10-K

UNITED STATES SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

Form 10-K

þ	ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
	For the fiscal year ended December 31, 2010
OR
o	TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
	For the transition period from          to

Commission File Number 001-34496

PENN MILLERS HOLDING CORPORATION

(Exact name of registrant as specified in its charter)

Pennsylvania
(State or other jurisdiction of
incorporation or organization) 80-0482459
(I.R.S. Employer
Identification No.)

72 North Franklin Street, Wilkes-Barre, PA 18773

(Address of principal executive offices) (Zip Code)

Registrant’s telephone number, including area code: (800) 233-8347

Securities Registered Pursuant to Section 12(b) of the Act:

Title of Each Class	Name of Each Exchange of Which Registered
Common Stock, par value $0.01 per share	NASDAQ Global Market

Securities Registered Pursuant to Section 12(g) of the Act: None

Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.  Yes o     No þ

Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act.  Yes o     No þ

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes þ     No o

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes o     No o

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of the registrant’s knowledge, in definitive proxy or other information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. 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 o	Smaller reporting company þ
	(Do not check if a smaller reporting company)

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).

Yes o     No þ

At June 30, 2010 the aggregate market value of the voting and non-voting common stock held by non-affiliates of the registrant (based on the closing sales price on that date) was $56,618,964.

At February 28, 2011, 5,080,252 shares of common stock, $0.01 par value, of Penn Millers Holding Corporation were outstanding.

DOCUMENTS INCORPORATED BY REFERENCE

Portions of the registrant’s Definitive Proxy Statement for the 2011 Annual Meeting of Shareholders to be held on May 11, 2011 are incorporated by reference into Part III of this Report.

PENN MILLERS HOLDING CORPORATION AND SUBSIDIARY

FORM 10-K

For the Year Ended December 31, 2010

Table of Contents

		Page
		Number
PART I
Item 1.	Business		1
Item 1A.	Risk Factors		26
Item 1B.	Unresolved Staff Comments		35
Item 2.	Properties		35
Item 3.	Legal Proceedings		35
Item 4.	Removed and Reserved		36
PART II
Item 5.	Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities		36
Item 6.	Selected Financial Data		37
Item 7.	Management’s Discussion and Analysis of Financial Condition and Results of Operations		38
Item 7A.	Quantitative and Qualitative Disclosures about Market Risk		73
Item 8.	Financial Statements and Supplementary Data		75
Item 9.	Changes in and Disagreements with Accountants on Accounting and Financial Disclosure		76
Item 9A.	Controls and Procedures		76
Item 9B.	Other Information		76
PART III
Item 10.	Directors, Executive Officers and Corporate Governance		76
Item 11.	Executive Compensation		77
Item 12.	Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters		77
Item 13.	Certain Relationships and Related Transactions, and Director Independence		77
Item 14.	Principal Accounting Fees and Services		77
PART IV
Item 15.	Exhibits, Financial Statement Schedules		77
SIGNATURES			80

PART I

Item 1.   Business

Background

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 Holding Company (Penn Millers Mutual), a Pennsylvania mutual holding company, and established a “mid-tier” stock holding company, PMHC Corp. (PMHC), to hold all of the outstanding shares of Penn Millers Insurance Company. 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.

On April 22, 2009, Penn Millers Mutual adopted a plan of conversion to convert Penn Millers Mutual from the mutual to the stock form of organization, which was approved by its eligible members on October 15, 2009. Upon its conversion, Penn Millers Mutual was renamed PMMHC Corp. and PMHC was subsequently merged with and into PMMHC Corp., thereby terminating PMHC’s existence and making PMMHC Corp. the stock holding company for Penn Millers Insurance Company and a wholly owned subsidiary of Penn Millers Holding Corporation. The historical consolidated financial statements of Penn Millers Mutual prior to the conversion became the consolidated financial statements of Penn Millers Holding Corporation upon completion of the conversion. Neither PMMHC Corp. nor Penn Millers Holding Corporation engages in any business operations. After the conversion, the outstanding capital stock of Penn Millers Insurance Company and proceeds derived from the public stock offering are the primary assets of PMMHC Corp. and Penn Millers Holding Corporation, respectively.

The references herein to “the Company,” “we,” “us,” “our” and “Penn Millers” refer to Penn Millers Holding Corporation and its direct and indirect subsidiaries.

On October 16, 2009, the Company completed the sale of 5,444,022 shares of Penn Millers Holding Corporation common stock, par value $0.01 per share, at an initial offering price of $10.00 per share in a concurrently-held subscription and community offering.

Prior to the completion of the offering, in accordance with the provisions of the Plan of Conversion of PMMHC Corp., our Employee Stock Ownership Plan (ESOP) purchased 539,999 of the shares in the offering, which was funded by a loan from Penn Millers Holding Corporation.

Our common stock is traded on the Nasdaq Global Market under the symbol “PMIC.”

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 providing information technology consulting for small businesses. Penn Software was a wholly owned subsidiary of PMHC. Both Eastern Insurance Group and Penn Software were accounted for as discontinued operations. In late 2010 we formally dissolved both Eastern Insurance Group and Penn Software.

Penn Millers Insurance Company 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 22, 2010.

Business Segments

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 and middle market commercial businesses. We are licensed in 40 states, but we currently target the sales of our insurance products to 33 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.

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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 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 or weather insurance. We market our agribusiness lines through independent producers and our employees. We have been writing agribusiness policies for over 123 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.

We market our agribusiness insurance product to 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 annual premium size of our agribusiness accounts range from approximately $800 to $2.2 million with an average annual premium of approximately $45,000. Our product is sold through approximately 250 specialty agribusiness producers and also on a direct basis. The primary competitors in our agribusiness marketplace are Nationwide Agribusiness, Continental Western Insurance Company, and Westfield Insurance Company. We seek to compete with other agribusiness insurance companies primarily on service rather than on price.

Our commercial business segment provides insurance coverage to small and middle market commercial businesses. We target select low to medium hazard businesses such as retailers, including beverage stores, floor covering stores, florists, grocery stores, office equipment and supplies stores, dry cleaners, printers, 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 manufacturing and wholesale businesses.

Our commercial business insurance segment product consists of a business owner’s policy called Solutions 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 under our Solutions offering include retail, service, hospitality, wholesalers, and printers. These lines within our Solutions product are sold through approximately 260 independent agents in Pennsylvania, New Jersey, Connecticut, Massachusetts, Tennessee, Virginia, New York, and Maryland.

In early 2009, we introduced an insurance product called PennEdge that allows us to write customized coverages on mid-size commercial accounts. PennEdge provides property and liability coverage to accounts that currently do not meet the eligibility requirements for our traditional business owner’s Solutions policy or our agribusiness products. PennEdge is specifically tailored to unique business and industry segments, including wholesalers, manufacturers, hospitality, printers, commercial laundries and dry cleaners. In 2010, we added hunting and fishing lodges, clubs, guides and outfitters, and metal recyclers to our target classes of insureds. We choose our targeted segments based on the experience of our underwriting staff, the market opportunities available to our existing producers and where we believe there are opportunities to reach producers that have not traditionally carried our products. Currently, the PennEdge product is available in twenty-four states and is marketed through both our agribusiness and commercial business producers. For segment reporting purposes, and consistent with how we manage our business, the results of PennEdge are included in our commercial business segment.

The premium size of our commercial business accounts (Solutions and PennEdge) range from approximately $250 to approximately $193,000, with an average annual premium of approximately $6,000. A large number of regional and national insurance companies compete for our small and mid-size business customers. We seek to compete with other commercial lines insurance companies primarily on service rather than on price.

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. The discontinued lines of business include personal lines business that we used to write on a voluntary direct basis, but discontinued in 2003; and business we assumed from various reinsurance and pooling agreements in which we voluntarily participated until 1993.

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The following table provides net premiums earned by business segment (dollars in thousands):

	Net Premiums Earned by Business Segment
	For the Years Ended December 31,
	2010		% of Total			2009		% of Total
Business Segment:
Agribusiness	$	45,226		66.4	%	$	45,289		60.1	%
Commercial Business		22,405		32.9	%		28,961		38.4	%
Other		466		0.7	%		1,108		1.5	%
Total	$	68,097		100.0	%	$	75,358		100.0	%

Financial information about our three business segments is contained in this report in Item 7 — “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and Note 15 to the consolidated financial statements “Segment Information” under Part II Item 8 — “Financial Statements and Supplementary Data.”

Geographic Distribution

We primarily market our products through a network of over 500 independent producers in 33 states. The following table shows the geographic distribution of our direct written premiums on a consolidated basis and for the agribusiness and commercial business segments for the year ended December 31, 2010:

Consolidated				Agribusiness Segment				Commercial Business Segment
State	% of Total			State	% of Total			State	% of Total
Pennsylvania		10.0	%	Illinois		11.1	%	New Jersey		31.5	%
New Jersey		9.5	%	Georgia		8.3	%	Pennsylvania		24.8	%
Illinois		7.8	%	North Carolina		7.8	%	Virginia		14.2	%
Georgia		6.0	%	Arkansas		7.2	%	Connecticut		10.4	%
North Carolina		5.6	%	Louisiana		6.8	%	Massachusetts		8.3	%
Arkansas		5.1	%	Missouri		6.3	%	Tennessee		6.2	%
Virginia		5.0	%	Kansas		5.8	%	All others(1)		4.6	%
Louisiana		4.8	%	Ohio		5.0	%	Total		100.0	%
Missouri		4.5	%	Minnesota		4.5	%
Kansas		4.1	%	Pennsylvania		3.8	%
Ohio		3.5	%	South Carolina		3.5	%
All others(1)		34.1	%	Mississippi		3.5	%
Total		100.0	%	All others(1)		26.4	%
				Total		100.0	%

(1) No other single state accounted for 3.5% or more of the individual total of direct written premiums.

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Our Products

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 and middle market commercial businesses. The following table provides net premiums earned by product line for the periods indicated (dollars in thousands):

	Net Premiums Earned by Product Line
	For the Years Ended December 31,
	2010		% of Total			2009		% of Total
Product Line:
Property — Agribusiness	$	16,273		23.9	%	$	16,546		22.0	%
Liability — Agribusiness		9,192		13.5	%		9,196		12.2	%
Property and liability — Commercial Business(1)		13,542		19.9	%		17,731		23.5	%
Workers’ compensation — Agribusiness and Commercial Business		11,933		17.5	%		13,473		17.9	%
Commercial auto — Agribusiness and Commercial Business		15,741		23.1	%		16,378		21.7	%
Other(2)		1,416		2.1	%		2,034		2.7	%
Total	$	68,097		100.0	%	$	75,358		100.0	%

(1)	Commercial business’ property and liability line of business is comprised primarily of a commercial multi-peril line of business where property and liability coverages under our business owner’s policy are rated together.
(2)	Other includes our non-core lines of business as described below, and the net premiums earned in our other segment of $466 and $1,108, for the years ended December 31, 2010 and, 2009, respectively.

Property coverage protects businesses against the loss or loss of use, including its income-producing ability, of business property.

Liability insurance includes commercial general liability, products liability, and professional liability covering our insureds’ operations.

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, so we rarely write stand-alone workers’ compensation policies.

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 generally marketed only in conjunction with other supporting lines.

Other lines of business include umbrella liability, boiler and machinery, and employment practices liability coverages offered by both our agribusiness and commercial business segments.

Our Business Strategies

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 a decline in premium revenue. We believe we are positioning the Company to take advantage of profitable growth opportunities that we anticipate will occur in the future. Our ability to successfully implement these strategies is subject to several risks, which are set forth in Item 1A — “Risk Factors.”

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Niche Strategies

•  Our principal business strategy in both our agribusiness and commercial business segments is to identify niche segments where competition is limited and we can add value through personal service to our producers and insureds. Our plans are to continue to develop and market products for niche businesses and industries:

•  Agribusiness — Grow our established niche

We are a well established niche player in the agribusiness insurance market with over 123 years in this specialty segment. We have a significant market position in the agribusiness insurance market, writing business 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.

•  We have taken actions in 2010 in order to allow us to write our agribusiness product in Texas and South Dakota beginning in mid-2011. Because of its large footprint and significant agricultural resources, we believe that Texas especially provides us business opportunities that our agribusiness segment can capitalize on.

•  We have transferred staff from other areas of the organization into our agribusiness marketing and underwriting operations, and we have positioned seasoned production underwriters in the Northwest and Midwest to generate new business. These production underwriters have extensive experience in agribusiness-specific property and casualty insurance and are extremely familiar with the areas we look to compete in, and the business and economic issues that matter to prospective customers in these areas.

•  We have also organized our agribusiness staffing into territory teams made up of raters and underwriters with geographic knowledge and business development experience. We believe that this enhanced customer-centric focus will provide us with opportunities to expand our business (both agribusiness and PennEdge) in states where we are under-represented.

•  Commercial Business — Move from being a generalist insurer of small business to being a specialist focused on select industries for small and middle market customers.

•  In early 2009, we introduced our new PennEdge product. PennEdge provides property and liability coverage to accounts that require a broader range of coverages than our traditional business owners or agribusiness products offer.

•  PennEdge will allow us to develop additional niche markets out of our existing commercial business target markets. We will focus our marketing and underwriting efforts on those industry segments that we understand, and in which we can differentiate ourselves from other insurance companies.

•  PennEdge is specifically tailored to unique business and industry segments, including wholesalers, manufacturing, hospitality, commercial laundries and dry cleaners, and printers. In 2010, we added hunting and fishing lodges, clubs, guides and outfitters and metal recyclers to our target classes of insureds. We choose our targeted segments based on the experience of our underwriting staff, the market opportunities available to our existing producers and where we believe there are opportunities to reach producers who have not traditionally carried our products.

•  As of December 31, 2010 the PennEdge product was approved in twenty-four states, up from eight states at the end of 2009. Our plans are to sell the PennEdge product through existing commercial business agents and to capitalize on our already strong and established relationships with agents and brokers who sell our agribusiness program.

•  Strategic Alliances — We have differentiated our coverage offerings by entering into strategic alliances in both our agribusiness and commercial business segments to offer equipment breakdown, employment practices liability, and miscellaneous professional liability coverage; and we have recently entered into a strategic alliance to begin offering environmental impairment liability (pollution) 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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Growth Strategies

The property and casualty insurance industry is cyclical, with periods of rising and falling premiums known as hard and soft markets, respectively. The industry has been experiencing soft market conditions. We believe that 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.

The primary purpose of our October 2009 public offering was to increase our capital to permit us to take advantage of growth opportunities when, and if, a hard market cycle returns. The capital derived from our public offering will provide us the leverage necessary to support our future growth in net premiums written, expand our producer network and successfully market and underwrite our agribusiness and PennEdge products. We have historically performed well in periods of significant premium increases. 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 148% (a compound annual growth rate of 25%), which exceeded the commercial lines industry growth of 63% (a compound annual growth rate of 13%) during that period.

Because we cannot determine with any certainty when and if we will see a hard market return in the near future, we have developed our growth strategies to increase direct premiums written and reduce our costs without relying on improved market conditions and economic upswings. We are licensed in 40 states and currently write business in 33 states. We believe that we have the right mix of underwriting capacity, diverse product offerings, and management experience to increase penetration in states we now serve and to enlarge our footprint overall.

•  We believe that there are significant cross-selling opportunities available to us by having products like PennEdge and our agribusiness lines. The brokers and agents, to whom we look to promote our products, serve a diverse group of potential insureds: middle market customers in the businesses we target, as well as larger businesses in the agricultural sector. We also believe that our capital adequacy will allow us access to larger, more sophisticated classes of insureds.

•  We will add new classes of business in areas we feel we can differentiate ourselves, capitalize on our established name and leverage our existing processes. For example, in 2010 we added coverage specifically tailored to hunting and fishing lodges, clubs, guides and outfitters, and metal recyclers.

•  We will develop strategic relationships with third parties that have a particular expertise in order to meet the specialized needs of our insureds. This will allow us to grow premium volume, without incurring excessive costs, by offering unique, value-added products to potential or existing insureds. In 2010, we entered into an agreement with a national workers’ compensation consulting firm that specializes in providing tools, training and support to employers in order to manage and ultimately reduce workers’ compensation costs. We believe that offering this program to our insureds will not only differentiate us from our competitors who do not offer a similar service, but will also ultimately lower our workers’ compensation loss ratios over time.

•  Penn Millers Insurance Company’s policies are sold through select independent insurance producers. These producers significantly influence the insured’s decision to choose our products over those of our competitors. 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.

•  In order to increase our market penetration, we have begun to more actively market our agribusiness and PennEdge offerings by using in-house out-bound telemarketing to reach out directly to potential commercial business insureds, targeted agribusiness customers, and brokers and agents who do not currently distribute our products.

•  In 2010, we changed the roles of our marketing representatives and realigned our marketing and underwriting teams by creating a “production underwriter” position that combines the business-building expertise of a marketing representative with the underwriting acumen of a traditional underwriter. We believe that combining these disciplines improves efficiencies and gives us increased opportunities to quote accounts directly, with very specific underwriting and pricing guidelines and authority. The home office approves all

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accounts beyond the individual production underwriter’s defined authority, and reviews all accounts written that are within the production underwriter’s authority.

•  We implemented new procedures in 2010 to more effectively use financial responsibility and credit information (credit) as part of the rating and risk selection process when underwriting our commercial business offerings. We believe that credit-based scoring is an effective predictor of risk with respect to the issuance of our policies, and have begun to place more reliance on this data in the underwriting and pricing of new and renewal policies.

•  Although we do not have any current plans to grow our business by acquisition, we will consider any relevant opportunities that complement our strategies.

Profit Improvement Strategies

•  Our Solutions business owner’s policy is offered in eight states and provides enhanced coverages intended for small business insureds. While the Solutions offering has served a business need, it has not performed consistently well because its design serves a relatively small population of potential customers, and its use beyond preferred small business insureds has resulted in less-than profitable loss ratios. Our aim is to have a smaller but more profitable Solutions book of business. In order to improve the future results in our Solutions product, we have implemented the following strategies that we feel will improve our loss ratios in this product in the future:

•  In late 2008, we made the strategic decision to withdraw from certain unprofitable classes of business and terminate relationships with several underperforming producers. We believe that refocusing the Solutions offering toward select agents and preferred insureds will improve the profitability of the Solutions policy over time. This decision has resulted in significantly lower premium volume in our commercial business segment, but we believe that our development of PennEdge and our cost containment efforts in Solutions will improve our underwriting profit.

•  We have begun to take aggressive pricing actions on renewing policies that have not been profitable to us, or present high-risk exposures. These pricing actions are intended to either generate an immediate underwriting profit, or to remove the business from our existing portfolio.

•  As previously mentioned, we will place more reliance on credit-based scoring data in the underwriting and pricing of new and renewal Solutions policies. We think that this data can provide valuable insight as to the amount of risk we are ultimately taking on, thereby allowing us to price the risk more appropriately.

•  Reduce our ratio of expenses to net premiums earned

•  We are a relatively small insurance company competing on an almost national scale. We believe that the support functions we have in place — information technology, accounting and finance, human resources, and management expertise — can support significantly more production without increasing much of our costs. We believe that we will only need to add staff that directly relate to increased revenues — the underwriting, marketing, claims and loss control functions. We believe that we can achieve improved economies of scale and lower underwriting expense ratios through our growth strategies.

•  We continually try to identify opportunities for process efficiencies and expense reductions throughout the organization. In February 2011, we reduced staff by nearly 10% and identified other expense reductions that, all together, we expect will total approximately $1 million annually.

Balance Sheet Management

•  Investments

•  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

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reflect the maturities of our liabilities, and (vi) maintaining a quality portfolio which will help attain the highest possible rating from A.M. Best.

•  We invest in high-quality corporate, government and municipal bonds with relatively short durations so as to position us to take advantage of changing market conditions and to match our estimated timing of claims payments.

•  For more information regarding our investments, see Item 7 — “Management’s Discussion and Analysis of Financial Condition and Results of Operations — Critical Accounting Estimates — Investments.”

•  Loss reserves — Estimating the ultimate liability for losses and LAE is an inherently uncertain process and reflects our best estimate at the balance sheet date. Our objective is to establish loss reserves that will ultimately prove to be adequate. For more information regarding our losses and loss adjustment expense reserves, refer to Item 7 — “Management’s Discussion and Analysis of Financial Condition and Results of Operations — Critical Accounting Estimates — Losses and Loss Adjustment Expense Reserves.”

•  Strong reinsurers

•  Our reinsurance providers, the majority of whom are longstanding partners who understand our business, are all carefully selected with the help of our reinsurance brokers. We monitor the solvency of reinsurers through regular review of their financial statements and, if available, their A.M. Best ratings. All of our significant reinsurance partners that A.M. Best follows have at least an “A-” A.M. Best rating. According to A.M. Best, companies with a rating of “A-” or better “have an excellent ability to meet their ongoing obligations to policyholders.” In certain instances, we may partner with a reinsurer who is not rated by A.M. Best. However, in such instances the reinsurer must be well capitalized, and have a strong credit rating from Standard and Poor’s or Moody’s rating agencies. We will generally only make exceptions for property related reinsurance in which there is typically little or no delay in the reporting of losses by insureds and the settlement of the claims. We have experienced no significant difficulties collecting amounts due from our reinsurers.

•  For additional information concerning reinsurance, see Item 1 — “Business — Reinsurance” and Note 11 of the notes to the Company’s consolidated financial statements in Part II Item 8 — “Financial Statements and Supplementary Data.”

Alignment of the Interests of Our Employees with Those of Our Shareholders

During 2010, we took actions to more closely align the interests of our management and employees with those of our shareholders by instituting incentive based compensation systems (both cash and stock) for our executive officers and employees, and stock ownership requirements for our directors and officers. These compensation programs and stock ownership requirements are set forth in greater detail in our 2010 proxy statement.

