Period.

     8.2 Except as otherwise expressly provided herein, to the extent any expense reimbursement or other in-kind benefit is determined to be subject to Code Section 409A, the amount of any such expenses eligible for reimbursement or in-kind benefits in one calendar year shall not affect the expenses eligible for reimbursement or in-kind benefits in any other taxable year (except under any lifetime limit applicable to expenses for medical care), in no event shall any expenses be reimbursed or in-kind benefits be provided after the last day of the calendar year following the calendar year in which you incurred such expenses or received such benefits, and in no event shall any right to reimbursement or in-kind benefits be subject to liquidation or exchange for another benefit.

     8.3 Any payments made pursuant to Section 3.4, to the extent of payments made from the date of termination through March 15th of the calendar year following such date, are intended to constitute separate payments for purposes of Treas. Reg. §1.409A-2(b)(2) and thus payable pursuant to the “short-term deferral” rule set forth in Treas. Reg. §1.409A-1(b)(4); to the

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extent such payments are made following said March 15th, they are intended to constitute separate payments for purposes of Treas. Reg. §1.409A-2(b)(2) made upon an involuntary termination from service and payable pursuant to Treas. Reg. §1.409A-1(b)(9)(iii), to the maximum extent permitted by said provision. Notwithstanding the foregoing, if the Company determines that any other payments hereunder fail to satisfy the distribution requirement of Section 409A(a)(2)(A) of the Internal Revenue Code of 1986, as amended (the “Code”), the payment of such benefit shall be delayed to the minimum extent necessary so that such payments are not subject to the provisions of Code Section 409A(a)(1).

     8.4 To the extent it is determined that any benefits described in Section 3.4.c. are taxable to you, they are intended to be payable pursuant to Treas. Reg. §1.409A-1(b)(9)(v), to the maximum extent permitted by said provision.

9. Miscellaneous.

     9.1 The invalidity or unenforceability of any provision of this Agreement will not affect the validity or enforceability of any other provision of this Agreement, which will remain in full force and effect.

     9.2 The validity, interpretation, construction and performance of this Agreement will be governed by the laws of the Commonwealth of Pennsylvania.

     9.3 No waiver by you or the Company at any time of any breach of, or compliance with, any provision of this Agreement to be performed by the Company or you, respectively, will be deemed a waiver of that or any other provision at any subsequent time.

     9.4 Upon any termination of employment that entitles you to payments and benefits under Section 3 (other than pursuant to Section 3.8), you must, within prescribed time limits, execute a legally enforceable release agreement substantially in the form of Exhibit A attached hereto prior to the receipt of such payments and benefits. Any payments made to you will be paid net of any applicable withholding required under federal, state or local law.

     9.5 This Agreement is the exclusive agreement with respect to the severance benefits payable to you in the event of a termination of your employment. All prior negotiations and agreements are hereby merged into this Agreement. You acknowledge and agree that any employment agreement, offer letter and/or any agreement regarding change in control or termination benefits, previously entered into between you and the Company are immediately null and void.

     9.6 Notwithstanding the termination of this Agreement, the provisions which specify continuing obligations, compensation and benefits, and rights shall remain in effect until such time as all such obligations are discharged, all such compensation and benefits are received, and no party or beneficiary has any remaining actual or contingent rights under this Agreement.

10. Recovery of Bonuses and Incentive Compensation. Notwithstanding anything in this Agreement to the contrary, all bonuses and incentive compensation paid to you (whether in equity or in cash) shall be subject to recovery by the Company in the event that such bonuses or incentive compensation are based on materially inaccurate financial statements (which includes,

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but is not limited to, statements of earnings, revenues, or gains) or other materially inaccurate performance metric criteria; provided that a determination as to the recovery of a bonus or incentive compensation shall be made within twelve (12) months following the date such bonus or incentive compensation was paid. In the event that the Board determines by at least a majority vote that a bonus or incentive compensation payment to you is recoverable, you shall reimburse all or a portion of such bonus or incentive compensation, to the fullest extent permitted by law, as soon as practicable following written notice to you by the Company of the same.

11. Legal Fees. In the event of a dispute following a Change in Control, the Company, or its successor, shall reimburse you for all reasonable legal fees and expenses incurred by you in attempting to obtain or enforce rights or benefits provided by this Agreement, if, with respect to any such right or benefit, you are successful in obtaining or enforcing such right or benefit (including by negotiated settlement).

12. Indemnification.

     12.1 The Company shall indemnify you in the event you are made a party or are threatened to be made a party to any threatened, pending, or completed action, suit, or proceeding, whether civil, criminal, administrative, or investigative (including, without limitation, actions by or in the right of the Company), by reason of the fact that you are or were a director or officer of the Company, or a director or officer of the Company serving at the request of the Company as a director, officer, employee, or agent of another corporation, partnership, joint venture, trust or other enterprise, against expenses (including attorneys’ fees), amounts paid in settlement, judgments, and fines actually and reasonably incurred by you in connection with such action, suit, or proceeding; provided, however, that no indemnification shall be made in any case where the act or failure to act giving rise to the claim for indemnification is determined by a court to have constituted willful misconduct or recklessness.

     12.2 Expenses (including attorneys’ fees) incurred in defending a civil or criminal action, suit, or proceeding, under Section 12.1 shall be paid by the Company in advance of the final disposition of such action, suit, or proceeding upon receipt of an undertaking by or on behalf of you to repay such amount if it shall be ultimately determined that you are not entitled to be indemnified by the Company as authorized in this Section 12.

     12.3 The Company shall purchase and maintain directors’ and officers’ liability insurance on behalf of you, at the Company’s expense, consistent with the amounts and terms provided to other directors and officers of the Company.

     If you accept this offer, please sign and date this letter in the space provided below and return a copy to the Company at 72 North Franklin Street, Wilkes-Barre, PA 18773-0016.

			Sincerely,
			/s/ Douglas Gaudet
			Penn Millers Holding Corporation
Accepted:	/s/ Michael O. Banks	Date:	August 14, 2009          Michael O. Banks

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EXHIBIT A
RELEASE AGREEMENT

THIS RELEASE AGREEMENT (this “Release Agreement”) is made as of this                      day of                                          , 20                    , by and between PMMHC Corporation, Penn Millers Holding Corporation, and Penn Millers Insurance Company (collectively, the “Employer”) and Michael O. Banks (the “Executive”). Capitalized terms not defined in this Release Agreement shall have the meanings ascribed to them in the Letter Agreement (as defined below). In consideration of the mutual agreements set forth below, the Executive and the Employer hereby agree as follows:

     1. General Release.

          a. In consideration of the payments and benefits required to be provided to the Executive under the agreement between the Employer and the Executive, dated August 14, 2009, (the “Letter Agreement”) and after consultation with counsel, the Executive, for himself and on behalf of each of the Executive’s heirs, executors, administrators, representatives, agents, successors and assigns (collectively, the “Releasors”), hereby irrevocably and unconditionally releases and forever discharges the Employer, its majority owned subsidiaries and affiliated companies, and each of its officers, employees, directors, shareholders, and agents (collectively, the “Releasees”) from any and all claims, actions, causes of action, rights, judgments, obligations, damages, demands, accountings, or liabilities of whatever kind or character (collectively, “Claims”), including, without limitation, any Claims under any federal, state, local, or foreign law, that the Releasors may have, or in the future may possess, arising out of (i) the Executive’s employment relationship with and service as an employee, officer, or director of the Employer and any of its majority-owned subsidiaries and affiliates, or the termination of the Executive’s service in any and all of such relevant capacities, (ii) the Letter Agreement, or (iii) any event, condition, circumstance, or obligation that occurred, existed, or arose on or prior to the date hereof; provided, however, that the release set forth in this Section shall not apply to (iv) the payment and/or benefit obligations of the Employer or any of its affiliates, (collectively, the “Employer Group”) under the Letter Agreement, (v) any Claims the Executive may have under any plans or programs not covered by the Letter Agreement in which the Executive participated and under which the Executive has accrued and become entitled to a benefit, and (vi) any indemnification or other rights the Executive may have under the Letter Agreement or in accordance with the governing instruments of any member of the Employer Group or under any director and officer liability insurance maintained by the Employer or any such group member with respect to liabilities arising as a result of the Executive’s service as an officer and employee of any member of the Employer Group or any predecessor thereof. Except as provided in the immediately preceding sentence, the Releasors further agree that the payments and benefits as required by the Letter Agreement shall be in full satisfaction of any and all Claims for payments or benefits, whether express or implied, that the Releasors may have against the Employer or any member of the Employer Group arising out of the Executive’s employment relationship under the Letter Agreement and the Executive’s service as an employee, officer or director of the Employer or a member of the Employer Group under the Letter Agreement or the termination thereof, as applicable.

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     2. Specific Release of Claims. In further consideration of the payments and benefits provided to the Executive under the Letter Agreement, the Releasors hereby unconditionally release and forever discharge the Releasees from any and all Claims that the Releasors may have in connection with the Executive’s employment or termination of employment, arising under:

          a. Title VII of the Civil Rights Act of 1964, the Age Discrimination in Employment Act (“ADEA”), the Americans With Disabilities Act of 1990 (“ADA”), the Rehabilitation Act of 1973, and any similar federal, state or local laws, including without limitation, the Pennsylvania Human Relations Act, as amended and any other non-discrimination and fair employment practices laws of any state and/or locality in which the Executive works or resides, all as amended;

          b. the Fair Credit Reporting Act (“FCRA”), the Employee Retirement Income Security Act of 1974 (“ERISA”), the Worker Adjustment and Retraining Notification Act (“WARN”); and

          c. all common law Claims including, but not limited to, actions in tort and for breach of contract, including, without limitation, Claims for incentive payments and/or commissions, including but not limited to, Claims for incentive and/or commission payments under any Employer incentive or commission plan, Claims for severance benefits, all Claims to any non-vested ownership interest in the Employer, contractual or otherwise, including but not limited to Claims to stock or stock options.

               This release applies to any and all Claims that the Executive may have relating to rights, known or unknown to him, resulting from a change in ownership control of the Employer, including, without limitation, rights pursuant to severance agreements, severance plans, incentive plans, equity compensation plans, or any other plan or agreement relating to the Executive’s employment.

               Notwithstanding anything contained herein to the contrary, no portion of any release contained in any Section of this Release Agreement shall release the Employer or the Employer Group from any Claims the Executive may have for breach of the provisions of this Release Agreement or to enforce this Release Agreement, that arise after the date of this Release Agreement, or to challenge the validity of the Executive’s release of ADEA Claims.

               By signing this Release Agreement, the Executive hereby acknowledges and confirms the following: (i) the Executive was advised by the Employer or his then employer in connection with his termination of employment or retirement to consult with an attorney of his choice prior to signing this Release Agreement and to have such attorney explain to the Executive the terms of this Release Agreement, including, without limitation, the terms relating to the Executive’s release of Claims arising under this Section, and the Executive has in fact consulted with an attorney; (ii) the Executive was given a period of not fewer than 21 days to consider the terms of this Release Agreement prior to its signing; and (iii) the Executive knowingly and voluntarily accepts the terms of this Release Agreement.

     3. No Assignment of Claims. The Executive represents and warrants that he has not assigned any of the Claims being released hereunder.

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     4. Complaints. The Executive affirms that he has not filed any complaint against any Releasee with any local, state or federal court and agrees not to do so in the future, except for Claims challenging the validity of the release of ADEA Claims. The Executive affirms further that he has not filed any claim, charge or complaint with the United States Equal Employment Opportunity Commission (“EEOC”) or any state or local agency authorized to investigate charges or complaints of unlawful employment discrimination (together, “Agency”). The Executive understands that nothing in this Release Agreement prevents him from filing a charge or complaint of unlawful employment discrimination with any Agency or assisting in or cooperating with an investigation of a charge or complaint of unlawful employment discrimination by an Agency, provided however that, the Executive acknowledges that he may not be able to recover any monetary benefits in connection with any such claim, charge, complaint or proceeding and disclaim entitlement to any such relief. Furthermore, if any Agency or court has now assumed or later assumes jurisdiction of any claim, charge or complaint on the Executive’s behalf against any Releasee, the Executive will disclaim entitlement to any relief.

     5. Revocation. This Release Agreement may be revoked by the Executive within the seven-day period commencing on the date the Executive signs this Release Agreement (the “Revocation Period”). In the event of any such revocation by the Executive, all obligations of the parties under this Release Agreement shall terminate and be of no further force and effect as of the date of such revocation. No such revocation by the Executive shall be effective unless it is in writing and signed by the Executive and received by the Employer prior to the expiration of the Revocation Period. In the event of revocation, the Executive shall not be entitled to the payments and benefits under the Letter Agreement, the receipt of which is conditioned on the Executive’s execution of this Release Agreement.

     6. Non-Disparagement. The Executive agrees not to disparage or criticize the Releasees, or any of them, or otherwise speak of Releasees, or any of them, in any negative or unflattering way to anyone with regard to any matters relating to the Executive’s employment by the Employer Group or the business or employment practices of such business entities. The Employer agrees, on behalf of itself, and the Employer Group, not to disparage or criticize the Executive or otherwise speak of the Executive in any negative or unflattering way to anyone with regard to any matters relating to the Executive’s employment with the Employer Group. The parties understand that this entire provision is a material provision of this Release Agreement. This Section shall not operate as a bar to (i) statements reasonably necessary to be made in any judicial, administrative or arbitral proceeding, or (ii) internal communications between and among the employees of the Employer Group with a job-related need to know about this Release Agreement or matters related to the administration of this Release Agreement.

     7. Cooperation. The Executive agrees to cooperate with the Employer with respect to all matters arising during or related to his employment about which he has personal knowledge because of his employment with the Employer, including but not limited to all matters (formal or informal) in connection with any government investigation, internal Employer investigation, litigation (potential or ongoing), administrative, regulatory, or other proceeding which currently exists, or which may have arisen prior to or arise following the signing of this Release Agreement. The Executive understands that the Employer agrees to reimburse Executive for his reasonable out-of-pocket expenses (not including attorney’s fees, legal costs, or lost time or opportunity) incurred in connection with such cooperation.

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     8. No Admission of Liability. The Executive agrees that this Release Agreement does not constitute, nor should it be construed to constitute, an admission by the Employer of any violation of federal, state, or local law, regulation, or ordinance, nor as an admission of liability under the common law or for any breach of duty the Employer owed or owes to the Executive.

     9. Representations and Warranties. The Executive acknowledges and agrees that (i) he is not aware of nor has he reported any conduct by any of the Releasees that violates any federal, state, or local law, rule, or regulation, (ii) he has not been denied any rights or benefits under the Family and Medical Leave Act of 1993 (“FMLA”) or any state or local law, act, or regulation providing for family and/or medical leave or been discriminated against in any way for exercising his rights under these laws, and (iii) in connection with offering the payments and benefits provided under the Letter Agreement, the Employer has not provided to the Executive, and has no obligation to provide to the Executive, any material non-public information as defined in applicable federal securities laws, concerning the Employer.

     10. Confidentiality. The Executive agrees to maintain as confidential, the terms and contents of this Release Agreement, and the contents of the negotiations and discussions resulting in this Release Agreement, except (i) as needed to obtain legal counsel, financial, or tax advice, (ii) to the extent required by federal, state, or local law or by order of court (iii) as needed to challenge the release of ADEA Claims or to participate in an Agency investigation, or (iv) as otherwise agreed to in writing by an officer of the Employer. The Executive agrees that before he seeks legal counsel or financial or tax advice, he will secure an agreement from such counsel or advisors to adhere to the same confidentiality obligations that apply to him. The Executive agrees not to discuss either the existence of or any aspect of this Release Agreement with any employee or ex-employee of the Employer.

     11. Successors. This Release Agreement is for the benefit of and is binding upon the Executive and his heirs, administrators, representatives, executors, successors, beneficiaries and assigns, and is also for the benefit of the Releasees and their successors and assigns.

     12. Violation. If the Executive violates any provisions of this Release Agreement, the Employer will be entitled to the immediate repayment of all payments and benefits paid pursuant to the Letter Agreement. The Executive agrees that repayment will not invalidate this Release Agreement and acknowledges that he will be deemed conclusively to be bound by the terms of this Release Agreement and to waive any right to seek to overturn or avoid it. If the Executive violates any provisions of this Release Agreement before all of the payments and benefits under the Letter Agreement have been provided, the Employer may discontinue any unpaid conditional payments and benefits.

     13. Additional Damages Available for Violation. The Executive agrees that the Employer will maintain all rights and remedies available to it at law and in equity in the event the Executive violates any provision of this Release Agreement. These rights and remedies may include, but may not be limited to, the right to bring court action to recover all consideration paid to the Executive pursuant to this Release Agreement and any additional damages the Employer may suffer as a result of such a breach.

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     14. Entire Agreement and Amendment. This Release Agreement contains and constitutes the entire understanding and agreement between the parties hereto with respect to the Executive’s severance benefits and waiver and release of Claims against the Employer and cancels all previous oral and written negotiations, agreements, commitments and writings in connection therewith. This Release Agreement shall be binding upon the parties and may not be modified in any manner, except by an instrument in writing of concurrent or subsequent date signed by a duly authorized representative of the parties and their respective agents, assign, heirs, executors, successors, and administrators. No delay or omission by the Employer in exercising any right under this Release Agreement shall operate as a waiver of that or any other right. A waiver or consent given by the Employer on any one occasion shall be effective only in that instance and shall not be construed as a bar or waiver of any right on any other occasion. The parties acknowledge and agree that Sections 9.6 and 12 of the Letter Agreement shall survive the execution of this Release Agreement and the termination of the Letter Agreement.

     15. Applicable Law. This Release Agreement shall be governed by and construed in accordance with the laws of the Commonwealth of Pennsylvania without regard to choice of law principles, and except as preempted by federal law. Should any provision of this Release Agreement be declared or be determined by any court of competent jurisdiction to be illegal or invalid, the validity of the remaining parts, terms or provisions shall not be affected thereby and the illegal or invalid part, term, or provision will be deemed not to be a part of this Release Agreement.

     16. Assignment. The Executive’s rights and obligations under this Release Agreement shall inure to the Executive’s benefit and shall bind the Executive, his heirs and representatives. The Employer’s rights and obligations under this Release Agreement shall inure to the benefit of and shall bind the Employer, its successors and assigns. The Executive may not assign this Release Agreement. The Employer may assign this Release Agreement, but it may not delegate the duty to make any payments hereunder without the Executive’s written consent, which shall not be unreasonably withheld.

     17. Severability. If any provision of this Release Agreement is held unenforceable by a court of competent jurisdiction, all remaining provisions shall continue in full force and effect without being impaired or invalidated in any way.

     18. Notices. All notices required by this Release Agreement shall be in writing and shall be deemed to have been duly delivered in person or when mailed by certified mail, return receipt requested, as follows:

          a. If to the Executive: 6 Bridle Path, Dallas, PA 18612

          b. If to the Employer: 72 North Franklin St., Wilkes-Barre, PA 18773-0016

The Executive is hereby advised that the Executive has up to twenty-one (21) calendar days to review this Release Agreement and that the Executive should consult with an attorney of the Executive’s choice prior to execution of this Release Agreement.

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     The Executive agrees that any modifications, material or otherwise, made to this Release Agreement do not restart or affect in any manner the original twenty-one (21) calendar day consideration.

     Having elected to execute this Release Agreement, to fulfill the promises and to receive the payments and benefits under the Letter Agreement, the Executive freely and knowingly, after due consideration, enters into this Release Agreement intending to waive, settle and release all claims the Executive has or might have against the Employer.

Statement by the Executive who is signing below. By signing this Release Agreement, I acknowledge that the Employer has advised and encouraged me to consult with an attorney prior to executing this Release Agreement. I have carefully read and fully understand the provisions of this Release Agreement and have had sufficient time and opportunity (over a period of 21 days) to consult with my personal tax, financial and legal advisors prior to executing this Release Agreement, and I intend to be legally bound by its terms.

     IN WITNESS WHEREOF, the Employer (on its behalf and on behalf of the members of the Employer Group) and the Executive, intending to be legally bound have executed this Release Agreement on the day and year first above written.

PENN MILLERS HOLDING CORPORATION

By

Title

EXECUTIVE

Michael O. Banks

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EX-10.4

Exhibit 10.4

August 14, 2009

Kevin D. Higgins
181 W. Pheasant Drive
Larksville, PA 18704

Re: Letter Agreement

Dear Kevin:

     It is with great pleasure that we extend an offer setting forth the following terms for your continued employment with PMMHC Corporation, (the “MHC”), Penn Millers Holding Corporation (the “Holding Corporation”), and Penn Millers Insurance Company, (the “Insurance Company”) (the Holding Corporation and the Insurance Company are sometimes referred to collectively or individually, as the context requires, as the “Company,” and the MHC, the Holding Corporation, and the Insurance Company, and their direct and indirect subsidiaries, are sometimes referred to collectively as the “Penn Millers System”).

1. Term of Agreement. The term of this agreement (the “Agreement”) shall commence on the date above (the “Effective Date”) and shall continue for a period of two (2) years thereafter. Commencing on the first anniversary of the Effective Date and on each anniversary thereafter (“Anniversary Date”), this Agreement shall automatically be renewed for one (1) additional year beyond the term otherwise established, unless one party provides written notice to the other party, at least ninety (90) days in advance of an Anniversary Date, of its intent not to renew this Agreement for an additional one year term. Nothing in this provision shall preclude termination as otherwise provided or permitted under this Agreement. Notwithstanding the foregoing, if a Change in Control occurs after the Effective Date and during the term of this Agreement, this Agreement shall continue in effect for a period of not less than two (2) years beyond the date of such Change in Control.

2. Covenant Not to Compete; Nonsolicitation; Confidential Information.

     2.1 During your employment with the Company and during the Restricted Period (as defined below), you shall not directly or indirectly, either for your own account or as an agent, consultant, employee, partner, officer, director, proprietor, investor (except as an investor owning less than 5% of the stock of a publicly owned company) or otherwise, of any person, firm, corporation, or enterprise:

a. solicit or hire any employees of the Company or induce any of such employees to terminate their employment relationship with the Company; or

b. solicit, induce or attempt to solicit or induce any customer, supplier or other entity doing business with the Company to cease doing business with the Company or, in the case of a customer, to place agribusiness insurance, as that term is commonly understood in the industry, with any competitor of the Company. For purposes of the foregoing provision, the term “customer” shall mean a business that the Company insures on the date that your employment terminates (or has insured during the previous twelve months) and a broker who has placed business with the Company on the date that your employment terminates but only with respect to those clients of the broker for which the broker has placed business with the Company in the twelve-month period preceding the date that your employment terminates.

     2.2 In addition to the limitations described in Section 2.1, during the Restricted Period you shall not, directly or indirectly, own, manage, operate, render services for (as a consultant or an advisor) or accept any employment with (a) Nationwide Agribusiness Insurance Company, Michigan Millers Insurance Company or Westfield Insurance Company or any of their successors in interest or (b) the agribusiness insurance business of any other insurance company whose business has, or could reasonably be expected to have, a material adverse effect on the Company’s business insurance business. In addition, you shall not, directly or indirectly, own, manage, operate, render services for (as a consultant or an adviser) or accept any employment with, within a fifty (50) mile radius of Wilkes-Barre, Pennsylvania, any other property and casualty insurance or reinsurance line of business to the extent that such ownership, management, operating, rendering of services or employment (and the activities necessarily incident thereto) have, or could reasonably be expected to have, a material adverse effect on the Company’s business insurance business.

     2.3 You agree that you will not at any time during the term of this Agreement (as determined under Section 1 hereof) or at any time thereafter for any reason, in any fashion, form or manner, either directly or indirectly, divulge, disclose or communicate to any person, firm, corporation or other business entity, in any manner whatsoever, any confidential information or trade secrets concerning the business of the Company, including, without limiting the generality of the foregoing, any customer lists or other customer identifying information, the techniques, methods or systems of the Company’s operation or management, any information regarding its financial matters, or any other material information concerning the business of the Company, its manner of operation, its plan or other material data. The provisions of this Section 2.3 shall not apply to (i) information that is public knowledge other than as a result of disclosure by you in breach of this Section 2.3; (ii) information disseminated by the Company to third parties in the ordinary course of business; (iii) information lawfully received by you from a third party who, based upon inquiry by you, is not bound by a confidential relationship to the Company, or (iv) information disclosed under a requirement of law or as directed by applicable legal authority having jurisdiction over you.

     2.4 Although you and the Company consider the restrictions contained in Sections 2.1, 2.2 and 2.3 to be the minimum restriction reasonable for the purposes of preserving the Company’s goodwill and other proprietary rights, if a final determination is made by a court that the time or territory, or any other restriction contained in Sections 2.1, 2.2 and 2.3 is an unreasonable or otherwise unenforceable restriction against you, the provisions of Sections 2.1,

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2.2 and 2.3 will not be rendered void, but will be deemed amended to apply as to such maximum time and territory and to such other extent as the court may determine to be reasonable.

     2.5 Notwithstanding anything to the contrary in Sections 3.3 or 3.4, in the event that you breach any of the covenants contained in this Section 2:

a.	Any remaining payments or benefits to be provided under Sections 3.3 or 3.4 shall not be paid or shall cease immediately upon such breach; and
b.	The Company shall be entitled to the immediate repayment of all payments and benefits provided under Sections 3.3 and 3.4.

     2.6 You agree that the covenants contained in this Section 2 may be assigned by the Company, as needed, to affect its purpose and intent and that the Company’s assignee shall be entitled to the full benefit of the restrictions enjoyed by the Company under the terms of these covenants.

     2.7 The term “Restricted Period” shall mean:

a.	In the event you are terminated by the Company for Cause, the twelve (12) month period following your termination of employment;
b.	In the event you are terminated pursuant to Section 3.1, the twelve (12) month period following your termination of employment;
c.	Notwithstanding Section 2.7.b., in the event you are terminated pursuant to Section 3.1 and such termination would amount to Good Reason but for the fact that it occurred prior to a Change in Control, a period up to twelve (12) months following your termination of employment, with the number of months, if any, selected by the Company in its sole discretion by providing written notice of such number to you within ten (10) days following the date on which you give notice of your termination of employment;
d.	In the event you are terminated pursuant to Section 3.2, the date of your termination of employment;
e.	In the event you are terminated pursuant to Section 3.3, the twelve (12) month period following your termination of employment; or
f.	In the event you are terminated pursuant to Section 3.4, the twenty-four (24) month period following your termination of employment.

3. Severance Benefits.

     3.1 Termination by You on Voluntary Basis. In the event that you voluntarily terminate your employment hereunder without Good Reason, you shall be entitled to receive:

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a.	If such termination occurs on or after age 65, a pro-rata payment from the Success Sharing Plan (or other annual incentive plan in effect) based on the number of full months that have elapsed from the start of the current annual performance period to the date of your termination of employment and actual annual performance through the end of the current annual performance period to the extent that at the conclusion of such period, such award is deemed earned, payable at the time such award would otherwise have been paid had your employment not terminated, but in no event later than March 15 of the calendar year following the end of such performance period;
b.	If such termination occurs on or after age 65, pro-rata vesting of any unvested and outstanding performance-based equity awards granted to you, based on the number of full months that have elapsed from the date of grant of such award to the date of your termination of employment and actual performance through the end of the applicable performance period to the extent that at the conclusion of such period, such awards are deemed earned, payable in-kind at the time such award would otherwise have been paid had your employment not terminated, but in no event later than March 15 of the calendar year following the end of the applicable performance period; provided, however, that (i) to the extent the benefits provided in this Subsection conflict with the terms of any plan or other agreement under or pursuant to which any equity awards were granted, the terms of such plan or other agreement shall control, and (ii) this Subsection shall not apply to payments or awards made or granted under any plan or other agreement designed to replace your benefits under the Penn Millers Holding Corporation Supplemental Executive Retirement Plan (the “SERP”), if any (with any such payments or awards shall be subject to the terms and conditions of any such plan or agreement); and
c.	If your voluntary termination of employment would amount to Good Reason but for the fact that it occurred prior to a Change in Control, a lump sum cash payment within sixty (60) days following termination of your employment equal to the product of (i) the number of months selected by the Company pursuant to Section 2.7.c. and (ii) your annual base compensation, divided by twelve (12).

     3.2 Termination By Reason of Death or Permanent Disability: In the event your employment is terminated by reason of your death or permanent disability (defined for this purpose as a condition by reason of which you are entitled to and receiving disability benefits under the Company’s long-term disability plan, if any, and if none, under the U.S. Social Security Act) you, or your estate, shall be entitled to receive:

a. Continuation of your annual base compensation then in effect for one (1) year (commencing on the next payroll date following the date of your termination of employment), offset by any amounts payable to you under any disability insurance plan or policy provided by the Company;

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b.

Continuation of employer-provided healthcare benefits for one (1) year at the levels and cost to you and your qualified dependents in effect on the date of your termination, and thereafter to elect, at your or your qualified dependents’ cost, COBRA continuation for the remainder of your or your qualified dependents’ COBRA eligibility, if any, it being understood that your and your dependents’ COBRA eligibility period will include the period during which the Company is providing benefits under this Section 3.2.b.; and

c.

If you are age 55 or have 10 years of service in the year of your termination of employment:

i.	Pro-rata vesting of any unvested and outstanding performance-based equity awards granted to you, based on the number of full months that have elapsed from the date of grant of such award to the date of your termination of employment, with all such awards payable in-kind at target levels for the applicable performance period within sixty (60) days following the date your employment terminates; and
ii.	Pro-rata vesting of any unvested and outstanding non-performance-based equity awards granted to you, based on the number of full months that have elapsed from the date of grant of such award to the date of termination of your employment, payable in-kind within sixty (60) days following the date your employment terminates.