Marketing and Distribution

We market our agricultural insurance product through approximately 250 producers in 33 states, and by our employees. Our Solutions business owner’s commercial insurance offering is sold through approximately 260 producers in 8 states. Our PennEdge offering is currently marketed in twenty-four states through our commercial business and agribusiness producers. We primarily market our products through this select group of more than 500 independent producers. All of these producers represent multiple insurance companies and are established businesses in the communities in which they operate. We consider our relationships with these producers to be positive. We also have two employees that are engaged in the direct marketing of our agribusiness insurance products, which accounted for approximately $3.1 million in direct premiums written for that segment in 2010.

One producer, Arthur J. Gallagher Risk Management Services, which places business with us through nine of their offices, accounted for $11.2 million, or approximately 13%, of our direct premiums written in 2010. Only one other producer accounted for more than 5% of our 2010 direct premiums written.

For the year ended December 31, 2010, our top 10 producers accounted for approximately 43% of our direct premiums written.

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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 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.

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

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

Our marketing efforts are further supported by our claims philosophy, which is designed to provide prompt and efficient service and claims processing, and aims to result 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 production underwriters are compensated based upon the profitability of the business that they sell and underwrite. Accordingly, they 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 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 ten loss control representatives is supported by a network of third party loss control providers to cover more remote areas. Our loss control representatives assess the risk of loss 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 risk management deficiencies are not corrected, we will decline the business or move to cancel, or elect not to 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

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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 service to our policyholders. Our experienced, knowledgeable claims staff provides timely, good faith investigation and settlement of meritorious claims for appropriate amounts, maintenance of adequate case reserves for claims, and control of external claims adjustment expenses.

Loss costs are controlled through a variety of programs and external partnerships unique to each line of business. For instance, we engage in medical fee reviews, service provider networks, nurse case management and other specialized services to significantly reduce the cost of workers’ compensation claims. We choose to partner with law firms, independent adjusters and other experts based on their particular skills and effectiveness in providing high levels of service and the most favorable outcomes to the Company and our policyholders.

In 2011, we will contract independent services to assist with reducing our legal expenses and to promote greater efficiency in complex litigation. We also plan to install a new web-based product to assist our auto and liability claims teams with real time information on state laws specific to the particular claims they are managing in order to improve outcomes on third party claims.

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.

To address our disaster recovery preparedness, we have contracted with a third-party provider that specializes in disaster recovery and business continuity systems support in order to allow us to continue to provide high quality service to our insureds and producers should a prolonged disruption to our operations occur.

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.

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We use a variety of reinsurance formats to manage our exposure to large losses and protect our capital:

•  Treaty reinsurance automatically reinsures an agreed-upon portion of a class of business without the need for approval by the reinsurer of the individual risks covered. We primarily use excess of loss reinsurance, where we limit our liability to all, or a particular portion, of the amount in excess of a predetermined deductible or retention.

•  Facultative reinsurance reinsures each policy or portion of a risk individually with the prior approval of the reinsurer. We use facultative reinsurance to provide additional capacity to write higher limits of insurance coverage or to reduce retentions on an individual risk basis.

•  Catastrophe reinsurance indemnifies us for an amount of loss resulting from a catastrophic event in excess of a predetermined retention.

•  The Terrorism Risk Insurance Act of 2002, which was modified and extended through December 31, 2014 by the Terrorism Risk Insurance Program Reauthorization Act of 2007 (collectively referred to as “TRIA”), provides additional protection to us. For further information regarding TRIA, see “— Regulation — Other Regulation” and Item 1A — “Risk Factors” of this Form 10-K.

Regardless of type, reinsurance does not legally discharge us from primary liability for the full amount due under the reinsured policies. However, the assuming reinsurer is obligated to reimburse us 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. We monitor our exposure to catastrophic losses and attempt to manage such exposure. Catastrophic events include windstorms, hail, tornadoes, hurricanes, earthquakes, riots, blizzards, terrorist activities and freezing temperatures. Sophisticated computer modeling techniques are used to evaluate underwriting risks in hurricane-prone and earthquake-prone areas in which we do business. We then use reinsurance to manage our aggregate exposures to catastrophes.

A primary factor in the selection of reinsurers from whom we purchase reinsurance is their financial strength. Our reinsurance arrangements are generally renegotiated annually. For the year ended December 31, 2010, we ceded to reinsurers $19.1 million of written premiums compared to $15.6 million of written premiums for the year ended December 31, 2009. At December 31, 2010 and 2009, we had reinsurance amounts due to us of $24.9 million and $19.5 million, respectively.

Property Excess of Loss Reinsurance

For 2010, 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. In 2011, we increased our retention on any one risk to $1.0 million.

The chart below illustrates the reinsurance coverage under our 2010 and 2011 excess of loss treaties for individual property risks:

	2010						2011
				Ceded Under						Ceded Under
				Reinsurance						Reinsurance
Property Losses Incurred	Retained by Company			Treaties			Retained by Company			Treaties
Up to $500,000		100	%		0	%		100	%		0	%
$500,000 in excess of $500,000		60	%		40	%		100	%		0	%
$4 million in excess of $1 million		0	%		100	%		0	%		100	%
$15 million in excess of $5 million		0	%		100	%		0	%		100	%

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Losses are subject to the following reinstatements and annual aggregate limits:

•  For 2010, the $500,000 in excess of $500,000 layer provided unlimited reinstatements; no annual aggregate limit;

•  For 2010 and 2011, the $4 million in excess of $1 million layer provides three reinstatements;

•  For 2010 and 2011, the $5 million in excess of $5 million layer provides two reinstatements; and

•  For 2010 and 2011, the $10 million in excess of $10 million layer provides one reinstatement.

Property Automatic Facultative Treaty

For both 2010 and 2011, individual property risks with insured values in excess of $20 million up to $50 million, as identified in the policy, are reinsured under an automatic facultative treaty. Outside the treaty, any exposure over $50 million is approved by the reinsurer on an exception basis.

Property Catastrophe Excess of Loss Reinsurance

Catastrophic reinsurance protects us from significant aggregate loss exposure. For 2010 and 2011, we retain the first $3 million on any one event and reinsure 95% of losses per event in excess of $3 million, up to a maximum of $45 million total for one event.

The treaty provides one reinstatement per layer resulting in $79.8 million in an annual aggregate limit after our 5% co-participation.

Casualty Excess of Loss Reinsurance

For 2010, 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. In 2011, we increased our retention on any one risk to $1.0 million. The chart below illustrates the reinsurance coverage under our 2010 and 2011 excess of loss treaties for individual casualty risks:

	2010						2011
				Ceded Under						Ceded Under
				Reinsurance						Reinsurance
Casualty Losses Incurred	Retained by Company			Treaties			Retained by Company			Treaties
Up to $500,000		100	%		0	%		100	%		0	%
$500,000 in excess of $500,000		60	%		40	%		100	%		0	%
$4 million in excess of $1 million		0	%		100	%		0	%		100	%
$5 million in excess of $5 million		0	%		100	%		0	%		100	%

For 2010 and 2011, our maximum coverage arising from workers’ compensation claims for any one life was $10 million.

Losses are subject to the following reinstatements and annual aggregate limits:

•  For 2010, the $500,000 in excess of $500,000 layer provided unlimited reinstatements, no annual aggregate limit;

•  For 2010 and 2011, the $4 million in excess of $1 million layer provides two reinstatements; and

•  For 2010 and 2011, the $5 million in excess of $5 million layer provides one reinstatement.

Umbrella Treaty Reinsurance

For 2010, 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

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facultative reinsurance. In 2011, umbrella reinsurance remained the same except that the facultative coverage for exposures over $5 million up to $10 million was replaced by a 100% quota share treaty. Although the level of reinsurance coverage in this layer is essentially unchanged, using a quota share treaty will enable us to offer customers more competitive rates for umbrella coverage and allow us to underwrite more efficiently.

Accident Year Aggregate Excess of Loss Reinsurance (Stop Loss Reinsurance)

We maintain a whole account, accident year aggregate excess of loss reinsurance (stop loss) contract for accident years 2008 and 2009. The purpose of the contract was to provide additional protection for our capital above our underlying reinsurance program. This stop loss reinsurance contract provides coverage in the event that the total company’s accident year loss and LAE ratios for 2008 or 2009 exceed 72%.

The minimum ceded premiums paid under the stop loss approximated $2.4 million for 2008 and 2009. If losses are ceded, additional ceded premiums are accrued at 20% of the ceded losses. The contract includes a funds withheld provision whereby we withhold a significant amount of the ceded premiums minus ceded losses, thereby providing us protection from credit risk. The contract provides for an interest accrual for the reinsurer on the balance of the funds that we have withheld.

The contract also contains a profit sharing provision such that if the net profit to the reinsurers for the two years combined exceeds approximately $1.6 million, any profit above that amount will be returned to us provided that on or before January 1, 2015 we agree to a commutation whereby the reinsurers are released from any and all past, current and future liabilities under the stop loss contract.

In 2008, an unusually high level of property losses, both catastrophe and non-catastrophe related, resulted in losses and additional reinsurance premiums being ceded to the reinsurers under the stop loss contract. For 2008, premiums ceded under the stop loss contract totaled $3.3 million; ceded losses totaled $4.3 million; and interest accrued on the funds withheld account totaled $86,000, for a net benefit under the stop loss contract to Penn Millers of approximately $884,000 at December 31, 2008.

In 2009, we experienced a reduction in the estimated ultimate losses for the 2008 accident year; and losses ceded to the stop loss contract were reduced. In addition, the estimated accident year 2009 ultimate loss experience was below the stop loss contract’s trigger loss ratio of 72%; and therefore, no losses were ceded for 2009. When the $2.4 million of ceded premiums for 2009 were added to the improved estimated experience for the 2008 accident year, the profit to the reinsurers for 2008 and 2009 combined was estimated to be $2.0 million. Accordingly, we are carrying a profit sharing refund due us of approximately $0.4 million at December 31, 2009 and at December 31, 2010, which represents the excess over the $1.6 million profit sharing provision in the contract.

To receive this estimated profit sharing, we will have to release the reinsurers from any and all past, current and future liabilities under the stop loss contract on or before January 1, 2015. Therefore, the accounting for this anticipated profit sharing and commutation reverses the losses and additional premiums ceded recorded in 2008, and accrues the profit sharing as reduced ceded premiums in 2009. This outcome has resulted in some significant fluctuations between earned premiums and incurred losses between 2008 and 2009 and has adversely impacted our loss ratio and slightly improved the expense ratio for 2009. Based on the 2008 and 2009 accident year incurred loss development we experienced in 2010, we still have not triggered the stop loss contract. As a result, there are no ceded premiums or losses related to the stop loss contract recognized in 2010.

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The experience and accounting under the stop loss reinsurance contract is as follows (in thousands):

													Cumulative
							Cumulative			Accrue for Expected			Accounting						Experience
	Recorded at						Total			Commutation and			Impact			Net			Activity
	December 31,			Experience in			December 31,			Profit Sharing			At December 31,			Recorded in			Recorded in
	2008			2009			2009			in 2009			2009			2009			2010
Stop loss ceded premiums — base	$	2,464		$	2,401		$	4,865		$	—		$	4,865		$	2,401		$	—
Additional premium @ 20% of ceded losses		858			(78	)		780			(780	)		—			(858	)		—
Profit sharing — returned premiums		—			—			—			(3,260	)		(3,260	)		(3,260	)		—
Total ceded premiums		3,322			2,323			5,645			(4,040	)		1,605			(1,717	)		—
Estimated accident year 2008 ceded losses		(4,292	)		394			(3,898	)		3,898			—			4,292			—
Interest expense		86			171			257			(257	)		—			(86	)		—
Stop loss reinsurance (benefit) cost	$	(884	)	$	2,888		$	2,004		$	(399	)	$	1,605		$	2,489		$	—

This reinsurance contract has been accounted for at December 31, 2009 and at December 31, 2010 as if it has been commuted because the estimated experience under the contract at this point in time would lead us to execute a commutation to recognize profit sharing under that contract. However, the contract does not require us to execute the commutation until on or before January 1, 2015. Therefore, we will keep the contract in effect until a later date to continue the stop loss reinsurance protection for possible future adverse development of reserves for the accident years 2008 and 2009.

The stop loss contract was not renewed for the 2010 accident year because the reinsurance protection was no longer necessary as we have raised additional capital through our stock offering in October 2009.

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 assistance of our reinsurance brokers. We monitor the solvency of reinsurers through regular review of their financial statements and, if available, their A.M. Best ratings. All of our significant reinsurance partners that A.M. Best follows have at least an “A−” A.M. Best rating. According to A.M. Best, companies with a rating of “A−” or better “have an excellent ability to meet their ongoing obligations to policyholders.” In certain instances, we may partner with a reinsurer who is not rated by A.M. Best. However, in such instances the reinsurer must be well capitalized and have a strong credit rating from Standard and Poor’s or Moody’s rating agencies. We will generally only make exceptions for property related reinsurance in which there is typically little or no delay in the reporting of losses by insureds and the settlement of the claims. We have experienced no significant difficulties collecting amounts due from reinsurers.

The following table sets forth the largest amounts of losses and loss expenses recoverable from reinsurers as of December 31, 2010 (dollars in thousands) and the A.M. Best rating of each:

	Losses & Loss
	Expense
	Recoverable		Percentage of
	on Unpaid		Total			A.M. Best
	Claims		Recoverable			Rating
Hannover Rueckversicherung AG	$	7,786		34.9	%		A
Swiss Reinsurance America Corporation		3,569		16.0	%		A
Transatlantic Reinsurance Company		2,414		10.8	%		A
Employers Mutual Casualty Co.		2,350		10.5	%		A-
Partner Reinsurance Co. of the U.S.		2,298		10.3	%		A+
R+V Versicherung AG(1)		1,255		5.6	%		NR-5
Platinum Underwriters Reinsurance, Inc.		504		2.3	%		A
General Reinsurance Corporation		470		2.1	%		A++
Aspen Insurance UK Limited		453		2.0	%		A
All Other		1,223		5.5	%
Total	$	22,322		100.0	%

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(1) R+V Versicherung AG is not formally followed by A.M. Best. The company holds a Standard & Poor’s (S&P) financial strength rating of A+. This reinsurer participates in our property per-risk and catastrophe excess reinsurance programs, and has posted a letter of credit with us in order to mitigate the risk of non-performance.

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, 2010, our participation was not material. Prior to 1994 we participated in various voluntary insurance pools that are currently in runoff. We no longer participate in any voluntary assumed reinsurance contracts.

Losses and LAE Reserves

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

Each quarter, we compute our estimated ultimate liability using actuarial 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. We reflect adjustments to reserves in the operating results of the periods in which the estimates are changed.

Our estimated liability for asbestos and environmental claims was $2.4 million at December 31, 2010 and at December 31, 2009; 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 for the years ended December 31, 2010 and 2009, prepared in accordance with U.S. GAAP:

	For the Years Ended
	December 31,
	2010			2009
	(In thousands)
Balance at January 1	$	106,710		$	108,065
Less Reinsurance recoverable on unpaid losses and LAE		18,356			22,625
Net liability at January 1		88,354			85,440
Losses and LAE incurred, net:
Current year	$	55,772		$	51,199
Prior years		(2,086	)		1,555
Total incurred losses and LAE		53,686			52,754
Less losses and LAE paid, net:
Current year	$	24,755		$	21,296
Prior years		29,634			28,544
Total losses and LAE expenses paid		54,389			49,840
Net liability for unpaid losses and LAE, at December 31	$	87,651		$	88,354
Reinsurance recoverable on unpaid losses and LAE		22,322			18,356
Reserve for unpaid losses and LAE at December 31	$	109,973		$	106,710

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).

The losses and LAE incurred in 2010 for prior accident years shows a negative amount of $2.1 million, which indicates that we had over-estimated our losses and LAE reserves at December 31, 2009.

The losses and LAE incurred in 2009 for prior accident years shows a positive amount of $1.6 million which indicates that we under-estimated our reserves at December 31, 2008. This situation results from the accounting for the stop loss contract assuming the liabilities will be commuted. To receive an estimated profit sharing under the stop loss contract, we will have to release the reinsurers from any and all past, current and future liabilities under the stop loss contract on or before January 1, 2015. The accounting for this anticipated profit sharing and commutation reverses the losses ceded and part of the premiums ceded under the contract. In return for taking back the $4.3 million of 2008 losses ceded under the contract at December 31, 2008, which were re-estimated to be $3.9 million at December 31, 2009, $4.0 million of premiums ceded under the contract will be returned to us.

This return of the 2008 ceded losses could be interpreted as adverse loss reserve development in the above schedule. The loss development experience in 2009 excluding the effects of the accounting for the stop loss contract is net favorable development (in thousands):

Return of 2008 losses ceded under stop loss contract	$	4,292
Favorable development in 2009 on December 31, 2008 unpaid losses and LAE reserves		(2,737	)
Net prior years reserve development in 2009 — unfavorable	$	1,555

For additional information concerning the stop loss reinsurance contract, see Item 1 — “Business — Reinsurance.”

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Reconciliation of Reserve for Losses and Loss Adjustment Expenses

The following table shows the development of our reserves for unpaid losses and LAE from 2000 through 2010 on a U.S. 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 re-estimated 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 re-estimated 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 2000 through 2003 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. Beginning in 2003, actuarial consultants were engaged to provide an additional reserve analysis three times per year. In 2009, we began utilizing an independent actuary to perform detailed reserve analyses on a quarterly basis. 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 gross and net reserve volatility in more recent years.

The net cumulative deficiency for those early years (2000 to 2003), 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 those early years. Our maximum retained loss for any one risk was $200,000 in 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. For 2008, we continued to retain $500,000 on any individual property and casualty risk, however, we retained 75% of losses in excess of $500,000 to $1 million, and 25% of losses in excess of $1 million to $5 million. As a complement to this increased retention, we entered into a whole account, accident year aggregate excess of loss (stop loss) contract that covers accident years 2008 and 2009 to provide coverage in the event that the 2008 or 2009 accident year loss ratio exceeds 72%. In 2009, we retained $500,000 on any individual property and casualty risk, and we lowered our retention to 52.5% of losses in excess of $500,000 to $1 million and 0% of losses in excess of $1 million to $5 million. In order to reduce our reinsurance costs, in 2010 we raised our retention to 60% in the $500,000 to $1 million layer.

Because of these and other factors, it is difficult to develop a meaningful extrapolation of estimated future redundancies or deficiencies in loss reserves from the data in the table.

	For the Years Ended December 31,
	2000		2001		2002		2003		2004		2005		2006		2007		2008		2009		2010
	(In thousands)
Liability for unpaid losses and LAE, net of reinsurance recoverables	$	29,476	$	35,656	$	42,731	$	48,072	$	55,804	$	61,032	$	69,316	$	77,229	$	85,440	$	88,354	$	87,651
Cumulative amount of liability paid through
One year later		12,523		15,441		15,279		18,849		19,288		21,262		19,681		22,591		28,544		29,634		—
Two years later		20,032		23,640		25,731		27,719		28,977		32,372		31,974		35,344		46,138		—		—
Three years later		25,184		28,897		31,372		34,125		35,481		40,950		40,378		47,263		—		—		—
Four years later		28,118		32,311		35,104		37,135		41,365		45,128		46,969		—		—		—		—
Five years later		30,318		33,755		36,561		39,446		43,494		48,754		—		—		—		—		—
Six years later		31,333		34,786		37,978		40,937		45,462		—		—		—		—		—		—
Seven years later		32,039		35,847		38,932		41,969		—		—		—		—		—		—		—
Eight years later		33,002		36,408		39,628		—		—		—		—		—		—		—		—
Nine years later		33,531		37,051		—		—		—		—		—		—		—		—		—
Ten years later		34,144		—		—		—		—		—		—		—		—		—		—

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	For the Years Ended December 31,
	2000			2001			2002			2003			2004		2005			2006		2007		2008			2009		2010
	(In thousands)
Liability re-estimated as of
One year later		34,545			38,657			44,764			49,658			54,729		61,017			64,679		72,004		86,995			86,268		—
Two years later		34,864			40,138			44,591			48,718			54,948		61,081			63,847		70,030		85,704			—		—
Three years later		35,865			40,527			44,424			49,954			54,510		59,884			62,422		68,497		—			—		—
Four years later		36,594			40,416			45,405			49,617			54,411		58,891			62,555		—		—			—		—
Five years later		37,108			40,696			45,603			49,284			53,575		59,175			—		—		—			—		—
Six years later		37,402			41,157			45,744			48,918			54,031		—			—		—		—			—		—
Seven years later		38,193			41,513			45,308			49,161			—		—			—		—		—			—		—
Eight years later		38,590			41,271			45,629			—			—		—			—		—		—			—		—
Nine years later		38,315			41,570			—			—			—		—			—		—		—			—		—
Ten years later		38,688			—			—			—			—		—			—		—		—			—		—
Cumulative total redundancy (deficiency)	$	(9,212	)	$	(5,914	)	$	(2,898	)	$	(1,089	)	$	1,773	$	1,857		$	6,761	$	8,732	$	(264	)	$	2,086	$	—
Gross liability — end of year	$	37,056		$	47,084		$	53,462		$	69,463		$	73,287	$	83,849		$	89,405	$	95,956		108,065		$	106,710	$	109,973
Reinsurance recoverables		7,580			11,428			10,731			21,391			17,483		22,817			20,089		18,727		22,625			18,356		22,322
Net liability — end of year	$	29,476		$	35,656		$	42,731		$	48,072		$	55,804	$	61,032		$	69,316	$	77,229	$	85,440		$	88,354	$	87,651
Gross re-estimated liability — latest	$	58,565		$	63,414		$	66,106		$	68,906		$	73,029	$	85,952		$	81,443	$	89,029	$	103,374		$	106,205
Re-estimated reinsurance recoverables — latest		19,877			21,844			20,477			19,745			18,998		26,777			18,888		20,532		17,670			19,937
Net re-estimated liability — latest	$	38,688		$	41,570		$	45,629		$	49,161		$	54,031	$	59,175		$	62,555	$	68,497	$	85,704		$	86,268
Gross cumulative redundancy (deficiency)	$	(21,509	)	$	(16,330	)	$	(12,644	)	$	557		$	258	$	(2,103	)	$	7,962	$	6,927	$	4,691		$	505

Investments

Our investments in fixed maturity 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 accumulated other comprehensive income (loss), net of taxes. The goal of our investment activities is to complement and support our strategies. As such, the investment portfolio’s goal is to maximize after-tax investment income and price appreciation while maintaining the portfolio’s 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. 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 (individual securities) at time of purchase excluding mutual funds with at least an average S&P credit rating of “B”;

•  Preferred stocks (except “trust preferred” securities);

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

•  Private placements other than section 144A issuances with registration rights;

•  Non-U.S. dollar denominated bonds;

•  Foreign currency trading;

•  Limited partnerships;

•  Convertible securities;

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•  Venture-capital investments;

•  Real estate properties (except Real Estate Investment Trusts);

•  Securities lending;

•  Portfolio leveraging, i.e., margin transactions; and

•  Short selling.