Notwithstanding the foregoing, (i) to the extent the benefits provided in this Subsection c. conflict with the terms of any plan or other agreement under or pursuant to which any equity awards were granted, the terms of such plan or other agreement shall control and (ii) this Subsection c. shall not apply to awards granted under any plan or other agreement designed to replace your benefits under the SERP, if any (with any such awards subject to the terms and conditions of any such plan or agreement).

d. A pro-rata payment from the Success Sharing Plan (or other annual incentive plan then in effect) as set forth in Section 3.1.a., without regard to the age requirements contained in Section 3.1.a.

     3.3 Termination by the Company without Cause prior to a Change in Control: In the event that your employment hereunder is terminated by the Company without Cause (as defined in Section 3.7), before a Change in Control (as defined in Section 3.6 below), you shall be entitled to receive:

a.	Continuation of your annual base compensation then in effect for one (1) year (commencing on the next payroll date following the date of your termination of employment);
b.	Continuation of employer-provided healthcare benefits for one (1) year at the levels and cost to you and your qualified dependents in effect on the date of your termination, and thereafter to elect, at your or your qualified dependents’

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	cost, COBRA continuation for the remainder of your or your qualified dependents’ COBRA eligibility, if any, it being understood that your and your dependents’ COBRA eligibility period will include the period during which the Company is providing benefits under this Section 3.3.b.;
c.	Continuation of the annual reimbursement allowance received in lieu of reimbursement for or payment of country club or social club membership fees, dues or other fees and any automobile allowance (the “Annual Stipend”), then in effect for one (1) year; provided that such amount shall be paid in accordance with the Company’s executive payroll practices, commencing on the next payroll date following the date of your termination of employment;
d.	If your termination of employment occurs prior to your attaining age 62, payment of all fees and expenses related to the provision of outplacement services through a firm of your choice, not to exceed $10,000; provided, however, that such outplacement expenses: (i) must be incurred no later than the end of the second full calendar year following the year of your termination of employment; and (ii) must be paid no later than the end of the third full calendar year following the year of your termination of employment; and
e.	A pro-rata payment from the Success Sharing Plan (or other annual incentive plan then in effect) as set forth in Section 3.1.a., without regard to the age requirements contained in Section 3.1.a.

     3.4 Termination by the Company Without Cause or by You with Good Reason on or after a Change in Control: If a Change in Control (as defined in Section 3.6 below) shall occur and concurrently therewith or during a period of twenty-four (24) months thereafter your employment hereunder is terminated by the Company without Cause (as defined in Section 3.7) or by you with Good Reason (as defined in Section 3.5 below), you shall be entitled to receive:

a.	A lump sum cash payment within sixty (60) days following your termination of employment equal to one (1) times your annual base compensation then in effect (or immediately prior to any reduction resulting in a termination for Good Reason);
b.	Continuation of your annual base compensation then in effect (or immediately prior to any reduction resulting in a termination for Good Reason) for one (1) year (commencing on the next payroll date following the date of your termination of employment);
c.	Continuation of employer-provided healthcare benefits for two (2) years at the levels and cost to you and your qualified dependents in effect on the date of your termination (or immediately prior to any reduction resulting in a termination for Good Reason), and thereafter to elect, at your or your qualified dependents’ cost, COBRA continuation for the remainder of your or your qualified dependents’ COBRA eligibility, if any, it being understood that your

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	and your dependents’ COBRA eligibility period will include the period during which the Company is providing benefits under this Section 3.4.c.;
d.	A lump sum cash payment within sixty (60) days following your termination of employment equal to two (2) times the Annual Stipend then in effect (or immediately prior to any reduction resulting in a termination for Good Reason);
e.	If your termination of employment occurs prior to your attaining age 62, payment of outplacement services as set forth in Section 3.3.d.;
f.	A pro-rata payment from the Success Sharing Plan (or other annual incentive plan then in effect) as set forth in Section 3.1.a., without regard to the age requirements contained in Section 3.1.a.; and
g.	Immediate and full vesting of equity awards as follows:

i.	Immediate and full vesting of any unvested and outstanding performance-based equity awards granted to you, with all such awards payable in-kind at target levels for the applicable performance period within sixty (60) days following the date your employment terminates; and
ii.	Immediate and full vesting of any unvested and outstanding non-performance-based equity awards granted to you, payable in-kind within sixty (60) days following the date your employment terminates.

Notwithstanding the foregoing, (i) to the extent the benefits provided in this Subsection g. conflict with the terms of any plan or other agreement under or pursuant to which any equity awards were granted, the terms of such plan or other agreement shall control and (ii) this Subsection g. shall not apply to awards granted under any plan or other agreement designed to replace your benefits under the SERP, if any (with any such awards subject to the terms and conditions of any such plan or agreement).

     3.5 Good Reason: You shall be considered to have terminated employment hereunder for Good Reason if such termination of employment occurs on or within twenty-four (24) months after a Change in Control and is on account of any of the following actions by the Company without your express written consent:

a.	A material reduction in your annual base compensation as in effect immediately prior to a Change in Control;
b.	Any material diminution of your positions, duties or responsibilities or the assignment to you of duties or responsibilities that are materially inconsistent with your then position, in effect immediately prior to a Change in Control;
c.	A failure by the Company to continue you as a participant in any incentive plan or program (whether annual or long-term and whether paid in cash or in equity)

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	on at least the same basis with respect to the potential amount of incentives thereunder immediately prior to a Change in Control;
d.	Any exclusion from full participation in or any material diminution in the benefits you are entitled to receive under any of the employee benefit plans of the Company in effect immediately prior to a Change in Control to the extent such exclusion or reduction is not imposed on executive officers of the Company generally;
e.	Any change in your principal place of work (other than a temporary change occasioned by the Company’s business needs) that would increase your commute by 50 miles or more as of the date of the Change in Control; or
f.	A material breach by the Company of its obligations under this Agreement.

     Notwithstanding the foregoing, a termination by you shall not be for “Good Reason,” unless you shall have given the Company at least ten (10) business days written notice specifying the grounds upon which you intend to terminate your employment hereunder for “Good Reason” and such notice is received by the Company within ninety (90) days of the date the event of “Good Reason” occurred. In addition, any action or inaction by the Company which is remedied within thirty (30) days following such written notice shall not constitute “Good Reason” for termination hereunder.

     3.6 Change in Control. Change in Control shall have the same meaning as a “Change in Control” under the Penn Millers Stock Incentive Plan, as such term may be amended from time to time.

     3.7 Cause. “Cause” means any of the following events: (a) breach of your fiduciary duty to the Company or your duty of loyalty to the Company; (b) willful act of material dishonesty with respect to any material matter involving the Company; (c) theft or material misuse of Company property; (d) engaging in personal conduct that would constitute grounds for liability for discrimination or sexual harassment (as proscribed by the U.S. Equal Employment Opportunity Commission Guidelines or any other applicable state or local regulatory body); (e) fraternization which affects your objectivity in the treatment of fellow employees or abusive or threatening behavior, after a warning by the Board of Directors of the Company (the “Board”), the Chief Executive Officer, or Human Resources to cease; (f) excessive absenteeism (which shall not include authorized absences for leave pursuant to the Family and Medical Leave Act, the Americans With Disabilities Act, or the Company’s vacation, paid time off, or short-term disability leave plans, policies, or arrangements) having a material adverse effect on Company business operations; (g) conviction of, or plea of guilty or nolo contendere to, a felony, any criminal charge involving moral turpitude, or illegal substance abuse charges; (h) illegal substance abuse or being under the influence of illegal substances during working time; (i) continuing neglect of management duties and responsibilities that has a material adverse effect on the Company; or (j) willful failure to timely report to the Board or direct supervisor information having a material adverse effect on Company business operations.

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     3.8 Accrued Benefits. Upon your termination of employment for any reason, you, or your estate, as applicable, shall receive your accrued but unpaid annual base compensation and any accrued but unpaid or otherwise vested benefits under any Penn Millers System benefit or incentive plan.

4. Best Net Benefit Limitation. Anything contained in this Agreement to the contrary notwithstanding, if any of the payments or benefits received or to be received by you pursuant to this Agreement (which the parties agree will not include any portion of payments allocated to the non-solicitation and non-compete provisions of Section 2 which are classified as payments of reasonable compensation for purposes of Code Section 280G), when taken together with payments and benefits provided to you under any other plans, contracts, or arrangements with the Penn Millers System (all such payments and benefits being hereinafter referred to as the “Total Payments”), will be subject to any excise tax imposed under Section 4999 of the Internal Revenue Code of 1986, as amended (the “Code”) (together with any interest or penalties, the “Excise Tax”), then such Total Payments shall be reduced to the extent necessary so that no portion thereof shall be subject to the Excise Tax; provided, however, that if you would receive in the aggregate greater value (as determined under Code Section 280G and the regulations thereunder) on an after tax basis if the Total Payments were not subject to such reduction, then no such reduction shall be made. To effectuate the reduction described above, if applicable, the Company shall first reduce or eliminate the payments and benefits provided under this Agreement. All calculations required to be made under this Section, including the portion of the payments hereunder to be allocated to the restrictive covenants set forth in Section 2, will be made by the Company’s independent public accountants, subject to the right of your representative to review the same. The parties recognize that the actual implementation of the provisions of this Section are complex and agree to deal with each other in good faith to resolve any questions or disagreements arising hereunder.

5. Binding Effect and Benefit.

     5.1 The Company shall require any successor (whether direct or indirect, by purchase, merger, consolidation, or otherwise) to all or substantially all of the business or assets of the Company to expressly assume and agree to perform this Agreement in the same manner and to the same extent that the Company would be required to perform it if no such succession had taken place. Failure by the Company to obtain such assumption and agreement prior to the effectiveness of any such succession shall constitute a material breach of this Agreement. As used in this Agreement, “the Company” shall mean the Company as hereinbefore defined and any successor to the respective business or assets of the Company as aforesaid which assumes and agrees to perform this Agreement by operation of law, or otherwise.

     5.2 This Agreement shall inure to the benefit of and be enforceable by your personal or legal representatives, executors, administrators, heirs, distributees, devisees, and legatees. If you should die while any amount is payable to you under this Agreement if you had continued to live, all such amounts, unless otherwise provided herein, shall be paid in accordance with the terms of this Agreement to your devisee, legatee, or other designee, or, if there is no such designee, to your estate.

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6. Assignment. This Agreement shall not be assignable by either party hereto, except as provided in Section 2.6 and by the Company to any successor in interest to the business of the Company, provided that the Company (if it remains a separate entity) shall remain fully liable under this Agreement for all obligations, payments and otherwise.

7. No Mitigation or Offset. In the event of termination of your employment, you will be under no obligation to seek other employment and there will be no offset against any payment or benefit provided for in this Agreement on account of any remuneration or benefits from any subsequent employment that he may obtain.

8. Application of Code Section 409A.

     8.1 Notwithstanding anything in this Agreement to the contrary, the receipt of any benefits under this Agreement as a result of a termination of employment shall be subject to satisfaction of the condition precedent that you undergo a “separation from service” within the meaning of Treas. Reg. § 1.409A-1(h) or any successor thereto. In addition, if you are deemed to be a “specified employee” within the meaning of that term under Code Section 409A(a)(2)(B), then with regard to any payment or the provisions of any benefit that is required to be delayed pursuant to Code Section 409A(a)(2)(B), such payment or benefit shall not be made or provided prior to the earlier of (i) the expiration of the six (6) month period measured from the date of your “separation from service” (as such term is defined in Treas. Reg. § 1.409A-1(h)), or (ii) the date of your death (the “Delay Period”). Within ten (10) days following the expiration of the Delay Period, all payments and benefits delayed pursuant to this Section (whether they would have otherwise been payable in a single sum or in installments in the absence of such delay) shall be paid or reimbursed to you in a lump sum, and any remaining payments and benefits due under this Agreement shall be paid or provided in accordance with the normal payment dates specified for them herein. Notwithstanding the foregoing, to the extent that the foregoing applies to the provision of any ongoing welfare benefits to you that would not be required to be delayed if the premiums therefore were paid by you, you shall pay the full costs of premiums for such welfare benefits during the Delay Period and the Company shall pay you an amount equal to the amount of such premiums paid by you during the Delay Period within ten (10) days after the conclusion of such Delay Period.

     8.2 Except as otherwise expressly provided herein, to the extent any expense reimbursement or other in-kind benefit is determined to be subject to Code Section 409A, the amount of any such expenses eligible for reimbursement or in-kind benefits in one calendar year shall not affect the expenses eligible for reimbursement or in-kind benefits in any other taxable year (except under any lifetime limit applicable to expenses for medical care), in no event shall any expenses be reimbursed or in-kind benefits be provided after the last day of the calendar year following the calendar year in which you incurred such expenses or received such benefits, and in no event shall any right to reimbursement or in-kind benefits be subject to liquidation or exchange for another benefit.

     8.3 Any payments made pursuant to Section 3.4, to the extent of payments made from the date of termination through March 15th of the calendar year following such date, are intended to constitute separate payments for purposes of Treas. Reg. §1.409A-2(b)(2) and thus payable pursuant to the “short-term deferral” rule set forth in Treas. Reg. §1.409A-1(b)(4); to the

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extent such payments are made following said March 15th, they are intended to constitute separate payments for purposes of Treas. Reg. §1.409A-2(b)(2) made upon an involuntary termination from service and payable pursuant to Treas. Reg. §1.409A-1(b)(9)(iii), to the maximum extent permitted by said provision. Notwithstanding the foregoing, if the Company determines that any other payments hereunder fail to satisfy the distribution requirement of Section 409A(a)(2)(A) of the Internal Revenue Code of 1986, as amended (the “Code”), the payment of such benefit shall be delayed to the minimum extent necessary so that such payments are not subject to the provisions of Code Section 409A(a)(1).

     8.4 To the extent it is determined that any benefits described in Section 3.4.c. are taxable to you, they are intended to be payable pursuant to Treas. Reg. §1.409A-1(b)(9)(v), to the maximum extent permitted by said provision.

9. Miscellaneous.

     9.1 The invalidity or unenforceability of any provision of this Agreement will not affect the validity or enforceability of any other provision of this Agreement, which will remain in full force and effect.

     9.2 The validity, interpretation, construction and performance of this Agreement will be governed by the laws of the Commonwealth of Pennsylvania.

     9.3 No waiver by you or the Company at any time of any breach of, or compliance with, any provision of this Agreement to be performed by the Company or you, respectively, will be deemed a waiver of that or any other provision at any subsequent time.

     9.4 Upon any termination of employment that entitles you to payments and benefits under Section 3 (other than pursuant to Section 3.8), you must, within prescribed time limits, execute a legally enforceable release agreement substantially in the form of Exhibit A attached hereto prior to the receipt of such payments and benefits. Any payments made to you will be paid net of any applicable withholding required under federal, state or local law.

     9.5 This Agreement is the exclusive agreement with respect to the severance benefits payable to you in the event of a termination of your employment. All prior negotiations and agreements are hereby merged into this Agreement. You acknowledge and agree that any employment agreement, offer letter and/or any agreement regarding change in control or termination benefits, previously entered into between you and the Company are immediately null and void.

     9.6 Notwithstanding the termination of this Agreement, the provisions which specify continuing obligations, compensation and benefits, and rights shall remain in effect until such time as all such obligations are discharged, all such compensation and benefits are received, and no party or beneficiary has any remaining actual or contingent rights under this Agreement.

10. Recovery of Bonuses and Incentive Compensation. Notwithstanding anything in this Agreement to the contrary, all bonuses and incentive compensation paid to you (whether in equity or in cash) shall be subject to recovery by the Company in the event that such bonuses or incentive compensation are based on materially inaccurate financial statements (which includes,

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but is not limited to, statements of earnings, revenues, or gains) or other materially inaccurate performance metric criteria; provided that a determination as to the recovery of a bonus or incentive compensation shall be made within twelve (12) months following the date such bonus or incentive compensation was paid. In the event that the Board determines by at least a majority vote that a bonus or incentive compensation payment to you is recoverable, you shall reimburse all or a portion of such bonus or incentive compensation, to the fullest extent permitted by law, as soon as practicable following written notice to you by the Company of the same.

11. Legal Fees. In the event of a dispute following a Change in Control, the Company, or its successor, shall reimburse you for all reasonable legal fees and expenses incurred by you in attempting to obtain or enforce rights or benefits provided by this Agreement, if, with respect to any such right or benefit, you are successful in obtaining or enforcing such right or benefit (including by negotiated settlement).

12. Indemnification.

     12.1 The Company shall indemnify you in the event you are made a party or are threatened to be made a party to any threatened, pending, or completed action, suit, or proceeding, whether civil, criminal, administrative, or investigative (including, without limitation, actions by or in the right of the Company), by reason of the fact that you are or were a director or officer of the Company, or a director or officer of the Company serving at the request of the Company as a director, officer, employee, or agent of another corporation, partnership, joint venture, trust or other enterprise, against expenses (including attorneys’ fees), amounts paid in settlement, judgments, and fines actually and reasonably incurred by you in connection with such action, suit, or proceeding; provided, however, that no indemnification shall be made in any case where the act or failure to act giving rise to the claim for indemnification is determined by a court to have constituted willful misconduct or recklessness.

     12.2 Expenses (including attorneys’ fees) incurred in defending a civil or criminal action, suit, or proceeding, under Section 12.1 shall be paid by the Company in advance of the final disposition of such action, suit, or proceeding upon receipt of an undertaking by or on behalf of you to repay such amount if it shall be ultimately determined that you are not entitled to be indemnified by the Company as authorized in this Section 12.

     12.3 The Company shall purchase and maintain directors’ and officers’ liability insurance on behalf of you, at the Company’s expense, consistent with the amounts and terms provided to other directors and officers of the Company.

     If you accept this offer, please sign and date this letter in the space provided below and return a copy to the Company at 72 North Franklin Street, Wilkes-Barre, PA 18773-0016.

			Sincerely,
			/s/ Douglas Gaudet
			Penn Millers Holding Corporation
Accepted:	/s/ Kevin D. Higgins	Date:	August 14, 2009                      Kevin D. Higgins

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EXHIBIT A
RELEASE AGREEMENT

THIS RELEASE AGREEMENT (this “Release Agreement”) is made as of this ___ day of                     , 20___, by and between PMMHC Corporation, Penn Millers Holding Corporation, and Penn Millers Insurance Company (collectively, the “Employer”) and Kevin D. Higgins (the “Executive”). Capitalized terms not defined in this Release Agreement shall have the meanings ascribed to them in the Letter Agreement (as defined below). In consideration of the mutual agreements set forth below, the Executive and the Employer hereby agree as follows:

     1. General Release.

          a. In consideration of the payments and benefits required to be provided to the Executive under the agreement between the Employer and the Executive, dated August 14, 2009, (the “Letter Agreement”) and after consultation with counsel, the Executive, for himself and on behalf of each of the Executive’s heirs, executors, administrators, representatives, agents, successors and assigns (collectively, the “Releasors”), hereby irrevocably and unconditionally releases and forever discharges the Employer, its majority owned subsidiaries and affiliated companies, and each of its officers, employees, directors, shareholders, and agents (collectively, the “Releasees”) from any and all claims, actions, causes of action, rights, judgments, obligations, damages, demands, accountings, or liabilities of whatever kind or character (collectively, “Claims”), including, without limitation, any Claims under any federal, state, local, or foreign law, that the Releasors may have, or in the future may possess, arising out of (i) the Executive’s employment relationship with and service as an employee, officer, or director of the Employer and any of its majority-owned subsidiaries and affiliates, or the termination of the Executive’s service in any and all of such relevant capacities, (ii) the Letter Agreement, or (iii) any event, condition, circumstance, or obligation that occurred, existed, or arose on or prior to the date hereof; provided, however, that the release set forth in this Section shall not apply to (iv) the payment and/or benefit obligations of the Employer or any of its affiliates, (collectively, the “Employer Group”) under the Letter Agreement, (v) any Claims the Executive may have under any plans or programs not covered by the Letter Agreement in which the Executive participated and under which the Executive has accrued and become entitled to a benefit, and (vi) any indemnification or other rights the Executive may have under the Letter Agreement or in accordance with the governing instruments of any member of the Employer Group or under any director and officer liability insurance maintained by the Employer or any such group member with respect to liabilities arising as a result of the Executive’s service as an officer and employee of any member of the Employer Group or any predecessor thereof. Except as provided in the immediately preceding sentence, the Releasors further agree that the payments and benefits as required by the Letter Agreement shall be in full satisfaction of any and all Claims for payments or benefits, whether express or implied, that the Releasors may have against the Employer or any member of the Employer Group arising out of the Executive’s employment relationship under the Letter Agreement and the Executive’s service as an employee, officer or director of the Employer or a member of the Employer Group under the Letter Agreement or the termination thereof, as applicable.

     2. Specific Release of Claims. In further consideration of the payments and benefits provided to the Executive under the Letter Agreement, the Releasors hereby unconditionally

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release and forever discharge the Releasees from any and all Claims that the Releasors may have in connection with the Executive’s employment or termination of employment, arising under:

          a. Title VII of the Civil Rights Act of 1964, the Age Discrimination in Employment Act (“ADEA”), the Americans With Disabilities Act of 1990 (“ADA”), the Rehabilitation Act of 1973, and any similar federal, state or local laws, including without limitation, the Pennsylvania Human Relations Act, as amended and any other non-discrimination and fair employment practices laws of any state and/or locality in which the Executive works or resides, all as amended;

          b. the Fair Credit Reporting Act (“FCRA”), the Employee Retirement Income Security Act of 1974 (“ERISA”), the Worker Adjustment and Retraining Notification Act (“WARN”); and

          c. all common law Claims including, but not limited to, actions in tort and for breach of contract, including, without limitation, Claims for incentive payments and/or commissions, including but not limited to, Claims for incentive and/or commission payments under any Employer incentive or commission plan, Claims for severance benefits, all Claims to any non-vested ownership interest in the Employer, contractual or otherwise, including but not limited to Claims to stock or stock options.

               This release applies to any and all Claims that the Executive may have relating to rights, known or unknown to him, resulting from a change in ownership control of the Employer, including, without limitation, rights pursuant to severance agreements, severance plans, incentive plans, equity compensation plans, or any other plan or agreement relating to the Executive’s employment.

               Notwithstanding anything contained herein to the contrary, no portion of any release contained in any Section of this Release Agreement shall release the Employer or the Employer Group from any Claims the Executive may have for breach of the provisions of this Release Agreement or to enforce this Release Agreement, that arise after the date of this Release Agreement, or to challenge the validity of the Executive’s release of ADEA Claims.

               By signing this Release Agreement, the Executive hereby acknowledges and confirms the following: (i) the Executive was advised by the Employer or his then employer in connection with his termination of employment or retirement to consult with an attorney of his choice prior to signing this Release Agreement and to have such attorney explain to the Executive the terms of this Release Agreement, including, without limitation, the terms relating to the Executive’s release of Claims arising under this Section, and the Executive has in fact consulted with an attorney; (ii) the Executive was given a period of not fewer than 21 days to consider the terms of this Release Agreement prior to its signing; and (iii) the Executive knowingly and voluntarily accepts the terms of this Release Agreement.

     3. No Assignment of Claims. The Executive represents and warrants that he has not assigned any of the Claims being released hereunder.

     4. Complaints. The Executive affirms that he has not filed any complaint against any Releasee with any local, state or federal court and agrees not to do so in the future, except

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for Claims challenging the validity of the release of ADEA Claims. The Executive affirms further that he has not filed any claim, charge or complaint with the United States Equal Employment Opportunity Commission (“EEOC”) or any state or local agency authorized to investigate charges or complaints of unlawful employment discrimination (together, “Agency”). The Executive understands that nothing in this Release Agreement prevents him from filing a charge or complaint of unlawful employment discrimination with any Agency or assisting in or cooperating with an investigation of a charge or complaint of unlawful employment discrimination by an Agency, provided however that, the Executive acknowledges that he may not be able to recover any monetary benefits in connection with any such claim, charge, complaint or proceeding and disclaim entitlement to any such relief. Furthermore, if any Agency or court has now assumed or later assumes jurisdiction of any claim, charge or complaint on the Executive’s behalf against any Releasee, the Executive will disclaim entitlement to any relief.

     5. Revocation. This Release Agreement may be revoked by the Executive within the seven-day period commencing on the date the Executive signs this Release Agreement (the “Revocation Period”). In the event of any such revocation by the Executive, all obligations of the parties under this Release Agreement shall terminate and be of no further force and effect as of the date of such revocation. No such revocation by the Executive shall be effective unless it is in writing and signed by the Executive and received by the Employer prior to the expiration of the Revocation Period. In the event of revocation, the Executive shall not be entitled to the payments and benefits under the Letter Agreement, the receipt of which is conditioned on the Executive’s execution of this Release Agreement.

     6. Non-Disparagement. The Executive agrees not to disparage or criticize the Releasees, or any of them, or otherwise speak of Releasees, or any of them, in any negative or unflattering way to anyone with regard to any matters relating to the Executive’s employment by the Employer Group or the business or employment practices of such business entities. The Employer agrees, on behalf of itself, and the Employer Group, not to disparage or criticize the Executive or otherwise speak of the Executive in any negative or unflattering way to anyone with regard to any matters relating to the Executive’s employment with the Employer Group. The parties understand that this entire provision is a material provision of this Release Agreement. This Section shall not operate as a bar to (i) statements reasonably necessary to be made in any judicial, administrative or arbitral proceeding, or (ii) internal communications between and among the employees of the Employer Group with a job-related need to know about this Release Agreement or matters related to the administration of this Release Agreement.

     7. Cooperation. The Executive agrees to cooperate with the Employer with respect to all matters arising during or related to his employment about which he has personal knowledge because of his employment with the Employer, including but not limited to all matters (formal or informal) in connection with any government investigation, internal Employer investigation, litigation (potential or ongoing), administrative, regulatory, or other proceeding which currently exists, or which may have arisen prior to or arise following the signing of this Release Agreement. The Executive understands that the Employer agrees to reimburse Executive for his reasonable out-of-pocket expenses (not including attorney’s fees, legal costs, or lost time or opportunity) incurred in connection with such cooperation.

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     8. No Admission of Liability. The Executive agrees that this Release Agreement does not constitute, nor should it be construed to constitute, an admission by the Employer of any violation of federal, state, or local law, regulation, or ordinance, nor as an admission of liability under the common law or for any breach of duty the Employer owed or owes to the Executive.

     9. Representations and Warranties. The Executive acknowledges and agrees that (i) he is not aware of nor has he reported any conduct by any of the Releasees that violates any federal, state, or local law, rule, or regulation, (ii) he has not been denied any rights or benefits under the Family and Medical Leave Act of 1993 (“FMLA”) or any state or local law, act, or regulation providing for family and/or medical leave or been discriminated against in any way for exercising his rights under these laws, and (iii) in connection with offering the payments and benefits provided under the Letter Agreement, the Employer has not provided to the Executive, and has no obligation to provide to the Executive, any material non-public information as defined in applicable federal securities laws, concerning the Employer.

     10. Confidentiality. The Executive agrees to maintain as confidential, the terms and contents of this Release Agreement, and the contents of the negotiations and discussions resulting in this Release Agreement, except (i) as needed to obtain legal counsel, financial, or tax advice, (ii) to the extent required by federal, state, or local law or by order of court (iii) as needed to challenge the release of ADEA Claims or to participate in an Agency investigation, or (iv) as otherwise agreed to in writing by an officer of the Employer. The Executive agrees that before he seeks legal counsel or financial or tax advice, he will secure an agreement from such counsel or advisors to adhere to the same confidentiality obligations that apply to him. The Executive agrees not to discuss either the existence of or any aspect of this Release Agreement with any employee or ex-employee of the Employer.

     11. Successors. This Release Agreement is for the benefit of and is binding upon the Executive and his heirs, administrators, representatives, executors, successors, beneficiaries and assigns, and is also for the benefit of the Releasees and their successors and assigns.

     12. Violation. If the Executive violates any provisions of this Release Agreement, the Employer will be entitled to the immediate repayment of all payments and benefits paid pursuant to the Letter Agreement. The Executive agrees that repayment will not invalidate this Release Agreement and acknowledges that he will be deemed conclusively to be bound by the terms of this Release Agreement and to waive any right to seek to overturn or avoid it. If the Executive violates any provisions of this Release Agreement before all of the payments and benefits under the Letter Agreement have been provided, the Employer may discontinue any unpaid conditional payments and benefits.

     13. Additional Damages Available for Violation. The Executive agrees that the Employer will maintain all rights and remedies available to it at law and in equity in the event the Executive violates any provision of this Release Agreement. These rights and remedies may include, but may not be limited to, the right to bring court action to recover all consideration paid to the Executive pursuant to this Release Agreement and any additional damages the Employer may suffer as a result of such a breach.

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     14. Entire Agreement and Amendment. This Release Agreement contains and constitutes the entire understanding and agreement between the parties hereto with respect to the Executive’s severance benefits and waiver and release of Claims against the Employer and cancels all previous oral and written negotiations, agreements, commitments and writings in connection therewith. This Release Agreement shall be binding upon the parties and may not be modified in any manner, except by an instrument in writing of concurrent or subsequent date signed by a duly authorized representative of the parties and their respective agents, assign, heirs, executors, successors, and administrators. No delay or omission by the Employer in exercising any right under this Release Agreement shall operate as a waiver of that or any other right. A waiver or consent given by the Employer on any one occasion shall be effective only in that instance and shall not be construed as a bar or waiver of any right on any other occasion. The parties acknowledge and agree that Sections 9.6 and 12 of the Letter Agreement shall survive the execution of this Release Agreement and the termination of the Letter Agreement.

     15. Applicable Law. This Release Agreement shall be governed by and construed in accordance with the laws of the Commonwealth of Pennsylvania without regard to choice of law principles, and except as preempted by federal law. Should any provision of this Release Agreement be declared or be determined by any court of competent jurisdiction to be illegal or invalid, the validity of the remaining parts, terms or provisions shall not be affected thereby and the illegal or invalid part, term, or provision will be deemed not to be a part of this Release Agreement.

     16. Assignment. The Executive’s rights and obligations under this Release Agreement shall inure to the Executive’s benefit and shall bind the Executive, his heirs and representatives. The Employer’s rights and obligations under this Release Agreement shall inure to the benefit of and shall bind the Employer, its successors and assigns. The Executive may not assign this Release Agreement. The Employer may assign this Release Agreement, but it may not delegate the duty to make any payments hereunder without the Executive’s written consent, which shall not be unreasonably withheld.

     17. Severability. If any provision of this Release Agreement is held unenforceable by a court of competent jurisdiction, all remaining provisions shall continue in full force and effect without being impaired or invalidated in any way.

     18. Notices. All notices required by this Release Agreement shall be in writing and shall be deemed to have been duly delivered in person or when mailed by certified mail, return receipt requested, as follows:

          a. If to the Executive: 181 W. Pheasant Drive, Larksville, PA 18704

          b. If to the Employer: 72 North Franklin St., Wilkes-Barre, PA 18773-0016

The Executive is hereby advised that the Executive has up to twenty-one (21) calendar days to review this Release Agreement and that the Executive should consult with an attorney of the Executive’s choice prior to execution of this Release Agreement.

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     The Executive agrees that any modifications, material or otherwise, made to this Release Agreement do not restart or affect in any manner the original twenty-one (21) calendar day consideration.

     Having elected to execute this Release Agreement, to fulfill the promises and to receive the payments and benefits under the Letter Agreement, the Executive freely and knowingly, after due consideration, enters into this Release Agreement intending to waive, settle and release all claims the Executive has or might have against the Employer.

Statement by the Executive who is signing below. By signing this Release Agreement, I acknowledge that the Employer has advised and encouraged me to consult with an attorney prior to executing this Release Agreement. I have carefully read and fully understand the provisions of this Release Agreement and have had sufficient time and opportunity (over a period of 21 days) to consult with my personal tax, financial and legal advisors prior to executing this Release Agreement, and I intend to be legally bound by its terms.

     IN WITNESS WHEREOF, the Employer (on its behalf and on behalf of the members of the Employer Group) and the Executive, intending to be legally bound have executed this Release Agreement on the day and year first above written.

PENN MILLERS HOLDING CORPORATION

By

Title

EXECUTIVE

Kevin D. Higgins

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EX-10.5

Exhibit 10.5

August 14, 2009

Harold W. Roberts
615 Beaver Brook Road
Shavertown, PA 18708

Re: Letter Agreement

Dear Harold:

     It is with great pleasure that we extend an offer setting forth the following terms for your continued employment with PMMHC Corporation, (the “MHC”), Penn Millers Holding Corporation (the “Holding Corporation”), and Penn Millers Insurance Company, (the “Insurance Company”) (the Holding Corporation and the Insurance Company are sometimes referred to collectively or individually, as the context requires, as the “Company,” and the MHC, the Holding Corporation, and the Insurance Company, and their direct and indirect subsidiaries, are sometimes referred to collectively as the “Penn Millers System”).

1. Term of Agreement. The term of this agreement (the “Agreement”) shall commence on the date above (the “Effective Date”) and shall continue for a period of two (2) years thereafter. Commencing on the first anniversary of the Effective Date and on each anniversary thereafter (“Anniversary Date”), this Agreement shall automatically be renewed for one (1) additional year beyond the term otherwise established, unless one party provides written notice to the other party, at least ninety (90) days in advance of an Anniversary Date, of its intent not to renew this Agreement for an additional one year term. Nothing in this provision shall preclude termination as otherwise provided or permitted under this Agreement. Notwithstanding the foregoing, if a Change in Control occurs after the Effective Date and during the term of this Agreement, this Agreement shall continue in effect for a period of not less than two (2) years beyond the date of such Change in Control.

2. Covenant Not to Compete; Nonsolicitation; Confidential Information.

     2.1 During your employment with the Company and during the Restricted Period (as defined below), you shall not directly or indirectly, either for your own account or as an agent, consultant, employee, partner, officer, director, proprietor, investor (except as an investor owning less than 5% of the stock of a publicly owned company) or otherwise, of any person, firm, corporation, or enterprise:

a. solicit or hire any employees of the Company or induce any of such employees to terminate their employment relationship with the Company; or

b. solicit, induce or attempt to solicit or induce any customer, supplier or other entity doing business with the Company to cease doing business with the Company or, in the case of a customer, to place agribusiness insurance, as that term is commonly understood in the industry, with any competitor of the Company. For purposes of the foregoing provision, the term “customer” shall mean a business that the Company insures on the date that your employment terminates (or has insured during the previous twelve months) and a broker who has placed business with the Company on the date that your employment terminates but only with respect to those clients of the broker for which the broker has placed business with the Company in the twelve-month period preceding the date that your employment terminates.

     2.2 In addition to the limitations described in Section 2.1, during the Restricted Period you shall not, directly or indirectly, own, manage, operate, render services for (as a consultant or an advisor) or accept any employment with (a) Nationwide Agribusiness Insurance Company, Michigan Millers Insurance Company or Westfield Insurance Company or any of their successors in interest or (b) the agribusiness insurance business of any other insurance company whose business has, or could reasonably be expected to have, a material adverse effect on the Company’s business insurance business. In addition, you shall not, directly or indirectly, own, manage, operate, render services for (as a consultant or an adviser) or accept any employment with, within a fifty (50) mile radius of Wilkes-Barre, Pennsylvania, any other property and casualty insurance or reinsurance line of business to the extent that such ownership, management, operating, rendering of services or employment (and the activities necessarily incident thereto) have, or could reasonably be expected to have, a material adverse effect on the Company’s business insurance business.

     2.3 You agree that you will not at any time during the term of this Agreement (as determined under Section 1 hereof) or at any time thereafter for any reason, in any fashion, form or manner, either directly or indirectly, divulge, disclose or communicate to any person, firm, corporation or other business entity, in any manner whatsoever, any confidential information or trade secrets concerning the business of the Company, including, without limiting the generality of the foregoing, any customer lists or other customer identifying information, the techniques, methods or systems of the Company’s operation or management, any information regarding its financial matters, or any other material information concerning the business of the Company, its manner of operation, its plan or other material data. The provisions of this Section 2.3 shall not apply to (i) information that is public knowledge other than as a result of disclosure by you in breach of this Section 2.3; (ii) information disseminated by the Company to third parties in the ordinary course of business; (iii) information lawfully received by you from a third party who, based upon inquiry by you, is not bound by a confidential relationship to the Company, or (iv) information disclosed under a requirement of law or as directed by applicable legal authority having jurisdiction over you.

     2.4 Although you and the Company consider the restrictions contained in Sections 2.1, 2.2 and 2.3 to be the minimum restriction reasonable for the purposes of preserving the Company’s goodwill and other proprietary rights, if a final determination is made by a court that the time or territory, or any other restriction contained in Sections 2.1, 2.2 and 2.3 is an unreasonable or otherwise unenforceable restriction against you, the provisions of Sections 2.1,

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2.2 and 2.3 will not be rendered void, but will be deemed amended to apply as to such maximum time and territory and to such other extent as the court may determine to be reasonable.

     2.5 Notwithstanding anything to the contrary in Sections 3.3, 3.4, or 3.8, in the event that you breach any of the covenants contained in this Section 2:

a.	Any remaining payments or benefits to be provided under Sections 3.3, 3.4, or 3.8 shall not be paid or shall cease immediately upon such breach; and
b.	The Company shall be entitled to the immediate repayment of all payments and benefits provided under Sections 3.3, 3.4, and 3.8.

     2.6 You agree that the covenants contained in this Section 2 may be assigned by the Company, as needed, to affect its purpose and intent and that the Company’s assignee shall be entitled to the full benefit of the restrictions enjoyed by the Company under the terms of these covenants.

     2.7 The term “Restricted Period” shall mean:

a.	In the event you are terminated by the Company for Cause, the twelve (12) month period following your termination of employment;
b.	In the event of a termination pursuant to Section 3.1, the twelve (12) month period following your termination of employment;
c.	Notwithstanding Section 2.7.b., in the event of a termination pursuant to Section 3.1 and such termination would amount to Good Reason but for the fact that it occurred prior to a Change in Control, a period up to twelve (12) months following your termination of employment, with the number of months, if any, selected by the Company in its sole discretion by providing written notice of such number to you within ten (10) days following the date on which you give notice of your termination of employment;
d.	In the event of a termination pursuant to Section 3.2, the date of your termination of employment;
e.	In the event of a termination pursuant to Section 3.3, the twelve (12) month period following your termination of employment; or
f.	In the event of a termination pursuant to Section 3.4, the twenty-four (24) month period following your termination of employment.

3. Severance Benefits.

     3.1 Termination by You on Voluntary Basis. In the event that you voluntarily terminate your employment hereunder without Good Reason, you shall be entitled to receive:

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a.	If such termination occurs on or after age 65, a pro-rata payment from the Success Sharing Plan (or other annual incentive plan in effect) based on the number of full months that have elapsed from the start of the current annual performance period to the date of your termination of employment and actual annual performance through the end of the current annual performance period to the extent that at the conclusion of such period, such award is deemed earned, payable at the time such award would otherwise have been paid had your employment not terminated, but in no event later than March 15 of the calendar year following the end of such performance period;
b.	If such termination occurs on or after age 65, pro-rata vesting of any unvested and outstanding performance-based equity awards granted to you, based on the number of full months that have elapsed from the date of grant of such award to the date of your termination of employment and actual performance through the end of the applicable performance period to the extent that at the conclusion of such period, such awards are deemed earned, payable in-kind at the time such award would otherwise have been paid had your employment not terminated, but in no event later than March 15 of the calendar year following the end of the applicable performance period; provided, however, that (i) to the extent the benefits provided in this Subsection conflict with the terms of any plan or other agreement under or pursuant to which any equity awards were granted, the terms of such plan or other agreement shall control, and (ii) this Subsection shall not apply to payments or awards made or granted under any plan or other agreement designed to replace your benefits under the Penn Millers Holding Corporation Supplemental Executive Retirement Plan (the “SERP”), if any (with any such payments or awards shall be subject to the terms and conditions of any such plan or agreement); and
c.	If your voluntary termination of employment would amount to Good Reason but for the fact that it occurred prior to a Change in Control, a lump sum cash payment within sixty (60) days following termination of your employment equal to the product of (i) the number of months selected by the Company pursuant to Section 2.7.c. and (ii) your annual base compensation, divided by twelve (12).

     3.2 Termination By Reason of Death or Permanent Disability: In the event your employment is terminated by reason of your death or permanent disability (defined for this purpose as a condition by reason of which you are entitled to and receiving disability benefits under the Company’s long-term disability plan, if any, and if none, under the U.S. Social Security Act) you, or your estate, shall be entitled to receive:

a. Continuation of your annual base compensation then in effect for one (1) year (commencing on the next payroll date following the date of your termination of employment), offset by any amounts payable to you under any disability insurance plan or policy provided by the Company;

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b.

Continuation of employer-provided healthcare benefits for one (1) year at the levels and cost to you and your qualified dependents in effect on the date of your termination, and thereafter to elect, at your or your qualified dependents’ cost, COBRA continuation for the remainder of your or your qualified dependents’ COBRA eligibility, if any, it being understood that your and your dependents’ COBRA eligibility period will include the period during which the Company is providing benefits under this Section 3.2.b.; and

c.

If you are age 55 or have 10 years of service in the year of your termination of employment:

i.	Pro-rata vesting of any unvested and outstanding performance-based equity awards granted to you, based on the number of full months that have elapsed from the date of grant of such award to the date of your termination of employment, with all such awards payable in-kind at target levels for the applicable performance period within sixty (60) days following the date your employment terminates; and
ii.	Pro-rata vesting of any unvested and outstanding non-performance-based equity awards granted to you, based on the number of full months that have elapsed from the date of grant of such award to the date of termination of your employment, payable in-kind within sixty (60) days following the date your employment terminates.

Notwithstanding the foregoing, (i) to the extent the benefits provided in this Subsection c. conflict with the terms of any plan or other agreement under or pursuant to which any equity awards were granted, the terms of such plan or other agreement shall control and (ii) this Subsection c. shall not apply to awards granted under any plan or other agreement designed to replace your benefits under the SERP, if any (with any such awards subject to the terms and conditions of any such plan or agreement).

d. A pro-rata payment from the Success Sharing Plan (or other annual incentive plan then in effect) as set forth in Section 3.1.a., without regard to the age requirements contained in Section 3.1.a.

     3.3 Termination by the Company without Cause prior to a Change in Control: In the event that your employment hereunder is terminated by the Company without Cause (as defined in Section 3.7), before a Change in Control (as defined in Section 3.6 below), you shall be entitled to receive:

a.	Continuation of your annual base compensation then in effect for one (1) year (commencing on the next payroll date following the date of your termination of employment);
b.	Continuation of employer-provided healthcare benefits for one (1) year at the levels and cost to you and your qualified dependents in effect on the date of your termination, and thereafter to elect, at your or your qualified dependents’

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	cost, COBRA continuation for the remainder of your or your qualified dependents’ COBRA eligibility, if any, it being understood that your and your dependents’ COBRA eligibility period will include the period during which the Company is providing benefits under this Section 3.3.b.;
c.	Continuation of the annual reimbursement allowance received in lieu of reimbursement for or payment of country club or social club membership fees, dues or other fees and any automobile allowance (the “Annual Stipend”), then in effect for one (1) year; provided that such amount shall be paid in accordance with the Company’s executive payroll practices, commencing on the next payroll date following the date of your termination of employment;
d.	If your termination of employment occurs prior to your attaining age 62, payment of all fees and expenses related to the provision of outplacement services through a firm of your choice, not to exceed $10,000; provided, however, that such outplacement expenses: (i) must be incurred no later than the end of the second full calendar year following the year of your termination of employment; and (ii) must be paid no later than the end of the third full calendar year following the year of your termination of employment; and
e.	A pro-rata payment from the Success Sharing Plan (or other annual incentive plan then in effect) as set forth in Section 3.1.a., without regard to the age requirements contained in Section 3.1.a.

     3.4 Termination by the Company Without Cause or by You with Good Reason on or after a Change in Control: If a Change in Control (as defined in Section 3.6 below) shall occur and concurrently therewith or during a period of twenty-four (24) months thereafter your employment hereunder is terminated by the Company without Cause (as defined in Section 3.7) or by you with Good Reason (as defined in Section 3.5 below), you shall be entitled to receive:

a.	A lump sum cash payment within sixty (60) days following your termination of employment equal to one (1) times your annual base compensation then in effect (or immediately prior to any reduction resulting in a termination for Good Reason);
b.	Continuation of your annual base compensation then in effect (or immediately prior to any reduction resulting in a termination for Good Reason) for one (1) year (commencing on the next payroll date following the date of your termination of employment);
c.	Continuation of employer-provided healthcare benefits for two (2) years at the levels and cost to you and your qualified dependents in effect on the date of your termination (or immediately prior to any reduction resulting in a termination for Good Reason), and thereafter to elect, at your or your qualified dependents’ cost, COBRA continuation for the remainder of your or your qualified dependents’ COBRA eligibility, if any, it being understood that your

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	and your dependents’ COBRA eligibility period will include the period during which the Company is providing benefits under this Section 3.4.c.;
d.	A lump sum cash payment within sixty (60) days following your termination of employment equal to two (2) times the Annual Stipend then in effect (or immediately prior to any reduction resulting in a termination for Good Reason);
e.	If your termination of employment occurs prior to your attaining age 62, payment of outplacement services as set forth in Section 3.3.d.;
f.	A pro-rata payment from the Success Sharing Plan (or other annual incentive plan then in effect) as set forth in Section 3.1.a., without regard to the age requirements contained in Section 3.1.a.; and
g.	Immediate and full vesting of equity awards as follows:

i.	Immediate and full vesting of any unvested and outstanding performance-based equity awards granted to you, with all such awards payable in-kind at target levels for the applicable performance period within sixty (60) days following the date your employment terminates; and
ii.	Immediate and full vesting of any unvested and outstanding non-performance-based equity awards granted to you, payable in-kind within sixty (60) days following the date your employment terminates.

Notwithstanding the foregoing, (i) to the extent the benefits provided in this Subsection g. conflict with the terms of any plan or other agreement under or pursuant to which any equity awards were granted, the terms of such plan or other agreement shall control and (ii) this Subsection g. shall not apply to awards granted under any plan or other agreement designed to replace your benefits under the SERP, if any (with any such awards subject to the terms and conditions of any such plan or agreement).

     3.5 Good Reason: You shall be considered to have terminated employment hereunder for Good Reason if such termination of employment occurs on or within twenty-four (24) months after a Change in Control and is on account of any of the following actions by the Company without your express written consent:

a.	A material reduction in your annual base compensation as in effect immediately prior to a Change in Control;
b.	Any material diminution of your positions, duties or responsibilities or the assignment to you of duties or responsibilities that are materially inconsistent with your then position, in effect immediately prior to a Change in Control;
c.	A failure by the Company to continue you as a participant in any incentive plan or program (whether annual or long-term and whether paid in cash or in equity)

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	on at least the same basis with respect to the potential amount of incentives thereunder immediately prior to a Change in Control;
d.	Any exclusion from full participation in or any material diminution in the benefits you are entitled to receive under any of the employee benefit plans of the Company in effect immediately prior to a Change in Control to the extent such exclusion or reduction is not imposed on executive officers of the Company generally;
e.	Any change in your principal place of work (other than a temporary change occasioned by the Company’s business needs) that would increase your commute by 50 miles or more as of the date of the Change in Control; or
f.	A material breach by the Company of its obligations under this Agreement.

     Notwithstanding the foregoing, a termination by you shall not be for “Good Reason,” unless you shall have given the Company at least ten (10) business days written notice specifying the grounds upon which you intend to terminate your employment hereunder for “Good Reason” and such notice is received by the Company within ninety (90) days of the date the event of “Good Reason” occurred. In addition, any action or inaction by the Company which is remedied within thirty (30) days following such written notice shall not constitute “Good Reason” for termination hereunder.

     3.6 Change in Control. Change in Control shall have the same meaning as a “Change in Control” under the Penn Millers Stock Incentive Plan, as such term may be amended from time to time.

     3.7 Cause. “Cause” means any of the following events: (a) breach of your fiduciary duty to the Company or your duty of loyalty to the Company; (b) willful act of material dishonesty with respect to any material matter involving the Company; (c) theft or material misuse of Company property; (d) engaging in personal conduct that would constitute grounds for liability for discrimination or sexual harassment (as proscribed by the U.S. Equal Employment Opportunity Commission Guidelines or any other applicable state or local regulatory body); (e) fraternization which affects your objectivity in the treatment of fellow employees or abusive or threatening behavior, after a warning by the Board of Directors of the Company (the “Board”), the Chief Executive Officer, or Human Resources to cease; (f) excessive absenteeism (which shall not include authorized absences for leave pursuant to the Family and Medical Leave Act, the Americans With Disabilities Act, or the Company’s vacation, paid time off, or short-term disability leave plans, policies, or arrangements) having a material adverse effect on Company business operations; (g) conviction of, or plea of guilty or nolo contendere to, a felony, any criminal charge involving moral turpitude, or illegal substance abuse charges; (h) illegal substance abuse or being under the influence of illegal substances during working time; (i) continuing neglect of management duties and responsibilities that has a material adverse effect on the Company; or (j) willful failure to timely report to the Board or direct supervisor information having a material adverse effect on Company business operations.

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     3.8 Supplemental Benefit. In addition to the foregoing, in the event of your termination of employment on or after age 60 for any reason other than by the Company for Cause, you shall receive the greater of (1) your retirement benefit calculated under the SERP at your age at retirement (calculated as a lump sum) or (2) the following lump-sum benefit applicable to that same age:

Age at
Termination	Benefit
60	$	175,000
61	$	200,000
62	$	250,000
63	$	300,000
64	$	400,000
65 or greater	$	571,000

     Subject to the provisions of Section 8.1, the benefits under the Section 3.8 shall be payable in a lump sum on or within sixty (60) days after your termination of employment at or after the specified attained age without proration. By way of example, if you terminate employment after age 60, but prior to age 61, you will receive a one-time payment of $175,000 or, if greater, your retirement benefit calculated under the SERP at such age, in satisfaction of this Section 3.8.

     3.9 Accrued Benefits. Upon your termination of employment for any reason, you, or your estate, as applicable, shall receive your accrued but unpaid annual base compensation and any accrued but unpaid or otherwise vested benefits under any Penn Millers System benefit or incentive plan.

4. Best Net Benefit Limitation. Anything contained in this Agreement to the contrary notwithstanding, if any of the payments or benefits received or to be received by you pursuant to this Agreement (which the parties agree will not include any portion of payments allocated to the non-solicitation and non-compete provisions of Section 2 which are classified as payments of reasonable compensation for purposes of Code Section 280G), when taken together with payments and benefits provided to you under any other plans, contracts, or arrangements with the Penn Millers System (all such payments and benefits being hereinafter referred to as the “Total Payments”), will be subject to any excise tax imposed under Section 4999 of the Internal Revenue Code of 1986, as amended (the “Code”) (together with any interest or penalties, the “Excise Tax”), then such Total Payments shall be reduced to the extent necessary so that no portion thereof shall be subject to the Excise Tax; provided, however, that if you would receive in the aggregate greater value (as determined under Code Section 280G and the regulations thereunder) on an after tax basis if the Total Payments were not subject to such reduction, then no such reduction shall be made. To effectuate the reduction described above, if applicable, the Company shall first reduce or eliminate the payments and benefits provided under this Agreement. All calculations required to be made under this Section, including the portion of the payments hereunder to be allocated to the restrictive covenants set forth in Section 2, will be made by the Company’s independent public accountants, subject to the right of your representative to review the same. The parties recognize that the actual implementation of the

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provisions of this Section are complex and agree to deal with each other in good faith to resolve any questions or disagreements arising hereunder.

5. Binding Effect and Benefit.

     5.1 The Company shall require any successor (whether direct or indirect, by purchase, merger, consolidation, or otherwise) to all or substantially all of the business or assets of the Company to expressly assume and agree to perform this Agreement in the same manner and to the same extent that the Company would be required to perform it if no such succession had taken place. Failure by the Company to obtain such assumption and agreement prior to the effectiveness of any such succession shall constitute a material breach of this Agreement. As used in this Agreement, “the Company” shall mean the Company as hereinbefore defined and any successor to the respective business or assets of the Company as aforesaid which assumes and agrees to perform this Agreement by operation of law, or otherwise.

     5.2 This Agreement shall inure to the benefit of and be enforceable by your personal or legal representatives, executors, administrators, heirs, distributees, devisees, and legatees. If you should die while any amount is payable to you under this Agreement if you had continued to live, all such amounts, unless otherwise provided herein, shall be paid in accordance with the terms of this Agreement to your devisee, legatee, or other designee, or, if there is no such designee, to your estate.

6. Assignment. This Agreement shall not be assignable by either party hereto, except as provided in Section 2.6 and by the Company to any successor in interest to the business of the Company, provided that the Company (if it remains a separate entity) shall remain fully liable under this Agreement for all obligations, payments and otherwise.

7. No Mitigation or Offset. In the event of termination of your employment, you will be under no obligation to seek other employment and there will be no offset against any payment or benefit provided for in this Agreement on account of any remuneration or benefits from any subsequent employment that he may obtain.

8. Application of Code Section 409A.

     8.1 Notwithstanding anything in this Agreement to the contrary, the receipt of any benefits under this Agreement as a result of a termination of employment shall be subject to satisfaction of the condition precedent that you undergo a “separation from service” within the meaning of Treas. Reg. § 1.409A-1(h) or any successor thereto. In addition, if you are deemed to be a “specified employee” within the meaning of that term under Code Section 409A(a)(2)(B), then with regard to any payment or the provisions of any benefit that is required to be delayed pursuant to Code Section 409A(a)(2)(B), such payment or benefit shall not be made or provided prior to the earlier of (i) the expiration of the six (6) month period measured from the date of your “separation from service” (as such term is defined in Treas. Reg. § 1.409A-1(h)), or (ii) the date of your death (the “Delay Period”). Within ten (10) days following the expiration of the Delay Period, all payments and benefits delayed pursuant to this Section (whether they would have otherwise been payable in a single sum or in installments in the absence of such delay) shall be paid or reimbursed to you in a lump sum, and any remaining payments and benefits due under

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this Agreement shall be paid or provided in accordance with the normal payment dates specified for them herein. Notwithstanding the foregoing, to the extent that the foregoing applies to the provision of any ongoing welfare benefits to you that would not be required to be delayed if the premiums therefore were paid by you, you shall pay the full costs of premiums for such welfare benefits during the Delay Period and the Company shall pay you an amount equal to the amount of such premiums paid by you during the Delay Period within ten (10) days after the conclusion of such Delay Period.

     8.2 Except as otherwise expressly provided herein, to the extent any expense reimbursement or other in-kind benefit is determined to be subject to Code Section 409A, the amount of any such expenses eligible for reimbursement or in-kind benefits in one calendar year shall not affect the expenses eligible for reimbursement or in-kind benefits in any other taxable year (except under any lifetime limit applicable to expenses for medical care), in no event shall any expenses be reimbursed or in-kind benefits be provided after the last day of the calendar year following the calendar year in which you incurred such expenses or received such benefits, and in no event shall any right to reimbursement or in-kind benefits be subject to liquidation or exchange for another benefit.

     8.3 Any payments made pursuant to Section 3.4, to the extent of payments made from the date of termination through March 15th of the calendar year following such date, are intended to constitute separate payments for purposes of Treas. Reg. §1.409A-2(b)(2) and thus payable pursuant to the “short-term deferral” rule set forth in Treas. Reg. §1.409A-1(b)(4); to the extent such payments are made following said March 15th, they are intended to constitute separate payments for purposes of Treas. Reg. §1.409A-2(b)(2) made upon an involuntary termination from service and payable pursuant to Treas. Reg. §1.409A-1(b)(9)(iii), to the maximum extent permitted by said provision. Notwithstanding the foregoing, if the Company determines that any other payments hereunder fail to satisfy the distribution requirement of Section 409A(a)(2)(A) of the Internal Revenue Code of 1986, as amended (the “Code”), the payment of such benefit shall be delayed to the minimum extent necessary so that such payments are not subject to the provisions of Code Section 409A(a)(1).

     8.4 To the extent it is determined that any benefits described in Section 3.4.c. are taxable to you, they are intended to be payable pursuant to Treas. Reg. §1.409A-1(b)(9)(v), to the maximum extent permitted by said provision.

9. Miscellaneous.

     9.1 The invalidity or unenforceability of any provision of this Agreement will not affect the validity or enforceability of any other provision of this Agreement, which will remain in full force and effect.

     9.2 The validity, interpretation, construction and performance of this Agreement will be governed by the laws of the Commonwealth of Pennsylvania.

     9.3 No waiver by you or the Company at any time of any breach of, or compliance with, any provision of this Agreement to be performed by the Company or you, respectively, will be deemed a waiver of that or any other provision at any subsequent time.

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     9.4 Upon any termination of employment that entitles you to payments and benefits under Section 3 (other than pursuant to Section 3.9), you must, within prescribed time limits, execute a legally enforceable release agreement substantially in the form of Exhibit A attached hereto prior to the receipt of such payments and benefits. Any payments made to you will be paid net of any applicable withholding required under federal, state or local law.

     9.5 This Agreement is the exclusive agreement with respect to the severance benefits payable to you in the event of a termination of your employment. All prior negotiations and agreements are hereby merged into this Agreement. You acknowledge and agree that any employment agreement, offer letter and/or any agreement regarding change in control or termination benefits, previously entered into between you and the Company are immediately null and void.

     9.6 Notwithstanding the termination of this Agreement, the provisions which specify continuing obligations, compensation and benefits, and rights shall remain in effect until such time as all such obligations are discharged, all such compensation and benefits are received, and no party or beneficiary has any remaining actual or contingent rights under this Agreement.

10. Recovery of Bonuses and Incentive Compensation. Notwithstanding anything in this Agreement to the contrary, all bonuses and incentive compensation paid to you (whether in equity or in cash) shall be subject to recovery by the Company in the event that such bonuses or incentive compensation are based on materially inaccurate financial statements (which includes, but is not limited to, statements of earnings, revenues, or gains) or other materially inaccurate performance metric criteria; provided that a determination as to the recovery of a bonus or incentive compensation shall be made within twelve (12) months following the date such bonus or incentive compensation was paid. In the event that the Board determines by at least a majority vote that a bonus or incentive compensation payment to you is recoverable, you shall reimburse all or a portion of such bonus or incentive compensation, to the fullest extent permitted by law, as soon as practicable following written notice to you by the Company of the same.

11. Legal Fees. In the event of a dispute following a Change in Control, the Company, or its successor, shall reimburse you for all reasonable legal fees and expenses incurred by you in attempting to obtain or enforce rights or benefits provided by this Agreement, if, with respect to any such right or benefit, you are successful in obtaining or enforcing such right or benefit (including by negotiated settlement).