Our board of directors and company management review the investment policy at least annually. Our fixed maturity investment portfolio is managed by a registered independent investment advisor specializing in the management of insurance company investments.

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.

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

	At December 31,
	2010				2009
	Cost or Amortized		Estimated Fair		Cost or Amortized		Estimated Fair
	Cost		Value		Cost		Value
Agencies not backed by the full faith and credit of the U.S. government	$	14,111	$	14,458	$	16,933	$	17,441
U.S. Treasury securities		721		736		4,499		4,612
State and political subdivisions		43,224		44,559		37,415		39,334
Corporate securities		76,325		78,441		71,470		73,691
Commercial mortgage-backed securities		1,589		1,662		3,806		3,775
Residential mortgage-backed securities		22,223		22,915		27,607		28,302
Total fixed maturities	$	158,193		162,771	$	161,730	$	167,155
Total equity securities(1)	$	10,885	$	10,874	$	—		—

(1) Equity securities represent the amount invested in a high-yield bond mutual fund invested primarily in corporate fixed maturity securities.

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The following table summarizes the distribution of our portfolio of fixed maturity investments and equity securities (a high-yield bond mutual fund) as a percentage of total estimated fair value based on credit ratings assigned by Standard & Poor’s (S&P) at December 31, 2010 (dollars in thousands):

	Estimated		Percent
Rating(1)	Fair Value		of Total(2)
Agencies not backed by the full faith and credit of the U.S. government	$	14,458		8.3	%
U.S. Treasury securities		736		0.4	%
AAA		48,482		27.9	%
AA		41,254		23.8	%
A		45,354		26.1	%
BBB		12,487		7.2	%
B(3)		10,874		6.3	%
Total	$	173,645		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) would be used where available.
(2)	Represents percent of fair value for classification as a percent of the total invested assets portfolio.
(3)	Represents the amount invested in a high-yield bond mutual fund invested primarily in corporate fixed maturity securities with an average S&P credit rating of “B”.

The table below sets forth the maturity profile of our fixed maturity securities at December 31, 2010. Expected maturities could differ from contractual maturities because borrowers may have the right to call or prepay obligations, with or without call or prepayment penalties (in thousands):

			Estimated Fair
	Amortized Cost		Value(1)
Less than one year	$	10,144	$	10,283
One though five years		88,455		91,582
Five through ten years		25,521		26,098
Greater than ten years		10,261		10,231
Commercial mortgaged-backed securities(2)		1,589		1,662
Residential mortgaged-backed securities(2)		22,223		22,915
Total fixed maturities	$	158,193	$	162,771

(1)

Fixed maturity securities are carried at fair value in our financial statements.

(2)

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

At December 31, 2010, the average effective duration of our mortgage-backed securities was 3.7 years. The average effective duration of our total fixed maturity investment portfolio was 3.2 years. 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.

Our fixed maturity portfolio held $22.9 million and $28.3 million of United States Agency-guaranteed residential mortgage-backed securities (RMBS) at December 31, 2010 and 2009, respectively. The RMBS had an

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average credit rating of AAA for both years ended 2010 and 2009, and we held no non-agency guaranteed RMBS during the years ended 2010 and 2009.

Approximately 12% of our investments in fixed maturity securities at December 31, 2010 are guaranteed by third party monoline insurers. As of December 31, 2010 and 2009, the fixed maturity securities guaranteed by these monoline insurers were comprised entirely of municipal bonds with a fair value of $20.1 million and $22.7 million, and an average credit rating of AA and AA+, respectively. We hold no securities issued by any third party insurer.

The following table sets forth information with respect to the fair value at December 31, 2010, and December 31, 2009, of the fixed maturity securities that are guaranteed by each of the third party insurers (in thousands):

	Fair Value at		Fair Value at
	December 31,		December 31,
Insurer	2010		2009
AMBAC	$	3,262	$	3,321
FGIC		4,871		5,524
FSA		8,242		9,494
MBIA		3,687		4,356
Total	$	20,062	$	22,695

The following table sets forth the ratings of the security, with and without consideration of guarantee, for the fixed maturity securities that are guaranteed by third party insurers at December 31, 2010, and with the guarantee as of December 31, 2009 (in thousands):

					At December 31,
	At December 31, 2010				2009
	With		Without		With
	Guarantee		Guarantee		Guarantee
Rating	Fair Value		Fair Value		Fair Value
AAA	$	8,175	$	1,104	$	9,476
AA		9,179		13,521		11,021
A		2,708		5,437		2,198
Total	$	20,062	$	20,062	$	22,695

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 and ratings, distribution systems and technical expertise. The primary competitors in our agribusiness marketplace are Nationwide Agribusiness, Continental Western Insurance Company and Westfield Insurance Company. A large number of regional and national insurance companies compete for small business and middle market customers.

Regulation

Insurance Company Regulation

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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;

•  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.

Some of the state insurance laws, regulations and practices that an insurance company is subject to are described in greater detail below.

Accounting and Financial Reporting.  Penn Millers Insurance Company is required 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 completed examination of Penn Millers Insurance Company was as of December 31, 2009. Although the results of the examination have not been formally issued by the Pennsylvania insurance Department, the examination did not result in any adjustments to our financial position. In addition, we are not aware of any substantive matters arising out of the examination that we believe would have 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

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companies. The capital levels of Penn Millers Insurance Company have never triggered any of these regulatory capital levels, however, the capital requirements applicable to Penn Millers Insurance Company could increase in the future.

NAIC Ratios.  The NAIC also has developed a set of 13 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. For the year ended December 31, 2010, Penn Millers Insurance Company did not have four or more results fall outside the acceptable IRIS range.

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.

Mandatory Pooling Arrangements.  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.

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 of a given line of business in that state. For the years ended December 31, 2010 and 2009, we incurred approximately $(49,000) and $114,000, 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 under these laws.

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, 2010, the amount available for payment of dividends by Penn Millers Insurance Company in 2011 without the prior approval of the Pennsylvania Insurance Department is approximately $6.8 million. “Extraordinary dividends” in excess of the foregoing limitations may only be paid with prior notice to, and approval of, the Pennsylvania Insurance Department.

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”

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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.

Other Regulation

Sarbanes-Oxley Act of 2002.  On July 30, 2002, President Bush signed into law the Sarbanes-Oxley Act of 2002, (the SOA). The stated goals of the SOA are to increase corporate responsibility, to 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. The SOA resulted in the implementation of very specific additional disclosure requirements and corporate governance rules, and compliance with the SOA imposes large costs on public companies like us.

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 by which the government pays 85% 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 premiums for commercial property and casualty policies. Coverage under the act must be offered to all property, casualty and surety insureds.

The immediate effect of the act 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.

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

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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.

On July 21, 2010, the President signed into law the Dodd-Frank Wall Street Reform and Consumer Protection Act (the Dodd-Frank Act). Among other things, the Dodd-Frank Act establishes a Federal Insurance Office within the U.S. Department of the Treasury. The Federal Insurance Office initially has limited regulatory authority and is empowered to gather data and information regarding the insurance industry and insurers, including conducting a study for submission to the U.S. Congress on how to modernize and improve insurance regulation in the U.S. Further, the Dodd-Frank Act gives the Federal Reserve supervisory authority over a number of financial services companies, including insurance companies, if they are designated by a two-thirds vote of a Financial Stability Oversight Council as “systemically important.” The Dodd-Frank Act, or other additional federal regulation that is adopted in the future, could impose significant burdens on us, including impacting the ways in which we conduct our business, increasing compliance costs and duplicating state regulation. At this time, we cannot conclude with any degree of certainty what impact these reforms will have on our business.

Many of the states in which we operate have passed or are considering legislation restricting or banning the use of “credit scoring” in the rating and risk selection process. The Fair and Accurate Credit Transactions Act, passed by the U.S. Congress in 2003, directed the Federal Trade Commission (“FTC”) to consult with the Office of Fair Housing and Equal Opportunity on, among other things, how the use of credit information may affect the availability and affordability of property and casualty insurance, and whether the use of certain factors by credit scoring systems could have a disparate impact on minorities. In July of 2007, the FTC released a report on credit scoring and its impact on automobile insurance. The FTC concluded that credit-based scoring is an effective predictor of risk with respect to the issuance of automobile insurance policies to consumers, but has little effect as an indicator of racial or ethnic status of consumers. Despite the FTC’s conclusions, some consumer groups and certain regulatory and legislative entities continue to resist the use of credit scoring in the rating and risk selection process. In 2008, the FTC asked nine of the nation’s largest homeowners insurance companies to provide information that the FTC says will allow it to determine how consumer credit data is used by the companies in underwriting and rate setting in this line of business. The results of the study could affect the future use of credit scoring. Banning or restricting this practice or other data mining would limit our ability, and the ability of other carriers, to take advantage of the predictive value of this information.

Employees

As of December 31, 2010, we had 114 employees. None of these employees are covered by a collective bargaining agreement. We believe that our relationship with our employees remains positive. On February 10, 2011 we announced a reduction in staffing of nearly 10% of our workforce in order to more effectively align our staffing levels with our current business needs.

Available Information

The Company maintains a website at www.pennmillers.com. Our annual report on Form 10-K, quarterly reports on Form 10-Q and current reports on Form 8-K, and amendments to those reports, filed or furnished pursuant to Section 13(a) or 15(d) of the Securities Exchange Act of 1934, are available free of charge on our website as soon as practicable after filing of such material with, or furnishing it to, the Securities and Exchange Commission. The information on our website is not part of this Form 10-K.

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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 with a stable outlook 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 22, 2010. 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.

Item 1A.   Risk Factors

As a “Smaller Reporting Company” we are not required to provide any disclosure under Item 1A. Risk factors are events and uncertainties over which the Company has limited or no control and which can have a material adverse impact on our financial condition or results of operations. We are subject to a variety of risk factors. The following information sets forth our evaluation of the risk factors we deem to be most material. We work to actively manage these risks, but the reader should be cautioned that we are only able to mitigate the impact of most risk factors, not eliminate the risk. Also, there may be other risks which we do not presently deem material that may become material in the future. You should carefully consider the following risk factors and all of the information set forth in this report, including our consolidated financial statements and notes thereto.

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

As a property and casualty insurer, we are subject to claims from catastrophes that may have a significant negative impact on our 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.

Longer-term natural catastrophe trends may be changing due to climate change, a phenomenon that has been associated with extreme weather events linked to rising temperatures, and includes effects on global weather patterns, greenhouse gases, sea, land and air temperatures, sea levels, rain and snow. Climate change, to the extent it produces rising temperatures and changes in weather patterns, could impact the frequency or severity of weather events, such as hurricanes. To the extent climate change does increase the frequency and severity of such weather events, we may face increased claims, including with respect to properties located in coastal areas.

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 have caused, and could continue to 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 2010 and 2009, annual losses incurred by us from such events, net of reinsurance, were approximately $5.6 million and $2.0 million, respectively.

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

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time period, it may materially affect our financial condition and results of operations. In 2010, we experienced an unusually high level of both catastrophe and non-catastrophe related weather losses from severe winter storm activity in the Mid-Atlantic and Northeast and from severe spring storm activity in the Midwest.

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 17 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 22, 2010. Financial strength ratings are used by producers and customers as a 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 strategies.

Turmoil in the capital markets and an 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. 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 2010. Rising unemployment, decreasing real estate and certain commodity prices, decreasing consumer spending and business investment, unprecedented stock price volatility and a significant slowdown in the economy have had a negative impact on the financial markets. It is not possible to predict whether conditions will deteriorate further or when the outlook will improve. As a result of such an economic downturn, the value of the securities we hold as investments may 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 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 municipal bond portfolio may be impacted by the effects of economic stress on state and local governments. Approximately 27.3% of our fixed maturity investment portfolio at December 31, 2010 is invested in obligations of states, municipalities and political subdivisions (collectively referred to as our municipal bond portfolio). Widespread concern currently exists regarding the stress on state and local governments emanating from: (i) declining revenues; (ii) large unfunded liabilities to government workers; and (iii) entrenched cost structures. Debt-to-gross domestic product ratios for the majority of states have been deteriorating due to, among other factors: (i) declines in federal monetary assistance provided as the United States is currently experiencing the largest deficit in its history; and (ii) lower levels of sales and property tax revenue as unemployment remains elevated and the housing market continues to remain unstable. This concern has led to speculation about the potential for a significant deterioration in the municipal bond market which could materially affect our results of operations, financial condition and liquidity. We may not be able to mitigate the exposure in our municipal portfolio if state and

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local governments are unable to fulfill their obligations. The risk of widespread issuer defaults may also increase if there are changes in legislation that permit states, or additional municipalities and political subdivisions, to file for bankruptcy protection or if there are judicial interpretations that, in a bankruptcy or other proceeding, lessen the value of any structural protections.

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. Our investments are subject to a variety of investment risks, including risks relating to general economic conditions, market volatility, interest rate fluctuations, liquidity risk and 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 effectively 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.

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

Approximately 34% of our business is concentrated in the southeastern United States, which is prone to tornadoes and hurricanes. As of December 31, 2010, almost 20% 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.

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.

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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 2011, our deductible is approximately $13.8 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.

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 four years, we have experienced increased price competition with regard to most of our product lines. This competitive environment may adversely affect our ability to increase revenues may adversely affect our profitability.

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Because estimating future losses is difficult and uncertain, if our actual losses exceed our estimates of losses and 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;

•  health care reform;

•  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 (also called “unfavorable”) loss development occurs when the revised estimate of expected losses with respect to a calendar year exceeds existing loss reserves. For example, our loss and loss expense reserve for the 2000 calendar year has experienced a cumulative unfavorable loss reserve development of $9.2 million (a 30.1% deficiency) as of December 31, 2010, while our loss and loss expense reserve for the 2006 calendar year has experienced a cumulative positive (also called “favorable”) loss development of $6.8 million (a 9.8% reduction) as of December 31, 2010. For additional information, see Item 1 — “Business — Losses 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, 2010, we ceded 22.0% 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 that A.M. Best follows is “A-” (Excellent), which is the fourth highest of fifteen ratings. For additional information, see Item 1 — “Business — Reinsurance.”

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.

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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 write our 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 primarily on independent producers (as we do). 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 of their offices, accounted for $11.2 million, or approximately 13%, of our direct premiums written in 2010. Only one other producer accounted for more than 5% of our 2010 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.

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.

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, 2010, we participated in mandatory pooling arrangements in the majority of the states in which we do business. 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

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in any given period or limit our ability to grow our business. For more information, see Item 1 — “Business — Regulation.”

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

Our investment portfolio is comprised mostly of fixed maturity securities at December 31, 2010, 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 $24.6 million or approximately 14% of our investments at December 31, 2010. 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.

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, soybeans and fertilizer. 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. 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. As of December 31, 2010 almost 20% of our direct premiums written originated 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.

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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;

•  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 completed examination was as of December 31, 2009, the results of which have not been formally issued by the Pennsylvania Insurance Department.

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. These key officers have an average of over twenty years of experience in the property and casualty insurance industry. 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. 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.

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.

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 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;

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•  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 662/3%, 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.

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

We depend primarily on dividends paid by Penn Millers Insurance Company and proceeds from the initial public offering that are not contributed to Penn Millers Insurance Company to provide funds for the payment of dividends to our shareholders. 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 Penn Millers Insurance Company is not sufficiently profitable, our ability to pay dividends to you in the future will be limited.

If our controls to ensure compliance with legal and regulatory policies and guidelines are not effective, our business, financial results and reputation could be materially adversely affected.

A control system, regardless of how well designed and effective we consider it to be, can only provide reasonable assurance that the control systems’ objectives will be met. If we determine that our controls are not effective, including internal controls over financial reporting, this could have an adverse effect on our financial results, liquidity, and reputation; and possibly subject us to litigation.

Item 1B.   Unresolved Staff Comments

None

Item 2.   Properties

Our headquarters are located at 72 North Franklin Street, Wilkes-Barre, Pennsylvania. We own this 39,963 square foot facility. We also rent office space in Indianapolis, IN. In the opinion of our management, the Company’s properties are adequate and suitable for its business as presently conducted and are adequately maintained.

Item 3.   Legal Proceedings

The Company is, from time to time, involved in legal proceedings that arise in the ordinary course of business. We believe that we have sufficient loss reserves and reinsurance to cover claims under insurance policies issued by us. Although there can be no assurance as to the ultimate disposition of these matters, we do not believe, based upon the information available at this time, that any current pending legal proceedings, either individually or in the aggregate, will have a material adverse effect on our business, financial conditions, or results of operations.

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Item 4.   (Removed and Reserved)

PART II

Item 5.   Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities

On October 17, 2009, our common stock began trading on the Nasdaq Global Market under the symbol “PMIC.” The number of holders of record, including individual owners of our common stock was 329 as of February 28, 2011. This is not the actual number of beneficial owners of our common stock, as shares are held in “street name” by brokers and others on behalf of individual owners.

We do not currently pay dividends on our common stock. Payment of dividends in the future is at the discretion of our board of directors and will depend on a number of factors including our operating results, overall financial condition, capital requirements and general business conditions. We depend primarily on dividends paid by Penn Millers Insurance Company to us and proceeds from the initial public offering that were not contributed to Penn Millers Insurance Company to provide funds for the payment of dividends. If Penn Millers Insurance Company chooses to pay dividends to Penn Millers Holding Corporation, we will receive dividends only after Penn Millers Insurance Company provides notice to, and without objection from, the Pennsylvania Insurance Department. 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. Information regarding the restrictions and limitations on the payment of cash dividends can be found in Item 1 “Business — Regulation.”

The following table sets forth the high and low closing sales prices of our common stock for the periods indicated that we were a publicly-traded company:

	Share Price Range
Period:	High		Low
2010 First Quarter	$	12.15	$	10.40
2010 Second Quarter		14.95		12.63
2010 Third Quarter		14.81		12.00
2010 Fourth Quarter		14.75		13.23
October 17, 2009 - December 31, 2009	$	11.08	$	10.00

Issuer Purchases of Equity Securities

In the three months ended June 30, 2010, the 54,440 shares remaining under our October 27, 2009 stock repurchase program were purchased at an average cost of $14.60 per share.

On May 12, 2010, our board of directors authorized the repurchase of up to 5% of the issued and outstanding shares of our common stock. The repurchases are authorized to be made from time to time in open market or privately negotiated transactions as, in our management’s sole opinion, market conditions warrant. We have the right to repurchase issued and outstanding shares of common stock until 5% of the shares, or 258,591, are repurchased. In the year ended December 31, 2010, we repurchased under this second program 232,691 shares at an average cost of $14.44 per share.

All purchases were made in accordance with the safe harbor set forth in Exchange Act Rule 10-b-18. The repurchased shares will be held as treasury shares and will be used in connection with our stock-based incentive plan.

On August 11, 2010, our board of directors approved a third share repurchase plan, authorizing the repurchase of an additional 245,662 common shares in open market or privately negotiated transactions during a twelve month

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period beginning August 18, 2010. For the year ended December 31, 2010, no shares were repurchased under the August 2010 program.

For more information on our stock repurchase programs, see “Liquidity and Capital Resources” in Item 7 of this Form 10-K.

Equity Compensation Plan Information

The following table summarizes the number of shares issuable pursuant to outstanding options and remaining available for issuance under the Company’s Stock Incentive Plan as of December 31, 2010:

					Number of Securities
	Number of Securities		Weighted-Average		Remaining Available for
	to be Issued upon Exercise		Exercise Price of		Future Issuance Under
	of Outstanding Options,		Outstanding Options,		Equity Compensation
Plan Category	Warrants and Rights		Warrants and Rights		Plans
Equity compensation plans approved by security holders		114,960	$	14.83		506,081
Equity compensation plans not approved by security holders		—		—		—
Total		114,960	$	14.83		506,081

Item 6.   Selected Financial Data

Not applicable.

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Item 7.             PENN MILLERS HOLDING CORPORATION AND SUBSIDIARY

MANAGEMENT’S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Dollars in Thousands, Except Per Share Amounts
(Unaudited)

Some of the statements contained in this document are “forward-looking statements” within the meaning of the Private Securities Litigation Reform Act of 1995. In some cases, you can identify forward-looking statements by terminology such as “may,” “will,” “should,” “expect,” “plan,” “intend,” “anticipate,” “believe,” “estimate,” “predict,” “potential” or “continue,” the negative of these terms or other terminology. Forward-looking statements are based on the opinions and estimates of management at the time the statements are made and are subject to certain risks and uncertainties that could cause actual results to differ materially from those anticipated in the forward-looking statements. 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 Item 1A — “Risk Factors” included in this Form 10-K that could affect the actual outcome of future events. All of these factors are difficult to predict and many are beyond our control.