12. Indemnification.

     12.1 The Company shall indemnify you in the event you are made a party or are threatened to be made a party to any threatened, pending, or completed action, suit, or proceeding, whether civil, criminal, administrative, or investigative (including, without limitation, actions by or in the right of the Company), by reason of the fact that you are or were a director or officer of the Company, or a director or officer of the Company serving at the request of the Company as a director, officer, employee, or agent of another corporation, partnership, joint venture, trust or other enterprise, against expenses (including attorneys’ fees), amounts paid in settlement, judgments, and fines actually and reasonably incurred by you in connection with such action, suit, or proceeding; provided, however, that no indemnification shall be made in any

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case where the act or failure to act giving rise to the claim for indemnification is determined by a court to have constituted willful misconduct or recklessness.

     12.2 Expenses (including attorneys’ fees) incurred in defending a civil or criminal action, suit, or proceeding, under Section 12.1 shall be paid by the Company in advance of the final disposition of such action, suit, or proceeding upon receipt of an undertaking by or on behalf of you to repay such amount if it shall be ultimately determined that you are not entitled to be indemnified by the Company as authorized in this Section 12.

     12.3 The Company shall purchase and maintain directors’ and officers’ liability insurance on behalf of you, at the Company’s expense, consistent with the amounts and terms provided to other directors and officers of the Company.

     If you accept this offer, please sign and date this letter in the space provided below and return a copy to the Company at 72 North Franklin Street, Wilkes-Barre, PA 18773-0016.

			Sincerely,
			/s/ Douglas Gaudet
			Penn Millers Holding Corporation
Accepted:	/s/ Harold W. Roberts	Date:	8/14/09      Harold W. Roberts

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EXHIBIT A
RELEASE AGREEMENT

THIS RELEASE AGREEMENT (this “Release Agreement”) is made as of this ___ day of                     , 20___, by and between PMMHC Corporation, Penn Millers Holding Corporation, and Penn Millers Insurance Company (collectively, the “Employer”) and Harold W. Roberts (the “Executive”). Capitalized terms not defined in this Release Agreement shall have the meanings ascribed to them in the Letter Agreement (as defined below). In consideration of the mutual agreements set forth below, the Executive and the Employer hereby agree as follows:

     1. General Release.

          a. In consideration of the payments and benefits required to be provided to the Executive under the agreement between the Employer and the Executive, dated August 14, 2009, (the “Letter Agreement”) and after consultation with counsel, the Executive, for himself and on behalf of each of the Executive’s heirs, executors, administrators, representatives, agents, successors and assigns (collectively, the “Releasors”), hereby irrevocably and unconditionally releases and forever discharges the Employer, its majority owned subsidiaries and affiliated companies, and each of its officers, employees, directors, shareholders, and agents (collectively, the “Releasees”) from any and all claims, actions, causes of action, rights, judgments, obligations, damages, demands, accountings, or liabilities of whatever kind or character (collectively, “Claims”), including, without limitation, any Claims under any federal, state, local, or foreign law, that the Releasors may have, or in the future may possess, arising out of (i) the Executive’s employment relationship with and service as an employee, officer, or director of the Employer and any of its majority-owned subsidiaries and affiliates, or the termination of the Executive’s service in any and all of such relevant capacities, (ii) the Letter Agreement, or (iii) any event, condition, circumstance, or obligation that occurred, existed, or arose on or prior to the date hereof; provided, however, that the release set forth in this Section shall not apply to (iv) the payment and/or benefit obligations of the Employer or any of its affiliates, (collectively, the “Employer Group”) under the Letter Agreement, (v) any Claims the Executive may have under any plans or programs not covered by the Letter Agreement in which the Executive participated and under which the Executive has accrued and become entitled to a benefit, and (vi) any indemnification or other rights the Executive may have under the Letter Agreement or in accordance with the governing instruments of any member of the Employer Group or under any director and officer liability insurance maintained by the Employer or any such group member with respect to liabilities arising as a result of the Executive’s service as an officer and employee of any member of the Employer Group or any predecessor thereof. Except as provided in the immediately preceding sentence, the Releasors further agree that the payments and benefits as required by the Letter Agreement shall be in full satisfaction of any and all Claims for payments or benefits, whether express or implied, that the Releasors may have against the Employer or any member of the Employer Group arising out of the Executive’s employment relationship under the Letter Agreement and the Executive’s service as an employee, officer or director of the Employer or a member of the Employer Group under the Letter Agreement or the termination thereof, as applicable.

     2. Specific Release of Claims. In further consideration of the payments and benefits provided to the Executive under the Letter Agreement, the Releasors hereby unconditionally

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release and forever discharge the Releasees from any and all Claims that the Releasors may have in connection with the Executive’s employment or termination of employment, arising under:

          a. Title VII of the Civil Rights Act of 1964, the Age Discrimination in Employment Act (“ADEA”), the Americans With Disabilities Act of 1990 (“ADA”), the Rehabilitation Act of 1973, and any similar federal, state or local laws, including without limitation, the Pennsylvania Human Relations Act, as amended and any other non-discrimination and fair employment practices laws of any state and/or locality in which the Executive works or resides, all as amended;

          b. the Fair Credit Reporting Act (“FCRA”), the Employee Retirement Income Security Act of 1974 (“ERISA”), the Worker Adjustment and Retraining Notification Act (“WARN”); and

          c. all common law Claims including, but not limited to, actions in tort and for breach of contract, including, without limitation, Claims for incentive payments and/or commissions, including but not limited to, Claims for incentive and/or commission payments under any Employer incentive or commission plan, Claims for severance benefits, all Claims to any non-vested ownership interest in the Employer, contractual or otherwise, including but not limited to Claims to stock or stock options.

               This release applies to any and all Claims that the Executive may have relating to rights, known or unknown to him, resulting from a change in ownership control of the Employer, including, without limitation, rights pursuant to severance agreements, severance plans, incentive plans, equity compensation plans, or any other plan or agreement relating to the Executive’s employment.

               Notwithstanding anything contained herein to the contrary, no portion of any release contained in any Section of this Release Agreement shall release the Employer or the Employer Group from any Claims the Executive may have for breach of the provisions of this Release Agreement or to enforce this Release Agreement, that arise after the date of this Release Agreement, or to challenge the validity of the Executive’s release of ADEA Claims.

               By signing this Release Agreement, the Executive hereby acknowledges and confirms the following: (i) the Executive was advised by the Employer or his then employer in connection with his termination of employment or retirement to consult with an attorney of his choice prior to signing this Release Agreement and to have such attorney explain to the Executive the terms of this Release Agreement, including, without limitation, the terms relating to the Executive’s release of Claims arising under this Section, and the Executive has in fact consulted with an attorney; (ii) the Executive was given a period of not fewer than 21 days to consider the terms of this Release Agreement prior to its signing; and (iii) the Executive knowingly and voluntarily accepts the terms of this Release Agreement.

     3. No Assignment of Claims. The Executive represents and warrants that he has not assigned any of the Claims being released hereunder.

     4. Complaints. The Executive affirms that he has not filed any complaint against any Releasee with any local, state or federal court and agrees not to do so in the future, except

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for Claims challenging the validity of the release of ADEA Claims. The Executive affirms further that he has not filed any claim, charge or complaint with the United States Equal Employment Opportunity Commission (“EEOC”) or any state or local agency authorized to investigate charges or complaints of unlawful employment discrimination (together, “Agency”). The Executive understands that nothing in this Release Agreement prevents him from filing a charge or complaint of unlawful employment discrimination with any Agency or assisting in or cooperating with an investigation of a charge or complaint of unlawful employment discrimination by an Agency, provided however that, the Executive acknowledges that he may not be able to recover any monetary benefits in connection with any such claim, charge, complaint or proceeding and disclaim entitlement to any such relief. Furthermore, if any Agency or court has now assumed or later assumes jurisdiction of any claim, charge or complaint on the Executive’s behalf against any Releasee, the Executive will disclaim entitlement to any relief.

     5. Revocation. This Release Agreement may be revoked by the Executive within the seven-day period commencing on the date the Executive signs this Release Agreement (the “Revocation Period”). In the event of any such revocation by the Executive, all obligations of the parties under this Release Agreement shall terminate and be of no further force and effect as of the date of such revocation. No such revocation by the Executive shall be effective unless it is in writing and signed by the Executive and received by the Employer prior to the expiration of the Revocation Period. In the event of revocation, the Executive shall not be entitled to the payments and benefits under the Letter Agreement, the receipt of which is conditioned on the Executive’s execution of this Release Agreement.

     6. Non-Disparagement. The Executive agrees not to disparage or criticize the Releasees, or any of them, or otherwise speak of Releasees, or any of them, in any negative or unflattering way to anyone with regard to any matters relating to the Executive’s employment by the Employer Group or the business or employment practices of such business entities. The Employer agrees, on behalf of itself, and the Employer Group, not to disparage or criticize the Executive or otherwise speak of the Executive in any negative or unflattering way to anyone with regard to any matters relating to the Executive’s employment with the Employer Group. The parties understand that this entire provision is a material provision of this Release Agreement. This Section shall not operate as a bar to (i) statements reasonably necessary to be made in any judicial, administrative or arbitral proceeding, or (ii) internal communications between and among the employees of the Employer Group with a job-related need to know about this Release Agreement or matters related to the administration of this Release Agreement.

     7. Cooperation. The Executive agrees to cooperate with the Employer with respect to all matters arising during or related to his employment about which he has personal knowledge because of his employment with the Employer, including but not limited to all matters (formal or informal) in connection with any government investigation, internal Employer investigation, litigation (potential or ongoing), administrative, regulatory, or other proceeding which currently exists, or which may have arisen prior to or arise following the signing of this Release Agreement. The Executive understands that the Employer agrees to reimburse Executive for his reasonable out-of-pocket expenses (not including attorney’s fees, legal costs, or lost time or opportunity) incurred in connection with such cooperation.

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     8. No Admission of Liability. The Executive agrees that this Release Agreement does not constitute, nor should it be construed to constitute, an admission by the Employer of any violation of federal, state, or local law, regulation, or ordinance, nor as an admission of liability under the common law or for any breach of duty the Employer owed or owes to the Executive.

     9. Representations and Warranties. The Executive acknowledges and agrees that (i) he is not aware of nor has he reported any conduct by any of the Releasees that violates any federal, state, or local law, rule, or regulation, (ii) he has not been denied any rights or benefits under the Family and Medical Leave Act of 1993 (“FMLA”) or any state or local law, act, or regulation providing for family and/or medical leave or been discriminated against in any way for exercising his rights under these laws, and (iii) in connection with offering the payments and benefits provided under the Letter Agreement, the Employer has not provided to the Executive, and has no obligation to provide to the Executive, any material non-public information as defined in applicable federal securities laws, concerning the Employer.

     10. Confidentiality. The Executive agrees to maintain as confidential, the terms and contents of this Release Agreement, and the contents of the negotiations and discussions resulting in this Release Agreement, except (i) as needed to obtain legal counsel, financial, or tax advice, (ii) to the extent required by federal, state, or local law or by order of court (iii) as needed to challenge the release of ADEA Claims or to participate in an Agency investigation, or (iv) as otherwise agreed to in writing by an officer of the Employer. The Executive agrees that before he seeks legal counsel or financial or tax advice, he will secure an agreement from such counsel or advisors to adhere to the same confidentiality obligations that apply to him. The Executive agrees not to discuss either the existence of or any aspect of this Release Agreement with any employee or ex-employee of the Employer.

     11. Successors. This Release Agreement is for the benefit of and is binding upon the Executive and his heirs, administrators, representatives, executors, successors, beneficiaries and assigns, and is also for the benefit of the Releasees and their successors and assigns.

     12. Violation. If the Executive violates any provisions of this Release Agreement, the Employer will be entitled to the immediate repayment of all payments and benefits paid pursuant to the Letter Agreement. The Executive agrees that repayment will not invalidate this Release Agreement and acknowledges that he will be deemed conclusively to be bound by the terms of this Release Agreement and to waive any right to seek to overturn or avoid it. If the Executive violates any provisions of this Release Agreement before all of the payments and benefits under the Letter Agreement have been provided, the Employer may discontinue any unpaid conditional payments and benefits.

     13. Additional Damages Available for Violation. The Executive agrees that the Employer will maintain all rights and remedies available to it at law and in equity in the event the Executive violates any provision of this Release Agreement. These rights and remedies may include, but may not be limited to, the right to bring court action to recover all consideration paid to the Executive pursuant to this Release Agreement and any additional damages the Employer may suffer as a result of such a breach.

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     14. Entire Agreement and Amendment. This Release Agreement contains and constitutes the entire understanding and agreement between the parties hereto with respect to the Executive’s severance benefits and waiver and release of Claims against the Employer and cancels all previous oral and written negotiations, agreements, commitments and writings in connection therewith. This Release Agreement shall be binding upon the parties and may not be modified in any manner, except by an instrument in writing of concurrent or subsequent date signed by a duly authorized representative of the parties and their respective agents, assign, heirs, executors, successors, and administrators. No delay or omission by the Employer in exercising any right under this Release Agreement shall operate as a waiver of that or any other right. A waiver or consent given by the Employer on any one occasion shall be effective only in that instance and shall not be construed as a bar or waiver of any right on any other occasion. The parties acknowledge and agree that Sections 9.6 and 12 of the Letter Agreement shall survive the execution of this Release Agreement and the termination of the Letter Agreement.

     15. Applicable Law. This Release Agreement shall be governed by and construed in accordance with the laws of the Commonwealth of Pennsylvania without regard to choice of law principles, and except as preempted by federal law. Should any provision of this Release Agreement be declared or be determined by any court of competent jurisdiction to be illegal or invalid, the validity of the remaining parts, terms or provisions shall not be affected thereby and the illegal or invalid part, term, or provision will be deemed not to be a part of this Release Agreement.

     16. Assignment. The Executive’s rights and obligations under this Release Agreement shall inure to the Executive’s benefit and shall bind the Executive, his heirs and representatives. The Employer’s rights and obligations under this Release Agreement shall inure to the benefit of and shall bind the Employer, its successors and assigns. The Executive may not assign this Release Agreement. The Employer may assign this Release Agreement, but it may not delegate the duty to make any payments hereunder without the Executive’s written consent, which shall not be unreasonably withheld.

     17. Severability. If any provision of this Release Agreement is held unenforceable by a court of competent jurisdiction, all remaining provisions shall continue in full force and effect without being impaired or invalidated in any way.

     18. Notices. All notices required by this Release Agreement shall be in writing and shall be deemed to have been duly delivered in person or when mailed by certified mail, return receipt requested, as follows:

a.	If to the Executive: 615 Beaver Brook Road, Shavertown, PA 18708
b.	If to the Employer: 72 North Franklin St., Wilkes-Barre, PA 18773-0016

The Executive is hereby advised that the Executive has up to twenty-one (21) calendar days to review this Release Agreement and that the Executive should consult with an attorney of the Executive’s choice prior to execution of this Release Agreement.

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     The Executive agrees that any modifications, material or otherwise, made to this Release Agreement do not restart or affect in any manner the original twenty-one (21) calendar day consideration.

     Having elected to execute this Release Agreement, to fulfill the promises and to receive the payments and benefits under the Letter Agreement, the Executive freely and knowingly, after due consideration, enters into this Release Agreement intending to waive, settle and release all claims the Executive has or might have against the Employer.

Statement by the Executive who is signing below. By signing this Release Agreement, I acknowledge that the Employer has advised and encouraged me to consult with an attorney prior to executing this Release Agreement. I have carefully read and fully understand the provisions of this Release Agreement and have had sufficient time and opportunity (over a period of 21 days) to consult with my personal tax, financial and legal advisors prior to executing this Release Agreement, and I intend to be legally bound by its terms.

     IN WITNESS WHEREOF, the Employer (on its behalf and on behalf of the members of the Employer Group) and the Executive, intending to be legally bound have executed this Release Agreement on the day and year first above written.

PENN MILLERS HOLDING CORPORATION

By

Title

EXECUTIVE

Harold W. Roberts

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EX-10.8

Exhibit 10.8

August 14, 2009

Jonathan C. Couch
303 Main Avenue
Clarks Summit, PA 18411

Re: Letter Agreement

Dear Jonathan:

     It is with great pleasure that we extend an offer setting forth the following terms for your continued employment with PMMHC Corporation, (the “MHC”), Penn Millers Holding Corporation (the “Holding Corporation”), and Penn Millers Insurance Company, (the “Insurance Company”) (the Holding Corporation and the Insurance Company are sometimes referred to collectively or individually, as the context requires, as the “Company,” and the MHC, the Holding Corporation, and the Insurance Company, and their direct and indirect subsidiaries, are sometimes referred to collectively as the “Penn Millers System”).

1. Term of Agreement. The term of this agreement (the “Agreement”) shall commence on the date above (the “Effective Date”) and shall continue for a period of two (2) years thereafter. Commencing on the first anniversary of the Effective Date and on each anniversary thereafter (“Anniversary Date”), this Agreement shall automatically be renewed for one (1) additional year beyond the term otherwise established, unless one party provides written notice to the other party, at least ninety (90) days in advance of an Anniversary Date, of its intent not to renew this Agreement for an additional one year term. Nothing in this provision shall preclude termination as otherwise provided or permitted under this Agreement. Notwithstanding the foregoing, if a Change in Control occurs after the Effective Date and during the term of this Agreement, this Agreement shall continue in effect for a period of not less than two (2) years beyond the date of such Change in Control.

2. Covenant Not to Compete; Nonsolicitation; Confidential Information.

     2.1 During your employment with the Company and during the Restricted Period (as defined below), you shall not directly or indirectly, either for your own account or as an agent, consultant, employee, partner, officer, director, proprietor, investor (except as an investor owning less than 5% of the stock of a publicly owned company) or otherwise, of any person, firm, corporation, or enterprise:

a. solicit or hire any employees of the Company or induce any of such employees to terminate their employment relationship with the Company; or

b. solicit, induce or attempt to solicit or induce any customer, supplier or other entity doing business with the Company to cease doing business with the Company or, in the case of a customer, to place agribusiness insurance, as that term is commonly understood in the industry, with any competitor of the Company. For purposes of the foregoing provision, the term “customer” shall mean a business that the Company insures on the date that your employment terminates (or has insured during the previous twelve months) and a broker who has placed business with the Company on the date that your employment terminates but only with respect to those clients of the broker for which the broker has placed business with the Company in the twelve-month period preceding the date that your employment terminates.

     2.2 In addition to the limitations described in Section 2.1, during the Restricted Period you shall not, directly or indirectly, own, manage, operate, render services for (as a consultant or an advisor) or accept any employment with (a) Nationwide Agribusiness Insurance Company, Michigan Millers Insurance Company or Westfield Insurance Company or any of their successors in interest or (b) the agribusiness insurance business of any other insurance company whose business has, or could reasonably be expected to have, a material adverse effect on the Company’s business insurance business. In addition, you shall not, directly or indirectly, own, manage, operate, render services for (as a consultant or an adviser) or accept any employment with, within a fifty (50) mile radius of Wilkes-Barre, Pennsylvania, any other property and casualty insurance or reinsurance line of business to the extent that such ownership, management, operating, rendering of services or employment (and the activities necessarily incident thereto) have, or could reasonably be expected to have, a material adverse effect on the Company’s business insurance business.

     2.3 You agree that you will not at any time during the term of this Agreement (as determined under Section 1 hereof) or at any time thereafter for any reason, in any fashion, form or manner, either directly or indirectly, divulge, disclose or communicate to any person, firm, corporation or other business entity, in any manner whatsoever, any confidential information or trade secrets concerning the business of the Company, including, without limiting the generality of the foregoing, any customer lists or other customer identifying information, the techniques, methods or systems of the Company’s operation or management, any information regarding its financial matters, or any other material information concerning the business of the Company, its manner of operation, its plan or other material data. The provisions of this Section 2.3 shall not apply to (i) information that is public knowledge other than as a result of disclosure by you in breach of this Section 2.3; (ii) information disseminated by the Company to third parties in the ordinary course of business; (iii) information lawfully received by you from a third party who, based upon inquiry by you, is not bound by a confidential relationship to the Company, or (iv) information disclosed under a requirement of law or as directed by applicable legal authority having jurisdiction over you.

     2.4 Although you and the Company consider the restrictions contained in Sections 2.1, 2.2 and 2.3 to be the minimum restriction reasonable for the purposes of preserving the Company’s goodwill and other proprietary rights, if a final determination is made by a court that the time or territory, or any other restriction contained in Sections 2.1, 2.2 and 2.3 is an unreasonable or otherwise unenforceable restriction against you, the provisions of Sections 2.1,

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2.2 and 2.3 will not be rendered void, but will be deemed amended to apply as to such maximum time and territory and to such other extent as the court may determine to be reasonable.

     2.5 Notwithstanding anything to the contrary in Sections 3.3 or 3.4, in the event that you breach any of the covenants contained in this Section 2:

a.	Any remaining payments or benefits to be provided under Sections 3.3 or 3.4 shall not be paid or shall cease immediately upon such breach; and
b.	The Company shall be entitled to the immediate repayment of all payments and benefits provided under Sections 3.3 and 3.4.

     2.6 You agree that the covenants contained in this Section 2 may be assigned by the Company, as needed, to affect its purpose and intent and that the Company’s assignee shall be entitled to the full benefit of the restrictions enjoyed by the Company under the terms of these covenants.

     2.7 The term “Restricted Period” shall mean:

a.	In the event you are terminated by the Company for Cause, the six (6) month period following your termination of employment;
b.	In the event of a termination pursuant to Section 3.1, the six (6) month period following your termination of employment;
c.	Notwithstanding Section 2.7.b., in the event of a termination pursuant to Section 3.1 and such termination would amount to Good Reason but for the fact that it occurred prior to a Change in Control, a period up to six (6) months following your termination of employment, with the number of months, if any, selected by the Company in its sole discretion by providing written notice of such number to you within ten (10) days following the date on which you give notice of your termination of employment;
d.	In the event you are terminated pursuant to Section 3.2, the date of your termination of employment;
e.	In the event of a termination pursuant to Section 3.3, the six (6) month period following your termination of employment; or
f.	In the event of a termination pursuant to Section 3.4, the twelve (12) month period following your termination of employment.

3. Severance Benefits.

     3.1 Termination by You on Voluntary Basis. In the event that you voluntarily terminate your employment hereunder without Good Reason, you shall be entitled to receive:

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a.	If such termination occurs on or after age 65, a pro-rata payment from the Success Sharing Plan (or other annual incentive plan in effect) based on the number of full months that have elapsed from the start of the current annual performance period to the date of your termination of employment and actual annual performance through the end of the current annual performance period to the extent that at the conclusion of such period, such award is deemed earned, payable at the time such award would otherwise have been paid had your employment not terminated, but in no event later than March 15 of the calendar year following the end of such performance period;
b.	If such termination occurs on or after age 65, pro-rata vesting of any unvested and outstanding performance-based equity awards granted to you, based on the number of full months that have elapsed from the date of grant of such award to the date of your termination of employment and actual performance through the end of the applicable performance period to the extent that at the conclusion of such period, such awards are deemed earned, payable in-kind at the time such award would otherwise have been paid had your employment not terminated, but in no event later than March 15 of the calendar year following the end of the applicable performance period; provided that to the extent the benefits provided in this paragraph conflict with the terms of any plan or other agreement under or pursuant to which any equity awards were granted, the terms of such plan or other agreement shall control; and
c.	If your voluntary termination of employment would amount to Good Reason but for the fact that it occurred prior to a Change in Control, a lump sum cash payment within sixty (60) days following termination of your employment equal to the product of (i) the number of months selected by the Company pursuant to Section 2.7.c. and (ii) your annual base compensation, divided by twelve (12).

     3.2 Termination By Reason of Death or Permanent Disability: In the event your employment is terminated by reason of your death or permanent disability (defined for this purpose as a condition by reason of which you are entitled to and receiving disability benefits under the Company’s long-term disability plan, if any, and if none, under the U.S. Social Security Act) you, or your estate, shall be entitled to receive a pro-rata payment from the Success Sharing Plan (or other annual incentive plan then in effect) as set forth in Section 3.1.a., without regard to the age requirements contained in Section 3.1.a.

     3.3 Termination by the Company without Cause prior to a Change in Control: In the event that your employment hereunder is terminated by the Company without Cause (as defined in Section 3.7), before a Change in Control (as defined in Section 3.6 below), you shall be entitled to receive:

a. Continuation of your annual base compensation then in effect for six (6) months (commencing on the next payroll date following the date of your termination of employment);

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b.	Continuation of employer-provided healthcare benefits for six (6) months at the levels and cost to you and your qualified dependents in effect on the date of your termination, and thereafter to elect, at your or your qualified dependents’ cost, COBRA continuation for the remainder of your or your qualified dependents’ COBRA eligibility, if any, it being understood that your and your dependents’ COBRA eligibility period will include the period during which the Company is providing benefits under this Section 3.3.b.;
c.	If your termination of employment occurs prior to your attaining age 62, payment of all fees and expenses related to the provision of outplacement services through a firm of your choice, not to exceed $10,000; provided, however, that such outplacement expenses: (i) must be incurred no later than the end of the second full calendar year following the year of your termination of employment; and (ii) must be paid no later than the end of the third full calendar year following the year of your termination of employment; and
d.	A pro-rata payment from the Success Sharing Plan (or other annual incentive plan then in effect) as set forth in Section 3.1.a., without regard to the age requirements contained in Section 3.1.a.

     3.4 Termination by the Company Without Cause or by You with Good Reason on or after a Change in Control: If a Change in Control (as defined in Section 3.6 below) shall occur and concurrently therewith or during a period of twenty-four (24) months thereafter your employment hereunder is terminated by the Company without Cause (as defined in Section 3.7) or by you with Good Reason (as defined in Section 3.5 below), you shall be entitled to receive:

a.	A lump sum cash payment within sixty (60) days following your termination of employment equal to one-half (1/2) times your annual base compensation then in effect (or immediately prior to any reduction resulting in a termination for Good Reason);
b.	Continuation of your annual base compensation then in effect (or immediately prior to any reduction resulting in a termination for Good Reason) for six (6) months (commencing on the next payroll date following the date of your termination of employment);
c.	Continuation of employer-provided healthcare benefits for one (1) year at the levels and cost to you and your qualified dependents in effect on the date of your termination (or immediately prior to any reduction resulting in a termination for Good Reason), and thereafter to elect, at your or your qualified dependents’ cost, COBRA continuation for the remainder of your or your qualified dependents’ COBRA eligibility, if any, it being understood that your and your dependents’ COBRA eligibility period will include the period during which the Company is providing benefits under this Section 3.4.c.;
d.	If your termination of employment occurs prior to your attaining age 62, payment of outplacement services as set forth in Section 3.3.c.;

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e.	A pro-rata payment from the Success Sharing Plan (or other annual incentive plan then in effect) as set forth in Section 3.1.a., without regard to the age requirements contained in Section 3.1.a.; and
f.	Immediate and full vesting of equity awards as follows:

i.	Immediate and full vesting of any unvested and outstanding performance-based equity awards granted to you, with all such awards payable in-kind at target levels for the applicable performance period within sixty (60) days following the date your employment terminates; and
ii.	Immediate and full vesting of any unvested and outstanding non-performance-based equity awards granted to you, payable in-kind within sixty (60) days following the date your employment terminates.

Notwithstanding the foregoing, to the extent the benefits provided in this Subsection f. conflict with the terms of any plan or other agreement under or pursuant to which any equity awards were granted, the terms of such plan or other agreement shall control.

     3.5 Good Reason: You shall be considered to have terminated employment hereunder for Good Reason if such termination of employment occurs on or within twenty-four (24) months after a Change in Control and is on account of any of the following actions by the Company without your express written consent:

a.	A material reduction in your annual base compensation as in effect immediately prior to a Change in Control;
b.	Any material diminution of your positions, duties or responsibilities or the assignment to you of duties or responsibilities that are materially inconsistent with your then position, in effect immediately prior to a Change in Control;
c.	A failure by the Company to continue you as a participant in any incentive plan or program (whether annual or long-term and whether paid in cash or in equity) on at least the same basis with respect to the potential amount of incentives thereunder immediately prior to a Change in Control;
d.	Any exclusion from full participation in or any material diminution in the benefits you are entitled to receive under any of the employee benefit plans of the Company in effect immediately prior to a Change in Control to the extent such exclusion or reduction is not imposed on executive officers of the Company generally;
e.	Any change in your principal place of work (other than a temporary change occasioned by the Company’s business needs) that would increase your commute by 50 miles or more as of the date of the Change in Control; or
f.	A material breach by the Company of its obligations under this Agreement.

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     Notwithstanding the foregoing, a termination by you shall not be for “Good Reason,” unless you shall have given the Company at least ten (10) business days written notice specifying the grounds upon which you intend to terminate your employment hereunder for “Good Reason” and such notice is received by the Company within ninety (90) days of the date the event of “Good Reason” occurred. In addition, any action or inaction by the Company which is remedied within thirty (30) days following such written notice shall not constitute “Good Reason” for termination hereunder.

     3.6 Change in Control. Change in Control shall have the same meaning as a “Change in Control” under the Penn Millers Stock Incentive Plan, as such term may be amended from time to time.