Factors that could affect our actual results include, among others, the fact that our loss reserves are based on estimates and may be inadequate to cover our actual losses; the uncertain effects of emerging claim and coverage issues on our business, including the effects of climate change; the geographic concentration of our business; an inability to obtain or collect on our reinsurance protection; a downgrade in the A.M. Best rating of our insurance subsidiaries; the impact of extensive regulation of the insurance industry and legislative and regulatory changes; a failure to realize our investment objectives; the effects of intense competition; the loss of one or more principal employees; the inability to acquire additional capital on favorable terms; a failure of independent insurance brokers to adequately market our products; and the effects of acts of terrorism or war.

The following discussion and analysis of our financial condition and results of operations should be read in conjunction with the consolidated financial statements and accompanying notes included thereto.

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 U.S. 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 (loss) income, combined ratios and written premiums. In addition, where we feel it enhances the presentation to the reader, we may present certain GAAP financial measures in a manner to reflect the impact of certain unusual or non-recurring situations. For the presentation of the year ended December 31, 2009 we have presented certain summary results and ratios in such a manner to show the impact of our accounting for our aggregate stop loss reinsurance contract. For more information about our stop loss contract, see Item 1 — “Business — Reinsurance.”

Management’s Overview

2010 Financial Results Summary

•  2010 Consolidated Results of Operations

•  Our net loss of $3,488 includes income tax expense of $2,615 mostly related to federal tax expense of $3,309 from a valuation allowance against our net deferred tax assets, and unusually high catastrophe losses in the second quarter of 2010.

•  Our net premiums earned of $68,097 were $7,261 lower than 2009 as a result of underwriting actions taken in our commercial business segment during 2009 and 2010.

•  We experienced pre-tax catastrophe losses of $5,578 (net of reinsurance), which were $3,599 higher than 2009.

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•  We experienced net favorable prior year reserve development of $2,086, as compared to unfavorable development of $1,555 in 2009 ($4,292 of which was related to the stop loss reversal).

•  Our consolidated GAAP combined ratio was 113.8% in 2010, an increase of 10.1 points compared to 2009.

•  Our pre-tax net investment income of $5,700 was a modest increase over 2009.

•  We recognized pre-tax net realized investment gains of $2,712 in 2010, compared to pre-tax net realized gains of $199 in 2009.

•  2010 Consolidated Financial Condition

•  Our book value per share was $20.85 at December 31, 2010, compared to $21.31 at December 31, 2009.

•  Total investments were $173,645 at December 31, 2010, compared to $167,155 at December 31, 2009.

•  Total assets were $254,721 at December 31, 2010, compared to $263,450 at December 31, 2009.

•  We repurchased 287,131 shares of our common stock at a total cost of $4,155 under our share repurchase program during 2010.

•  Shareholders’ equity was $93,028 at December 31, 2010, compared to $100,048 at December 31, 2009.

2011 Expectations

•  For both our agribusiness and commercial business segments, we continue to emphasize that we will not compromise profitability for top line growth. However, competitive pressures in the marketplace continue to exert downward pressure on our prices, which will continue to affect our writing of new and renewal business.

•  In our agribusiness segment, our focus on underwriting discipline and rate adequacy in the midst of this soft market (a market we expect to continue in 2011) has resulted in our premium revenue growth being relatively modest.

•  In our commercial business segment, we believe that the steps we have taken to improve the quality of our accounts through more targeted underwriting, increased use of financial scoring, and more proactive agency management will improve our loss ratios in this segment over time.

•  We believe our plans for the expansion of our PennEdge product, our strategic alliances and our plan to grow our producer network will position us to take advantage of profitable growth opportunities in the future.

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 are 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 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

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months. Thus, for example, for a policy that is written on July 1, 2010, one-half of the premiums would be earned in 2010 and the remaining half would be earned in 2011.

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

We invest our shareholders’ equity and the funds supporting our insurance liabilities (including unearned premiums and unpaid losses 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 or amortized cost, as applicable. Our portfolio of fixed maturity 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 would result in a net realized loss.

Our expenses consist primarily of:

Losses and loss adjustment expenses

Losses and loss adjustment expenses (or LAE) 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.

Underwriting expenses

Expenses incurred to underwrite risks are referred to as policy acquisition costs 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 expenses not specifically attributable to an individual segment are allocated to those segments based upon factors such as employee headcount, 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 U.S. 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 (loss) income, combined ratios and written premiums. In addition, where we feel it enhances the presentation to the reader, we may present certain GAAP financial measures in a manner to reflect the impact of certain unusual or non-recurring situations.

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

Loss and loss adjustment expense ratio (loss ratio)

The loss and loss adjustment expense ratio is the ratio (expressed as a percentage) of losses 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 losses 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 losses and loss adjustment expenses 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 (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 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.

Underwriting (loss) income

Underwriting (loss) income measures the pre-tax profitability of our insurance segments. It is derived by subtracting losses and loss adjustment expenses, 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 consolidated statements of operations.

Earnings per share

Basic earnings per share is calculated by dividing income available to common shareholders by the weighted average number of common shares outstanding during the period. The weighted average number of common shares outstanding excludes the shares of our ESOP that the Company has not yet committed to release to participants’ accounts. In calculating diluted earnings per share, we include all potentially dilutive securities in the calculation of the average shares outstanding during the period. Prior to October 16, 2009 there were no shares outstanding for Penn Millers Holding Corporation.

Book value per share

Book value per share is calculated by dividing total shareholders’ equity by the shares outstanding at the end of the period. Prior to October 16, 2009 there were no shares outstanding for Penn Millers Holding Corporation.

Results excluding the impact of our aggregate stop loss contract

We have presented certain summary results and ratios in such a manner to show the impact of our accounting for our aggregate stop loss reinsurance contract. Our ceded premiums and losses, and GAAP ratios have been significantly impacted by the reversal of the aggregate stop loss contract in 2009, and we have detailed the impact this accounting has had on our underlying results.

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Critical Accounting Estimates

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 ongoing basis 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.

Losses 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 “IBNR” which is comprised of estimated development of our case reserves and estimates of claims that have been incurred but have not yet been reported.

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 losses and loss adjustment expenses incurred but not reported. Some claims may not be reported for many years. As a result, the liability for unpaid losses and loss adjustment reserves includes significant estimates for IBNR.

We utilize an independent actuary to assist with the estimation of our losses and LAE reserves each quarter. The actuary prepares estimates of the ultimate liability for unpaid losses and LAE based on established actuarial methods.

We accrue liabilities for unpaid losses and loss adjustment expenses based upon estimates of the ultimate amount payable. Our estimates of ultimate losses and loss adjustment expenses by line of business are established 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. However, results derived by this method may be understated as this method does not take into account large unpaid claims, and the accuracy of results can be affected by changes in the rate of claim settlements or shifts in the size of claims settled.

The actuary produces and reviews 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 actuary’s 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 actuary produces and reviews 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 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 an estimated ultimate loss.

Frequency/Severity Method — The Frequency/Severity Method combines estimates of ultimate claim counts and estimates of per claim ultimate loss severity 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.

The actuarially-determined estimate is selected based upon indications from the actuarial methodologies describe above, which are generally accepted methods. 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 and for the accident year.

We estimate IBNR reserves by reducing the selected actuarial estimate of the ultimate losses and loss adjustment expenses incurred by line of business as of the financial statement date by losses and loss adjustment expense payments incurred by line of business as of that same date.

The process of estimating loss reserves involves a significant degree of judgment and is subject to uncertainty from various sources. This includes both internal and external events, such as changes in claims handling procedures, economic inflation, legal trends, and legislative changes, among others. The impact of these items on ultimate losses and loss adjustment expenses is difficult to estimate. Uncertainty in loss reserve estimation difficulties also differs by line of business due to variation 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 loss reserving process, including the application of individual 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. In establishing our estimates, we consider all significant facts and 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 losses 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.

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Our reserves for unpaid losses and LAE are summarized below:

	As of		As of
	December 31,		December 31,
	2010		2009
Case reserves	$	53,330	$	55,258
IBNR reserves		34,321		33,096
Net unpaid losses and LAE		87,651		88,354
Reinsurance recoverable on unpaid losses and LAE		22,322		18,356
Reserves for unpaid losses and LAE	$	109,973	$	106,710

At December 31, 2010, the amount recorded as compared to the actuarially-determined reserve range, net of reinsurance was as follows:

Reserve Range for Unpaid Losses and LAE
Low End	Recorded	High End
$80,201	$87,651	$91,372

At December 31, 2009, the amount recorded as compared to the actuarially-determined reserve range, net of reinsurance was as follows:

Reserve Range for Unpaid Losses and LAE
Low End	Recorded	High End
$78,154	$88,354	$91,086

Our actuary developed a range of reasonable reserve estimates which reflect the uncertainty inherent in the loss reserving 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 losses 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 actuary reviewed the variance around the select loss reserve estimates for each of the actuarial methods and selected reasonable low and high estimates based on his knowledge and judgment. In making these judgments the actuary typically assumed, based on his 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 actuary 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 development could significantly impact our loss reserve levels; and

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

Actuaries generally are required to exercise a considerable degree of judgment in the evaluation of all of these and other factors in the analysis of losses and LAE reserves, and the 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 actuary is consistent with the observed development of our loss reserves over the last few years.

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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 as shown for 2009 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. This reinsurance contract has been accounted for at December 31, 2009 as if it has been commuted because the estimated experience under the contract at this point in time would lead us to execute a commutation to recognize profit sharing under that contract. However, the contract does not require us to execute the commutation until on or before January 1, 2015. Therefore, we will keep the contract in effect until a later date to continue the stop loss reinsurance protection of future adverse development of reserves for the accident years 2008 and 2009. For additional information concerning the stop loss reinsurance contract, see Item 1 “Business — Reinsurance.”

The following factors could impact the frequency and severity of claims, and therefore, the ultimate amount of losses 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.

Lines of Business and Actuarial Range

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 our actuary and management. The following table provides case and IBNR reserves

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for losses and loss adjustment expenses by major lines of business as of December 31, 2010 and December 31, 2009. A discussion of each major line of business will follow.

As of December 31, 2010

							Actuarially Determined
					Total		Range of Estimates
	Case Reserves		IBNR Reserves		Reserves		Low		High
Commercial auto liability	$	8,586	$	5,899	$	14,485	$	13,428	$	15,023
Workers’ compensation		12,290		8,201		20,491		19,545		21,204
Commercial multi-peril		11,518		6,391		17,909		16,582		18,743
Liability		9,515		9,096		18,611		16,823		19,162
Fire & allied		5,748		1,109		6,857		5,826		7,190
Assumed		4,372		3,202		7,574		6,574		8,040
Other		1,301		423		1,724		1,423		2,010
Total net reserves		53,330		34,321		87,651	$	80,201	$	91,372
Reinsurance recoverables		12,784		9,538		22,322
Gross reserves	$	66,114	$	43,859	$	109,973

As of December 31, 2009

							Actuarially Determined
					Total		Range of Estimates
	Case Reserves		IBNR Reserves		Reserves		Low		High
Commercial auto liability	$	9,115	$	5,386	$	14,501	$	12,719	$	14,681
Workers’ compensation		13,675		7,262		20,937		19,472		21,109
Commercial multi-peril		14,262		6,778		21,040		19,413		21,597
Liability		9,209		7,851		17,060		14,343		17,470
Fire & allied		3,546		1,244		4,790		3,927		4,920
Assumed		4,264		4,008		8,272		6,972		9,066
Other		1,187		567		1,754		1,308		2,243
Total net reserves		55,258		33,096		88,354	$	78,154	$	91,086
Reinsurance recoverables		8,261		10,095		18,356
Gross reserves	$	63,519	$	43,191	$	106,710

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 based on 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 -8% to +4%, with the ranges around each of our core lines of business (excluding assumed and other lines) ranging from the widest being -15% to +5% (fire & allied) to the narrowest being -5% to +3% (workers’ compensation). As shown in the table below, since 2004 the variance in our originally estimated loss reserves has ranged from 0.3% deficient to 11.3% redundant.

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

	2004			2005			2006			2007			2008			2009
As originally estimated	$	55,804		$	61,032		$	69,316		$	77,229		$	85,440		$	88,354
As estimated at December 31, 2010		54,031			59,175			62,555			68,497			85,704			86,268
Net cumulative redundancy (deficiency)	$	1,773		$	1,857		$	6,761		$	8,732		$	(264	)	$	2,086
% redundancy (deficiency)		3.2	%		3.0	%		9.8	%		11.3	%		(0.3	)%		2.4	%

The table below summarizes the impact on our shareholders’ equity from changes in estimates of unpaid losses and LAE reserves as of December 31, 2010:

			Percentage Change in
	Aggregate Loss and		Shareholders’
Reserve Range for Unpaid Losses and LAE	LAE Reserve		Equity(1)
Low End	$	80,201		5.3	%
Recorded		87,651		—
High End		91,372		(2.6	)%

(1) Net of tax

If the losses and LAE reserves were recorded at the high end of the actuarially-determined range, the losses and LAE reserves would increase by $3,721. This increase in reserves would have the effect of decreasing net income and shareholders’ equity as of December 31, 2010 by $2,456. If the losses and LAE reserves were recorded at the low end of the actuarially-determined range, the losses and LAE reserves at December 31, 2010 would be reduced by $7,450, with corresponding increases in net income and shareholders’ equity of $4,917.

If the losses and LAE reserves were to adversely develop to the high end of the range, approximately $3,721 of anticipated future payments for the losses and LAE expenses would be required to be paid, thereby affecting cash flows in future periods as the payments for losses are made.

Specific considerations for major lines of business

Commercial Multi-Peril

At December 31, 2010, the commercial multi-peril line of business had recorded reserves, net of reinsurance, of $17,909, which represented 20.4% of our total net reserves. At December 31, 2009, this line of business had recorded reserves, net of reinsurance, of $21,040, which represented 23.8% 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. At December 31, 2010 and 2009, no adjustment was 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.

Workers’ Compensation

At December 31, 2010, our workers’ compensation line of business had recorded reserves, net of reinsurance, of $20,491, or 23.4% of our total net reserves, and was equal to the actuarially selected estimate for this line. At December 31, 2009, this line of business had recorded reserves, net of reinsurance, of $20,937, which represented 23.7% of our total net reserves. At December 31, 2009 this reserve was $525, or 2.6% 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

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available for injured workers. The additional reserve above the actuarial central estimate at December 31, 2009 was held to cover this potential for adverse development. Our actuary has become more familiar with our book of business and the underlying trends in our loss experience, particularly as they are affected by the extended downturn in the labor market. As a result, our actuary increased the selected tail loss development factors for this line of business in the second quarter of 2010. The effect of increasing these factors has been an increase in the ultimate losses for the recent immature accident years. We believe that our actuary has refined the assumptions for this line of business to appropriately capture the inherent uncertainty related to the reserving, which will be sufficient to cover future losses. Therefore, we have recorded our reserves at June 30, 2010, at September 30, 2010, and at December 31, 2010 at the same amount as the actuarial central estimate.

Liability

This line of business includes general liability, products liability, and umbrella liability coverages. At December 31, 2010, our liability line of business had recorded reserves, net of reinsurance, of $18,611, which represented 21.2% of our total net reserves and was equal to the actuarially selected estimate for this line. At December 31, 2009, our liability line of business had recorded reserves, net of reinsurance, of $17,060, which represented 19.3% of our total net reserves. This reserve at December 31, 2009 was $650, or 4.0%, 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. The additional reserve above the actuarial central estimate at December 31, 2009 was held to cover this potential for adverse development. During the first quarter of 2010, we experienced unfavorable development on 2009 accident year claims that contributed to an increase in our actuary’s ultimate loss estimate for this line of business by approximately $800. As of March 31, 2010, we believe that the actuary has refined assumptions for this line of business to appropriately capture the inherent uncertainty related to the reserving that will be sufficient to cover future losses. Therefore, we have recorded our reserves at the same amount as the actuarial central estimate for each of the quarterly periods in the year ended December 31, 2010.

Commercial Automobile Liability

At December 31, 2010, our commercial automobile liability line of business had recorded reserves, net of reinsurance, of $14,485, which represented 16.5% of our total net reserves and was equal to the actuarially selected estimate for this line. At December 31, 2009, our commercial automobile liability line of business had recorded reserves, net of reinsurance, of $14,501, which represented 16.4% of our total net reserves. This reserve at December 31, 2009 was $525, or 3.8% above the actuarially selected estimate. This line of business is similar to workers’ compensation in that the reporting of claims is generally timely but 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. The additional reserve above the actuarial central estimate at December 31, 2009 was held to cover this potential for adverse development. During the first quarter of 2010, we experienced unfavorable development on accident year 2008 claims that contributed to an increase in our actuary’s ultimate loss estimate for this line of business by over $800. As of March 31, 2010, we believe that the actuary has refined assumptions for this line of business to appropriately capture the inherent uncertainty related to the reserving that will be sufficient to cover future losses. Therefore, we have recorded our reserves at the same amount as the actuarial central estimate for each of the quarterly periods in the year ended December 31, 2010.

Fire and Allied

At December 31, 2010, our fire and allied lines of business had recorded reserves, net of reinsurance, of $6,857, which represented 7.8% of our total net reserves. At December 31, 2009, our fire and allied lines of business had recorded reserves, net of reinsurance, of $4,790, which represented 5.4% of our total net reserves. These lines of business comprise a substantial amount of the property exposures that we insure. Our allied line of business covers losses primarily from wind, hail, and snow. No adjustment was made to the actuarially selected estimate for this line

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at December 31, 2010 and 2009. Favorable or unfavorable development can occur on specific claims based on changes in the cost of building materials, refinement of damage assessments, including business income coverage, and resolution of coverage issues; and as opportunities for salvage and subrogation are investigated.

Assumed

At December 31, 2010, our assumed lines of business had recorded reserves, net of reinsurance, of $7,574, which represented 8.6% of our total net reserves and was equal to the actuarially selected estimate for this line. At December 31, 2009, our assumed lines of business had recorded reserves, net of reinsurance, of $8,272, which represented 9.4% of our total net reserves. At December 31, 2009, this reserve was $300, or 3.8% 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; and also include 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. The additional reserve above the actuarial central estimate at December 31, 2009 was held to cover this potential for adverse development. Our actuary has become more familiar with our book of business and the underlying trends in our loss experience, particularly as they are affected by the extended downturn in the labor market. As a result, our actuary increased the selected paid and incurred development factors for this line of business in the second quarter of 2010. The effect of increasing these factors has been an increase in the ultimate losses for the recent immature accident years. The effect of that increase has been partially offset by the declines in total ultimate losses as a result of the declining volume of business assumed from the pools. However, we believe that our actuary has refined the assumptions for this line of business to appropriately capture the inherent uncertainty related to the reserving, which will be sufficient to cover future losses. Therefore, we have recorded our reserves at June 30, 2010, at September 30, 2010, and at December 31, 2010 at the same amount as the actuarial central estimate.

Our estimated liability for asbestos and environmental claims was $2,363 at December 31, 2010, and $2,397 at December 31, 2009, 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.

Investments

Our fixed maturity and equity securities (the securities classified as equity securities on our consolidated balance sheets is comprised of an investment in a high-yield bond mutual fund) 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.

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The fair value and unrealized losses for our securities that were temporarily impaired as of the years ended December 31, 2010 and December 31, 2009 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
December 31, 2010:
U.S. Treasuries	$	284	$	17	$	—	$	—	$	284	$	17
State and political subdivisions		9,477		182		2,803		47		12,280		229
Residential mortgage-backed securities		3,094		64		361		2		3,455		66
Corporate securities		9,658		200		928		9		10,586		209
Total fixed maturity securities		22,513		463		4,092		58		26,605		521
Equity securities(1)		10,874		11		—		—		10,874		11
Total temporarily impaired securities	$	33,387	$	474	$	4,092	$	58	$	37,479	$	532

(1) Equity securities represent the amount invested in a high-yield bond mutual fund invested primarily in corporate fixed maturity securities.

	Less than 12 Months				12 Months or Longer				Total
	Fair		Unrealized		Fair		Unrealized		Fair		Unrealized
Description of Securities	Value		Losses		Value		Losses		Value		Losses
December 31, 2009:
Agencies not backed by the full faith and credit of the U.S. government	$	5,965	$	30	$	—	$	—	$	5,965	$	30
State and political subdivisions		5,021		65		555		10		5,576		75
Commercial mortgage-backed securities		—		—		1,938		65		1,938		65
Residential mortgage-backed securities		9,549		149		—		—		9,549		149
Corporate securities		21,283		179		3,471		63		24,754		242
Total temporarily impaired securities	$	41,818	$	423	$	5,964	$	138	$	47,782	$	561

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.

At December 31, 2010 and December 31, 2009, we had gross unrealized losses on fixed maturity and equity securities of $532 and $561, respectively. We have evaluated each fixed maturity security and taken into account the severity and duration of any declines in fair value, 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 fixed maturity portfolio are most likely attributable to the current market conditions and we will recover the entire amortized cost basis. Our fixed maturity investments and equity securities 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. Our investment 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 a fixed maturity 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

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amortized cost basis is referred to as the “credit loss.” If we determine that we intend to sell the securities that have experienced a decline in fair value below cost, or that it is more likely than not that we will be required to sell the securities prior to recovering their amortized cost basis less any current-period credit losses, the full amount of the other-than-temporary impairment will be recognized in earnings. If we conclude based on our analysis that there is a credit loss, and 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 securities, the amount of 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 applicable tax.

In 2009, we determined that one security in our fixed maturity 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 in 2009 of approximately $197. There were no other-than-temporary impairment charges in 2010. Adverse investment market conditions, or poor operating results of underlying investments, could result in impairment charges in the future.

A portion of our investment portfolio is in a high-yield bond mutual fund invested primarily in corporate fixed maturity securities, with an average S&P credit rating of “B”. We believe that a fund of this nature is generally prone to less volatility than securities that are tied to U.S. equities (stock) markets. In evaluating the potential impairment of this fund, we consider our ability and intent to hold this asset for a reasonable time to recover our cost basis and the duration and magnitude of any unrealized losses. We also take into account other relevant factors such as: any ratings agencies announcements, general economic and market sector conditions, and input from our independent investment manager. We have found that the decline in fair value for this asset is due to general declines and volatility in the U.S. bond markets that we believe to be temporary in nature.