     3.7 Cause. “Cause” means any of the following events: (a) breach of your fiduciary duty to the Company or your duty of loyalty to the Company; (b) willful act of material dishonesty with respect to any material matter involving the Company; (c) theft or material misuse of Company property; (d) engaging in personal conduct that would constitute grounds for liability for discrimination or sexual harassment (as proscribed by the U.S. Equal Employment Opportunity Commission Guidelines or any other applicable state or local regulatory body); (e) fraternization which affects your objectivity in the treatment of fellow employees or abusive or threatening behavior, after a warning by the Board of Directors of the Company (the “Board”), the Chief Executive Officer, or Human Resources to cease; (f) excessive absenteeism (which shall not include authorized absences for leave pursuant to the Family and Medical Leave Act, the Americans With Disabilities Act, or the Company’s vacation, paid time off, or short-term disability leave plans, policies, or arrangements) having a material adverse effect on Company business operations; (g) conviction of, or plea of guilty or nolo contendere to, a felony, any criminal charge involving moral turpitude, or illegal substance abuse charges; (h) illegal substance abuse or being under the influence of illegal substances during working time; (i) continuing neglect of management duties and responsibilities that has a material adverse effect on the Company; or (j) willful failure to timely report to the Board or direct supervisor information having a material adverse effect on Company business operations.

     3.8 Accrued Benefits. Upon your termination of employment for any reason, you, or your estate, as applicable, shall receive your accrued but unpaid annual base compensation and any accrued but unpaid or otherwise vested benefits under any Penn Millers System benefit or incentive plan.

4. Best Net Benefit Limitation. Anything contained in this Agreement to the contrary notwithstanding, if any of the payments or benefits received or to be received by you pursuant to this Agreement (which the parties agree will not include any portion of payments allocated to the non-solicitation and non-compete provisions of Section 2 which are classified as payments of reasonable compensation for purposes of Code Section 280G), when taken together with payments and benefits provided to you under any other plans, contracts, or arrangements with the Penn Millers System (all such payments and benefits being hereinafter referred to as the “Total Payments”), will be subject to any excise tax imposed under Section 4999 of the Internal Revenue Code of 1986, as amended (the “Code”) (together with any interest or penalties, the “Excise Tax”), then such Total Payments shall be reduced to the extent necessary so that no portion thereof shall be subject to the Excise Tax; provided, however, that if you would receive

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in the aggregate greater value (as determined under Code Section 280G and the regulations thereunder) on an after tax basis if the Total Payments were not subject to such reduction, then no such reduction shall be made. To effectuate the reduction described above, if applicable, the Company shall first reduce or eliminate the payments and benefits provided under this Agreement. All calculations required to be made under this Section, including the portion of the payments hereunder to be allocated to the restrictive covenants set forth in Section 2, will be made by the Company’s independent public accountants, subject to the right of your representative to review the same. The parties recognize that the actual implementation of the provisions of this Section are complex and agree to deal with each other in good faith to resolve any questions or disagreements arising hereunder.

5. Binding Effect and Benefit.

     5.1 The Company shall require any successor (whether direct or indirect, by purchase, merger, consolidation, or otherwise) to all or substantially all of the business or assets of the Company to expressly assume and agree to perform this Agreement in the same manner and to the same extent that the Company would be required to perform it if no such succession had taken place. Failure by the Company to obtain such assumption and agreement prior to the effectiveness of any such succession shall constitute a material breach of this Agreement. As used in this Agreement, “the Company” shall mean the Company as hereinbefore defined and any successor to the respective business or assets of the Company as aforesaid which assumes and agrees to perform this Agreement by operation of law, or otherwise.

     5.2 This Agreement shall inure to the benefit of and be enforceable by your personal or legal representatives, executors, administrators, heirs, distributees, devisees, and legatees. If you should die while any amount is payable to you under this Agreement if you had continued to live, all such amounts, unless otherwise provided herein, shall be paid in accordance with the terms of this Agreement to your devisee, legatee, or other designee, or, if there is no such designee, to your estate.

6. Assignment. This Agreement shall not be assignable by either party hereto, except as provided in Section 2.6 and by the Company to any successor in interest to the business of the Company, provided that the Company (if it remains a separate entity) shall remain fully liable under this Agreement for all obligations, payments and otherwise.

7. No Mitigation or Offset. In the event of termination of your employment, you will be under no obligation to seek other employment and there will be no offset against any payment or benefit provided for in this Agreement on account of any remuneration or benefits from any subsequent employment that he may obtain.

8. Application of Code Section 409A.

     8.1 Notwithstanding anything in this Agreement to the contrary, the receipt of any benefits under this Agreement as a result of a termination of employment shall be subject to satisfaction of the condition precedent that you undergo a “separation from service” within the meaning of Treas. Reg. § 1.409A-1(h) or any successor thereto. In addition, if you are deemed to be a “specified employee” within the meaning of that term under Code Section 409A(a)(2)(B),

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then with regard to any payment or the provisions of any benefit that is required to be delayed pursuant to Code Section 409A(a)(2)(B), such payment or benefit shall not be made or provided prior to the earlier of (i) the expiration of the six (6) month period measured from the date of your “separation from service” (as such term is defined in Treas. Reg. § 1.409A-1(h)), or (ii) the date of your death (the “Delay Period”). Within ten (10) days following the expiration of the Delay Period, all payments and benefits delayed pursuant to this Section (whether they would have otherwise been payable in a single sum or in installments in the absence of such delay) shall be paid or reimbursed to you in a lump sum, and any remaining payments and benefits due under this Agreement shall be paid or provided in accordance with the normal payment dates specified for them herein. Notwithstanding the foregoing, to the extent that the foregoing applies to the provision of any ongoing welfare benefits to you that would not be required to be delayed if the premiums therefore were paid by you, you shall pay the full costs of premiums for such welfare benefits during the Delay Period and the Company shall pay you an amount equal to the amount of such premiums paid by you during the Delay Period within ten (10) days after the conclusion of such Delay Period.

     8.2 Except as otherwise expressly provided herein, to the extent any expense reimbursement or other in-kind benefit is determined to be subject to Code Section 409A, the amount of any such expenses eligible for reimbursement or in-kind benefits in one calendar year shall not affect the expenses eligible for reimbursement or in-kind benefits in any other taxable year (except under any lifetime limit applicable to expenses for medical care), in no event shall any expenses be reimbursed or in-kind benefits be provided after the last day of the calendar year following the calendar year in which you incurred such expenses or received such benefits, and in no event shall any right to reimbursement or in-kind benefits be subject to liquidation or exchange for another benefit.

     8.3 Any payments made pursuant to Section 3.4, to the extent of payments made from the date of termination through March 15th of the calendar year following such date, are intended to constitute separate payments for purposes of Treas. Reg. §1.409A-2(b)(2) and thus payable pursuant to the “short-term deferral” rule set forth in Treas. Reg. §1.409A-1(b)(4); to the extent such payments are made following said March 15th, they are intended to constitute separate payments for purposes of Treas. Reg. §1.409A-2(b)(2) made upon an involuntary termination from service and payable pursuant to Treas. Reg. §1.409A-1(b)(9)(iii), to the maximum extent permitted by said provision. Notwithstanding the foregoing, if the Company determines that any other payments hereunder fail to satisfy the distribution requirement of Section 409A(a)(2)(A) of the Internal Revenue Code of 1986, as amended (the “Code”), the payment of such benefit shall be delayed to the minimum extent necessary so that such payments are not subject to the provisions of Code Section 409A(a)(1).

9. Miscellaneous.

     9.1 The invalidity or unenforceability of any provision of this Agreement will not affect the validity or enforceability of any other provision of this Agreement, which will remain in full force and effect.

     9.2 The validity, interpretation, construction and performance of this Agreement will be governed by the laws of the Commonwealth of Pennsylvania.

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     9.3 No waiver by you or the Company at any time of any breach of, or compliance with, any provision of this Agreement to be performed by the Company or you, respectively, will be deemed a waiver of that or any other provision at any subsequent time.

     9.4 Upon any termination of employment that entitles you to payments and benefits under Section 3 (other than pursuant to Section 3.8), you must, within prescribed time limits, execute a legally enforceable release agreement substantially in the form of Exhibit A attached hereto prior to the receipt of such payments and benefits. Any payments made to you will be paid net of any applicable withholding required under federal, state or local law.

     9.5 This Agreement is the exclusive agreement with respect to the severance benefits payable to you in the event of a termination of your employment. All prior negotiations and agreements are hereby merged into this Agreement. You acknowledge and agree that any employment agreement, offer letter and/or any agreement regarding change in control or termination benefits, previously entered into between you and the Company are immediately null and void.

     9.6 Notwithstanding the termination of this Agreement, the provisions which specify continuing obligations, compensation and benefits, and rights shall remain in effect until such time as all such obligations are discharged, all such compensation and benefits are received, and no party or beneficiary has any remaining actual or contingent rights under this Agreement.

10. Recovery of Bonuses and Incentive Compensation. Notwithstanding anything in this Agreement to the contrary, all bonuses and incentive compensation paid to you (whether in equity or in cash) shall be subject to recovery by the Company in the event that such bonuses or incentive compensation are based on materially inaccurate financial statements (which includes, but is not limited to, statements of earnings, revenues, or gains) or other materially inaccurate performance metric criteria; provided that a determination as to the recovery of a bonus or incentive compensation shall be made within twelve (12) months following the date such bonus or incentive compensation was paid. In the event that the Board determines by at least a majority vote that a bonus or incentive compensation payment to you is recoverable, you shall reimburse all or a portion of such bonus or incentive compensation, to the fullest extent permitted by law, as soon as practicable following written notice to you by the Company of the same.

11. Legal Fees. In the event of a dispute following a Change in Control, the Company, or its successor, shall reimburse you for all reasonable legal fees and expenses incurred by you in attempting to obtain or enforce rights or benefits provided by this Agreement, if, with respect to any such right or benefit, you are successful in obtaining or enforcing such right or benefit (including by negotiated settlement).

12. Indemnification.

     12.1 The Company shall indemnify you in the event you are made a party or are threatened to be made a party to any threatened, pending, or completed action, suit, or proceeding, whether civil, criminal, administrative, or investigative (including, without limitation, actions by or in the right of the Company), by reason of the fact that you are or were a director or officer of the Company, or a director or officer of the Company serving at the request

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of the Company as a director, officer, employee, or agent of another corporation, partnership, joint venture, trust or other enterprise, against expenses (including attorneys’ fees), amounts paid in settlement, judgments, and fines actually and reasonably incurred by you in connection with such action, suit, or proceeding; provided, however, that no indemnification shall be made in any case where the act or failure to act giving rise to the claim for indemnification is determined by a court to have constituted willful misconduct or recklessness.

     12.2 Expenses (including attorneys’ fees) incurred in defending a civil or criminal action, suit, or proceeding, under Section 12.1 shall be paid by the Company in advance of the final disposition of such action, suit, or proceeding upon receipt of an undertaking by or on behalf of you to repay such amount if it shall be ultimately determined that you are not entitled to be indemnified by the Company as authorized in this Section 12.

     12.3 The Company shall purchase and maintain directors’ and officers’ liability insurance on behalf of you, at the Company’s expense, consistent with the amounts and terms provided to other directors and officers of the Company.

     If you accept this offer, please sign and date this letter in the space provided below and return a copy to the Company at 72 North Franklin Street, Wilkes-Barre, PA 18773-0016.

			Sincerely,
			/s/ Douglas Gaudet
			Penn Millers Holding Corporation
Accepted:	/s/ Jonathan C. Couch	Date:	8/14/09                         Jonathan C. Couch

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EXHIBIT A
RELEASE AGREEMENT

THIS RELEASE AGREEMENT (this “Release Agreement”) is made as of this ___ day of                     , 20___, by and between PMMHC Corporation, Penn Millers Holding Corporation, and Penn Millers Insurance Company (collectively, the “Employer”) and Jonathan C. Couch (the “Executive”). Capitalized terms not defined in this Release Agreement shall have the meanings ascribed to them in the Letter Agreement (as defined below). In consideration of the mutual agreements set forth below, the Executive and the Employer hereby agree as follows:

     1. General Release.

          a. In consideration of the payments and benefits required to be provided to the Executive under the agreement between the Employer and the Executive, dated August 14, 2009, (the “Letter Agreement”) and after consultation with counsel, the Executive, for himself and on behalf of each of the Executive’s heirs, executors, administrators, representatives, agents, successors and assigns (collectively, the “Releasors”), hereby irrevocably and unconditionally releases and forever discharges the Employer, its majority owned subsidiaries and affiliated companies, and each of its officers, employees, directors, shareholders, and agents (collectively, the “Releasees”) from any and all claims, actions, causes of action, rights, judgments, obligations, damages, demands, accountings, or liabilities of whatever kind or character (collectively, “Claims”), including, without limitation, any Claims under any federal, state, local, or foreign law, that the Releasors may have, or in the future may possess, arising out of (i) the Executive’s employment relationship with and service as an employee, officer, or director of the Employer and any of its majority-owned subsidiaries and affiliates, or the termination of the Executive’s service in any and all of such relevant capacities, (ii) the Letter Agreement, or (iii) any event, condition, circumstance, or obligation that occurred, existed, or arose on or prior to the date hereof; provided, however, that the release set forth in this Section shall not apply to (iv) the payment and/or benefit obligations of the Employer or any of its affiliates, (collectively, the “Employer Group”) under the Letter Agreement, (v) any Claims the Executive may have under any plans or programs not covered by the Letter Agreement in which the Executive participated and under which the Executive has accrued and become entitled to a benefit, and (vi) any indemnification or other rights the Executive may have under the Letter Agreement or in accordance with the governing instruments of any member of the Employer Group or under any director and officer liability insurance maintained by the Employer or any such group member with respect to liabilities arising as a result of the Executive’s service as an officer and employee of any member of the Employer Group or any predecessor thereof. Except as provided in the immediately preceding sentence, the Releasors further agree that the payments and benefits as required by the Letter Agreement shall be in full satisfaction of any and all Claims for payments or benefits, whether express or implied, that the Releasors may have against the Employer or any member of the Employer Group arising out of the Executive’s employment relationship under the Letter Agreement and the Executive’s service as an employee, officer or director of the Employer or a member of the Employer Group under the Letter Agreement or the termination thereof, as applicable.

     2. Specific Release of Claims. In further consideration of the payments and benefits provided to the Executive under the Letter Agreement, the Releasors hereby unconditionally

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release and forever discharge the Releasees from any and all Claims that the Releasors may have in connection with the Executive’s employment or termination of employment, arising under:

          a. Title VII of the Civil Rights Act of 1964, the Age Discrimination in Employment Act (“ADEA”), the Americans With Disabilities Act of 1990 (“ADA”), the Rehabilitation Act of 1973, and any similar federal, state or local laws, including without limitation, the Pennsylvania Human Relations Act, as amended and any other non-discrimination and fair employment practices laws of any state and/or locality in which the Executive works or resides, all as amended;

          b. the Fair Credit Reporting Act (“FCRA”), the Employee Retirement Income Security Act of 1974 (“ERISA”), the Worker Adjustment and Retraining Notification Act (“WARN”); and

          c. all common law Claims including, but not limited to, actions in tort and for breach of contract, including, without limitation, Claims for incentive payments and/or commissions, including but not limited to, Claims for incentive and/or commission payments under any Employer incentive or commission plan, Claims for severance benefits, all Claims to any non-vested ownership interest in the Employer, contractual or otherwise, including but not limited to Claims to stock or stock options.

               This release applies to any and all Claims that the Executive may have relating to rights, known or unknown to him, resulting from a change in ownership control of the Employer, including, without limitation, rights pursuant to severance agreements, severance plans, incentive plans, equity compensation plans, or any other plan or agreement relating to the Executive’s employment.

               Notwithstanding anything contained herein to the contrary, no portion of any release contained in any Section of this Release Agreement shall release the Employer or the Employer Group from any Claims the Executive may have for breach of the provisions of this Release Agreement or to enforce this Release Agreement, that arise after the date of this Release Agreement, or to challenge the validity of the Executive’s release of ADEA Claims.

               By signing this Release Agreement, the Executive hereby acknowledges and confirms the following: (i) the Executive was advised by the Employer or his then employer in connection with his termination of employment or retirement to consult with an attorney of his choice prior to signing this Release Agreement and to have such attorney explain to the Executive the terms of this Release Agreement, including, without limitation, the terms relating to the Executive’s release of Claims arising under this Section, and the Executive has in fact consulted with an attorney; (ii) the Executive was given a period of not fewer than 21 days to consider the terms of this Release Agreement prior to its signing; and (iii) the Executive knowingly and voluntarily accepts the terms of this Release Agreement.

     3. No Assignment of Claims. The Executive represents and warrants that he has not assigned any of the Claims being released hereunder.

     4. Complaints. The Executive affirms that he has not filed any complaint against any Releasee with any local, state or federal court and agrees not to do so in the future, except

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for Claims challenging the validity of the release of ADEA Claims. The Executive affirms further that he has not filed any claim, charge or complaint with the United States Equal Employment Opportunity Commission (“EEOC”) or any state or local agency authorized to investigate charges or complaints of unlawful employment discrimination (together, “Agency”). The Executive understands that nothing in this Release Agreement prevents him from filing a charge or complaint of unlawful employment discrimination with any Agency or assisting in or cooperating with an investigation of a charge or complaint of unlawful employment discrimination by an Agency, provided however that, the Executive acknowledges that he may not be able to recover any monetary benefits in connection with any such claim, charge, complaint or proceeding and disclaim entitlement to any such relief. Furthermore, if any Agency or court has now assumed or later assumes jurisdiction of any claim, charge or complaint on the Executive’s behalf against any Releasee, the Executive will disclaim entitlement to any relief.

     5. Revocation. This Release Agreement may be revoked by the Executive within the seven-day period commencing on the date the Executive signs this Release Agreement (the “Revocation Period”). In the event of any such revocation by the Executive, all obligations of the parties under this Release Agreement shall terminate and be of no further force and effect as of the date of such revocation. No such revocation by the Executive shall be effective unless it is in writing and signed by the Executive and received by the Employer prior to the expiration of the Revocation Period. In the event of revocation, the Executive shall not be entitled to the payments and benefits under the Letter Agreement, the receipt of which is conditioned on the Executive’s execution of this Release Agreement.

     6. Non-Disparagement. The Executive agrees not to disparage or criticize the Releasees, or any of them, or otherwise speak of Releasees, or any of them, in any negative or unflattering way to anyone with regard to any matters relating to the Executive’s employment by the Employer Group or the business or employment practices of such business entities. The Employer agrees, on behalf of itself, and the Employer Group, not to disparage or criticize the Executive or otherwise speak of the Executive in any negative or unflattering way to anyone with regard to any matters relating to the Executive’s employment with the Employer Group. The parties understand that this entire provision is a material provision of this Release Agreement. This Section shall not operate as a bar to (i) statements reasonably necessary to be made in any judicial, administrative or arbitral proceeding, or (ii) internal communications between and among the employees of the Employer Group with a job-related need to know about this Release Agreement or matters related to the administration of this Release Agreement.

     7. Cooperation. The Executive agrees to cooperate with the Employer with respect to all matters arising during or related to his employment about which he has personal knowledge because of his employment with the Employer, including but not limited to all matters (formal or informal) in connection with any government investigation, internal Employer investigation, litigation (potential or ongoing), administrative, regulatory, or other proceeding which currently exists, or which may have arisen prior to or arise following the signing of this Release Agreement. The Executive understands that the Employer agrees to reimburse Executive for his reasonable out-of-pocket expenses (not including attorney’s fees, legal costs, or lost time or opportunity) incurred in connection with such cooperation.

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     8. No Admission of Liability. The Executive agrees that this Release Agreement does not constitute, nor should it be construed to constitute, an admission by the Employer of any violation of federal, state, or local law, regulation, or ordinance, nor as an admission of liability under the common law or for any breach of duty the Employer owed or owes to the Executive.

     9. Representations and Warranties. The Executive acknowledges and agrees that (i) he is not aware of nor has he reported any conduct by any of the Releasees that violates any federal, state, or local law, rule, or regulation, (ii) he has not been denied any rights or benefits under the Family and Medical Leave Act of 1993 (“FMLA”) or any state or local law, act, or regulation providing for family and/or medical leave or been discriminated against in any way for exercising his rights under these laws, and (iii) in connection with offering the payments and benefits provided under the Letter Agreement, the Employer has not provided to the Executive, and has no obligation to provide to the Executive, any material non-public information as defined in applicable federal securities laws, concerning the Employer.

     10. Confidentiality. The Executive agrees to maintain as confidential, the terms and contents of this Release Agreement, and the contents of the negotiations and discussions resulting in this Release Agreement, except (i) as needed to obtain legal counsel, financial, or tax advice, (ii) to the extent required by federal, state, or local law or by order of court (iii) as needed to challenge the release of ADEA Claims or to participate in an Agency investigation, or (iv) as otherwise agreed to in writing by an officer of the Employer. The Executive agrees that before he seeks legal counsel or financial or tax advice, he will secure an agreement from such counsel or advisors to adhere to the same confidentiality obligations that apply to him. The Executive agrees not to discuss either the existence of or any aspect of this Release Agreement with any employee or ex-employee of the Employer.

     11. Successors. This Release Agreement is for the benefit of and is binding upon the Executive and his heirs, administrators, representatives, executors, successors, beneficiaries and assigns, and is also for the benefit of the Releasees and their successors and assigns.

     12. Violation. If the Executive violates any provisions of this Release Agreement, the Employer will be entitled to the immediate repayment of all payments and benefits paid pursuant to the Letter Agreement. The Executive agrees that repayment will not invalidate this Release Agreement and acknowledges that he will be deemed conclusively to be bound by the terms of this Release Agreement and to waive any right to seek to overturn or avoid it. If the Executive violates any provisions of this Release Agreement before all of the payments and benefits under the Letter Agreement have been provided, the Employer may discontinue any unpaid conditional payments and benefits.

     13. Additional Damages Available for Violation. The Executive agrees that the Employer will maintain all rights and remedies available to it at law and in equity in the event the Executive violates any provision of this Release Agreement. These rights and remedies may include, but may not be limited to, the right to bring court action to recover all consideration paid to the Executive pursuant to this Release Agreement and any additional damages the Employer may suffer as a result of such a breach.

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     14. Entire Agreement and Amendment. This Release Agreement contains and constitutes the entire understanding and agreement between the parties hereto with respect to the Executive’s severance benefits and waiver and release of Claims against the Employer and cancels all previous oral and written negotiations, agreements, commitments and writings in connection therewith. This Release Agreement shall be binding upon the parties and may not be modified in any manner, except by an instrument in writing of concurrent or subsequent date signed by a duly authorized representative of the parties and their respective agents, assign, heirs, executors, successors, and administrators. No delay or omission by the Employer in exercising any right under this Release Agreement shall operate as a waiver of that or any other right. A waiver or consent given by the Employer on any one occasion shall be effective only in that instance and shall not be construed as a bar or waiver of any right on any other occasion. The parties acknowledge and agree that Sections 9.6 and 12 of the Letter Agreement shall survive the execution of this Release Agreement and the termination of the Letter Agreement.

     15. Applicable Law. This Release Agreement shall be governed by and construed in accordance with the laws of the Commonwealth of Pennsylvania without regard to choice of law principles, and except as preempted by federal law. Should any provision of this Release Agreement be declared or be determined by any court of competent jurisdiction to be illegal or invalid, the validity of the remaining parts, terms or provisions shall not be affected thereby and the illegal or invalid part, term, or provision will be deemed not to be a part of this Release Agreement.

     16. Assignment. The Executive’s rights and obligations under this Release Agreement shall inure to the Executive’s benefit and shall bind the Executive, his heirs and representatives. The Employer’s rights and obligations under this Release Agreement shall inure to the benefit of and shall bind the Employer, its successors and assigns. The Executive may not assign this Release Agreement. The Employer may assign this Release Agreement, but it may not delegate the duty to make any payments hereunder without the Executive’s written consent, which shall not be unreasonably withheld.

     17. Severability. If any provision of this Release Agreement is held unenforceable by a court of competent jurisdiction, all remaining provisions shall continue in full force and effect without being impaired or invalidated in any way.

     18. Notices. All notices required by this Release Agreement shall be in writing and shall be deemed to have been duly delivered in person or when mailed by certified mail, return receipt requested, as follows:

          a. If to the Executive: 303 Main Avenue, Clarks Summit, PA 18411

          b. If to the Employer: 72 North Franklin St., Wilkes-Barre, PA 18773-0016

The Executive is hereby advised that the Executive has up to twenty-one (21) calendar days to review this Release Agreement and that the Executive should consult with an attorney of the Executive’s choice prior to execution of this Release Agreement.

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     The Executive agrees that any modifications, material or otherwise, made to this Release Agreement do not restart or affect in any manner the original twenty-one (21) calendar day consideration.

     Having elected to execute this Release Agreement, to fulfill the promises and to receive the payments and benefits under the Letter Agreement, the Executive freely and knowingly, after due consideration, enters into this Release Agreement intending to waive, settle and release all claims the Executive has or might have against the Employer.

Statement by the Executive who is signing below. By signing this Release Agreement, I acknowledge that the Employer has advised and encouraged me to consult with an attorney prior to executing this Release Agreement. I have carefully read and fully understand the provisions of this Release Agreement and have had sufficient time and opportunity (over a period of 21 days) to consult with my personal tax, financial and legal advisors prior to executing this Release Agreement, and I intend to be legally bound by its terms.

     IN WITNESS WHEREOF, the Employer (on its behalf and on behalf of the members of the Employer Group) and the Executive, intending to be legally bound have executed this Release Agreement on the day and year first above written.

PENN MILLERS HOLDING CORPORATION

By

Title

EXECUTIVE

Jonathan C. Couch

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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		16
5.7 Certain Stock Transactions		16
5.8 Valuation of Trust Fund		16
ARTICLE VI MAXIMUM LIMITATION ON ALLOCATIONS		17
6.1 Participation Solely in This Plan		17
6.2 Participation in Another Defined Contribution Plan		17
6.3 Definitions		17
ARTICLE VII INVESTMENT OF TRUST ASSETS		19

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	Page
ARTICLE VIII COMPANY STOCK APPRAISAL		20
ARTICLE IX DISTRIBUTIONS		21
9.1 Termination of Employment		21
9.2 Death		21
9.3 Time of Payment		21
9.4 Manner of Making Payments		22
9.5 Form of Payment		22
9.6 Direct Rollover		22
9.7 Diversification Election		23
9.8 Election to Retain Interests in Plan		23
9.9 Mandatory Distributions		24
9.10 Dividend Distributions		24
9.11 Right of First Refusal		25
9.12 Prohibited Allocations		25
ARTICLE X RIGHT TO SELL COMPANY STOCK		27
10.1 Put Requirements		27
ARTICLE XI VOTING AND TENDER OF COMPANY STOCK		29
11.1 Voting		29
11.2 Tender		29
11.3 Fiduciary Responsibilities		30
11.4 Procedures for Voting and Tender		30
ARTICLE XII ADMINISTRATION		31
12.1 Fiduciary Responsibilities		31
12.2 The Administrative Committee		31
12.3 Plan Expenses		32
12.4 Meetings and Voting		32
12.5 Compensation		32
12.6 Claims Procedures		33
12.7 Liabilities		34
ARTICLE XIII AMENDMENTS		35
13.1 Right to Amend		35
13.2 Amendment by Administrative Committee		35
13.3 Plan Merger and Asset Transfers		35
13.4 Amendment of Vesting Schedule		35

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	Page
ARTICLE XIV TERMINATION		36
14.1 Right to Terminate		36
14.2 Effect of Termination		36
14.3 Change in Control		36
ARTICLE XV MISCELLANEOUS		37
15.1 Non-alienation of Benefits		37
15.2 Appointment of Guardian		37
15.3 Satisfaction of Benefit Claims		37
15.4 Controlling Law		37
15.5 Non-guarantee of Employment		37
15.6 Severability and Construction of the Plan		37
15.7 No Requirement of Profits		38
15.8 All Risk on Participants and Beneficiaries		38
ARTICLE XVI TOP-HEAVY PROVISIONS		39
16.1 Determination of Top-Heavy Status		39
16.2 Top-Heavy Definitions		39
16.3 Top-Heavy Rules		41
ARTICLE XVII EXEMPT LOANS		43
17.1 General		43
17.2 Terms of Exempt Loan Agreements		43
17.3 Prohibition on Purchase Arrangements		43
17.4 Suspense Account.		43

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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.

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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 25% or more of the combined voting power of the Company’s then outstanding securities other than pursuant to a transaction excepted in Clause (b);

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

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                    (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 60% 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 a majority 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 25% or more of the then outstanding voting securities) will have beneficial ownership of 25% or more of the combined voting power of the Surviving Company’s then outstanding voting securities;

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

               (d) 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 25% 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 25% or more of the combined voting power of the Company’s then outstanding securities; provided, however, that if a Person becomes a beneficial owner of 25% 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 Corporation 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.

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          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 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

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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.

          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

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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 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,

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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 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

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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.

          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.

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          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.

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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 has completed six months of service. Months of service with the Employer prior to the Effective Date of the Plan shall count for purposes of determining whether the Employee has completed six months 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 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) 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

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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 who completed 1,000 Hours of Service during the Plan Year and are actively employed on the last day of the Plan Year. An eligible Participant’s allocation of the Employer contribution for a Plan Year shall be determined by multiplying a Participant’s allocation percentage by the Employer contribution made to the Trust. A Participant’s allocation percentage is determined in three steps. First, a Participant’s compensation ratio is determined by calculating the ratio of the Compensation of each eligible

14

Participant for the Plan Year to the total Compensation of all eligible Participants for the Plan Year. Second, a Participant’s initial allocation percentage is determined by multiplying each Participant’s compensation ratio determined in step 1 by the following factor based upon the Participant’s combined age plus Years of Service as of the December 31 of the Plan Year to which the allocation relates:

Combined Age plus Years of
Service as of December 31	Factor
20 – 29		50	%
30 – 39		55	%
40 – 49		65	%
50 – 54		85	%
55 – 59		100	%
60 – 64		115	%
65 – 69		130	%
70 – 74		135	%
75 – 79		140	%
80 – 84		155	%
85 – 89		155	%
90 +		160	%

Third, the final allocation percentage for each eligible Participant is determined by calculating the ratio of the initial allocation percentage determined in step 2 for each eligible Participant to the total of all initial allocation percentages for all eligible participants determined in step 2.