We developed our investment policy in conjunction with our external investment manager, and our board of directors reviews the policy at least annually. Our investment portfolio is professionally managed by a registered independent investment advisor specializing in the management of insurance company assets. We use quoted values and other data provided by a nationally recognized independent pricing service in our process for determining the fair values of our investments. Its evaluations represent an exit price and a good faith estimate 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.

Securities classified as Level 1 securities consist of U.S. Treasury fixed maturity securities and publicly traded mutual funds; Level 2 securities are comprised of available for sale fixed maturity securities whose fair value was determined using observable market inputs. For fixed maturity securities that have quoted prices in active markets, market quotations are provided. Fair values for securities for which quoted market prices were unavailable were estimated based upon reference to observable inputs such as benchmark interest rates, market comparables, and other relevant inputs. Investments valued using these inputs include obligations of U.S. government agencies, obligations of states and political subdivisions, commercial and residential mortgage-backed securities, and corporate debt securities. The fair value inputs that the pricing service uses in determining the fair value of our investments include, but are not limited to:

U.S. government agencies (depending on the specific market or program):  broker quotes; U.S. Treasury market and floating rate indices; overall credit quality, including assessments of market sectors and the level and variability of sources of payment; credit support including collateral; the establishment of a risk adjusted credit spread over the applicable risk free yield curve for discounted cash flow valuations; assessments of the level of economic sensitivity.

States and political subdivisions:  overall credit quality, including assessments of market sectors and the level and variability of sources of payment such as general obligation, revenue or lease; credit support such as insurance; state or local economic and political base; prefunded and escrowed to maturity covenants.

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Commercial mortgage-backed securities:  overall credit quality, including assessments of the level and variability of credit support and collateral type such as office, retail, or lodging; predictability of cash flows for the deal structure; prevailing economic market conditions.

Residential mortgage-backed securities:  estimates of prepayment speeds based upon historical prepayment rate trends; underlying collateral interest rates; original weighted average maturity; vintage year; borrower credit quality characteristics; interest rate and yield curve forecasts; U.S. government support programs; tax policies; and delinquency/default trends.

Corporate securities:  overall credit quality, the establishment of a risk adjusted credit spread over the applicable risk free yield curve for discounted cash flow valuations; assessments of the level of industry economic sensitivity; company financial policies; indenture restrictive covenants; and/or security and collateral.

All unadjusted estimates of fair value for our fixed maturity securities priced by the pricing service as described above are included in the amounts reported as Level 2 securities.

In the event that the independent pricing service is unable to provide a fair value estimate, we would attempt to obtain a non-binding fair value estimate derived from observable inputs 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 December 31, 2010 and 2009 were utilized, among other resources, in reaching a conclusion as to the fair value of our investments. During 2010 all of our fixed maturity investments were priced using this one primary service.

Management reviews the reasonableness of the pricing provided by the independent pricing service by employing various analytical procedures. We review all fixed maturity securities to identify recent downgrades, significant changes in pricing, and pricing anomalies on individual securities relative to other similar securities. This will include looking for relative consistency across securities in common sectors, durations and credit ratings. This review will also include all fixed maturity securities rated lower than “A” by Moody’s or S&P. If, after this review, management does not believe the pricing for any security is a reasonable estimate of fair value, then it will seek to resolve the discrepancy through discussions with the pricing service. In our review we did not identify any such discrepancies for the years ended December 31, 2010 and 2009, and no adjustments were made to the estimates provided by the pricing service for the years ended December 31, 2010, and 2009. The classification within the fair value hierarchy of FASB ASC 820, Fair Value Measurements and Disclosures, is then confirmed based on the final conclusions from the pricing review.

Deferred Policy Acquisition Costs

In accordance with ASC Topic 944, Financial Services — Insurance, certain direct policy 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. The method followed in computing deferred acquisition costs (DAC) limits the amount of 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. If the sum of the expected loss and loss adjustment expenses, the expected dividends to policyholders, unamortized acquisition costs, and maintenance costs exceeds the related unearned premiums and anticipated investment income, then the excess must be written off. Future changes in estimates, the most significant of which is expected losses and loss adjustment expenses, may require adjustments to deferred policy acquisition costs. If the estimation of net realizable value indicates that the deferred acquisition

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costs are not recoverable, they would be written off, and further analysis would be performed to determine if an additional liability would need to be accrued.

Our estimate of the expected loss and loss adjustment expenses, which is derived from our estimate of an expected loss ratio, is the most significant factor in determining the recoverability of our deferred acquisition cost asset. Each reporting period, we evaluate our estimates of future losses and loss adjustment expenses associated with our unearned premium utilizing the most recent actuarial analysis as a key input to the analysis. This evaluation is done for our agribusiness and commercial business segments and is used to determine the expected loss and loss adjustment expenses we will incur on each segment’s unearned premium. The determination of the expected loss and loss adjustment expenses examines trends and averages in our actual accident year loss ratios, and considers the impact of factors such as recent inflation and premium rate changes, changes in underwriting practices, and abnormal levels of frequency or severity that could cause the historical ratios to vary from our near term expectations.

In 2010, our commercial business segment has experienced elevated loss ratios due mostly to higher amounts reserved for current year losses. With the climb in the loss ratio in our commercial business segment, the excess of unearned premiums and anticipated investment income over the expected expenses in our DAC recoverability projection has narrowed. If the actual loss ratio in our commercial business segment were to continue to increase in future periods significantly enough to cause the expected loss ratio to increase by more than roughly two percentage points, we would consider a portion of our DAC to be unrecoverable. Furthermore, if we did not consider investment income in the expected recoverability calculation, approximately $298 of the $3,075 of deferred acquisition costs in our commercial business segment at December 31, 2010 would be unrecoverable.

At December 31, 2010, and 2009, deferred policy acquisition costs and the related unearned premium reserves were as follows:

	December 31,
	2010		2009
Agribusiness segment
Deferred policy acquisition costs	$	6,658	$	6,386
Unearned premium reserves	$	30,117	$	28,727
Commercial business segment
Deferred policy acquisition costs	$	3,075	$	3,665
Unearned premium reserves	$	12,683	$	14,577
Other
Deferred policy acquisition costs	$	2	$	2
Unearned premium reserves	$	7	$	9
Total
Deferred policy acquisition costs	$	9,735	$	10,053
Unearned premium reserves	$	42,807	$	43,313

Income Taxes

We utilize 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 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. We evaluate the recoverability of deferred tax assets by taking into account the future taxable income of the legal entity that generated the deferred tax asset. Any changes in estimated future taxable income may require us to change our estimated valuation allowance against our deferred

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tax assets. In determining whether a valuation allowance is required, we consider all available evidence, both positive and negative, including our cumulative losses in recent years, projected taxable income and available tax strategies.

We have deferred tax assets resulting from tax credit carryforwards, net operating losses and other deductible temporary differences, which will reduce taxable income in future periods. ASC 740, Income Taxes (ASC 740) requires that a valuation allowance be established when it is “more likely than not” that all or a portion of deferred tax assets will not be realized. A review of all available positive and negative evidence needs to be considered, including a company’s performance, the market environment in which it operates, the length of carryback and carryforward periods, and future operating income projections. Where there are cumulative losses in recent years, ASC 740 creates a strong presumption that a valuation allowance is needed.

The significant level of second quarter catastrophic losses, and additional losses that we recognized in the third quarter of 2010, resulted in a $3,077 pre-tax loss from continuing operations for the first nine months of 2010. In the third quarter of 2010, we established a full valuation allowance against our net deferred tax assets that resulted in net income tax expense of $2,508 for the nine months ended September 30, 2010. Although our fourth quarter of 2010 had positive pre-tax income, and our current financial forecasts indicate that taxable income will be generated in the future, those favorable factors were not considered sufficient positive evidence to overcome the observable negative evidence associated with our three year cumulative loss position. Therefore, at December 31, 2010 we carry a full valuation allowance against our federal net deferred tax assets of $3,468. In future periods, we may be able to reduce some or all of the valuation allowance upon our determination that we will be able to realize such deferred tax assets. In that event, we would be able to reduce our future tax liability and recognize an income tax benefit within the statement of operations to the extent of those assets.

For state income tax return purposes, as of December 31, 2010 and December 31, 2009 we had $648 and $629, respectively of deferred tax assets associated with state income tax net operating loss (NOL) carryforwards that will completely expire if unused by 2030. The amount and timing of realizing the benefit of state NOL carryforwards depends on future state taxable income and limitations imposed by tax laws. After considering the potential of our holding company’s ability to generate sufficient state taxable income in the future in order to utilize these state NOL carryforwards, we have determined that it is not more likely than not that we will be able to do so. Accordingly, we have established a valuation allowance of $648 and $629 at December 31, 2010 and December 31, 2009, respectively, to reflect our determination that we will not realize the benefit of these state NOL carryforwards in the future.

As of December 31, 2010 and 2009, we had no material unrecognized tax benefits or accrued interest and penalties. Federal tax years 2007 through 2010 were open for examination as of December 31, 2010.

Pension Benefit Obligation

In connection with our public offering, in July 2009 our board of directors approved a resolution to freeze the future accrual of benefits under our defined benefit pension plan effective October 31, 2009. On August 1, 2009, the pension plan administrator authorized the plan freeze, whereby all participants’ accrued benefits under the plan were frozen as of October 31, 2009. We recorded an estimated curtailment benefit of $1,659 pre-tax, or $1,095 after-tax, which was reflected in other comprehensive income (loss) in 2009. On May 12, 2010, upon approval by our Board of Directors, we terminated our Supplemental Executive Retirement Plan (SERP) for four of the five participants. The one remaining participant is a retired employee in pay status. The SERP benefit obligation was re-measured on that date and we recorded a net curtailment loss of $68 and a settlement gain of $747 which were classified as underwriting and administrative expenses in the consolidated statements of operations.

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, employee turnover, expected retirement age, optional form of benefit and mortality. We review these assumptions for changes annually with our independent

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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. We used a weighted average discount rate of 5.31% and 5.84% to determine the value of our pension benefit obligation at December 31, 2010 and 2009, respectively. 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.

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 once annually and make changes when considered appropriate. In 2010, we did not change our expected long-term rate of return from the 7.5% used in 2009. Our pension plan assets are valued at actual fair value as of the measurement date.

Pension expense for 2010 would have increased approximately $28 if our expected return on plan assets were one half of one percent lower. The benefit obligation at December 31, 2010 would have increased by approximately $576 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 8 of the notes to our consolidated financial statements under Part II Item 8 — “Financial Statements and Supplementary Data.”

To the extent our defined benefit pension plan and SERP are underfunded, we will continue to make contributions to these plans. As of December 31, 2010, our defined benefit pension plan and SERP were underfunded by $1,976 combined. The amount of our future contributions will vary and is subject to a number of factors, including, the performance of the plans’ 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:

	For the Years Ended
	December 31,
	2010			2009
Revenues:
Premiums earned:
Agribusiness	$	45,226		$	45,289
Commercial Business		22,405			28,961
Other		466			1,108
Total premiums earned		68,097			75,358
Investment income, net of investment expense		5,700			5,648
Realized investment gains, net		2,712			199
Other income		325			223
Total revenues	$	76,834		$	81,428
Components of net (loss) income:
Underwriting (loss) income:
Agribusiness	$	(592	)	$	1,985
Commercial Business		(7,922	)		(4,509	)
Other		(362	)		175
Total underwriting losses		(8,876	)		(2,349	)
Investment income, net of investment expense		5,700			5,648
Realized investment gains, net		2,712			199
Other income		325			223
Corporate expense		(539	)		(429	)
Interest expense		(31	)		(22	)
Other expense, net		(164	)		(209	)
(Loss) income from continuing operations, before income taxes		(873	)		3,061
Income tax expense (benefit)		2,615			(346	)
(Loss) income from continuing operations		(3,488	)		3,407
Discontinued operations:
Income from discontinued operations, before income taxes		—			39
Income tax expense		—			879
Loss from discontinued operations		—			(840	)
Net (loss) income	$	(3,488	)	$	2,567
GAAP ratios:
Loss and loss adjustment expense ratio		78.8	%		70.0	%
Underwriting expense ratio		35.0	%		33.7	%
Combined ratio		113.8	%		103.7	%

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Consolidated Premiums Written and Premiums Earned

The components of premiums written and earned, for the years ended December 31, 2010 and 2009 are as follows:

Consolidated	2010						2009
	Written			Earned			Written			Earned
Direct	$	86,524		$	86,638		$	88,356		$	90,332
Assumed		295			297			873			876
Ceded — Stop loss contract reversal		—			—			1,717			1,717
Ceded — All other		(19,082	)		(18,838	)		(17,300	)		(17,567	)
Net	$	67,737		$	68,097		$	73,646		$	75,358

Net premiums earned in 2010 were lower compared to 2009 by $7,261, or 9.6%; the change was primarily due to:

•  Consolidated direct premiums earned declined $3,694 primarily from a decline in direct premiums earned in our commercial business segment of $5,479 as we continue to see the effects of our efforts to improve our underwriting results in this segment by aggressively managing underperforming producers and classes of business. In 2010, direct premiums earned in our agribusiness segment increased by $1,848, or 3.2%, compared to 2009. This increase in direct premiums earned was due to improved retention of existing business, although competitive pressures have resulted in the loss of a few larger accounts in 2010, as well as the timing of new business acquired in 2009 and 2010. In our other segment, net premiums earned declined $642 for the year ended 2010, compared to the same period of 2009 due mostly to a decline in premiums assumed from the national workers’ compensation pool.

•  For the year ended December 31, 2009, the net adjustment of ceded premium recorded under the stop loss contract was $1,717. The premiums ceded under the contract for the 2008 accident year were reversed in the third quarter of 2009 as a result of favorable development in the loss ratio subject to the contract. The stop loss contract was not renewed for 2010 because the reinsurance protection is no longer necessary as we raised additional capital through our stock offering which closed in October 2009. For additional information concerning the stop loss reinsurance contract, see Item 1 — “Business — Reinsurance.”

•  Ceded premiums earned (excluding the stop loss) were higher in the year ended December 31, 2010, compared to the same period of 2009 primarily from increases in reinsurance rates on our 2010 reinsurance program. Also, the year ended 2009 includes a benefit from the reversal of a $645 reinsurance reinstatement premium accrual we had recognized in the second quarter of 2009. In 2010, we raised our participation rate on our per-risk reinsurance treaty: losses between $500 and $1,000 being retained at 60.0% in 2010 versus 52.5% in 2009.

Net Investment Income

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

	For the Years Ended
	December 31,
	2010			2009(1)
Average cash and invested assets	$	183,765		$	147,425
Pre-tax investment income, net of expenses		5,700			5,648
Average pre-tax return on average cash and invested assets(1)		3.1	%		3.8	%

(1) Our initial public offering on October 16, 2009 increased our cash and invested assets on that date by $45,666. Accordingly, we have weighted the average cash and invested assets for 2009 to account for the days in 2009 we were a public company.

Net investment income increased slightly from 2009 to 2010. The net increase in the period is primarily attributable to higher balances of available for sale securities funded with cash from our October 2009 initial public offering, and higher dividend income, partially offset by the impact of declining interest rates.

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Realized Investment Gains, Net

For the year ended December 31, 2010 we had net realized investment gains of $2,712 from the sale of fixed maturity and equity securities.

For the year ended December 31, 2009 we had net realized investment gains of $199, which is net of a pre-tax other-than-temporary impairment loss on one security of approximately $197.

Other Income

Other income primarily consists of premium installment charges and fluctuations in returns on company-owned life insurance (COLI) policies. Other income was $325 and $223 for the years ended 2010 and 2009, respectively. The increase in other income is due primarily to higher returns on the COLI policies in 2010 compared to 2009. As a result of our decision to terminate the SERP, in the second quarter of this year we redeemed our COLI policies that had been previously purchased to fund the SERP liabilities when they came due.

Consolidated 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 (loss) income, combined ratios, written premiums and discussion of our 2009 results that excludes the impact of our aggregate stop loss contract.

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

Losses and Loss Adjustment Expenses

The components of incurred losses and LAE and the loss and LAE ratio in 2010 and 2009 are as follows:

	For the Years Ended
Consolidated	December 31,
	2010			2009
Net premiums earned	$	68,097		$	75,358
Incurred losses and LAE:
Losses	$	46,721		$	47,032
Catastrophe losses		5,578			1,979
Other weather losses		3,473			2,188
Stop loss ceded reversal		—			4,292
Favorable prior year development(1)		(2,086	)		(2,737	)
Total incurred losses and LAE	$	53,686		$	52,754
Loss and LAE ratios:
Losses		68.6	%		62.4	%
Catastrophe losses		8.2	%		2.6	%
Other weather losses		5.1	%		2.9	%
Stop loss ceded reversal		—	%		5.7	%
Prior year development(1)		(3.1	)%		(3.6	)%
Total Loss and LAE ratio		78.8	%		70.0	%

(1) 2009 Prior year development excludes the impact of the stop loss reversal.

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Our consolidated loss and loss adjustment expense (LAE) ratio was 78.8% for the year ended December 31, 2010, compared to 70.0% in 2009. Total losses and LAE in 2010 were $53,686, compared to $52,754 for 2009. The changes in losses and LAE in 2010 compared to 2009 are further described below:

•  On a consolidated basis, losses not attributable to catastrophes or weather were lower by $311 primarily due to lower claim severity in our commercial auto line of business and lower claim frequency in our workers’ compensation and liability lines of business within our agribusiness segment. In our commercial business segment, these losses were higher due to increased severity arising from several large property losses in our commercial multi-peril line, adverse workers’ compensation development in 2009 that impacted our estimates for 2010, and increased frequency in commercial auto liability and other liability claims in 2010 compared to 2009.

•  Catastrophe losses were $3,599 higher in the year to date period of 2010, compared to the same period of 2009 due to severe second quarter 2010 storms in the Midwest that affected several of our large agribusiness insureds. These storm losses arose from catastrophic wind events in Arkansas, Minnesota, Kansas, and Illinois. Our loss ratio from catastrophes in 2010 was 8.2 points compared to 2.6 points in 2009. Catastrophe and weather loss ratios will vary significantly year to year and quarter to quarter due to the volatility of the frequency and the severity of such losses, relative to the small size of our company. We typically experience the highest level of weather-related loss activity in the second quarter of the year. Also, our catastrophe losses for 2010 include late winter storms in the Northeast and Mid-Atlantic states that adversely impacted first quarter 2010 results in our commercial business segment.

•  The favorable prior year reserve development for 2010 of $2,086 includes reversals in additional reserves carried above the actuarial central estimate (see our discussion of “Losses and Loss Adjustment Expense Reserves” under the section entitled “Critical Accounting Estimates”) and was due to a lower level of incurred loss emergence relative to expectations in the workers’ compensation, commercial auto, and liability lines of business in our agribusiness segment. Within our agribusiness segment, the commercial auto line of business was also impacted positively by favorable prior year claims settlements. This favorable development was partly offset by unfavorable development in the fire and allied lines of business due to updated information on previously reported large property claims. In our commercial business segment, we experienced net favorable prior year reserve development of $26. Favorable loss emergence, relative to expectations, in the commercial multi-peril line and favorable claims settlements in the fire and allied lines were offset by unfavorable development in the commercial auto liability line and other liability lines.

Underwriting Expenses

Our underwriting expense ratio represents the ratio of underwriting expenses (amortization of deferred policy acquisition costs and underwriting and administrative expenses) divided by net premiums earned. As one component of the combined ratio, along with the loss and loss adjustment expense 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.

The consolidated underwriting expense ratio was 35.0% for 2010, compared to 33.7% for 2009; an increase of 130 basis points. The factors that contributed to the net increase in the expense ratio are further described below:

•  In 2010, the combination of higher reinsurance costs (and therefore lower earned premium) and an overall decline in direct earned premium from our reduction of unprofitable business in our commercial business segment has caused this underwriting expense ratio to increase.

•  Consolidated underwriting and administrative expenses, including amortization of deferred policy acquisition costs, were $23,826 for the year ended 2010 and $25,382 for the year ended 2009. In the second quarter of 2010, we recognized a net gain from the SERP termination of $679. The remainder of the decrease in underwriting and administrative expenses is primarily due to lower amortization of deferred policy acquisition costs of $1,213 resulting from our lower direct and assumed earned premiums, and the 2009

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underwriting and administrative costs included employee incentive costs based on company performance. The lower deferred policy acquisition costs were partially offset by increases in insurance, consulting and legal costs associated with public company compliance requirements.

Interest Expense

Interest expense was $31 for the year ended 2010, as compared to $22 for the year ended 2009. Interest expense for 2009 included the reversal of the stop loss interest expense of $86, which was offset by interest expense of $78 associated with our long-term debt and lines of credit that we retired in late 2009.

Other Expense, net

Other expense, net is comprised primarily of estimated reserves and specific write-offs of uncollectible premiums.

Other expense, net was $164 for the year ended 2010, and $209 for the year ended 2009. The decrease of $45 for the period is due primarily to lower levels of write-offs and aging of receivables in 2010 as compared to 2009, the positive impact of which we attribute to our decision to withdraw from certain unprofitable classes of business.

(Loss)   Income from Continuing Operations, before Income Taxes

For the year ended 2010, we had a pre-tax loss from continuing operations of $873 compared to pre-tax income of $3,061 for the year ended 2009. The factors that contributed to the net decrease in pre-tax income are further described below:

•  Net premiums earned in 2010 were $7,261 lower than 2009. The favorable impact of the stop loss on 2009 earned premiums was $1,717.

•  For the year ended December 31, 2010 compared to the same period of 2009, losses and LAE were $53,686 and $52,754, respectively; catastrophe and weather-related losses were higher by $4,884, and losses and LAE were unfavorably impacted in 2009 by $4,292 from the stop loss reversal.

•  Net realized gains from sales of fixed maturity and equity securities were higher by $2,316 in 2010 compared to 2009. Total net realized gains in 2009 included an other-than-temporary impairment charge of $197.

•  Total underwriting and administrative expenses were lower by $1,556 in 2010 compared to 2009, due primarily to our lower level of earned premium in 2010 compared to 2009, which resulted in lower amortization expense for policy acquisition costs. The SERP termination gain recorded in the second quarter of 2010 was partly offset by increased public company compliance-related costs incurred in 2010.

Income Tax Expense (Benefit)

For the year ended 2010, the income tax expense for continuing operations was $2,615, or an effective rate of (300)%. The year ended 2010 includes an adjustment to income tax expense of $3,309 associated with our establishing a valuation allowance against our federal net deferred tax assets. For more information regarding the impact that the valuation allowance had on our income tax expense, see Note 10 to our consolidated financial statements. Excluding the impact of the valuation allowance, our effective income tax rate for the year ended December 31, 2010 was 79.5%. Our effective tax rate is impacted by the relationship of our pre-tax loss from continuing operations compared to the level of tax exempt interest income earned on our municipal bond portfolio.

For the year ended December 31, 2009, the income tax benefit from continuing operations was $346, or an effective tax rate of (11.3)%. The 2009 provision for income taxes includes a reversal of a deferred tax valuation allowance of $1,026, as we determined at the time that it was more likely than not that we would be able to realize the full benefit of our deferred tax assets related to our 2008 capital losses. Other changes in the consolidated effective income tax rate are primarily due to the amount of our pre-tax income from continuing operations, and its relationship to the level of tax exempt interest income earned on our municipal bond portfolio.

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Net Loss from Discontinued Operations

Net loss from discontinued operations includes 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 year ended 2009, the net loss from discontinued operations of $840 includes a provision for income taxes of $879, 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.

Net (Loss) Income

For the year ended December 31, 2010, we had a net loss of $3,488, or $0.76 per diluted share, compared to net income of $2,567, or $0.19 per diluted share, for the year ended December 31, 2009. The decrease in net income of $6,055 in 2010 compared to 2009 was due to the items discussed above.

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.

Agribusiness

The results of our agribusiness segment were as follows:

Agribusiness	For the Years Ended December 31,
	2010			2009
Direct premiums written	$	60,787		$	58,675
Net premiums written		46,605			46,787
Revenues:
Net premiums earned	$	45,226		$	45,289
Other income		95			31
Total revenues(1)	$	45,321		$	45,320
Operating (loss) income:
Underwriting (loss) income	$	(592	)	$	1,985
Other income		95			31
Interest & other expenses		(83	)		(35	)
Total operating (loss) income(1)	$	(580	)	$	1,981
Loss and loss expense ratio		71.5	%		65.5	%
Underwriting expense ratio		29.8	%		30.1	%
GAAP combined ratio		101.3	%		95.6	%

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

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Agribusiness Segment: Premiums Written and Premiums Earned

The components of premiums written and earned, for the years ended December 31, 2010 and 2009 in our agribusiness segment are as follows:

Agribusiness	2010						2009
	Written			Earned			Written			Earned
Direct	$	60,787		$	59,128		$	58,675		$	57,280
Ceded — Stop loss contract reversal		—			—			615			615
Ceded — All other		(14,182	)		(13,902	)		(12,503	)		(12,606	)
Net	$	46,605		$	45,226		$	46,787		$	45,289

The agribusiness marketplace has been very competitive during the last four 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 this period.

Direct premiums written increased from $58,675 for the year ended December 31, 2009 to $60,787 for the same period of 2010, a 3.6% increase. The increase is due to higher new business and increased retention rates, although competitive pressures have resulted in the loss of a few larger accounts in 2010. We continue to hold the line on rates while we believe that our competition often reduces rates below what we feel are adequate levels compared to the risks underwritten. We believe that our strong financial position, our stable and consistent presence in the agribusiness market, and our reputation for strong customer service will serve us better in the long run as these attributes differentiate us from competitors who we believe compete purely on price.

For the year ended December 31, 2009, the net reversal of the stop loss was $615. Ceded premiums earned (excluding the stop loss) were higher in 2010 compared to 2009, primarily due to increases in reinsurance rates on our 2010 reinsurance program; and the first quarter of 2009 included a reinsurance reinstatement premium credit of $252.

The timing of direct premiums written in 2009 and 2010 together with the increase in ceded premiums, resulted in our net premiums earned in our agribusiness segment decreasing from $45,289 in 2009 to $45,226 in 2010.

Agribusiness Segment: Underwriting (Loss) Income

The discussion below provides more insight into the variances in the categories of losses and LAE and underwriting and administrative expense, which impact underwriting profitability:

Losses and Loss Adjustment Expenses and Loss and LAE ratio

The components of incurred losses and LAE and the loss and LAE ratio in 2010 and 2009 in our agribusiness segment are as follows:

	For the Years Ended
Agribusiness	December 31,
	2010			2009
Net premiums earned	$	45,226		$	45,289
Incurred losses and LAE:
Losses	$	27,688		$	28,495
Catastrophe losses		4,204			1,758
Other weather losses		2,586			1,348
Stop loss ceded reversal		—			568
Favorable prior year development(1)		(2,136	)		(2,515	)
Total incurred losses and LAE	$	32,342		$	29,654

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	For the Years Ended
Agribusiness	December 31,
	2010			2009
Loss and LAE ratios:
Losses		61.2	%		62.9	%
Catastrophe losses		9.3	%		3.9	%
Other weather losses		5.7	%		3.0	%
Stop loss ceded reversal		—	%		1.3	%
Prior year development(1)		(4.7	)%		(5.6	)%
Total Loss and LAE ratio		71.5	%		65.5	%

(1) 2009 prior year development excludes the impact of the stop loss reversal.

Our agribusiness segment incurred $32,342 of losses and LAE for the year ended 2010, as compared to $29,654 of losses and LAE for the year ended 2009. The loss ratio in our agribusiness segment increased from 65.5% in 2009 to 71.5% in 2010, due primarily to the second quarter catastrophe losses that negatively impacted our agribusiness segment. The factors that contributed to the net increase of $2,688 are further described below:

•  Other current accident year losses were lower by $807 primarily due to lower claims severity in our commercial auto line of business and lower claim frequency in our workers’ compensation and liability lines of business. These improvements were partially offset by increased severity in our liability lines of business.

•  Weather-related losses from both catastrophic and non-catastrophic events increased by $3,684 in 2010 compared to 2009. The catastrophe losses were primarily from several Midwest storms in the second quarter of 2010 that resulted in large claims mostly incurred by four of our agribusiness policyholders. Catastrophe losses accounted for 9.3 loss ratio points in 2010, compared to 3.9 loss ratio points in 2009.

•  In 2009 we recorded a reversal of 2008 accident year losses we had previously ceded under our aggregate stop loss contract as a result of favorable development on that accident year. The impact of the reversal on our losses and LAE was $568 in the year ended December 31, 2009. We did not renew the stop loss contract in 2010.

•  The favorable prior year reserve development of $2,136 in 2010 was due to favorable development in the workers’ compensation, commercial auto, and liability lines of business as a result of a lower level of incurred loss emergence relative to expectations. This favorable development was partly offset by unfavorable development in the fire and allied lines of business due to updated information on previously reported large property claims.

Agribusiness Underwriting Expenses and GAAP Combined Ratio

Total underwriting and administrative expenses, including amortization of deferred policy acquisition costs were $13,476 for the year ended 2010 as compared to $13,650 for the same period in 2009, a decrease of $174. This net decrease in underwriting expenses was due to lower underwriting and administrative expenses, mostly from the SERP termination gain recorded in the second quarter of 2010 and a lower level of incentive compensation costs in 2010, which were partially offset by higher amortization of deferred policy acquisition costs as a result of the growth in direct premiums earned in 2010. This overall decrease relative to the smaller decrease in net premiums earned resulted in the underwriting expense ratio decreasing slightly from 30.1% for 2009 to 29.8% for 2010.

The decrease in the underwriting expense ratio, when netted against the increase in the loss and LAE ratio, resulted in our combined ratio in our agribusiness segment increasing from 95.6% for 2009 to 101.3% for 2010.

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Agribusiness Segment — Lines of Business

The following table sets forth the direct premiums written, net premiums earned, and calendar year loss and LAE ratios reported for our agribusiness segment by line of business:

	For the Years Ended
Agribusiness	December 31,
	2010			2009
Direct Premiums Written:
Property	$	22,815		$	21,394
Commercial Auto		13,123			13,025
Liability		10,023			10,595
Workers’ Compensation		8,590			7,950
Other		6,236			5,711
Total	$	60,787		$	58,675
Net Premiums Earned:
Property	$	16,273		$	16,546
Commercial Auto		11,569			11,632
Liability		9,192			9,196
Workers’ Compensation		7,464			7,238
Other		728			677
Total	$	45,226		$	45,289
Loss and Loss Adjustment Expense Ratios:
Property		103.7	%		70.8	%
Commercial Auto		52.9	%		72.8	%
Liability		62.5	%		52.3	%
Workers’ Compensation		43.4	%		63.3	%
Other		49.9	%		11.2	%
Total		71.5	%		65.5	%

Property

Commercial property coverage protects businesses against the loss or loss of use, including its income-producing ability, of the insured’s property. As of December 31, 2010, our agribusiness segment had approximately 1,200 property insurance policies in force. The loss ratio for our property lines was adversely impacted by unusually high levels of catastrophe and other weather related losses in 2010 while the property loss ratio for 2009 was impacted favorably by lower catastrophe losses and lower claim frequency.

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 motorists. Commercial automobile policies are generally marketed only in conjunction with other supporting lines. As of December 31, 2010, our agribusiness segment had approximately 990 commercial automobile insurance policies in force. Our 2010 loss ratio for commercial auto benefited from favorable prior years claims settlements and lower claim severity on the current accident year, whereas in 2009 we experienced an increase in the number of large claims reported for that year.

Liability

Liability insurance includes commercial general liability, products liability, and professional liability covering our agribusiness insureds’ operations. As of December 31, 2010, our agribusiness segment had approximately 1,200 general liability insurance policies in force. Our liability loss ratio was higher in 2010 as we observed an increase in severity of newer claims, which was partially offset by favorable prior year reserve development.

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Workers’ Compensation

Workers’ compensation coverage protects employers against specified benefits payable under state law for workplace injuries to employees. We consider our workers’ compensation business to be a companion product; we rarely write stand-alone workers’ compensation policies. As of December 31, 2010, our agribusiness segment had approximately 400 workers’ compensation insurance policies in force. Our calendar year loss ratio decreased by slightly less than 20 loss ratio points due to lower new claim frequency and favorable prior year reserve development. We believe that the profitability of our workers’ compensation line has improved in recent accident years as a result of stricter underwriting guidelines and improved pricing adequacy.

Other

Other lines of business consist primarily of umbrella liability, boiler and machinery, and employment practices liability insurance.

Commercial Business

The results of our commercial business segment were as follows:

	For the Years Ended
Commercial Business	December 31,
	2010			2009
Direct premiums written	$	25,568		$	29,449
Net premiums written		20,668			25,754
Revenues:
Net premiums earned	$	22,405		$	28,961
Other income		230			189
Total revenues(1)	$	22,635		$	29,150
Operating loss:
Underwriting loss	$	(7,922	)	$	(4,509	)
Other income		230			189
Interest & other expenses		(113	)		(118	)
Total operating loss(1)	$	(7,805	)	$	(4,438	)
Loss and loss adjustment expense ratio		93.0	%		78.4	%
Underwriting expense ratio		42.4	%		37.2	%
GAAP combined ratio		135.4	%		115.6	%

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

Commercial Business Segment: Premiums Written and Premiums Earned

The components of premiums written and earned, for the years ended December 31, 2010 and 2009 in our commercial business segment are as follows:

Commercial Business	2010						2009
	Written			Earned			Written			Earned
Direct	$	25,568		$	27,341		$	29,449		$	32,820
Ceded — Stop loss contract reversal		—			—			1,102			1,102
Ceded — All other		(4,900	)		(4,936	)		(4,797	)		(4,961	)
Net	$	20,668		$	22,405		$	25,754		$	28,961

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Our direct premiums written in our commercial business segment were $25,568 for the year ended 2010 and $29,449 for the year ended 2009. The factors that contributed to the net decline of $3,881, or 13.2%, are further described below:

•  In late 2008 and 2009 we elected to withdraw from certain unprofitable classes of business and terminate relationships with several underperforming producers. These actions have continued to have an adverse impact on the premium volume in this segment as our agents adapted to our increased selectivity in the business we are willing to write.

•  The commercial insurance marketplace continues to be very competitive, and we continue to experience downward pressure on our pricing.

In 2009, we introduced our PennEdge product within our commercial business segment to enable us to write customized coverages on mid-size commercial accounts. At December 31, 2010 and at December 31, 2009, our PennEdge offering was approved in twenty-four and eight states, respectively, and we believe it has been well received by our agents and policyholders. For the years ended December 31, 2010 and 2009, the direct premiums written of our PennEdge product were $3,842 and $1,846, respectively.

Net premiums earned were $22,405 and $28,961 for the years ended 2010 and 2009, respectively. This decrease in net premiums earned is due primarily to the decline in direct premiums written resulting from the runoff of unprofitable business, changes in our reinsurance program in 2010, and the impact of the stop loss on 2009 ceded premiums of $1,102. For additional information concerning the stop loss reinsurance contract, see Item 1 — “Business — Reinsurance.”

Commercial Business Segment: Underwriting Loss

The discussion below provides more insight into the variances in the categories of losses and LAE and underwriting and administrative expense, which impact underwriting profitability:

Losses and Loss Adjustment Expenses and Loss and LAE ratio

The components of incurred losses and LAE and the loss and LAE ratio in 2010 and 2009 in our commercial business segment are as follows:

	For the Years Ended
Commercial Business	December 31,
	2010			2009
Net premiums earned	$	22,405		$	28,961
Incurred losses and LAE:
Losses	$	18,603		$	17,587
Catastrophe losses		1,374			221
Other weather losses		887			840
Stop loss ceded reversal		—			3,724
Prior year development(1)		(26	)		323
Total incurred losses and LAE	$	20,838		$	22,695
Loss and LAE ratios:
Losses		83.0	%		60.7	%
Catastrophe losses		6.1	%		0.8	%
Other weather losses		4.0	%		2.9	%
Stop loss ceded reversal		—	%		12.9	%
Prior year development(1)		(0.1	)%		1.1	%
Total Loss and LAE ratio		93.0	%		78.4	%

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(1) 2009 prior year development excludes the impact of the stop loss reversal.

Our commercial business segment incurred $20,838 of losses and LAE for the year ended 2010, as compared to $22,695 of losses and LAE for the year ended 2009. The decrease in earned premiums for 2010, relative to the lower losses and LAE in 2010 resulted in our loss ratio in our commercial business segment increasing from 78.4% in 2009 to 93.0% in 2010. The factors that contributed to the net decrease of $1,857 in losses and LAE are further described below:

•  Current accident year losses in our commercial business segment were $1,016 higher in 2010 compared to 2009. The increase is primarily attributable to our commercial multi-peril line, which experienced three large fire losses, as well as an increase in the frequency of smaller-size claims. In addition, we have experienced greater severity on workers’ compensation claims in 2010 compared to 2009. Increases in the frequency of commercial auto liability and other liability claims also contributed to the increases in current year losses in 2010 compared to 2009.

•  Catastrophe losses were $1,153 higher in 2010, compared to 2009. The spring storms that severely affected our agribusiness insureds also affected our commercial policyholders, and several winter storms in the first quarter of 2010 were designated as catastrophes.

•  The reversal of the stop loss in the third quarter of 2009 resulted in $3,724 of ceded incurred losses being reversed for the commercial business segment. We did not renew the stop loss contract in 2010.

•  Modest favorable prior year reserve development of $26 in 2010 represented an improvement over the $323 of unfavorable development in 2009. In 2010, we had favorable development in the commercial multi-peril line and the fire and allied lines of business. The development in the commercial multi-peril line was due to changes in loss emergence relative to expectations and the fire and allied lines development was the result of favorable claim settlements. This favorable development was mostly offset by unfavorable development in the liability lines as a result of changes in loss emergence relative to expectations and in the commercial auto liability line as a result of unfavorable development on prior year commercial auto claims.

Commercial Business Underwriting Expenses and GAAP Combined Ratio

Total underwriting and administrative expenses, including amortization of deferred policy acquisition costs in our commercial business segment were $9,489 and $10,775 for the years ended 2010 and 2009, respectively. This decrease of $1,286 is primarily due to the reduction in our net premiums earned in 2009 and 2010 that resulted in lower amortization of deferred policy acquisition costs. The lower underwriting expenses in 2010 were not enough to offset the reduction in earned premium in 2010 compared to 2009, and the underwriting expense ratio increased from 37.2% in 2009 to 42.4% for the year ended December 31, 2010.

The increase in the expense ratio, together with the increases in the loss and LAE ratio, resulted in our combined ratio in our commercial business segment increasing from 115.6% in 2009 to 135.4% in 2010.

Commercial Business Segment — Lines of Business

The following table sets forth the direct premiums written, net premiums earned, and calendar year loss and LAE ratios reported for our commercial lines products for the periods indicated:

	For the Years Ended
Commercial Business	December 31,
	2010		2009
Direct Premiums Written:
Property & Liability	$	14,170	$	16,453
Workers’ Compensation		4,315		5,465
Commercial Auto		4,171		4,560
Other		2,912		2,971
Total	$	25,568	$	29,449

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	For the Years Ended
Commercial Business	December 31,
	2010			2009
Net Premiums Earned:
Property & Liability	$	13,542		$	17,731
Workers’ Compensation		4,469			6,235
Commercial Auto		4,172			4,746
Other		222			249
Total	$	22,405		$	28,961
Loss and Loss Adjustment Expense Ratios:
Property & Liability		91.8	%		63.7	%
Workers’ Compensation		99.9	%		136.7	%
Commercial Auto		88.1	%		61.3	%
Other		117.0	%		(10.3	)%
Total		93.0	%		78.4	%

Property and Liability

Our property and liability coverage includes commercial multi-peril, fire, allied, and general liability insurance. The majority of this business is rated and classified as commercial multi-peril. As of December 31, 2010, our commercial business segment had approximately 4,300 property and liability insurance policies in force. Similar to our agribusiness segment, our commercial business segment experienced unusually high levels of severe property losses in 2010.

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 and we rarely write workers’ compensation policies on a stand-alone basis. As of December 31, 2010, our commercial business segment had approximately 1,270 workers compensation insurance policies in force. Our workers’ compensation line has experienced a lower loss ratio in 2010 as a result of a decline in claim frequency and favorable development on prior accident years. In 2009, we experienced an unusually high level of adverse development on prior accident years. In general, this line has been adversely impacted of late by a higher than usual number of large claims, and we have also observed increasing claim severity.

Commercial Automobile

Commercial auto coverage protects businesses against liability to others for both bodily injury and property damage, medical payments to insureds and occupants of their vehicles, physical damage to an insured’s own vehicle from collision and various other perils, and damages caused by uninsured motorists. Commercial automobile policies are only marketed in conjunction with our business owner’s policies. As of December 31, 2010, our commercial business segment had approximately 850 commercial automobile insurance policies in force. For 2010, our commercial auto line of business experienced increased frequency of commercial automobile claims and adverse development on prior accident years. This line experienced favorable prior year reserve development in 2009.

Other Segment

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 discontinued writing in 2003, 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. The most significant of these is a reinsurance agreement we entered into with Munich Re America

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(formerly American Re), beginning January 1, 1969 and 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. 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. At December 31, 2010 and at December 31, 2009 we had $5,070 and $5,260, respectively of loss reserves established for our voluntary assumed pools. The mandatory assigned risk programs serve as a secondary market for high risk insureds and include: the Fair Access to Insurance Requirements (FAIR) Plans; beachfront and windstorm plans; Commercial Automobile Insurance Plans (CAIPs); and national and state workers’ compensation pools.

The results of our other segment were as follows:

	For the Years Ended
Other	December 31,
	2010			2009
Net premiums written	$	464		$	1,105
Revenues:
Net premiums earned	$	466		$	1,108
Total revenues	$	466		$	1,108
Underwriting (loss) income	$	(362	)	$	175
Total operating (loss) income	$	(362	)	$	175
Loss and loss adjustment expense ratio		108.6	%		36.6	%
Underwriting expense ratio		69.1	%		47.7	%
GAAP combined ratio		177.7	%		84.3	%

Both revenues and expenses in our other segment have experienced volatility due to fluctuating results from our participation in our mandatory pools. This is reflected in net premiums earned of $466 in 2010 and $1,108 in 2009. The lower operating income for 2010 as compared to 2009 is mostly due to the decline in earned premiums and increased loss development in the Munich Re pool.

The chart below shows the amount of operating (loss) income arising from each of the components for our other segment:

	For the Years Ended
	December 31,
	2010			2009
Mandatory assumed reinsurance	$	372		$	203
Personal lines — runoff		—			177
Voluntary assumed reinsurance — runoff		(734	)		(205	)
Total operating (loss) income	$	(362	)	$	175

Financial Position

At December 31, 2010, we had total assets of $254,721, compared to total assets of $263,450 at December 31, 2009. The change in our total assets is due to lower cash and invested assets as a result of share repurchases, and a higher level of claims payments on current accident year incurred losses; lower premiums receivable and lower deferred policy acquisition costs, due to declines in premium volume; and lower deferred tax assets, due to our establishing a valuation allowance against these assets. Reinsurance receivables and recoverables were higher in 2010 due to the higher losses we experienced this year, including increased catastrophe losses we experienced in the second quarter of 2010.