Solely for purposes of determining a Participant’s Years of Service under this Section 5.5, a Participant’s Years of Service shall include a Participant’s Years of Service under the Plan as of December 31 of the Plan Year to which the allocation relates plus a Participant’s years of service for benefit accrual purposes earned under the Penn Millers Holding Corporation Pension Plan as of October 31, 2009.

In the event that allocations under this Section 5.5 would fail the general test for nondiscrimination in amount of contributions under Treas. Reg. 1.401(a)(4)-2(c), the allocation to Participants who are Highly Compensated Employees shall be reduced and reallocated to Participants who are not Highly Compensated Employees pro-rata until the general test for nondiscrimination in amount of contributions under Treas. Reg. 1.401(a)(4)-2(c) is passed.

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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

21

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

37

“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.

38

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.

39

               (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

40

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.

41

               (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	%

42

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

43

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.

44

          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]

45

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
August 20, 2009

EX-23.2

Exhibit 23.2

August 7, 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 August 7, 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 August 7, 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

August 7, 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 Update”) of the estimated consolidated pro forma market value of Penn Millers Mutual Holding Company (“PMMHC”) as of August 7, 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 and appraisal update as of June 5, 2009 are 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

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

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

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 periods ended March 31, 2009 and June 30, 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

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

the Offering on the Company’s operating characteristics and financial performance as they relate to the Estimated Pro Forma Market Value of PMMHC. We have reviewed the economy and demographic characteristics of the primary market area in which the Company currently operates. We have compared the Company’s financial performance and condition with publicly-traded insurance institutions evaluated and selected in accordance with the valuation guidelines. 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 August 7, 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

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

assured Curtis that it has relied on its own counsel, accountants and other experts for legal, accounting, tax and similar professional advice.

The Valuation Range reported herein will be updated as appropriate. These updates will consider, among other factors, any developments or changes in the Company’s operating performance, financial condition, or management policies, and current conditions in the securities markets for insurance company common stocks. Should any such new developments 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	17
Stock Price Performance and Market Conditions	17
VI. VALUATION ANALYSIS AND CONCLUSIONS	19
Valuation Review	19
Valuation Analysis	19
Valuation Conclusion	22

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 March 31, 2009 and June 30, 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 and June 30, 2009.

Table 1
Selected Financial Condition Data
As of March 31, 2009 and June 30, 2009
(Dollars in Thousands)

	6/30/2009			3/31/2009
Balance Sheet Data
Total assets		228,385			228,415
Total investments and cash		146,878			143,993
Premiums and fees receivable		26,783			28,753
Reinsurance receivables and recoverables		25,950			25,064
Loss and loss adjustment expense reserves		118,025			116,775
Unearned premiums		41,218			44,811
Total liabilities		176,413			177,254
Total surplus		51,972			51,161
Total surplus / assets		22.76	%		22.40	%

Source: Penn Millers’ GAAP financial statements.

     The Company’s total assets remained flat at $228.4 million at March 31, 2009 and June 30, 2009. From March 31, 2009 to June 30, 2009, total investments increased by $6.5 million, This increase was mostly offset by a $3.6 million reduction in cash, a $2.0 million decline in premiums and fees receivable, and a $1.4 million decline in assets from discontinued operations.

     The Company’s portfolio of investment securities amounted to $134.8 million at June 30, 2009 and constituted 59.0% of total assets. As of June 30, 2009, Penn Millers’ investments consisted of $26.7 million of mortgage-backed securities, and $108.0 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 June 30, 2009. The following

1

PRO FORMA VALUATION APPRAISAL

chart shows the composition of securities of Penn Millers’ investment portfolio as of June 30, 2009.

Chart 2
Penn Millers’ Investment Portfolio
As of June 30, 2009

Source: Penn Millers’ management.

     It should be noted that the Company advised that early in the third quarter of 2009, it became apparent that one corporate bond in its portfolio had suffered significant declines from which it was unlikely to recover. As a result of this new information, on July 16, 2009 the Company sold its holdings in this security, and recorded a pre-tax other-than-temporary impairment loss as of June 30, 2009 of approximately $197,000.

     Total liabilities decreased from $177.3 million at March 31, 2009 to $176.4 million at June 30, 2009. The $841,000 decrease in total liabilities from March 31, 2009 to June 30, 2009 primarily reflected a $3.6 million decrease in unearned premiums, offset by a $1.3 million increase in loss and loss adjustment expense reserves and a $1.6 million increase in accounts

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payable and accrued expenses. Penn Millers borrowed debt outstanding remained flat at $3.0 million at March 31, 2009 and June 30, 2009.

     The Company’s total surplus, as measured under generally accepted accounting principles (“GAAP”), increased modestly from $51.2 million at March 31, 2009 to $52.0 million at June 30, 2009, primarily as a result of an increase in accumulated unrealized investment gains from continuing operations. The Company’s ratio of total surplus to total assets increased from 22.4% at March 31, 2009 to 22.8% at June 30, 2009. As shown in the following chart, the Company’s return on average assets (“ROAA”) and return on average equity (“ROAE”) improved slightly from March to June 2009.

Chart 3
Penn Millers ROAA and ROAE
For the Years Ended December 31, 2003 through 2008, March 31, 2009 and June 30, 2009

Source: Curtis calculation based on Penn Millers’ GAAP financial statements.
*	Note: ROAA and ROAE are calculated using net income for the trailing twelve month period and the average assets and equity book values at the ending twelve month period and corresponding prior year period.

Income and Expense Trends

     Table 2 displays the Company’s earnings results and selected operating ratios for the trailing twelve month (“TTM”) periods ended March 31, 2009 and June 30, 2009. Exhibit IV-2

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displays the Company’s annual income statements for 2003 through 2008, as well as the TTM periods ended March 31, 2009 and June 30, 2009.

Table 2
Selected Operating Performance Data
For the TTM periods ended March 31, 2009 and June 30, 2009
(Dollars in Thousands)

	TTM ended			TTM ended
	6/30/2009 (e)			3/31/2009 (e)
REVENUE
Premiums earned	$	76,294		$	77,327
Investment income, net of investment expense		5,381			5,298
Realized investment (losses) gains, net		(7,828	)		(7,627	)
Fee Income		0			0
Commission income		0			0
Other income		301			282
Total revenue		74,148			75,280
LOSSES AND EXPENSES
Losses and loss adjustment expenses		54,564			56,343
Underwriting and administrative expenses (a)		26,056			26,414
Interest expense		253			213
Other expenses, net		379			376
Total losses and expenses		81,252			83,346
Income from continuing operations		(7,104	)		(8,066	)
Income taxes expense (benefit)		(1,765	)		(2,074	)
Net income (loss) from continuing operations		(5,339	)		(5,992	)
Discontinued Operations:
Pre-tax (loss) income on discontinued ops		(3,081	)		(3,104	)
Income tax (benefit) expense		641			632
(Loss) income on discontinued ops		(3,722	)		(3,736	)
Net income		(9,061	)		(9,728	)
Operating Ratios
Loss ratio (b)		71.5	%		72.9	%
Expense ratio (c)		34.2	%		34.2	%
Combined ratio (d)		105.7	%		107.0	%

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

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     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 $75.3 million for the TTM period ended March 31, 2009 to $74.1 million for the TTM period ended June 30, 2009 due to a $1.0 million decrease in premiums earned. Including discontinued operations, Penn Millers experienced a net loss of $9.1 million for the TTM period ended June 30, 2009 as compared to net loss of $9.7 million for the TTM period ended March 31, 2009.

     Underwriting and administrative expenses decreased slightly from $26.4 million for the TTM period ended March 31, 2009 to $26.0 million for the TTM period ended June 30, 2009. As a percent of earned premium revenue, the Company’s expense ratio remained flat at 34.2% for the TTM period ended March 31, 2009 and the TTM period ended June 30, 2009. The loss ratio decreased from 72.9% for the TTM period ended March 31, 2009 to 71.5% for the TTM period ended June 30, 2009, resulting in a combined ratio that decreased from 107.0% for the TTM period ended March 31, 2009 to 105.7% for the TTM period ended June 30, 2009. According to management, the decrease in loss ratio is due to a lower level of new claim activity across most lines of business. As shown in the following chart, since 2003, Penn Millers’ combined ratio has ranged from 103.7% to 107.3%.

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Chart 4
Penn Millers Combined Ratio Composition
For the Year Ended December 31, 2003 to December 31, 2008
and the TTM Periods Ended March 31, 2009 and June 30, 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 June 30, 2009. Net premiums earned slightly decreased from $30.8 million for the TTM period ended March 31, 2009 to $30.1 million for the TTM period ended June 30, 2009. Losses and loss adjustment expenses decreased from 77.9% of net premiums earned in the TTM period ended March 31, 2009 to 76.5% of net premiums in the TTM period ended June 30, 2009. Commercial underwriting loss totaled $4.0 million in the TTM period ended June 30, 2009.

Chart 5
Penn Millers Commercial Lines Net Premiums Earned and Loss Ratio
For the TTM Periods ended March 31, 2009 and June 30, 2009

Source: Penn Millers financial statements.

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     The Company’s agribusiness segment was unprofitable in the TTM period ended June 30, 2009. Net premiums earned decreased from $44.9 million in TTM period ended March 31, 2009 to $44.8 million in the TTM period ended June 30, 2009. Losses and loss adjustment expenses decreased from 71.0% of net premiums earned in the TTM period ended March 31, 2009 to 70.0% of net premiums in the TTM period ended June 30, 2009. Agribusiness underwriting loss totaled $428,000 in the TTM period ended June 30, 2009.

Chart 6
Penn Millers Agribusiness Net Premiums Earned and Loss Ratio
For the TTM Periods ended March 31, 2009 and June 30, 2009

Source: Penn Millers financial statements.

     The Company exited the personal lines business in 2004. Underwriting income related to the run-off of personal lines amounted to approximately $467,000 in the TTM period ended June 30, 2009. Assumed reinsurance was profitable in the TTM period ended June 30, 2009.

     Penn Millers ceded $19.3 million of gross written premiums to reinsurers for the TTM period ended June 30, 2009, an increase of approximately $2.5 million as compared to the prior TTM period.

     Table 3 provides operating performance segment data for the Company for the TTM periods ended March 31, 2009 and June 30, 2009.

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Table 3
Segment Operating Performance Data
For the TTM Periods ended March 31, 2009 and June 30, 2009
(Dollars in Thousands)

	For the twelve month period ended June 30, 2009
																		As a % of Total
	Agri			Commerical			Personal			Assumed		Total			Agri			Comm			Pers			Assum
Direct premiums written	$	57,779		$	32,938		$	0		$	246		90,963			63.5	%		36.2	%		0.0	%		0.3	%
Net premiums written		44,992			26,420			0			1,360		72,772			61.8	%		36.3	%		0.0	%		1.9	%
Net premiums earned		44,767			30,148			0			1,379		76,294			58.7	%		39.5	%		0.0	%		1.8	%
Losses and loss adjustment expenses		31,359			23,051			(467	)		621		54,564			57.5	%		42.2	%		-0.9	%		1.1	%
Other underwriting expenses		13,836			11,130			0			537		25,503			54.3	%		43.6	%		0.0	%		2.1	%
Total losses and expenses		45,195			34,181			(467	)		1,158		80,067			56.4	%		42.7	%		-0.6	%		1.4	%
Underwriting income (loss)		(428	)		(4,033	)		467			221		(3,773	)		11.3	%		106.9	%		-12.4	%		-5.9	%

	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	%

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 March 31, 2009 and June 30, 2009.

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Table 4
Agribusiness and Commercial Lines Segment Gross Premium Data
For the TTM Periods ended March 31, 2009 and June 30, 2009
(Dollars in Thousands)

	Agribusiness						Commerical Lines
	TTM 6/30/09			TTM 3/31/09			TTM 6/30/09			TTM 3/31/09
Direct premiums written:
Fire and Allied		18,763			19,235			4,363			4,837
Inland		2,187			2,238			282			275
Workers Compensation		8,127			8,290			6,856			7,373
General Liability		10,212			10,407			5,200			5,670
Product Liability		4,721			4,871			531			426
Surety		22			19			0			0
Burglary		169			168			26			61
Boiler and Machinery		887			898			822			838
Auto		12,690			13,181			4,771			5,041
Commercial Multi-Peril		—			—			10,057			11,118
Earthquake		—			—			31			22
Total		57,779			59,305			32,939			35,661
(% of Total Premiums)
Direct premiums written:
Fire and Allied		32.5	%		32.4	%		13.2	%		13.6	%
Inland		3.8	%		3.8	%		0.9	%		0.8	%
Workers Compensation		14.1	%		14.0	%		20.8	%		20.7	%
General Liability		17.7	%		17.5	%		15.8	%		15.9	%
Product Liability		8.2	%		8.2	%		1.6	%		1.2	%
Surety		0.0	%		0.0	%		0.0	%		0.0	%
Burglary		0.3	%		0.3	%		0.1	%		0.2	%
Boiler and Machinery		1.5	%		1.5	%		2.5	%		2.3	%
Auto		22.0	%		22.2	%		14.5	%		14.1	%
Commercial Multi-Peril		0.0	%		0.0	%		30.5	%		31.2	%
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, decreased by 2.5% to $18.8 million in the TTM period ended June 30, 2009. Direct commercial multi-peril direct premiums written, the largest component of the Company’s commercial lines segment, decreased by 9.5% to $10.1 million in the TTM period ended June 30, 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 June 30, 2009.

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Chart 7
Agribusiness and Commercial Lines Composition of Direct Premiums Written
For the TTM Period Ended June 30, 2009

Source: Penn Millers financial data.

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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 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.

Table 5
Historical P&C Insurance Performance

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
Underwriting 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
Underwriting 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	%
Policyholder 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

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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.

     National Underwriter reported in August, 2009 that insurance renewals remain soft, but some experts believe that signs indicate the market has begun to turn. Some companies are beginning to turn down high risks and are raising prices as they begin to seek underwriting profit. The ratio of policyholders’ surplus to United States gross domestic product, which measures the supply of insurance capacity relative to the demand for that capacity, suggests that the market is close to its bottom. One expert noted that he believes pricing increases will occur by the end of this year or the beginning of 2010.

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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 most recent TTM period. 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 $52.0 million remained below the Comparable Group’s total asset mean of $656.3 million and total equity mean of $203.5 million, respectively.

     The Company’s ratio of total equity to total assets was 22.8% at June 30, 2009 and remained below the Comparable Group mean ratio of total equity to total assets of 32.0%. The Company’s ratio of cash and investments to total assets was 64.3% at June 30, 2009 and remained below the Comparable Group mean ratio of 70.2%.

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Table 6
Comparable Financial Condition Data
Penn Millers and the Comparable Group
As of or for the most recent TTM Period

									Total Cash
							Total Policy		and					Tangible			Total Policy		Cash and
	Total Assets		Total Equity		Tangible		Reserves		Investments		Equity /			Equity /			Reserves /		Investments /
	($ 000)		($ 000)		Equity ( $000)		($ 000)		($ 000)		Assets			Assets			Equity		Assets
Penn Millers	$	228,385	$	51,972	$	51,972	$	118,025	$	146,878		22.8	%		22.8	%		2.27x		64.3	%
Public P&C Insurance Group Mean		12,858,005		3,718,911		3,113,906		6,817,464		8,342,222		31.3	%		28.6	%		2.28x		69.9	%
Public P&C Insurance Group Median		2,952,489		828,897		766,195		1,687,845		2,194,325		28.6	%		26.0	%		2.02x		71.3	%
Comparable Group Mean		656,297		203,549		191,587		379,975		456,182		32.0	%		30.1	%		1.94x		70.8	%
Comparable Group Median		673,276		189,064		165,293		377,520		468,155		31.3	%		27.4	%		1.77x		71.0	%
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.		765,742		345,853		345,853		369,849		543,677		45.2	%		45.2	%		1.07x		71.0	%
CRM Holdings, Ltd.		452,951		101,677		98,465		273,506		340,804		22.4	%		21.7	%		2.69x		75.2	%
Donegal Group Inc.		893,824		371,328		371,328		488,237		638,161		41.5	%		41.5	%		1.31x		71.4	%
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.		1,142,746		307,348		306,406		723,328		1,002,325		26.9	%		26.8	%		2.35x		87.7	%
First Mercury Financial Corporation		1,045,694		286,838		223,154		578,191		648,738		27.4	%		21.3	%		2.02x		62.0	%
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.		580,809		148,430		143,014		385,190		392,632		25.6	%		24.6	%		2.60x		67.6	%
National Interstate Corporation		969,243		243,547		243,547		584,812		572,988		25.1	%		25.1	%		2.40x		59.1	%
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		187,572		187,572		651,829		617,900		19.2	%		19.2	%		3.48x		63.2	%
SeaBright Insurance Holdings, Inc.		911,125		341,811		336,425		498,059		594,029		37.5	%		36.9	%		1.46x		65.2	%
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.

     Table 7 compares Penn Millers with the Comparable Group and Public P&C Insurance Group based on selected measures of profitability.

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Table 7
Comparable Operating Performance Data
Penn Millers and the Comparable Group
For the most recent TTM period

	Total Revenue		Net Income			GAAP			GAAP Loss			Combined
	($ 000)		($ 000)			Expense Ratio			Ratio			Ratio			ROAA			ROAE
Penn Millers	$	74,148		($5,339	)		34.2	%		71.5	%		105.7	%		-2.4	%		-9.6	%
Public P&C Insurance Group Mean		3,533,184		161,709			32.3	%		60.3	%		92.7	%		0.9	%		3.2	%
Public P&C Insurance Group Median		655,419		29,149			31.3	%		60.8	%		93.7	%		1.3	%		4.4	%
Comparable Group Mean		196,170		1,694			36.0	%		64.1	%		100.1	%		-0.4	%		-1.5	%
Comparable Group Median		166,200		7,201			35.0	%		63.3	%		97.7	%		1.4	%		3.9	%
Comparable Group
21st Century Holding Company		62,937		(6,484	)		47.5	%		63.8	%		111.3	%		-3.2	%		-8.1	%
Baldwin & Lyons, Inc.		176,997		10,154			35.3	%		54.0	%		89.3	%		1.3	%		3.0	%
CRM Holdings, Ltd.		134,533		(14,860	)		51.3	%		80.8	%		132.1	%		-3.5	%		-13.5	%
Donegal Group Inc.		378,831		17,222			31.2	%		72.7	%		103.9	%		1.9	%		4.7	%
Eastern Insurance Holdings, Inc.		129,820		(20,512	)		34.8	%		67.0	%		101.7	%		-5.4	%		-13.5	%
EMC Insurance Group Inc.		405,255		3,786			36.4	%		63.1	%		99.5	%		0.3	%		1.3	%
First Mercury Financial Corporation		251,615		22,708			30.6	%		63.4	%		94.0	%		2.4	%		8.5	%
Hallmark Financial Services, Inc.		267,758		12,208			29.5	%		62.0	%		91.5	%		2.3	%		6.5	%
Mercer Insurance Group, Inc.		155,403		9,050			37.0	%		60.9	%		97.9	%		1.6	%		6.5	%
National Interstate Corporation		295,525		21,474			23.8	%		56.6	%		80.4	%		2.2	%		9.8	%
National Security Group, Inc.		59,538		(4,505	)		42.0	%		76.5	%		118.4	%		-3.4	%		-11.5	%
NYMAGIC, INC.		107,837		(52,159	)		48.4	%		48.0	%		96.4	%		-7.1	%		-28.4	%
SeaBright Insurance Holdings, Inc.		275,243		20,284			30.3	%		67.2	%		97.5	%		2.4	%		6.3	%
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 June 30, 2009. Five companies in the Comparable Group also experienced operating losses during the most recent TTM period. Penn Millers’ profitability continues to be impacted by a high combined ratio, which was 105.7%. The Comparable Group reported mean and median combined ratios of 100.1% and 97.7%, respectively.

     The Company’s relatively high combined ratio was attributable primarily to its higher loss ratio. Penn Millers’ loss ratio measured 71.5% for the TTM period ended June 30, 2009, which was above the Comparable Group mean and median loss ratios of 64.1% and 63.3%. Among the Comparable Group members, CRM Holdings, Ltd., Donegal Group, Inc., and National Security Group, Inc. reported higher loss ratios at 80.8%, 72.7%, and 76.5%, respectively.

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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 the June 5, 2009 Appraisal Update. Nine companies experienced a price increase, and five companies experienced a price decline. The mean and median price changes among the Comparable Group were positive 6.6% and positive 4.2%, respectively. The market valuation ratios of the Comparable Group have remained relatively unchanged since June 5, 2009.

Table 8
Comparative Market Valuation Performance
As of June 5, 2009 and August 7, 2009

														8/7/2009			6/5/2009
	Change in													Price /			Price /			8/7/2009		6/5/2009		8/7/2009		6/5/2009		8/7/2009			6/5/2009
	Closing			8/7/2009		6/5/2009		8/7/2009			6/5/2009			Tangible			Tangible			Price / LTM		Price / LTM		Price / LTM		Price / LTM		Price / Total			Price / Total
	Price			Closing Price		Closing Price		Price / Book			Price / Book			Book			Book			EPS		EPS		Revenue		Revenue		Assets			Assets
Public P&C Insurance Group Mean	NA			NA		NA			96.9	%		93.2	%		107.1	%		103.6	%		21.30x		26.05x		1.45x		0.66x		29.7	%		27.6	%
Public P&C Insurance Group Median	NA			NA		NA			90.3	%		87.2	%		100.0	%		94.5	%		14.35x		10.44x		1.04x		0.95x		26.6	%		25.7	%
Comparable Group Mean		6.6	%	NA		NA			76.6	%		75.3	%		82.3	%		81.5	%		21.90x		27.78x		0.85x		0.82x		24.5	%		23.4	%
Comparable Group Median		4.2	%	NA		NA			75.7	%		70.4	%		83.1	%		73.4	%		12.85x		11.65x		0.76x		0.73x		23.2	%		23.1	%
Comparable Group
21st Century Holding Company		37.9	%		4.66		3.38		49.0	%		35.5	%		49.0	%		35.5	%	Neg		Neg			0.59x		0.43x		18.2	%		13.2	%
Baldwin & Lyons, Inc.		0.6	%		21.08		20.95		89.8	%		95.0	%		89.8	%		95.0	%		29.69x		130.94x		1.75x		1.85x		40.6	%		40.4	%
CRM Holdings, Ltd.		-6.8	%		1.10		1.18		18.1	%		19.3	%		18.7	%		19.9	%	Neg		Neg			0.14x		0.15x		4.1	%		4.3	%
Donegal Group Inc.		-0.9	%		15.75		15.89		108.1	%		110.2	%		108.1	%		110.4	%		23.16x		20.91x		1.06x		1.07x		44.9	%		45.6	%
Eastern Insurance Holdings, Inc.		4.9	%		9.90		9.44		65.0	%		62.5	%		75.8	%		72.8	%	Neg		Neg			0.69x		0.66x		23.1	%		22.2	%
EMC Insurance Group Inc.		6.2	%		23.10		21.75		99.5	%		100.7	%		99.8	%		101.0	%		74.52x	Neg			0.75x		0.71x		26.8	%		26.1	%
First Mercury Financial Corporation		-11.0	%		12.41		13.94		78.1	%		92.0	%		100.3	%		120.1	%		9.85x		6.51x		0.89x		1.09x		21.4	%		25.6	%
Hallmark Financial Services, Inc.		-4.2	%		6.69		6.98		73.3	%		76.5	%		115.2	%		120.2	%		11.53x		12.03x		0.52x		0.54x		25.3	%		26.4	%
Mercer Insurance Group, Inc.		21.7	%		18.50		15.20		78.5	%		66.8	%		81.5	%		69.4	%		12.85x		11.26x		0.75x		0.60x		20.1	%		16.7	%
National Interstate Corporation		11.1	%		18.55		16.69		147.4	%		143.6	%		147.4	%		143.6	%		16.71x		23.51x		1.22x		1.09x		37.1	%		31.5	%
National Security Group, Inc.		-1.2	%		8.50		8.60		59.8	%		60.5	%		59.8	%		60.5	%	Neg		Neg			0.35x		0.36x		16.8	%		17.0	%
NYMAGIC, INC.		25.0	%		18.42		14.74		84.7	%		74.0	%		84.7	%		74.0	%	Neg		Neg			1.47x		1.23x		16.3	%		13.0	%
SeaBright Insurance Holdings, Inc.		3.7	%		9.81		9.46		61.5	%		60.5	%		62.4	%		61.3	%		10.33x		9.01x		0.76x		0.75x		23.1	%		22.5	%
Unico American Corporation		4.8	%		8.05		7.68		59.2	%		56.5	%		59.2	%		56.5	%		8.47x		8.09x		1.00x		0.96x		24.8	%		23.6	%

Source: SNL Financial and CapitalIQ.

     Table 9 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 13.6% between June 5, 2009 and August 7, 2009. The SNL Insurance Index outperformed the broader markets indexes as reflected by the Standard & Poor’s 500, which increased 7.5% and the Russell 3000, which increased 7.7% between June 5, 2009 and August 7, 2009.

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PRO FORMA VALUATION APPRAISAL

Table 9
Selected Stock Market Index Performance
For the Period Ended August 7, 2009

					Change (%)
	Index Value		Index Value		Since
	8/7/2009		6/5/2009		6/5/2009		YTD			1 Year			3 Years
SNL Insurance Indexes
SNL Insurance		326.80		287.77		13.57		6.94			(22.75	)		(36.29	)
SNL Insurance Underwriter		322.33		283.17		13.83		7.81			(23.15	)		(37.47	)
SNL Insurance Broker		516.17		469.08		10.04		(5.07	)		(14.73	)		(6.95	)
S&P Insurance		157.77		138.28		14.09		6.53			(38.25	)		(53.64	)
SNL Sector Indexes
SNL Insurance Multiline		89.71		88.20		1.71		(2.59	)		(67.78	)		(82.44	)
SNL Insurance L&H		421.40		358.42		17.57		12.72			(29.80	)		(34.33	)
SNL Insurance P&C		340.66		299.74		13.65		4.14			(6.61	)		(2.07	)
SNL Reinsurance		443.80		379.44		16.96		9.84			(27.95	)		(48.80	)
SNL Managed Care		452.33		432.64		4.55		8.72			(19.77	)		(38.35	)
SNL Title Insurer		528.62		425.66		24.19		(6.83	)		18.73			(47.93	)
SNL Mortgage & Finl Guaranty		52.46		45.50		15.30		60.33			(14.97	)		(90.25	)
SNL Asset Size Indexes
SNL Insurance < $250M		349.06		323.83		7.79		17.49			(18.87	)		(39.80	)
SNL Insurance $250M-$500M		329.59		285.08		15.62		8.81			(23.54	)		(40.70	)
SNL Insurance $500M-$1B		329.19		317.42		3.71		1.47			(7.04	)		(20.53	)
SNL Insurance $1B-$2.5B		574.97		561.29		2.44		(4.91	)		(14.09	)		(12.07	)
SNL Insurance $2.5B-$10B		409.22		368.06		11.18		1.57			(8.01	)		(27.40	)
SNL Insurance > $10B		309.51		272.55		13.56		8.17			(25.90	)		(39.75	)
SNL Insurance > $1B		334.97		296.65		12.92		6.95			(23.87	)		(38.05	)
SNL Insurance < $1B		384.11		363.09		5.79		4.64			(11.06	)		(25.48	)
SNL Market Cap Indexes
SNL Micro Cap Insurance		180.33		176.53		2.15		8.64			(32.73	)		(48.07	)
SNL Small Cap Insurance		390.73		358.86		8.88		(6.63	)		(16.17	)		(33.17	)
SNL Mid Cap Insurance		213.53		199.72		6.92		(2.40	)		(27.14	)		(46.89	)
SNL Large Cap Insurance		305.06		233.30		30.75		25.21			(13.79	)		(28.92	)
Broad Market Indexes
S&P 500		1,010.48		940.09		7.49		11.87			(20.19	)		(20.79	)
SNL All Financial Institutions		409.26		347.62		17.73		14.27			(24.12	)		(48.61	)
Russell 1000		1,063.95		987.61		7.73		13.47			(20.04	)		(20.05	)
Russell 2000		1,422.56		1,318.08		7.93		14.61			(19.77	)		(17.77	)
Russell 3000		1,086.08		1,008.03		7.74		13.56			(20.01	)		(19.88	)

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PRO FORMA VALUATION APPRAISAL

VI. VALUATION ANALYSIS AND CONCLUSIONS

Valuation Review

     In the April 1, 2009 Appraisal and June 5, 2009 Appraisal Update, 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 June 5, 2009 Appraisal Update. The median P/B ratio of the Comparable Group increased from 70.4% at June 5, 2009 to 75.7% at August 7, 2009 and the mean P/B ratio of the Comparable Group increased from 75.3% at June 5, 2009 to 76.6% at August 7, 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 June 30, 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 50.5% at the minimum, 55.0% at the midpoint, and 59.0% at the maximum as shown in Table 10.

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PRO FORMA VALUATION APPRAISAL

Table 10
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
August 7, 2009 Appraisal
Financial Data as of June 30, 2009
Gross Proceeds	$	45,050		$	53,000		$	60,950
Price / Book Value		50.5	%		55.0	%		59.0	%
Price / Tangible Book Value		50.5	%		55.0	%		59.0	%
Price / Total Assets		17.0	%		19.4	%		21.8	%
Price / LTM EPS	neg			neg			neg
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

Source: Curtis Financial Group.

     Table 11 displays the market valuation ratios of the Comparable Group as of August 7, 2009 and pro forma ratios for the Company.

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PRO FORMA VALUATION APPRAISAL

Table 11
Comparative Market Valuation Analysis
As of August 7, 2009

			Total
			Market					Price /			Price /		Price /		Price /						Current
	Closing		Value		Price /			Tangible			LTM		LTM		Total			Equity /			Dividend
	Price		($000’s)		Book			Book			EPS		Revenue		Assets			Assets			Yield
Penn Millers
Pro Forma Valuation Minimum	$	10.00	$	45,050		50.5	%		50.5	%	Neg			0.60x		17.0	%		33.6	%		0.0	%
Pro Forma Valuation Midpoint		10.00		53,000		55.0	%		55.0	%	Neg			0.70x		19.4	%		35.3	%		0.0	%
Pro Forma Valuation Maximum		10.00		60,950		59.0	%		59.0	%	Neg			0.80x		21.8	%		36.9	%		0.0	%
Comparable Group Mean	NA		$	174,147		76.6	%		82.3	%		21.90x		0.85x		24.5	%		32.0	%		4.6	%
Comparable Group Median	NA			149,256		75.7	%		83.1	%		12.85x		0.76x		23.2	%		31.3	%		2.8	%
Comparable Group
21st Century Holding Company		4.66		37,345		49.0	%		49.0	%	Neg			0.59x		18.2	%		37.2	%		15.6	%
Baldwin & Lyons, Inc.		21.08		311,288		90.0	%		90.0	%		29.69x		1.76x		40.7	%		45.2	%		5.5	%
CRM Holdings, Ltd.		1.10		18,280		18.0	%		18.6	%	Neg			0.14x		4.0	%		22.4	%	NA
Donegal Group Inc.		15.75		401,238		108.1	%		108.1	%		23.16x		1.06x		44.9	%		41.5	%		2.5	%
Eastern Insurance Holdings, Inc.		9.90		89,946		65.5	%		76.4	%	Neg			0.69x		23.3	%		35.6	%		3.5	%
EMC Insurance Group Inc.		23.10		305,750		99.5	%		99.8	%		74.52x		0.75x		26.8	%		26.9	%		2.8	%
First Mercury Financial Corporation		12.41		223,907		78.1	%		100.3	%		9.85x		0.89x		21.4	%		27.4	%	NA
Hallmark Financial Services, Inc.		6.69		139,640		73.3	%		115.2	%		11.53x		0.52x		25.3	%		34.6	%	NA
Mercer Insurance Group, Inc.		18.50		116,521		78.5	%		81.5	%		12.85x		0.75x		20.1	%		25.6	%		2.4	%
National Interstate Corporation		18.55		359,109		147.4	%		147.4	%		16.71x		1.22x		37.1	%		25.1	%		1.3	%
National Security Group, Inc.		8.50		20,966		59.8	%		59.8	%	Neg			0.35x		16.8	%		28.0	%		6.6	%
NYMAGIC, INC.		18.42		158,873		84.7	%		84.7	%	Neg			1.47x		16.3	%		19.2	%		1.7	%
SeaBright Insurance Holdings, Inc.		9.81		210,058		61.5	%		62.4	%		10.33x		0.76x		23.1	%		37.5	%	NA
Unico American Corporation		8.05		45,137		59.2	%		59.2	%		8.47x		1.00x		24.8	%		41.8	%	NA

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 76.6% measuring 23.0% at the valuation maximum, 28.2% at the valuation midpoint, and 34.1% at the valuation minimum. The Company’s P/B valuation ratios reflect a discount to the Comparable Group’s 75.7% median of 22.1% at the valuation maximum, 27.3% at the valuation midpoint, and 33.3% 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 and Appraisal Update as of June 5, 2009.

     Based on the P/A ratio, the Company’s midpoint valuation of $53.0 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

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PRO FORMA VALUATION APPRAISAL

median P/A ratios of 24.5% and 23.2%, 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 August 7, 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 

August 7, 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)

	6/30/2009			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		134,783			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		134,783			128,298			121,914			126,178			113,603			106,877			105,571			98,389
Cash and cash equivalents (cash overdraft)		12,095			15,695			11,959			10,134			13,052			10,021			11,431			14,387
Premiums and fees receivable		26,783			28,753			31,080			32,489			30,465			26,910			29,256			24,056
Reinsurance receivables and recoverables		25,950			25,064			20,637			15,640			18,886			22,923			18,053			22,222
Deferred acquisition costs		9,862			10,522			10,601			11,014			10,381			9,646			10,352			9,243
Prepaid reinsurance premiums		3,769			4,170			4,342			4,234			4,119			3,645			3,731			3,209
Accrued investment income		1,565			1,391			1,431			1,499			1,439			1,302			1,225			1,236
PP&E, less accumulated depreciation		3,958			4,071			4,231			4,401			4,228			4,255			5,020			5,583
Income taxes receivable		738			1,294			1,508			1,056			—			894						—
Deferred income taxes		3,240			3,656			4,728			1,872			1,439			1,429			—			—
Other		5,642			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		228,385			228,415			220,524			219,613			207,768			197,897			192,020			185,455
LIABILITIES AND SURPLUS
Loss and loss adjustment expense reserves		118,025			116,775			108,065			95,956			89,405			83,849			73,287			69,463
Unearned premiums		41,218			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		14,211			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		2,959			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		176,413			177,254			169,769			158,212			147,238			140,128			132,114			126,180
Unassigned surplus		51,730			51,945			51,914			59,293			58,207			56,127			55,837			54,439
Accumulated other comprehensive income, net		242			(784	)		(1,159	)		2,108			2,323			1,642			4,069			4,836
Total surplus		51,972			51,161			50,755			61,401			60,530			57,769			59,906			59,275
Total liabilities and surplus		228,385			228,415			220,524			219,613			207,768			197,897			192,020			185,455
Performance and Capital Ratios
Return on average assets		-2.37	%		-2.66	%		-2.03	%		0.68	%		0.94	%		0.12	%		0.64	%		1.00	%
Return on average surplus		-9.61	%		-10.57	%		-7.95	%		2.38	%		3.23	%		0.41	%		2.03	%		3.12	%
Surplus to total assets		22.76	%		22.40	%		23.02	%		27.96	%		29.13	%		29.19	%		31.20	%		31.96	%

Notes:

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			TTM ended
	6/30/2009 (e)			3/31/2009 (e)			2008			2007			2006			2005			2004			2003
REVENUE
Premiums earned	$	76,294		$	77,327		$	78,737		$	70,970		$	64,645		$	64,723		$	63,090		$	56,065
Investment income, net of investment expense		5,381			5,298			5,335			5,324			4,677			4,444			4,278			4,058
Realized investment (losses) gains, net		(7,828	)		(7,627	)		(5,819	)		(702	)		349			424			936			833
Other income		301			282			411			508			345			277			301			371
Total revenue		74,148			75,280			78,664			76,100			70,016			69,868			68,605			61,327
LOSSES AND EXPENSES
Losses and loss adjustment expenses		54,564			56,343			57,390			49,783			43,766			40,242			42,910			35,822
Underwriting and administrative expenses (a)		26,056			26,414			26,562			24,163			23,296			29,221			24,359			22,911
Interest expense		253			213			184			125			222			195			51			56
Other expenses, net		379			376			365			184			314			266			82			101
Total losses and expenses		81,252			83,346			84,501			74,255			67,598			69,924			67,402			58,890
Income from continuing operations		(7,104	)		(8,066	)		(5,837	)		1,845			2,418			(56	)		1,203			2,437
Income taxes expense (benefit)		(1,765	)		(2,074	)		(1,378	)		396			506			(296	)		(4	)		587
Net income (loss) from continuing operations		(5,339	)		(5,992	)		(4,459	)		1,449			1,912			240			1,207			1,850
Discontinued Operations:
Pre-tax (loss) income on discontinued ops		(3,081	)		(3,104	)		(3,090	)		(489	)		292			385			240			340
Income tax (benefit) expense		641			632			(170	)		(126	)		124			151			63			143
(Loss) income on discontinued ops		(3,722	)		(3,736	)		(2,920	)		(363	)		168			234			177			197
Net income		(9,061	)		(9,728	)		(7,379	)		1,086			2,080			474			1,384			2,047
Operating Ratios
Loss ratio (b)		71.5	%		72.9	%		72.9	%		70.1	%		67.7	%		62.2	%		68.0	%		63.9	%
Expense ratio (c)		34.2	%		34.2	%		33.7	%		34.0	%		36.0	%		45.1	%		38.6	%		40.9	%
Combined ratio (d)		105.7	%		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.
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)

	6/30/2009				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		24,796		25,744		23,459		25,399		26,360		26,984		27,509		27,461
State and political subdivisions		31,654		33,163		31,775		32,957		30,321		31,134		26,538		27,047
Mortgage backed		26,423		26,745		25,374		25,305		20,636		20,724		11,618		11,488
Corporate		48,524		49,131		39,930		38,253		33,656		33,927		33,964		33,910
Total fixed securities		131,397		134,783		120,538		121,914		110,973		112,769		99,629		99,906
Equity		—		—		—		—		10,525		13,409		10,476		13,697
Total investment securities		131,397		134,783		120,538		121,914		121,498		126,178		110,105		113,603

Notes:

Source: 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 (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 (%)
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			75,655,000		47,291,000		16,561,000		12,805,000		13,295,000		44,197,000		0.58		2.86		0.22		0.17		0.86		58.90		28.70		87.60		1.58		7.72
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			133,091,000		95,860,000		15,098,000		14,224,000		28,545,000		97,125,000		0.73		6.35		0.11		0.11		1.76		74.00		24.40		98.40		-1.41		-13.05
American Financial Group, Inc.	AFG			25,842,100		20,189,900		2,678,800		2,396,900		3,237,200		17,949,000		0.69		7.54		0.10		0.09		1.02		46.20		35.80		82.00		0.87		8.35
American Physicians Capital, Inc.	ACAP			972,209		686,173		240,209		240,209		118,889		811,594		0.83		2.86		0.25		0.25		0.45		49.80		25.10		74.90		4.33		17.15
American Physicians Service Group, Inc.	AMPH			288,848		126,792		144,246		141,978		65,415		242,601		0.84		0.88		0.50		0.49		0.50		38.81		17.47		56.28		6.76		14.08
American Safety Insurance Holdings, Ltd.	ASI			1,086,901		714,595		223,150		213,454		174,549		733,395		0.67		3.20		0.21		0.20		0.82		59.40		39.70		99.10		0.01		-0.04
AMERISAFE, Inc.	AMSF			1,157,196		730,190		278,273		278,273		278,843		809,089		0.70		2.62		0.24		0.24		1.08		64.30		21.70		86.00		3.90		17.35
AmTrust Financial Services, Inc.	AFSI			3,183,530		1,825,488		476,853		374,131		494,965		1,410,833		0.44		3.83		0.15		0.12		1.42		56.30		23.40		79.70		2.72		20.95
Arch Capital Group Ltd.	ACGL			16,641,935		9,442,023		4,029,968		3,603,333		2,831,367		11,643,601		0.70		2.34		0.24		0.22		0.78		57.10		29.90		87.00		1.27		5.54
Argo Group International Holdings, Ltd.	AGII			6,919,700		4,056,900		1,459,200		1,208,000		1,362,100		4,103,800		0.59		2.78		0.21		0.17		0.99		60.97		35.05		96.02		0.80		3.76
Aspen Insurance Holdings Limited	AHL			8,022,100		4,304,700		2,972,500		2,964,300		1,788,700		6,002,600		0.75		1.45		0.37		0.37		0.65		55.40		30.60		86.00		1.30		3.49
AXIS Capital Holdings Limited	AXS			15,378,885		9,232,919		4,909,119		4,814,061		2,720,385		11,055,319		0.72		1.88		0.32		0.31		0.59		55.80		27.60		83.40		1.29		4.15
Baldwin & Lyons, Inc.	BWINB			765,742		369,849		345,853		345,853		175,515		543,677		0.71		1.07		0.45		0.45	NA			54.00		35.30		89.30		1.28		3.00
Berkshire Hathaway Inc.	BRK.A			275,646,000		71,596,000		118,837,000		84,915,000		27,753,000		136,838,000		0.50		0.60		0.43		0.31	NA			74.80		22.04		96.84		1.15		2.74
Chubb Corporation	CB			48,572,000		28,435,000		14,504,000		14,037,000		11,520,000		40,297,000		0.83		1.96		0.30		0.29		0.83		56.37		32.24		89.39		2.97		11.33
Cincinnati Financial Corporation	CINF			13,522,000		7,412,000		4,144,000		4,144,000		3,095,610		9,962,000		0.74		1.79		0.31		0.31		0.74		79.40		32.70		112.10		3.09		9.87
CNA Surety Corporation	SUR			1,610,950		685,832		828,677		689,892		427,424		1,203,988		0.75		0.83		0.51		0.43		0.55		29.30		53.30		82.60		6.82		14.03
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			893,824		488,237		371,328		367,428		353,129		638,161		0.71		1.31		0.42		0.41		0.97		72.70		31.20		103.90		1.94		4.74
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			1,142,746		723,328		307,348		306,406		386,275		1,002,325		0.88		2.35		0.27		0.27		1.29		63.10		36.40		99.50		0.34		1.26
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			8,079,345		4,476,916		2,475,597		2,279,724		1,753,852		5,733,830		0.71		1.81		0.31		0.28		0.75		60.40		30.40		90.80		1.88		6.29
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			2,635,728		1,422,448		829,116		829,116		207,605		1,024,356		0.39		1.72		0.31		0.31	NA			75.20		28.70		103.90		1.58		4.91
Everest Re Group, Ltd.	RE			17,326,935		10,240,069		5,545,415		5,545,415		3,729,431		14,207,305		0.82		1.85		0.32		0.32		0.72		60.20		28.60		88.80		0.77		2.55
Fairfax Financial Holdings Limited	FFH			27,020,900		16,838,000		5,613,200		5,297,700		4,496,000		19,489,900		0.72		3.00		0.21		0.20		0.89		70.14		28.36		98.50		3.82		21.20
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			1,045,694		578,191		286,838		223,154		207,640		648,738		0.62		2.02		0.27		0.21		0.79		63.40		30.60		94.00		2.38		8.47
Flagstone Reinsurance Holdings Limited	FSR			2,654,398		976,171		1,306,557		1,253,166		736,955		1,822,043		0.69		0.75		0.49		0.47		0.65		37.30		37.00		74.30		-5.92		-11.72
FPIC Insurance Group, Inc.	FPIC			977,332		639,534		267,438		256,605		161,794		710,581		0.73		2.39		0.27		0.26		0.57		59.10		25.10		84.20		2.84		10.70
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			1,312,716		245,454		614,546		614,546		158,315		1,135,430		0.86		0.40		0.47		0.47		0.37		56.30		40.40		96.70		-2.53		-5.28
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			7,747,700		4,396,400		2,221,100		2,051,100		2,509,900		4,819,800		0.62		1.98		0.29		0.26		1.25		65.10		33.70		98.80		0.72		3.08
Harleysville Group Inc.	HGIC			3,203,625		2,266,835		692,056		668,656		892,119		2,539,439		0.79		3.28		0.22		0.21		1.30		65.96		34.81		100.77		1.46		6.89
HCC Insurance Holdings, Inc.	HCC			8,876,261		4,691,848		2,809,465		1,961,673		2,011,984		5,469,185		0.62		1.67		0.32		0.22		0.77		60.50		25.00		85.50		3.60		11.57
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			5,828,171		3,795,925		561,839		514,443		658,285		4,231,133		0.73		6.76		0.10		0.09		2.02		73.90		25.30		99.20		0.42		5.00
Infinity Property and Casualty Corporation	IPCC			1,753,151		920,958		560,212		484,937		882,420		1,200,139		0.68		1.64		0.32		0.28		1.55		70.52		21.63		92.15		1.17		3.80
IPC Holdings, Ltd.	IPCR			2,612,668		569,119		2,014,218		2,014,218		407,681		2,308,496		0.88		0.28		0.77		0.77		0.24		15.70		33.50		49.20		5.53		7.34
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			9,711,499		6,335,786		2,352,425		2,010,751		1,930,520		7,317,021		0.75		2.69		0.24		0.21		0.80		59.13		38.16		97.29		-1.30		-5.54
Meadowbrook Insurance Group, Inc.	MIG			1,878,089		1,193,297		477,442		358,350		482,846		1,142,511		0.61		2.50		0.25		0.19		1.16		58.70		31.50		90.20		2.13		8.66
Mercer Insurance Group, Inc.	MIGP			580,809		385,190		148,430		143,014		145,390		392,632		0.68		2.60		0.26		0.25		1.02		60.90		37.00		97.90		1.59		6.53
Mercury General Corporation	MCY			4,141,871		1,932,709		1,642,546		1,529,467		2,701,993		3,172,892		0.77		1.18		0.40		0.37		1.63		67.20		29.30		96.50		-2.38		-6.02
Montpelier Re Holdings Ltd.	MRH			3,144,100		1,083,400		1,597,000		1,432,500		543,800		2,597,600		0.83		0.68		0.51		0.46		0.41		28.90		38.70		67.60		0.71		1.48

Exhibit VI-1 (Continued)
Penn Millers Mutual Holding Company
Financial Performance Data for Publicly Traded Property and Casualty Companies

								Tangible		Total		Cash and		Cash and		Policy		Total		Tangible		Net Prem				GAAP		GAAP
		Total Asset		Total Policy		Total Equity		Equity		Policy		Investments		Investments		Reserves /		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		969,243		584,812		243,547		243,547		290,380		572,988		0.59		2.40		0.25		0.25		1.29		56.60		23.80		80.40		2.15			9.80
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	NA			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		187,572		187,572		158,247		617,900		0.63		3.48		0.19		0.19		0.87		48.01		48.39		96.40		-7.14			-28.43
Odyssey Re Holdings Corp.	ORH		10,150,029		6,096,231		3,138,352		3,138,352		1,999,887		8,090,058		0.80		1.94		0.31		0.31		0.70		67.30		29.20		96.50		3.58			12.60
Old Republic International Corporation	ORI		13,718,600		8,869,000		3,753,100		3,753,100		3,225,000		9,277,200		0.68		2.36		0.27		0.27	NA			81.30		41.00		122.30		-1.84			-6.42
OneBeacon Insurance Group, Ltd.	OB		7,494,400		5,136,600		1,305,400		1,305,400		1,937,900		3,821,100		0.51		3.93		0.17		0.17		1.52		57.60		35.80		93.40		-2.74			-16.95
PartnerRe Ltd.	PRE		16,974,071		10,714,780		4,767,678		4,338,159		3,755,311		12,070,176		0.71		2.25		0.28		0.26		0.88		54.80		30.50		85.30		3.38			13.04
Platinum Underwriters Holdings, Ltd.	PTP		4,968,138		2,585,087		1,952,704		1,952,704		1,035,177		4,399,258		0.89		1.32		0.39		0.39		0.53		56.00		22.50		78.50		4.08			10.95
PMA Capital Corporation	PMACA		2,525,231		1,518,619		368,998		338,833		413,580		806,945		0.32		4.12		0.15		0.13		1.17		70.45		43.01		113.46		0.22			1.58
ProAssurance Corporation	PRA		4,598,409		2,752,983		1,527,671		1,398,036		454,568		3,784,506		0.82		1.80		0.33		0.30		0.32		58.80		22.70		81.50		4.15			12.89
Progressive Corporation	PGR		19,087,600		10,578,500		4,925,000		4,925,000		13,678,200		13,611,300		0.71		2.15		0.26		0.26		3.10		70.10		21.00		91.10		-0.23			-0.96
RenaissanceRe Holdings Ltd.	RNR		8,805,437		3,007,377		4,104,164		4,033,321		1,382,902		6,385,938		0.73		0.73		0.47		0.46		0.37		22.50		26.90		49.40		2.20			4.74
RLI Corp.	RLI		2,482,685		1,508,800		763,602		737,388		508,678		1,800,089		0.73		1.98		0.31		0.30		0.68		44.30		39.40		83.70		1.87			6.39
Safety Insurance Group, Inc.	SAFT		1,417,938		751,793		601,689		601,689		545,462		1,061,367		0.75		1.25		0.42		0.42		0.87		67.20		30.20		97.40		3.97			9.53
SeaBright Insurance Holdings, Inc.	SBX		911,125		498,059		341,811		336,425		254,270		594,029		0.65		1.46		0.38		0.37		0.83		67.20		30.30		97.50		2.39			6.27
Selective Insurance Group, Inc.	SIGI		5,030,875		3,545,857		946,375		916,738		1,461,312		3,631,093		0.72		3.75		0.19		0.18		1.54		68.00		31.60		99.60		-0.05			-0.27
Specialty Underwriters’ Alliance, Inc.	SUAI		462,500		297,700		140,700		130,000		143,695		266,400		0.58		2.12		0.30		0.28		1.06		62.80		43.65		106.45		0.49			1.62
State Auto Financial Corporation	STFC		2,501,600		1,383,100		780,300		778,300		1,144,300		2,115,000		0.85		1.77		0.31		0.31		1.52		77.80		33.40		111.20		-1.33			-4.16
Tower Group, Inc.	TWGP		2,576,254		1,356,288		847,299		571,929		573,548		1,581,576		0.61		1.60		0.33		0.22		1.31		52.80		32.70		85.50		4.37			17.25
Transatlantic Holdings, Inc.	TRH		14,084,507		9,731,716		3,549,291		3,549,291		4,032,304		11,298,456		0.80		2.74		0.25		0.25		1.27		67.50		26.80		94.30		0.60			2.59
Travelers Companies, Inc.	TRV		111,326,000		72,008,000		26,920,000		22,919,000		21,536,000		73,725,000		0.66		2.67		0.24		0.21		0.84		60.50		31.40		91.90		2.17			9.39
Unico American Corporation	UNAM		182,340		96,150		76,226		76,226		32,643		149,331		0.82		1.26		0.42		0.42	NA			61.00		26.00		87.00		2.88			7.27
United America Indemnity, Ltd.	INDM		2,505,401		1,550,201		763,362		754,090		322,050		1,678,754		0.67		2.03		0.30		0.30		0.44		59.90		39.70		99.60		-4.63			-16.81
United Fire & Casualty Company	UFCS		2,806,189		2,074,826		653,183		652,663		495,150		2,355,893		0.84		3.18		0.23		0.23		0.73		77.10		30.70		107.80		-1.24			-5.09
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		5,008,450		2,168,073		2,151,969		2,006,440		1,302,316		3,530,566		0.70		1.01		0.43		0.40		0.66		39.70		33.80		73.50		3.12			7.17
W.R. Berkley Corporation	WRB		16,656,495		11,099,715		3,295,699		3,187,707		4,020,940		12,855,598		0.77		3.37		0.20		0.19		1.23		62.60		32.00		94.60		0.55			2.88
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		15,551,000		8,704,200		3,851,400		3,789,100		3,668,900		9,535,200		0.61		2.26		0.25		0.24		0.99		59.24		33.49		92.73		-1.38			-6.23
Zenith National Insurance Corp.	ZNT		2,507,708		1,276,498		1,049,916		1,028,931		528,533		2,009,704		0.80		1.22		0.42		0.41		0.50		72.20		45.20		117.40		1.15			2.84
Group Aggregate
Overall P&C Insurance Group Mean			12,858,005		6,817,464		3,718,911		3,113,906		2,421,404		8,342,222		0.70		2.28		0.31		0.29		0.97		60.31		32.30		92.70		0.91			3.16
Overall P&C Insurance Group Median			2,952,489		1,687,845		828,897		766,195		544,631		2,194,325		0.71		2.02		0.29		0.26		0.86		60.80		31.30		93.70		1.29			4.45
P&C Group Mean > $1.2 Bil. Total Assets			18,193,881		9,639,118		5,252,511		4,392,122		3,402,992		11,791,322		0.70		2.42		0.31		0.28		0.94		59.58		32.08		91.67		1.01			3.24
P&C Group Median > $1.2 Bil. Total Assets			5,828,171		3,164,484		2,014,218		1,952,704		1,362,100		4,103,800		0.72		1.98		0.30		0.26		0.84		60.30		31.45		92.44		1.29			4.74
P&C Group Mean < $1.2 Bil. Total Assets			692,207		384,094		222,301		199,573		183,383		478,275		0.69		1.97		0.33		0.29		1.05		61.96		32.83		95.12		0.70			2.98
P&C Group Median < $1.2 Bil. Total Assets			765,742		365,086		223,150		143,014		161,794		392,632		0.71		2.02		0.28		0.25		0.97		62.80		30.90		96.05		1.28			3.49
P&C Group Mean > $500 m Total Revenue			14,404,930		7,637,688		4,163,807		3,486,688		2,705,912		9,344,584		0.70		2.36		0.31		0.28		0.95		59.64		32.01		91.73		1.12			3.95
P&C Group Mean > $500 m Total Revenue			3,403,633		2,266,835		1,049,916		1,028,931		736,955		2,539,439		0.71		2.03		0.28		0.26		0.86		60.30		31.20		92.73		1.46			4.91
P&C Group Mean < $500 m Total Revenue			310,721		164,541		110,306		90,225		113,727		211,960		0.71		1.68		0.35		0.31		1.21		65.68		34.65		100.33		(0.78	)		(3.19	)
P&C Group Median < $500 m Total Revenue			288,848		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 (%)		(%)
21st Century Holding Company	TCHC		4.66		8,014		37,345		48.99		48.99	Neg		Neg			0.59		18.25		15.55		(25.80	)
ACE Limited	ACE		50.54		337,508		17,057,669		103.00		133.21		6.81		14.48		1.24		22.55		2.04		(6.60	)
Affirmative Insurance Holdings, Inc.	AFFM		3.95		15,415		60,889		26.25		118.91		32.92	Neg			0.13		7.51		2.53		(40.78	)
Alleghany Corporation	Y		272.36		9,208		2,507,997		98.31		104.47		23.50	NA			2.87		41.71	NA			(11.80	)
Allied World Assurance Company Holdings, Ltd	AWH		42.56		51,258		2,181,536		87.55		101.33		4.69		10.06		1.82		24.53		1.77		9.55
Allstate Corporation	ALL		27.79		540,600		15,023,274		99.51		105.62		13.92	Neg			0.50		11.29		5.01		(40.48	)
American Financial Group, Inc.	AFG		25.17		116,500		2,932,305		109.46		122.34		6.04		10.19		0.67		11.35		2.19		(13.65	)
American Physicians Capital, Inc.	ACAP		32.74		11,275		369,144		153.68		153.68		8.42		9.09		2.42		37.97		0.83		(1.88	)
American Physicians Service Group, Inc.	AMPH		21.90		7,007		153,453		106.38		108.08		6.54		8.11		2.00		53.13		1.39		10.05
American Safety Insurance Holdings, Ltd.	ASI		15.92		10,524		167,534		75.08		78.49		530.67	Neg			0.87		15.41	NA			(2.69	)
AMERISAFE, Inc.	AMSF		17.10		19,242		329,040		118.24		118.24		5.86		7.99		1.13		28.43	NA			(5.05	)
AmTrust Financial Services, Inc.	AFSI		11.72		59,735		700,094		146.82		187.13		5.25		8.31		1.11		21.99		1.72		(17.58	)
Arch Capital Group Ltd.	ACGL		62.70		62,626		3,926,670		97.44		108.97		8.15		23.14		1.36		23.60	NA			(10.25	)
Argo Group International Holdings, Ltd.	AGII		35.62		30,795		1,096,907		75.17		90.80		10.87		21.20		0.74		15.85	NA			(2.17	)
Aspen Insurance Holdings Limited	AHL		24.15		85,646		2,068,354		69.58		69.78		13.45		20.82		1.09		25.78		2.47		(8.76	)
AXIS Capital Holdings Limited	AXS		28.72		149,861		4,304,008		87.67		89.40		12.64		30.88		1.59		27.99		2.75		(14.32	)
Baldwin & Lyons, Inc.	BWINB		21.08		14,733		310,572		89.80		89.80		13.43		29.69		1.75		40.56		5.50		1.79
Berkshire Hathaway Inc.	BRK.A		108,100.00		1,552		167,740,932		141.15		197.54		18.80		57.17		1.60		60.85	NA			(6.61	)
Chubb Corporation	CB		48.15		357,400		17,208,810		118.65		122.60		8.81		11.07		1.37		35.43		2.59		(1.59	)
Cincinnati Financial Corporation	CINF		24.63		162,556		4,003,762		96.62		96.62		20.25		9.51		1.01		29.61		5.37		(12.72	)
CNA Surety Corporation	SUR		16.81		44,412		746,566		90.09		108.21		6.95		6.98		1.57		46.34	NA			20.59
CRM Holdings, Ltd.	CRMH		1.10		16,775		18,453		18.15		18.74	Neg		Neg			0.14		4.07	NA			(69.44	)
Donegal Group Inc.	DGICA		15.75		25,475		401,238		108.06		109.20		21.44		23.16		1.06		44.89		2.50		(8.16	)
Eastern Insurance Holdings, Inc.	EIHI		9.90		9,009		89,189		64.99		75.75	Neg		Neg			0.69		23.14		3.49		(34.09	)
EMC Insurance Group Inc.	EMCI		23.10		13,236		305,750		99.48		99.79		13.28		74.52		0.75		26.76		2.81		(7.08	)
Employers Holdings, Inc.	EIG		14.88		46,506		692,005		150.45		170.28		7.19		8.00		1.59		18.38		1.45		(14.97	)
Endurance Specialty Holdings Ltd.	ENH		32.21		58,895		1,897,008		76.63		83.21		9.32		15.19		1.03		23.48		3.28		(2.28	)
Enstar Group Limited	ESGR		59.52		13,788		820,635		95.36		97.77		9.43		10.16		13.87		18.77	NA			(48.23	)
Erie Indemnity Company	ERIE		37.79		57,363		2,167,751		261.45		261.45		19.12		53.23		2.05		82.24		4.78		(19.25	)
Everest Re Group, Ltd.	RE		83.09		61,265		5,090,509		91.80		91.80		9.18		39.01		1.38		29.38		2.52		(0.41	)
Fairfax Financial Holdings Limited	FFH		335.75		17,564		5,897,150		105.06		111.32		4.22		5.90		0.80		21.82		1.60		33.10
First Acceptance Corporation	FAC		2.48		48,865		121,185		53.47		147.39	Neg		Neg			0.43		27.07	NA			(35.08	)
First Mercury Financial Corporation	FMR		12.41		18,042		223,907		78.06		100.34		7.99		9.85		0.89		21.41	NA			—
Flagstone Reinsurance Holdings Limited	FSR		11.10		85,163		945,309		72.35		75.43	Neg		Neg			1.70		35.61		1.64		(10.27	)
FPIC Insurance Group, Inc.	FPIC		34.40		7,533		259,135		96.90		100.99		7.10		9.56		1.45		26.51	NA			(33.85	)
GAINSCO, INC.	GAN		14.37		4,741		68,127		124.45		125.85		24.32	Neg			0.35		27.58	NA		NA
Greenlight Capital Re, Ltd.	GLRE		18.79		36,690		689,400		112.18		112.18	Neg		Neg			5.51		52.52	NA			(12.40	)
Hallmark Financial Services, Inc.	HALL		6.69		20,873		139,640		73.28		115.20		6.88		11.53		0.52		25.33	NA			(31.66	)
Hanover Insurance Group, Inc.	THG		40.01		51,400		2,056,514		92.59		100.26		15.43		33.34		0.76		26.54		1.05		(10.33	)
Harleysville Group Inc.	HGIC		31.31		28,116		880,319		127.20		131.65		10.26		19.09		0.92		27.48		3.46		(14.85	)
HCC Insurance Holdings, Inc.	HCC		26.30		112,520		2,959,276		105.33		150.85		9.14		9.81		1.29		33.34		1.87		4.91
Hilltop Holdings Inc.	HTH		12.45		56,495		703,363		88.90		93.33	Neg		Neg			6.12		67.32	NA			19.14
Horace Mann Educators Corporation	HMN		11.58		40,532		469,361		83.54		91.24		9.09		19.97		0.55		8.05		2.29		(21.49)