At December 31, 2010, total liabilities were $161,693, compared to $163,402 at December 31, 2009. The $1,709 decrease was primarily due to lower accrued expenses for profitability based incentive payments, and the

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decrease in unearned premiums of $506 from reductions in premiums written in 2009 and 2010; higher losses and LAE reserves of $3,263 were the result of higher current year loss experience and timing of claims payments.

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 sources of recurring 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.

On October 16, 2009, we completed an initial public offering of 5,444,022 shares of common stock at $10.00 per share. The gross proceeds from the offering were $54,440, less conversion and offering expenses and commissions of $3,867; less the loan to our ESOP of $5,400; less funds used to pay down of our line of credit of $1,800; with the remaining being available for general corporate purposes of approximately $43,373. After using a portion of the proceeds to fund a loan to our ESOP and retire our line of credit, we contributed $25,000 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 through the expansion of our producer networks and the marketing of our new PennEdge product. The net proceeds have been invested in securities consistent with our investment policy.

In connection with our conversion and public offering, we established an ESOP which purchased 539,999 shares in the offering in return for a note from us bearing interest at 4.06% on the principal amount of $5,400. The issuance of the shares to the ESOP was fully recognized in the additional paid-in capital account at the offering closing date, with a contra account established in the shareholders’ equity section of the balance sheet for the unallocated shares at an amount equal to their $10.00 per share purchase price.

It is anticipated that approximately 10% of the ESOP shares will be allocated annually to employee participants of the ESOP. An expense charge is booked ratably during each year for the shares committed to be allocated to participants that year, determined with reference to the fair market value of our stock at the time the commitment to allocate the shares is accrued and recognized. For the year ended December 31, 2010, we recognized compensation expense of $703 on 54,000 shares of our common stock that were committed to be released to participants’ accounts at December 31, 2010. For the year ended December 31, 2009, we recognized compensation expense of $92 on 18,000 shares of our common stock that were committed to be released to participants’ accounts at December 31, 2009.

On October 27, 2009, our board of directors authorized the repurchase of up to 5% of the issued and outstanding shares of our common stock. The repurchases were authorized to be made from time to time in open market or privately negotiated transactions as, in our management’s sole opinion, market conditions warranted. We had the right to repurchase issued and outstanding shares of common stock until 5% of the shares, or 272,201, were repurchased. As of December 2009, we had repurchased 217,761 shares at an average cost of $10.18 per share. In the three months ended June 30, 2010, the remaining 54,440 shares were purchased at an average cost of $14.60 per share.

On May 12, 2010, our board of directors authorized the repurchase of up to 5% of the issued and outstanding shares of our common stock. The repurchases are authorized to be made from time to time in open market or privately negotiated transactions as, in our management’s sole opinion, market conditions warrant. We have the right to repurchase issued and outstanding shares of common stock until 5% of the shares, or 258,591, are repurchased. In the year ended December 31, 2010, we have repurchased under this second program 232,691 shares at an average cost of $14.44 per share. The repurchased shares will be held as treasury shares and will be used in connection with our stock-based incentive plan.

On August 11, 2010, our board of directors approved a third share repurchase plan, authorizing the repurchase of an additional 245,662 common shares in open market or privately negotiated transactions during a twelve month

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period beginning August 18, 2010. For the year ended December 31, 2010, no shares were repurchased under the August 2010 program.

Cash flows from continuing operations for the years ended December 31, 2010 and 2009 were as follows:

	For the Years Ended
	December 31,
	2010			2009
Cash flows (used in) provided by operating activities	$	(6,439	)	$	6,280
Cash flows used in investing activities		(3,116	)		(39,087	)
Cash flows (used in) provided by financing activities		(4,155	)		41,068
Net (decrease) increase in cash and cash equivalents	$	(13,710	)	$	8,261

Cash flows from operating activities decreased by $12,719 for the period ended December 31, 2010 compared to the period ended December 31, 2009. The change is primarily due to increased claims payments and lower premium volume in 2010 compared to 2009.

Investing activities used $3,116 and $39,087 of net cash for the years ended December 31, 2010 and 2009, respectively. In 2010, net purchases of available-for-sale securities were $5,617, and we received $2,682 of cash from the redemption of our COLI policies. In the second quarter of this year we terminated our SERP and these COLI policies had been purchased for the purpose of funding the SERP liabilities when they came due. For 2009, net purchases of available for sale securities were $41,509, as the net proceeds from our public offering were invested in fixed maturity obligations consistent with our investment policy. Net proceeds from our February 2009 sale of the net assets of Eastern Insurance Group provided $2,576 of net cash, and in 2009 we received the final contingent payment from the early 2008 sale of the net assets Penn Software of $52.

Cash flows used in financing activities for the year ended December 31, 2010 were comprised entirely of amounts we paid for our outstanding stock under our share repurchase plans. Cash flows provided by financing activities for the year ended December 31, 2009 reflect gross proceeds from our public offering of $54,440, reduced by the loan to our ESOP of $5,400 and by $3,374 paid for fees and expenses associated with our conversion and public offering. Share repurchases accounted for $2,216 of cash used in financing activities in 2009.

In the first quarter of 2009, we borrowed $733 on our $2,000 line of credit that existed at that time. In the third quarter of 2009, we consolidated our long-term loan and lines of credit by entering into a new, four year $3,000 revolving line of credit with a commercial bank. On August 3, 2009, $1,800 of this new line of credit and cash on hand of $1,134 was used to pay off the outstanding long-term loan amount of $1,251 of principal and interest, and our two existing lines of credit, at an aggregate amount of principal and interest of $1,683. On December 1, 2009, the $3,000 line of credit was terminated, and the principal balance of $1,800 was repaid in full with proceeds from our public offering.

Our principal source of liquidity is the proceeds from our public offering and 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 (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.

As of December 31, 2010, the amount available for payment of dividends from Penn Millers Insurance Company in 2011 without the prior approval of the Pennsylvania Insurance Department is $6,819 based upon the insurance company’s 2010 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

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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.

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 losses 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. We provide insurance coverages to mills, silos, and other agribusinesses, which store large quantities of commodities such as corn, wheat, soybeans and fertilizer. 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.

Recent Accounting Pronouncements

In January 2010, the FASB issued guidance to improve the disclosures related to fair value measurements. The new guidance requires expanded fair value disclosures, including the reasons for significant transfers between Level 1 and Level 2 and the amount of significant transfers into each level disclosed separately from transfers out of each level. For Level 3 fair value measurements, information in the reconciliation of recurring Level 3 measurements about purchases, sales, issuances and settlements shall be presented separately on a gross basis, rather than as one net number. In addition, clarification was provided about existing disclosure requirements, such as presenting fair value measurement disclosures for each class of assets and liabilities that are determined based on their nature and risk characteristics and their placement in the fair value hierarchy (that is, Level 1, 2, or 3), as opposed to each major category of assets and liabilities, as required in the previous guidance. Disclosures about the valuation techniques and inputs used to measure fair value for both recurring and nonrecurring fair value measurements are required for fair value measurements that fall in either Level 2 or Level 3. We adopted this new guidance effective January 1, 2010, except for the gross presentation of purchases, sales, issuances and settlements in the Level 3 reconciliation, which is effective for annual and interim reporting periods beginning after December 15, 2010. The disclosures required by this new guidance are provided in Note 3 to the consolidated financial statements.

In July 2010, the FASB issued Accounting Standards Update (ASU) 2010-20, Disclosures about the Credit Quality of Financing Receivables and the Allowance for Credit Losses, which requires significant new disclosures about the allowance for credit losses and the credit quality of financing receivables. The requirements are intended to enhance transparency regarding credit losses and the credit quality of loan and lease receivables. Under this statement, allowance for credit losses and fair value are to be disclosed by portfolio segment, while credit quality information, impaired financing receivables and nonaccrual status are to be presented by class of financing receivable. The disclosures are to be presented at the level of disaggregation that management uses when assessing and monitoring the portfolio’s risk and performance. This ASU is effective for interim and annual reporting periods after December 15, 2010. Excluding certain agency receivables, which are immaterial, all of our financing receivables have maturity dates of less than one year. The adoption of this ASU did not have an impact on our financial position and results of operations.

In October 2010, the FASB issued ASU 2010-26, Accounting for Costs Associated with Acquiring or Renewing Insurance Contracts (a consensus of the FASB Emerging Issues Task Force). This ASU amends ASC Topic 944, Financial Services — Insurance, to address which costs related to the acquisition of new or renewal insurance contracts qualify for deferral. The ASU allows insurance entities to defer costs related to the acquisition of new or renewal insurance contracts that are (1) incremental direct costs of the contract transaction (i.e., would not

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have occurred without the contract transaction), (2) a portion of the employees’ compensation and fringe benefits related to certain activities for successful contract acquisitions, (3) other costs related directly to the insurer’s acquisition activities in (2) that would not have been incurred had the acquisition contract transaction not occurred, and (4) direct-response advertising costs as defined in ASC Subtopic 340-20, Other Assets and Deferred Costs — Capitalized Advertising Costs. An insurance entity would expense as incurred all other costs related to the acquisition of new or renewal insurance contracts. The amendments in the ASU are effective for fiscal years, and interim periods within those years, beginning after December 15, 2011, and can be applied either prospectively or retrospectively. Early application is permitted at the beginning of an entity’s annual reporting period. We are currently evaluating the impact that the adoption of this ASU will have on our financial position and results of operations.

All other standards and updates of those standards issued during the twelve months ended December 31, 2010 either (i) provide supplemental guidance, (ii) are technical corrections, (iii) are not applicable to us or (iv) are not expected to have a significant impact on our results of operations or financial condition.

Off-Balance Sheet Arrangements

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

Item 7A.   Quantitative and Qualitative Disclosures about Market Risk

Under smaller reporting company rules we are not required to disclose information required under Item 7A. However, in order to provide information to our investors, we have elected to provide information related to our market risks.

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 risks 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.

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 effective duration of the fixed maturity securities in our investment portfolio at December 31, 2010, was 3.2 years. Our fixed maturity 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.

Approximately 6% of our investment portfolio at December 31, 2010 is in a high-yield bond fund that invests primarily in U.S. debt securities. This is a publicly traded mutual fund in which we have an ownership stake in the overall assets of the fund (that is stated as a number of shares), and we are not a creditor in the underlying debt securities. Because this is an investment in shares of a mutual fund, we have classified this investment as an equity security on our consolidated balance sheets. This fund is also subject to interest rate risk and has an option-adjusted duration of 4.77 years at December 31, 2010.

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

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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 investments measured in terms of fair value (which is equal to carrying value) at December 31, 2010:

Hypothetical Change in	Estimated Change
Interest Rates	in Fair Value			Fair Value
200 basis point increase	$	(13,187	)	$	160,458
100 basis point increase		(6,425	)		167,220
No change		—			173,645
100 basis point decrease		5,880			179,525
200 basis point decrease		11,342			184,987

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.

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. We monitor the solvency of reinsurers through regular review of their financial statements and, if available, their A.M. Best ratings. All of our significant reinsurance partners that A.M. Best follows have at least an “A−” A.M. Best rating. According to A.M. Best, companies with a rating of “A−” or better “have an excellent ability to meet their ongoing obligations to policyholders.” In certain instances, we may partner with a reinsurer who is not rated by A.M. Best. However, in such instances the reinsurer must be well capitalized and have a strong credit rating from Standard and Poor’s or Moody’s rating agencies. We will generally only make exceptions for property related reinsurance in which there is typically little or no delay in the reporting of losses by insureds and the settlement of the claims. We have experienced no significant difficulties collecting amounts due from reinsurers. For more information regarding the credit ratings of our reinsurers, see Item 1 “Business — Reinsurance.”

Equity Risk

Equity price risk is the risk that we will incur economic losses due to adverse changes in equity prices. In the fourth quarter of 2010, we sold all of our equity securities (which represented approximately 6% of our investment portfolio) that had been invested in a passively-managed equity index fund, and invested the proceeds in a high-yield bond mutual fund.

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Item 8.   Financial Statements and Supplementary Data

	Page
Consolidated Financial Statements
Report of Independent Registered Public Accounting Firm		F-1
Consolidated Balance Sheets as of December 31, 2010 and 2009		F-2
Consolidated Statements of Operations for the Years Ended December 31, 2010 and 2009		F-3
Consolidated Statements of Shareholders’ Equity for the Years Ended December 31, 2010 and 2009		F-4
Consolidated Statements of Cash Flows for the Years Ended December 31, 2010 and 2009		F-5
Notes to the Consolidated Financial Statements		F-6

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Report of Independent Registered Public Accounting Firm

The Board of Directors and Shareholders

Penn Millers Holding Corporation:

We have audited the accompanying consolidated balance sheets of Penn Millers Holding Corporation and subsidiary (the Company) as of December 31, 2010 and 2009, and the related consolidated statements of operations, shareholders’ equity, and cash flows for the years then ended. These consolidated financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these consolidated financial statements 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 Holding Corporation and subsidiary as of December 31, 2010 and 2009, and the results of their operations and their cash flows for the years then ended, in conformity with U.S. generally accepted accounting principles.

/s/ KPMG LLP

Philadelphia, PA

March 28, 2011

F-1

PENN MILLERS HOLDING CORPORATION AND SUBSIDIARY

Consolidated Balance Sheets
December 31, 2010 and 2009

	December 31,			December 31,
	2010			2009
	(Dollars in thousands,
	except share data)
ASSETS
Investments:
Fixed maturities:
Available for sale, at fair value (amortized cost $158,193 in 2010 and $161,730 in 2009)	$	162,771			167,155
Equity Securities:
Available for sale, at fair value (cost $10,885 in 2010)		10,874			—
Cash and cash equivalents		6,510			20,220
Premiums and fees receivable		28,394			29,526
Reinsurance receivables and recoverables		24,912			19,502
Deferred policy acquisition costs		9,735			10,053
Prepaid reinsurance premiums		4,320			4,076
Accrued investment income		1,621			1,810
Property and equipment, net of accumulated depreciation		3,323			3,769
Income taxes receivable		1,253			—
Deferred income taxes		—			3,518
Other		1,008			3,821
Total assets	$	254,721			263,450
LIABILITIES AND SHAREHOLDERS’ EQUITY
Liabilities:
Losses and loss adjustment expense reserves	$	109,973			106,710
Unearned premiums		42,807			43,313
Accounts payable and accrued expenses		8,913			12,762
Income taxes payable		—			617
Total liabilities		161,693			163,402
Shareholders’ equity:
Preferred stock, no par value, authorized 1,000,000; no shares issued or outstanding		—			—
Common stock, $0.01 par value, authorized 10,000,000; issued 2010, 5,444,022 and 2009, 5,444,022; outstanding 2010, 4,462,131 shares and 2009, 4,695,262 shares		54			54
Additional paid-in capital		51,068			50,520
Accumulated other comprehensive income		2,054			2,519
Retained earnings		50,993			54,481
Unearned ESOP, 476,999 and 530,999 shares		(4,770	)		(5,310	)
Treasury stock, at cost, 504,892 and 217,761 shares		(6,371	)		(2,216	)
Total shareholders’ equity		93,028			100,048
Total liabilities and shareholders’ equity	$	254,721			263,450

See accompanying notes to consolidated financial statements.

F-2

PENN MILLERS HOLDING CORPORATION AND SUBSIDIARY

Consolidated Statements of Operations
Years ended December 31, 2010 and 2009

	2010			2009
	(Dollars in thousands, except share data)
Revenues:
Premiums earned	$	68,097			75,358
Investment income, net of investment expense		5,700			5,648
Realized investment gains, net:
Total other-than-temporary impairment losses		—			(197	)
Portion of loss recognized in other comprehensive income		—			—
Other realized investment gains, net		2,712			396
Total realized investment gains, net		2,712			199
Other income		325			223
Total revenues		76,834			81,428
Losses and expenses:
Losses and loss adjustment expenses		53,686			52,754
Amortization of deferred policy acquisition costs		20,170			21,383
Underwriting and administrative expenses		3,656			3,999
Interest expense		31			22
Other expense, net		164			209
Total losses and expenses		77,707			78,367
(Loss) income from continuing operations, before income taxes		(873	)		3,061
Income tax expense (benefit)		2,615			(346	)
(Loss) income from continuing operations		(3,488	)		3,407
Discontinued operations:
Income from discontinued operations, before income taxes		—			39
Income tax expense		—			879
Loss from discontinued operations		—			(840	)
Net (loss) income	$	(3,488	)		2,567
Earnings per share (see note 19):
Basic:
(Loss) income from continuing operations	$	(0.76	)		0.19
Loss from discontinued operations		—			—
Net (loss) income per common share	$	(0.76	)		0.19
Diluted:
(Loss) income from continuing operations	$	(0.76	)		0.19
Loss from discontinued operations		—			—
Net (loss) income per common share	$	(0.76	)		0.19

See accompanying notes to consolidated financial statements.

F-3

PENN MILLERS HOLDING CORPORATION AND SUBSIDIARY

Consolidated Statements of Shareholders’ Equity
Years ended December 31, 2010 and 2009

							Accumulated
					Additional		Other
	Common Stock				Paid-in		Comprehensive			Retained			Unearned			Treasury
	Shares		Amount		Capital		(Loss) Income			Earnings			ESOP			Stock			Total
	(Dollars in thousands, except share data)
Balance at December 31, 2008		—	$	—		—		(1,159	)		51,914			—			—			50,755
Net income											2,567									2,567
Other comprehensive income, net of taxes:
Unrealized investment holding gain arising during period, net of related income tax expense of $1,440								2,796												2,796
Reclassification adjustment for realized gains included in net income, net of related income tax expense of $61								(119	)											(119	)
Net unrealized investment gain																				2,677
Defined benefit pension plan, net of related income tax benefit of $48								(94	)											(94	)
Curtailment benefit, net of related tax expense of $564								1,095												1,095
Comprehensive income																				6,245
Net proceeds from issuance of common stock		5,444,022		54		50,518								(5,400	)					45,172
ESOP shares released						2								90						92
Treasury stock purchased, 217,761 shares																	(2,216	)		(2,216	)
Balance at December 31, 2009		5,444,022		54		50,520		2,519			54,481			(5,310	)		(2,216	)		100,048
Net loss											(3,488	)								(3,488	)
Other comprehensive income, net of taxes:
Unrealized investment holding gain arising during period, net of related income tax expense of $0								1,854												1,854
Reclassification adjustment for realized gains included in net loss, net of related income tax expense of $0								(2,712	)											(2,712	)
Net unrealized investment loss																				(858	)
Defined benefit pension plans, net of related income tax expense of $0								(70	)											(70	)
Recognition of prior service costs related to curtailment and settlement, net of tax expense of $0 (see note 8)								463												463
Comprehensive loss																				(3,953	)
Stock-based compensation						385														385
ESOP shares released						163								540						703
Treasury stock purchased, 287,131 shares																	(4,155	)		(4,155	)
Balance at December 31, 2010		5,444,022	$	54		51,068		2,054			50,993			(4,770	)		(6,371	)		93,028

See accompanying notes to consolidated financial statements.

F-4

PENN MILLERS HOLDING CORPORATION AND SUBSIDIARY

Consolidated Statements of Cash Flows
Years ended December 31, 2010 and 2009

	2010			2009
	(Dollars in thousands)
Cash flows from operating activities:
Net (loss) income	$	(3,488	)		2,567
Loss from discontinued operations		—			840
Adjustments to reconcile net (loss) income to net cash (used in) provided by operating activities:
Change in receivables, unearned premiums, and prepaid reinsurance		(5,028	)		1,366
Change in losses and loss adjustment expense reserves		3,263			(1,355	)
Change in accounts payable and accrued expenses		(3,456	)		926
Change in current income taxes		(1,870	)		1,246
Deferred income taxes		3,518			(685	)
Change in deferred acquisition costs		318			548
Change in accrual and amortization of investment income		1,171			71
Amortization and depreciation		626			668
ESOP share allocation		703			92
Amortization of stock-based compensation		385			—
Realized investment gains, net		(2,712	)		(199	)
Other, net		131			195
Net cash (used in) provided by operating activities		(6,439	)		6,280
Cash flows from investing activities:
Available-for-sale investments:
Purchases of fixed maturity securities		(64,376	)		(69,637	)
Purchases of equity securities		(22,025	)		—
Sales of fixed maturity securities		49,772			21,328
Sales of equity securities		11,542			—
Maturities of fixed maturity securities		19,470			6,800
Proceeds from disposition of corporate owned life insurance policies		2,682			—
Proceeds on sale of net assets of subsidiaries		—			2,628
Purchases of property and equipment, net		(181	)		(206	)
Cash used in investing activities — continuing operations		(3,116	)		(39,087	)
Cash provided by investing activities — discontinued operations		—			285
Net cash used in investing activities		(3,116	)		(38,802	)
Cash flows from financing activities:
Net proceeds from issuance of common stock		—			49,040
Purchase of treasury stock		(4,155	)		(2,216	)
Initial public offering costs paid		—			(3,374	)
Net payments on line of credit		—			(950	)
Repayment of long-term debt		—			(1,432	)
Cash (used in) provided by financing activities — continuing operations		(4,155	)		41,068
Cash used in financing activities — discontinued operations		—			(285	)
Net cash (used in) provided by financing activities		(4,155	)		40,783
Net (decrease) increase in cash		(13,710	)		8,261
Cash and cash equivalents at beginning of period		20,220			11,959
Cash and cash equivalents at end of period		6,510			20,220
Less cash of discontinued operations at end of period		—			—
Cash and cash equivalents of continuing operations at end of period	$	6,510			20,220

See accompanying notes to consolidated financial statements.

F-5

PENN MILLERS HOLDING CORPORATION AND SUBSIDIARY

Notes to Consolidated Financial Statements
(Dollars in thousands, except per share amounts)

(1)   Description of Business

Penn Millers Holding Corporation 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.