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 (%)		(%)
Infinity Property and Casualty Corporation	IPCC		41.54		13,828		574,415		102.54		118.45		7.66		28.26		0.65		32.76		0.94		(9.30	)
IPC Holdings, Ltd.	IPCR		30.60		55,991		1,713,323		85.06		85.06		8.24		14.43		4.00		65.58		2.94		(4.58	)
Kingsway Financial Services Inc.	KFS		3.48		55,091		191,717		51.74		62.23	Neg		Neg			0.14		6.19		4.37		(58.12	)
Markel Corporation	MKL		309.46		9,825		3,040,445		129.25		151.21		18.19	Neg			1.74		31.31	NA			(16.36	)
Meadowbrook Insurance Group, Inc.	MIG		7.48		57,517		430,225		90.11		120.06		8.36		11.33		0.77		22.91		1.24		5.35
Mercer Insurance Group, Inc.	MIGP		18.50		6,298		116,521		78.50		81.48		8.76		12.85		0.75		20.06		2.37	NA
Mercury General Corporation	MCY		36.52		55,320		2,020,281		123.00		132.09		19.04	Neg			0.80		48.78		5.04		(28.34	)
Montpelier Re Holdings Ltd.	MRH		15.90		86,400		1,373,760		86.02		95.90		11.62		99.38		2.61		43.69		1.79		(1.30	)
National Interstate Corporation	NATL		18.55		19,359		359,109		147.45		147.45		8.82		16.71		1.22		37.05		1.34		8.42
National Security Group, Inc.	NSEC		8.50		2,467		20,966		59.83		59.83	Neg		Neg			0.35		16.77		6.57		(41.58	)
Navigators Group, Inc.	NAVG		50.32		16,993		855,088		120.02		121.13		11.64		18.30		1.26		25.12	NA			2.26
NYMAGIC, INC.	NYM		18.42		8,625		158,874		84.70		84.70	Neg		Neg			1.47		16.26		1.68		(3.46	)
Odyssey Re Holdings Corp.	ORH		46.52		59,298		2,758,531		87.90		87.90		17.04		8.02		1.08		27.18		0.58		25.90
Old Republic International Corporation	ORI		11.51		235,563		2,711,327		72.24		72.24	Neg		Neg			0.76		19.76		5.70		6.57
OneBeacon Insurance Group, Ltd.	OB		12.96		95,100		1,232,496		94.42		94.42		7.78	Neg			0.82		16.45		8.05		(32.50	)
PartnerRe Ltd.	PRE		69.62		57,469		4,000,992		83.92		92.23		7.84		7.79		0.91		23.57		2.58		(1.96	)
Platinum Underwriters Holdings, Ltd.	PTP		34.24		51,594		1,766,579		90.47		90.47		8.60		9.33		1.41		35.56		0.89		(4.76	)
PMA Capital Corporation	PMACA		5.41		32,231		174,372		47.26		51.46		7.98		30.06		0.34		6.91	NA			(43.82	)
ProAssurance Corporation	PRA		51.82		33,186		1,719,699		112.57		123.01		8.29		9.63		3.07		37.40	NA			(3.95	)
Progressive Corporation	PGR		16.37		674,600		11,043,202		224.23		224.23		11.69	Neg			0.87		57.86	NA			(16.78	)
RenaissanceRe Holdings Ltd.	RNR		50.58		61,322		3,101,651		75.57		76.90		13.28		42.50		2.39		35.22		1.78		(1.60	)
RLI Corp.	RLI		51.64		21,721		1,121,672		146.89		152.11		10.81		23.80		2.25		45.18		1.70		(8.86	)
Safety Insurance Group, Inc.	SAFT		32.87		15,648		514,362		85.49		85.49		8.83		9.21		0.85		36.28		4.20		(24.37	)
SeaBright Insurance Holdings, Inc.	SBX		9.81		21,413		210,058		61.45		62.44		7.11		10.33		0.76		23.05	NA			(14.25	)
Selective Insurance Group, Inc.	SIGI		16.55		53,234		881,023		93.09		96.10		16.09	Neg			0.57		17.51		2.27		(29.81	)
Specialty Underwriters’ Alliance, Inc.	SUAI		6.53		15,917		103,938		73.87		79.95		13.89		50.23		0.68		22.47	NA			29.05
State Auto Financial Corporation	STFC		17.38		39,600		688,248		88.20		88.43	Neg		Neg			0.58		27.51		2.00		(42.03	)
Tower Group, Inc.	TWGP		23.81		40,606		966,837		114.11		169.05		10.14		8.88		1.33		37.53		0.71		17.87
Transatlantic Holdings, Inc.	TRH		44.67		66,803		2,984,090		84.08		84.08		8.10		35.45		0.74		21.19		1.90		(24.10	)
Travelers Companies, Inc.	TRV		47.46		579,800		27,517,308		102.22		120.06		9.83		11.60		1.15		24.72		2.65		6.92
Unico American Corporation	UNAM		8.05		5,607		45,137		59.21		59.21		8.43		8.47		1.00		24.75	NA		NA
United America Indemnity, Ltd.	INDM		6.47		50,863		329,085		43.11		43.64		32.20	Neg			0.96		13.14	NA			(53.32	)
United Fire & Casualty Company	UFCS		17.47		26,592		464,558		71.12		71.18	Neg		Neg			0.81		16.55		1.93		(39.15	)
Universal Insurance Holdings, Inc.	UVE		5.08		40,530		205,891		188.44		188.44		4.79		5.84		1.10		33.13		32.92		33.68
Validus Holdings, Ltd.	VR		24.40		78,942		1,926,187		89.51		96.00		9.39		14.35		1.40		38.46		3.63		5.72
W.R. Berkley Corporation	WRB		23.48		166,226		3,902,986		118.43		122.44		8.96		44.30		0.92		23.43		0.87		(0.04	)
Wesco Financial Corporation	WSC		309.00		7,120		2,200,021		103.89		119.57		23.70		30.26		2.59		80.92		0.53		(16.26	)
White Mountains Insurance Group, Ltd.	WTM		287.90		8,857		2,549,930		66.21		67.30	Neg		Neg			0.81		16.40		0.39		(35.07	)
Zenith National Insurance Corp.	ZNT		24.84		37,342		927,575		88.35		90.15		23.62		31.85		1.52		36.99		6.64		(31.89	)

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 (%)		(%)
Group Aggregate
Overall P&C Insurance Group Mean				4,350,300		96.87		107.15		19.44		21.30		1.45		29.72		3.42		(11.94	)
Overall P&C Insurance Group Median				880,671		90.29		100.02		9.25		14.35		1.04		26.53		2.29		(9.30	)
P&C Group Mean > $1.2 Bil. Total Assets				6,170,984		101.16		110.88		11.83		22.05		1.58		30.68		2.62		(12.11	)
P&C Group Median > $1.2 Bil. Total Assets				1,926,187		93.09		100.26		9.41		14.84		1.11		27.18		2.12		(10.27	)
P&C Group Mean < $1.2 Bil. Total Assets				199,138		87.10		98.65		40.59		19.20		1.14		27.56		6.11		(11.49	)
P&C Group Median < $1.2 Bil. Total Assets				158,874		78.50		99.79		8.59		10.33		0.87		25.33		2.53		(6.07	)
P&C Group Mean > $500 m Total Revenue				7,702,236		99.01		108.39		11.66		23.25		1.18		28.75		2.72		(10.07	)
P&C Group Mean > $500 m Total Revenue				2,344,766		92.84		96.36		10.14		18.69		1.05		27.33		2.27		(9.08	)
P&C Group Mean < $500 m Total Revenue				469,110		94.40		105.72		29.91		18.81		1.76		30.86		4.70		(14.29	)
P&C Group Median < $500 m Total Revenue				282,443		89.35		100.66		8.42		10.33		1.03		25.04		2.44		(12.40	)

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 gross proceeds 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 3.52%, which represents the estimated yield on the 10 year U.S. Treasury bond at the end of July 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 6/30/2009 (a)		(5,339	)		(5,339	)		(5,339	)
Pro forma income on net proceeds (b-4)		853			1,014			1,175
Pro forma ESOP adjustment (b-5)		(293	)		(344	)		(396	)
Pro forma net income		(4,778	)		(4,669	)		(4,560	)
Pro forma earnings per share (b-8)		(1.18	)		(0.98	)		(0.83	)
Total Revenue:
LTM ended 6/30/2009 (a)		74,148			74,148			74,148
Pro forma revenue on net proceeds, pre-tax		1,313			1,561			1,808
Pro forma total revenue		75,461			75,709			75,956
Total Equity:
Total equity at 6/30/2009		51,972			51,972			51,972
Net offering proceeds		41,804			49,635			57,466
Less: ESOP purchase		(4,505	)		(5,299	)		(6,094	)
Pro forma total equity (b-6)		89,272			96,308			103,343
Pro forma book value per share (b-7)		19.82			18.17			16.96
Tangible Equity:
Total tangible equity at 6/30/2009		51,972			51,972			51,972
Net offering proceeds		41,804			49,635			57,466
Less: ESOP purchase		(4,505	)		(5,299	)		(6,094	)
Pro forma tangible equity		89,272			96,308			103,343
Pro forma tangible book value per share (b-7)		19.82			18.17			16.96
Total Assets:
Total assets at 6/30/2009		228,385			228,385			228,385
Net offering proceeds		41,804			49,635			57,466
Less: ESOP purchase		(4,505	)		(5,299	)		(6,094	)
Pro forma total assets		265,685			272,721			279,756
Pro Forma Ratios:
Price / LTM EPS		-8.49	x		-10.22	x		-12.03	x
Price / LTM Revenue		0.60	x		0.70	x		0.80	x
Price / Book Value		50.46	%		55.03	%		58.98	%
Price / Tangible Book Value		50.46	%		55.03	%		58.98	%
Price / Total Assets		16.96	%		19.43	%		21.79	%
Total Equity / Assets		33.60	%		35.31	%		36.94	%
Tangible Equity / Assets		33.60	%		35.31	%		36.94	%

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-99.5

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 (877) 764-2743, 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. No stock order forms shall be submitted or accepted until such time that our registration statement is effective with the U.S. Securities and Exchange Commission.

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 (877) 764-2743, 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. No stock order forms shall be submitted or accepted until such time that our registration statement is effective with the U.S. Securities and Exchange Commission.

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 (877) 764-2743, 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. No stock order forms shall be submitted or accepted until such time that our registration statement is effective with the U.S. Securities and Exchange Commission.

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 1-877-764-2743
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

Penn Millers Holding Corporation
Conversion and Stock Offering

Policyholder Considerations

As a policyholder of Penn Millers Insurance Company we are asking you to vote for our plan of mutual to stock conversion. We are also offering you the first chance to buy stock in the company if you want to do so.

The following are points to consider as you decide how to vote on the mutual to stock conversion of Penn Millers Mutual Holding Company and whether to purchase stock in the offering (along with references to the page numbers in the prospectus that you should read for a more complete description).

• The conversion offering will provide enhanced protection to policyholders by:

o Increasing capital; and

o Enhancing claims paying ability (see pages 3-4, 7, 32, and 35-38 of the prospectus).

     WE URGE YOU TO VOTE FOR THE PLAN OF CONVERSION.

• You are not required to purchase stock. But if you elect to do so, as a policyholder, you have the first right to purchase stock in the offering. This will permit you to own a share of the existing equity of the company (described throughout the prospectus).

• The stock is being offered at a pro forma price-to-book value of between 50% and 62% (see pages 43 and 116-119 of the prospectus).

We have filed a Registration Statement on Form S-1 (including a prospectus) with the SEC (Commission File No. 333-156936) for the offering to which this document relates. Before you invest, you should read the prospectus in the registration statement and other documents

we have filed with the SEC for more complete information about Penn Millers and this offering. If you have not already received a copy of these documents, you may get them for free by visiting EDGAR on the SEC web site at http://www.sec.gov. Alternatively, Penn Millers will arrange to send you a copy of the prospectus if you request it by calling the company toll-free at 1-800-233-8347.

Penn Millers Holding Corporation
Conversion and Stock Offering

Investment Considerations
for Potential Investors

The following are investment considerations for investors in our stock offering (along with references to the page numbers in our prospectus that you should read for a more complete description).

• The stock is being offered at a pro forma price-to-book value of between 50% and 62% (see pages 43 and 116-119 of the prospectus)

• We have a significant market position in the agribusiness insurance market, operating in 33 states. This is a specialized niche market with a limited number of competitors where we believe we have expertise and strong growth opportunities (see pages 2-5, 85-86, 89 and 102 of the prospectus).

• We also operate in the general commercial insurance market in eight states. We have developed a new product (PennEdge) that we introduced in 2009 to attract middle market commercial business. We believe this can be a differentiating product for us in a competitive market (see pages 2-5, 18, 84-85 and 87-88 of the prospectus).

• The property and casualty insurance industry is cyclical, with periods of rising and falling premiums known as hard and soft markets. The industry has been experiencing soft market conditions. Although no assurance can be given, we believe that a hard market with rising premiums will return in 2010 and 2011. We have historically performed well in periods of significant premium increases (see pages 3-4, 16-17 and 84 of the prospectus).

We have filed a Registration Statement on Form S-1 (including a prospectus) with the SEC (Commission File No. 333-156936) for the offering to which this document relates. Before you invest, you

should read the prospectus in the registration statement and other documents we have filed with the SEC for more complete information about Penn Millers and this offering. If you have not already received a copy of these documents, you may get them for free by visiting EDGAR on the SEC web site at http://www.sec.gov. Alternatively, Penn Millers will arrange to send you a copy of the prospectus if you request it by calling the company toll-free at 1-800-233-8347.

EX-99.6

Exhibit 99.6

ESCROW AGREEMENT

          THIS AGREEMENT (the “Agreement”) is entered into this ___ day of August, 2009, by and between PENN MILLERS HOLDING CORPORATION, a Pennsylvania corporation (“Company”), and CHRISTIANA BANK & TRUST COMPANY, a Delaware banking corporation (the “Escrow Agent”).

          WITNESSETH:

          WHEREAS, the Company proposes to offer and sell to eligible subscribers and other purchasers up to 6,772,221 shares of common stock (the “Shares”) of the Company at a price of $10.00 per Share, in a subscription offering and a community offering (collectively, the “Offering”);

          WHEREAS, the prospectus with respect to the Offering provides that all collected funds received with subscriptions for the Shares (the “Proceeds”) will be placed in an account (the “Escrow Account”) with the Escrow Agent until such times as the Escrow Agent is required to release the Proceeds to the Company or return the Proceeds, without interest, to the subscribers; and

          WHEREAS, the Escrow Agent has consented to act as escrow agent subject to the conditions and requirements set forth herein.

          NOW, THEREFORE, in consideration of the premises and the covenants and agreements set forth herein, and other good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, the parties hereto, intending to be legally bound, hereby agree as follows:

     1. Appointment of Escrow Agent

          The Company hereby appoints the Escrow Agent to act, and the Escrow Agent hereby agrees to assume and perform the duties of, the Escrow Agent as set forth in this agreement. The Escrow Agent agrees to deposit all of the Proceeds into the Escrow Account and to hold and release the funds in the Escrow Account in accordance with the terms hereof.

     2. Responsibilities and Obligations of Escrow Agent

               a. The Escrow Agent shall have no responsibility, obligation, duty (including fiduciary duty) or liability hereunder, except those expressly provided for in this Agreement and in any modification or amendment hereof to which the Escrow Agent has consented in writing.

               b. The Escrow Agent shall have no responsibility, obligation, duty (including fiduciary duty), or liability to any person with respect to any action taken, suffered, or omitted to be taken by it in good faith under this Agreement and shall in no event be liable hereunder except for its gross negligence or willful misconduct.

1

               c. No reference in this Agreement to any other agreement, including, but not limited to the stock order form, shall be construed or deemed to enlarge the responsibilities, obligations, duties, or liabilities of the Escrow Agent set forth in this Agreement, and the Escrow Agent is not charged with the knowledge of any other agreement.

               d. The Escrow Agent shall be fully protected in relying upon the truth of any statement contained in any notice, and without inquiry as to any other facts, that appears to be genuine and to be signed by the proper person or persons, and is entitled to believe all signatures are genuine and that any person signing any document who claims to be duly authorized, is in fact so authorized.

               e. The Escrow Agent shall be entitled to act on any instruction given to it in writing by the Company.

               f. The Escrow Agent shall be entitled to act in accordance with any court order or other final determinations by any governmental authority with jurisdiction of the matter.

               g. The Escrow Agent shall have no responsibility to make payments out of the Escrow Account in an amount in excess of the amount of good funds deposited in the Escrow Account, together with any earnings thereon, at the time any payment is to be made.

               h. In the event that the Escrow Agent should at any time be confronted with inconsistent claims or demands from the Company and any other person, the Escrow Agent shall have the right to file an interpleader action, or another appropriate action, suit or proceeding, in any court of competent jurisdiction within the State of Delaware, to which jurisdiction the Company hereby agrees to submit, and request that such court determine the rights of the Company and all other persons with respect to this Agreement, and upon doing so, the Escrow Agent automatically shall be released from any obligations or liabilities as a consequence of any such claims or demands.

               i. The Escrow Agent may execute any of its powers or responsibilities hereunder and exercise any rights hereunder either directly or by or through its agents or attorneys. Nothing in this Agreement shall be deemed to impose upon the Escrow Agent any duty to qualify to do business or to act as a fiduciary or otherwise in any jurisdiction. The Escrow Agent shall not be responsible for and shall not be under a duty to examine or pass upon the validity, binding effect, execution or sufficiency of this Agreement or of any agreement amending or supplementing this or any other agreement.

               j. The Escrow Agent shall have no responsibility for any federal, state, local or international tax reporting related to taxable income or gains on the Escrow Account earned or accrued during the existence of the Escrow Account.

     3. Compensation of Escrow Agent

          The Escrow Agent shall be entitled to compensation for its services rendered as agreed to in Schedule A attached hereto, which such fees, including legal expenses, shall be payable upon execution of this Agreement. The Escrow Agent is expressly prohibited from withdrawing from

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or charging against the Escrow Account any amounts due to the Escrow Agent under this Agreement.

     4. Indemnification of Escrow Agent

          The Escrow Agent shall be indemnified and held harmless by the Company against any claim or charge made against it by reason of any action or failure to act in connection with any of the transactions contemplated by this Agreement, and against any loss the Escrow Agent may sustain in carrying out the terms of this Agreement, including, without limitation, the Escrow Agent’s unpaid fees and expenses (including reasonable legal fees and expenses incurred in connection with any matter related to the performance of the Escrow Agent’s duties hereunder), but excluding any loss the Escrow Agent may sustain as a result of its gross negligence or willful misconduct.

     5. Termination and Resignation

               a. This Agreement shall terminate when the Escrow Agent or its successor or assign receives written notification of termination including final disposition instructions signed by the Company and upon the actual final disposition of the monies held in escrow hereunder.

               b. The Escrow Agent may resign at any time and be discharged from its duties as Escrow Agent hereunder by giving the Company not fewer than thirty (30) days prior notice thereof. As soon as practicable after its resignation, the Escrow Agent shall turn over to a successor escrow agent appointed by the Company all monies held hereunder upon presentation of the document appointing a new escrow agent and its acceptance thereof. If no new escrow agent is so appointed within the thirty (30) day period following such notice of resignation, the Escrow Agent may designate its successor by written notice to the Company so long as such successor is a bank or trust company, and provided that such successor must agree in writing to be bound by this Agreement. Upon the designation of such successor escrow agent, the resigning Escrow Agent shall be released from any and all liabilities arising thereafter provided that such successor escrow agent agrees to be bound by the terms and provisions of this Agreement. If no successor escrow agent is appointed within thirty (30) days, the Escrow Agent reserves the right to forward this matter, and all monies in the Escrow Account, at the expense of the Company, to a court of competent jurisdiction and give written notice of the same to the Company.

     6. Receipt and Deposit of Funds Into Escrow Account

          The Company shall direct all subscribers to make their checks and/or money orders payable to the Escrow Agent, and all funds from subscribers of the Offering shall be sent directly to the Stock Information Center established by the Company and managed by Griffin Financial Group, LLC (“Griffin Financial”), together with a dated stock order form for the Shares containing the name of the subscriber, the subscriber’s address and the number of shares desired to be purchased. The Company shall cause Griffin Financial to forward to the Escrow Agent all checks and/or money orders received at the Stock Information Center and accepted by the Company, together with a report showing the name of the subscriber, the time and date that the stock order form was received, and the amount of subscription funds received from each

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subscriber (the “Subscriptions”). Such checks and/or money orders will be sent by Federal Express by 12:00 noon of the next business day after receipt by the Stock Information Center. Once a check and/or money order received by the Escrow Agent has cleared and funds are available for withdrawal, the Escrow Agent shall deposit the funds received from such check or money order in the Escrow Account. No funds will be deposited into the Escrow Account until after the check or money order has cleared and such funds are available for withdrawal. So long as the Escrow Agent is holding the Proceeds or any other funds or cash in the Escrow Account, it will invest such monies in accordance with the selection made by the Company from the Christiana Money Market Election Form.

     7. Release of Funds From Escrow Account

          The Escrow Agent shall hold all funds received from the Offering pursuant to the terms of this Agreement until the Escrow Agent has received a written certificate of an officer of the Company stating that (i) subscriptions and orders for the minimum number of Shares required to be sold in the Offering have been accepted and payment received for such Shares and (ii) all conditions to the Offering have been satisfied (collectively, the “Escrow Conditions”). Upon receipt of the written certificate described in the immediately preceding sentence, the Escrow Agent shall promptly disburse the Escrow Funds to the Company by a wire transfer of immediately available funds. In the event that the Escrow Conditions are not satisfied on or before                     , 2009, the Escrow Agent shall, upon receipt of written notice from the Company, issue a refund check to each subscriber in the amount of the collected funds received from the subscriber and issue a check to the Company in the amount of any interest or other income earned on the Proceeds.

     8. Collection Procedure

          The Escrow Agent is hereby authorized to deposit each check received for collection and, upon collection of the proceeds of each check, deposit the collected proceeds into the Escrow Account. Any check returned unpaid to the Escrow Agent shall be returned to the Stock Information Center by the Escrow Agent, and any fees, charges or expenses relating to such returned check shall be paid by the Company. If the Company rejects any subscription for which the Escrow Agent has already collected funds, the Escrow Agent shall, upon receipt of written notice from the Company, promptly issue a refund check to the rejected subscriber in the amount of the collected funds. If the Company rejects any subscription for which the Escrow Agent has not yet collected funds but has submitted the subscriber’s check for collection, the Escrow Agent, upon receipt of written notice from the Company, shall promptly issue a check in the amount of the subscriber’s check to the rejected subscriber after the Escrow Agent has cleared such funds. If the Escrow Agent has not yet submitted a rejected subscriber’s check for collection, the Escrow Agent shall promptly remit the subscriber’s check directly to the subscriber.

     9. Notices

          All notices and other communications provided for herein shall be in writing, shall be hand delivered or delivered by facsimile or by any express courier, shall be deemed given when

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received, and shall be addressed to the Company and the Escrow Agent at their respective addresses as follows:

a. To the Company:	Penn Millers Holding Corporation 72 North Franklin Street P.O. Box P Wilkes-Barre, PA 18773-0016202 Attention: Michael O. Banks Fax: (570) 200-1340
b. To the Escrow Agent:	Christiana Bank & Trust Company 300 Delaware Avenue, Suite 714 Wilmington, DE 19801 Attention: Corporate Trust Administration

     10. Parties Bound

          This Agreement shall inure to the benefit of and be binding upon the successors and assigns of the Company and the Escrow Agent.

     11. Amendment

          This Agreement cannot be modified, amended, supplemented, or changed, nor can any provision hereof be waived, except by a written instruction executed by the Company and the Escrow Agent.

     12. Assignment

          Neither party may assign its rights and/or obligations under this Agreement without the written consent of the Company and the Escrow Agent, which consent shall not be unreasonably withheld.

     13. Applicable Law

          This Agreement shall be governed by and construed and enforced in accordance with the laws of the State of Delaware.

     14. Severability

          If at any time subsequent to the date hereof, any provision of this Agreement shall be held by any court of competent jurisdiction to be illegal, void, or unenforceable, such provision shall have no effect upon and shall not impair the enforceability of any other provision of this Agreement.

     15. Counterparts/Entire Agreement

          This Agreement may be executed in any number of counterparts and by facsimile, each of which will be deemed an original, but all of which together will constitute one and the same

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instrument. This Agreement (including its Schedules) constitutes the entire agreement among the parties hereto with respect to the subject matter hereof and supersedes all prior agreements and understandings, oral and written, among the parties hereto with respect to the subject matter hereof.

     16. No Interest of Third Parties

          Nothing in this Agreement shall be construed to give any person or entity other than the parties hereto any legal or equitable right, remedy, interest or claim under or in respect of this Agreement or any funds escrowed hereunder.

          IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be duly executed the day and year first above written.

PENN MILLERS HOLDING CORPORATION
By:
	Name:
	Title:
CHRISTIANA BANK & TRUST COMPANY, as Escrow Agent
By:
	Name:
	Title:

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SCHEDULE A

Escrow Fees

Administration and Set-Up	$	15,000
Attorney’s Fees	$	2,000

Schedule “A”, page 1

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 US AT (877) 764-2743, 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. The Holding Company, Penn Millers Mutual and Penn Millers Insurance Company are collectively referred to as “Penn Millers”. 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) 822-8111.

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 an “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 approved the Plan on August 19, 2009. The Department’s approval of the Plan is not a recommendation or endorsement of the Plan or the related stock offering.

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’ success. Penn Millers Mutual believes that completion of the Conversion will

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provide it with strategic flexibility. With increased capital Penn Millers 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 group of companies 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, we want 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 co-managed by Griffin Financial and Sterne Agee & Leach, Inc. 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 the converted 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.

          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 upon 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

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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 .

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

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• 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.

     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

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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.

Recent Tax 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.

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.

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

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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 1,000,000 shares of common stock, $0.01 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).

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          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

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IF YOU HAVE ANY QUESTIONS, PLEASE CONTACT US AT (877) 764-2743, BETWEEN THE HOURS OF 10:00 A.M. AND 4:00 P.M.

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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.

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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 (888) 764-2743, 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 (877) 764-2743.

Sincerely,

Douglas A. Gaudet
President and Chief Executive Officer

Please vote today by returning all proxy cards received.

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