On April 22, 2009, Penn Millers Mutual Holding Company (Penn Millers Mutual), a Pennsylvania mutual holding company, formed Penn Millers Holding Corporation (Corporation) to effect its conversion from a mutual to stock form of organization. On October 16, 2009, Penn Millers Mutual converted from mutual to stock form and was renamed PMMHC Corp. (PMMHC). PMMHC then issued all of its outstanding capital stock to the Corporation, thereby becoming its wholly owned subsidiary. Immediately following the conversion, PMHC Corp., the wholly owned subsidiary of PMMHC, merged with and into PMMHC, thereby terminating PMHC Corp.’s existence. On October 16, 2009, Penn Millers Holding Corporation completed a stock offering (Offering) and sold 5,444,022 shares of common stock in a concurrently-held subscription and community offering for $10 per share, raising approximately $45,172, net of offering costs and the purchase of common stock by the Employee Stock Ownership Plan (ESOP). Shares of the Corporation began trading on October 19, 2009 on the Nasdaq Global Market under the symbol “PMIC.” The historical consolidated financial statements of Penn Millers Mutual prior to the conversion became the consolidated financial statements of the Corporation upon completion of the conversion.

Upon conversion, and consistent with the terms of the plan of conversion, the board of directors authorized and approved PMMHC to issue 1,000,000 shares of $0.01 par stock to the Corporation at par per share. PMMHC also retired 1,000 shares previously held in PMHC Corp.

Upon completion of the merger of PMHC Corp. into PMMHC, PMMHC became the stock holding company for Penn Millers Insurance Company (PMIC). PMIC is a property and casualty insurance company incorporated in Pennsylvania. The stock of PMIC is the most significant asset of PMMHC. American Millers Insurance Company (AMIC) is a property and casualty insurance company incorporated in Pennsylvania and is a wholly owned subsidiary of PMIC. PMMHC owns all of the outstanding common stock of PMIC, which owns all of the outstanding common stock of Penn Millers Agency, Inc. and AMIC. The Corporation and PMMHC conduct no business other than acting as holding companies.

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 product 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 targets small and middle market businesses and offers coverages for property, liability, business interruption, crime coverage, workers’ compensation, commercial automobile, and umbrella liability. The types of businesses this segment targets include retail, service, hospitality, wholesalers, manufacturers, and printers. Both the commercial and agribusiness lines are marketed primarily 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, and Penn Software & Technology Services, Inc. (PSTS), which provided both hardware and computer programming services to its clients. The Company sold substantially all of the assets of EIG and PSTS in 2009 and 2008, respectively (see note 17). The financial results of each of these subsidiaries have been presented as discontinued operations during the year ended December 31, 2009. The Company ceased all operations of EIG in 2009 and PSTS in 2008.

F-6

PENN MILLERS HOLDING CORPORATION AND SUBSIDIARY

Notes to Consolidated Financial Statements — (Continued)

(2)   Summary of Significant Accounting Policies

(a)   Basis of Presentation

The accompanying consolidated financial statements have been prepared in accordance 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.

(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 at the date of the consolidated financial statements. These reported amounts include the financial statement recognition of loss reserves, contingent liabilities, tax valuation allowances, valuation of deferred policy acquisition costs, valuation of defined benefit pension obligations and valuation of investments, including other-than-temporary impairment of investments. These reported amounts also include the disclosure of contingent assets and liabilities. Management’s estimates and assumptions also affect the reported amounts of revenues and expenses, during the reporting period. Actual results could differ from these estimates.

(c)   Concentration of Risk

The Company’s business is subject to concentration of risk with respect to geographic concentration. Although the Company’s operating subsidiaries are licensed collectively in 40 states, direct premiums written for two states, New Jersey and Pennsylvania, accounted for almost 20% of the Company’s direct premiums written for the year ended December 31, 2010. 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 of its offices, accounted for 13% of the Company’s direct premium writings for 2010. Only one other producer accounted for more than 5% of the Company’s 2010 direct premium writings.

(d)   Investments

The Company classifies all of its fixed maturity securities as available for sale. Fixed maturities classified as available for sale are carried at fair value. Short-term investments are recorded at cost, which approximates fair value. The fair value of Level 1 and Level 2 fixed maturities is based upon data supplied by an independent pricing service. The fair value of Level 3 fixed maturity securities is based on cash flow analysis and other valuation techniques.

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 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 gains and losses on sale of investments are recognized in net income 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 gains or losses on investments carried at fair value, net of applicable

F-7

PENN MILLERS HOLDING CORPORATION AND SUBSIDIARY

Notes to Consolidated Financial Statements — (Continued)

income taxes, are reflected directly in shareholders’ equity as a component of comprehensive income (loss) and, accordingly, have no effect on net income.

Prior to April 1, 2009, the Company recognized in earnings an other-than-temporary impairment for a fixed maturity security in an unrealized loss position unless it could assert that it had both the intent and ability to hold the fixed maturity security for a period of time sufficient to allow for a recovery of fair value to the security’s amortized cost basis. During that time, the entire difference between the fixed maturity security’s amortized cost basis and its fair value was recognized in earnings if it was determined to have an other-than-temporary impairment.

On April 1, 2009, the Financial Accounting Standards Board (FASB) issued new guidance on the recognition and presentation of other-than-temporary impairments. This new guidance amends the previously used methodology for determining whether an other-than-temporary impairment exists for fixed maturity securities. 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 security’s fair value is below cost and the Company intends to sell or more likely than not will be required to sell the security before recovery of its value. If the fixed maturity security meets either of these two criteria, the other-than-temporary impairment recognized in earnings is equal to the entire difference between the security’s amortized cost basis and its estimated fair value at the impairment measurement date. If the Company does not intend to sell, or more likely than not will not be required to sell, a fixed maturity security whose fair value has declined below its cost, the amount of the decline below cost due to credit-related reasons is charged to earnings and the remaining difference is included in comprehensive income.

The fair value of investments is reported in note 3. The fair value of other financial instruments, principally receivables, accounts payable and accrued expenses approximates their December 31, 2010 and 2009 carrying values.

(e)   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.

(f)   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.

(g)   Deferred 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 acquisition 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 losses and loss adjustment expenses, may require adjustments to deferred policy acquisition

F-8

PENN MILLERS HOLDING CORPORATION AND SUBSIDIARY

Notes to Consolidated Financial Statements — (Continued)

costs. If the estimation of net realizable value indicates that the deferred policy acquisition costs are not recoverable, they would be written off.

(h)   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 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, 2010, an impairment is not considered necessary.

(i)   Income Taxes

The Company and its subsidiary file a consolidated federal income tax return. Incomes taxes are allocated to each legal entity based on income before income tax expense. 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. The Company regularly reviews its deferred tax assets for recoverability taking into consideration such factors as historical losses, projected future taxable income and the character of such income and the expected timing of the reversals of existing temporary differences. A valuation allowance is recorded when it is more likely than not that some portion or all of the deferred tax assets will not be realized. The Company’s policy is to account for interest as a component of interest expense and penalties as a component of other expense.

(j)   Deferred Offering Costs

In accordance with the Securities and Exchange Commission (SEC) Staff Accounting Bulletin (SAB) Topic 5A, Expenses of Offering, the Company had deferred offering costs consisting principally of legal, underwriting, and audit fees incurred through the completion of the offering, on October 16, 2009. At December 31, 2009, $3,867 of offering costs were netted against the offering proceeds in equity.

(k)   Discontinued Operations

Discontinued operations represent components of the Company that have been disposed of. The results of operations of reporting units classified as discontinued operations are done so for all periods presented.

(l)   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 $2,363 and $2,397 at December 31, 2010 and 2009, 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

F-9

PENN MILLERS HOLDING CORPORATION AND SUBSIDIARY

Notes to Consolidated Financial Statements — (Continued)

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.

(m)   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 and rates of return. 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.

(n)   Employee Stock Ownership Plan

The Company recognizes compensation expense related to its ESOP equal to the product of the number of shares earned, or committed to be released during the period, and the average price of the Company’s common stock during the period. The estimated fair value of unearned ESOP shares is calculated based on the average price of the Company’s common stock for the period. For purposes of calculating earnings per share, the Company includes the weighted average of ESOP shares committed to be released for the period.

(o)   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.

(p)   Earnings per Share

Basic and diluted earnings per share (EPS) are computed by dividing income available to common shareholders by the weighted average number of common shares outstanding during the period. The denominator for basic EPS includes ESOP shares committed to be released. In calculating diluted EPS, the weighted average shares outstanding includes all potentially dilutive securities.

(q)   Adoption of New Accounting Standards

In January 2010, the Financial Accounting Standards Board (FASB) issued guidance to improve the disclosures related to fair value measurements. The new guidance requires expanded fair value disclosures, including the reasons for significant transfers between Level 1 and Level 2 and the amount of significant transfers into each level disclosed separately from transfers out of each level. For Level 3 fair value measurements,

F-10

PENN MILLERS HOLDING CORPORATION AND SUBSIDIARY

Notes to Consolidated Financial Statements — (Continued)

information in the reconciliation of recurring Level 3 measurements about purchases, sales, issuances and settlements shall be presented separately on a gross basis, rather than as one net number. In addition, clarification is provided about existing disclosure requirements, such as presenting fair value measurement disclosures for each class of assets and liabilities that are determined based on their nature and risk characteristics and their placement in the fair value hierarchy (that is, Level 1, 2, or 3), as opposed to each major category of assets and liabilities, as required in the previous guidance. Disclosures about the valuation techniques and inputs used to measure fair value for both recurring and nonrecurring fair value measurements are required for fair value measurement that fall in either Level 2 or Level 3. The Company adopted this new guidance effective January 1, 2010, except for the gross presentation of purchases, sales, issuances and settlements in the Level 3 reconciliation, which is effective for annual and interim reporting periods beginning after December 15, 2010. The disclosures required by this new guidance are provided in the accompanying note 3.

In July 2010, the FASB issued Accounting Standards Update (ASU) 2010-20, Disclosures about the Credit Quality of Financing Receivables and the Allowance for Credit Losses, which requires significant new disclosures about the allowance for credit losses and the credit quality of financing receivables. The requirements are intended to enhance transparency regarding credit losses and the credit quality of loan and lease receivables. Under this statement, allowance for credit losses and fair value are to be disclosed by portfolio segment, while credit quality information, impaired financing receivables and nonaccrual status are to be presented by class of financing receivable. The disclosures are to be presented at the level of disaggregation that management uses when assessing and monitoring the portfolio’s risk and performance. This ASU is effective for interim and annual reporting periods after December 15, 2010. Excluding certain agency receivables, which are immaterial, all of the Company’s financing receivables have maturity dates of less than one year. The adoption of this ASU did not have an impact on the Company’s financial position and results of operations.

In October 2010, the FASB issued ASU 2010-26, Accounting for Costs Associated with Acquiring or Renewing Insurance Contracts (a consensus of the FASB Emerging Issues Task Force). This ASU amends FASB ASC Topic 944, Financial Services — Insurance, to address which costs related to the acquisition of new or renewal insurance contracts qualify for deferral. The ASU allows insurance entities to defer costs related to the acquisition of new or renewal insurance contracts that are (1) incremental direct costs of the contract transaction (i.e., would not have occurred without the contract transaction), (2) a portion of the employees’ compensation and fringe benefits related to certain activities for successful contract acquisitions, (3) other costs related directly to the insurer’s acquisition activities in (2) that would not have been incurred had the acquisition contract transaction not occurred, and (4) direct-response advertising costs as defined in ASC Subtopic 340-20, Other Assets and Deferred Costs — Capitalized Advertising Costs. An insurance entity would expense as incurred all other costs related to the acquisition of new or renewal insurance contracts. The amendments in the ASU are effective for fiscal years, and interim periods within those years, beginning after December 15, 2011, and can be applied either prospectively or retrospectively. Early application is permitted at the beginning of an entity’s annual reporting period. The Company is currently evaluating the impact that the adoption of this ASU will have on its financial position and results of operations.

All other standards and updates of those standards issued during the year ended December 31, 2010 either (i) provide supplemental guidance, (ii) are technical corrections, (iii) are not applicable to the Company, or (iv) are not expected to have a significant impact on the Company.

(3)   Fair Value Measurements

The Company’s estimates of fair value for financial assets and financial liabilities are based on the framework established in the fair value accounting guidance, which is a part of ASC 820.

The fair value of a financial asset or financial liability is the amount at which the 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 the guidance set forth by ASC 820, the Company’s financial assets and financial liabilities

F-11

PENN MILLERS HOLDING CORPORATION AND SUBSIDIARY

Notes to Consolidated Financial Statements — (Continued)

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.

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.

Transfers between level categorizations may occur due to changes in the availability of market observable inputs. Transfers in and out of level categorizations are reported as having occurred at the beginning of the quarter in which the transfer occurred. There were no transfers between level categorizations during the years ended December 31, 2010 and 2009.

The table below presents the balances of assets and liabilities measured at fair value on a recurring basis as of December 31, 2010 and December 31, 2009:

	Level 1		Level 2		Level 3		Total
December 31, 2010:
Fixed maturities, available for sale
U.S. Treasuries	$	736		—		—		736
Agencies not backed by the full faith and credit of the U.S. government		—		14,458		—		14,458
State and political subdivisions		—		44,559		—		44,559
Commercial mortgage-backed securities		—		1,662		—		1,662
Residential mortgage-backed securities		—		22,915		—		22,915
Corporate securities		—		78,441		—		78,441
Total available for sale	$	736		162,035		—		162,771
Equity securities
High yield bond fund	$	10,874		—		—		10,874
Total equities	$	10,874		—		—		10,874
Total assets	$	11,610		162,035		—		173,645

F-12

PENN MILLERS HOLDING CORPORATION AND SUBSIDIARY

Notes to Consolidated Financial Statements — (Continued)

	Level 1		Level 2		Level 3		Total
December 31, 2009:
Fixed maturities, available for sale
U.S. Treasuries	$	4,612		—		—		4,612
Agencies not backed by the full faith and credit of the U.S. government		—		17,441		—		17,441
State and political subdivisions		—		39,334		—		39,334
Commercial mortgage-backed securities		—		3,775		—		3,775
Residential mortgage-backed securities		—		28,302		—		28,302
Corporate securities		—		73,691		—		73,691
Total available for sale	$	4,612		162,543		—		167,155

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 the Company one quote per instrument. Level 1 securities consist of U.S. Treasury fixed maturity securities and publicly traded mutual funds. Level 2 securities are comprised of available for sale fixed maturity securities whose fair value was determined using observable market inputs. For fixed maturity securities that have quoted prices in active markets, market quotations are provided. Fair values for securities for which quoted market prices were unavailable were estimated based upon reference to observable inputs such as benchmark interest rates, market comparables, and other relevant inputs. Investments valued using these inputs include obligations of U.S. government agencies, obligations of states and political subdivisions, commercial and residential mortgage-backed securities, and corporate securities. Inputs into the fair value application that are utilized by asset class include but are not limited to:

U.S. government agencies (depending on the specific market or program):   broker quotes; U.S. treasury market and floating rate indices; overall credit quality, including assessments of market sectors and the level and variability of sources of payment; credit support including collateral; the establishment of a risk adjusted credit spread over the applicable risk free yield curve for discounted cash flow valuations; assessments of the level of economic sensitivity;

States and political subdivisions:  overall credit quality, including assessments of market sectors and the level and variability of sources of payment such as general obligation, revenue or lease; credit support such as insurance, state or local economic and political base; prefunded and escrowed to maturity covenants;

Commercial mortgage-backed securities:  overall credit quality, including assessments of the level and variability of credit support and collateral type such as office, retail, or lodging; predictability of cash flows for the deal structure; prevailing economic market conditions;

Residential mortgage-backed securities:  estimates of prepayment speeds based upon historical prepayment rate trends; underlying collateral interest rates; original weighted average maturity; vintage year; borrower credit quality characteristics; interest rate and yield curve forecasts; U.S. government support programs; tax policies; and delinquency/default trends; and

Corporate securities:  overall credit quality; the establishment of a risk adjusted credit spread over the applicable risk free yield curve for discounted cash flow valuations; assessments of the level of industry economic sensitivity; company financial policies; indenture restrictive covenants; and/or security and collateral.

All unadjusted estimates of fair value for our fixed maturities priced by the pricing services as described above are included in the amounts disclosed in Level 2.

F-13

PENN MILLERS HOLDING CORPORATION AND SUBSIDIARY

Notes to Consolidated Financial Statements — (Continued)

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, derived from observable inputs, 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.

The fair value estimates of the Company’s investments provided by the independent pricing service at December 31, 2010, were utilized, among other resources, in reaching a conclusion as to the fair value of investments. As of December 31, 2010, all of the Company’s fixed maturity investments were priced using this one primary service. 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 Standard & Poor’s (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 as presented in ASC 820 is then confirmed based on the final conclusions from the pricing review. The Company did not have any such discrepancies at December 31, 2010.

The fair value of other financial instruments, principally receivables, accounts payable and accrued expenses, approximates their December 31, 2010 and December 31, 2009 carrying values.

(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, 2010 and December 31, 2009, are as follows:

			Gross		Gross
	Amortized		Unrealized		Unrealized		Estimated
	Cost		Gains		Losses		Fair Value
December 31, 2010:
U.S. Treasuries	$	721		32		17		736
Agencies not backed by the full faith and credit of the U.S. government		14,111		347		—		14,458
State and political subdivisions		43,224		1,564		229		44,559
Commercial mortgage-backed securities		1,589		73		—		1,662
Residential mortgage-backed securities		22,223		758		66		22,915
Corporate securities		76,325		2,325		209		78,441
Total fixed maturities	$	158,193		5,099		521		162,771
Total equity securities	$	10,885		—		11		10,874

F-14

PENN MILLERS HOLDING CORPORATION AND SUBSIDIARY

Notes to Consolidated Financial Statements — (Continued)

			Gross		Gross
	Amortized		Unrealized		Unrealized		Estimated
	Cost		Gains		Losses		Fair Value
December 31, 2009:
U.S. Treasuries	$	4,499		113		—		4,612
Agencies not backed by the full faith and credit of the U.S. government		16,933		538		30		17,441
State and political subdivisions		37,415		1,994		75		39,334
Commercial mortgage-backed securities		3,806		34		65		3,775
Residential mortgage-backed securities		27,607		844		149		28,302
Corporate securities		71,470		2,463		242		73,691
Total fixed maturities	$	161,730		5,986		561		167,155

The amortized cost and estimated fair value of fixed maturity securities at December 31, 2010 by contractual maturity, are shown below:

	Amortized		Estimated
	Cost		Fair Value
Due in one year or less	$	10,144		10,283
Due after one year through five years		88,455		91,582
Due after five years through ten years		25,521		26,098
Due after ten years		10,261		10,231
		134,381		138,194
Commercial mortgage-backed securities		1,589		1,662
Residential mortgage-backed securities		22,223		22,915
Total fixed maturities	$	158,193		162,771

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, 2010 and December 31, 2009, investments with a fair value of $4,348 and $4,358, respectively, were on deposit with regulatory authorities, as required by law.

Major categories of net investment income are as follows:

	2010			2009
Interest on fixed maturities	$	6,134			6,187
Dividends on equity securities		155			—
Interest on cash and cash equivalents		7			19
Total investment income		6,296			6,206
Investment expense		(596	)		(558	)
Investment income, net of investment expense	$	5,700			5,648

F-15

PENN MILLERS HOLDING CORPORATION AND SUBSIDIARY

Notes to Consolidated Financial Statements — (Continued)

Realized gross gains from investments and the change in difference between fair value and cost of investments, before applicable income taxes, are as follows:

	2010			2009
Fixed maturity securities:
Available for sale:
Gross gains	$	2,913			555
Gross losses		(201	)		(178	)
Other-than-temporary impairment losses		—			(197	)
Realized investment gains, net		2,712			180
Change in value of interest rate swap		—			19
Realized investment gains after change in value of interest rate swap, net	$	2,712			199
Change in difference between fair value and cost of investments:
Fixed maturity securities for continuing operations	$	(847	)		4,049
Equity securities for continuing operations		(11	)		—
Total for continuing operations		(858	)		4,049
Equity securities for discontinued operations		—			7
Total including discontinued operations	$	(858	)		4,056

Income tax expense on net realized investment gains was $922 and $61 for the years ended December 31, 2010 and 2009, respectively. Deferred income tax expense applicable to net unrealized investment gains, included in accumulated other comprehensive income, was $1,845 at both December 31, 2010 and December 31, 2009, respectively. See note 10 for additional information related to the allocation of tax between continuing operations and accumulated other comprehensive income.

The fair value and unrealized losses for securities temporarily impaired as of December 31, 2010 and December 31, 2009 are as follows:

	Less than 12 Months				12 Months or Longer				Total
			Unrealized				Unrealized				Unrealized
Description of Securities	Fair Value		Losses		Fair Value		Losses		Fair Value		Losses
2010:
U.S. Treasuries		284		17		—		—		284		17
State and political subdivisions		9,477		182		2,803		47		12,280		229
Residential mortgage-backed securities		3,094		64		361		2		3,455		66
Corporate securities	$	9,658		200		928		9		10,586		209
Total fixed maturity securities		22,513		463		4,092		58		26,605		521
Equity securities		10,874		11		—		—		10,874		11
Total temporarily impaired securities	$	33,387		474		4,092		58		37,479		532

F-16

PENN MILLERS HOLDING CORPORATION AND SUBSIDIARY

Notes to Consolidated Financial Statements — (Continued)

	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:
Agencies not backed by the full faith and credit of the U.S. government	$	5,965		30		—		—		5,965		30
State and political subdivisions		5,021		65		555		10		5,576		75
Commercial mortgage-backed securities		—		—		1,938		65		1,938		65
Residential mortgage-backed securities		9,549		149		—		—		9,549		149
Corporate securities		21,283		179		3,471		63		24,754		242
Total temporarily impaired securities	$	41,818		423		5,964		138		47,782		561

These fixed maturity and equity securities 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. There are $4,092 in fixed maturity securities, at fair value, that at December 31, 2010, had been below cost for 12 months or longer. The $58 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 fixed maturity 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 of these assets are most likely attributable to the current interest rate environment.

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.

A portion of the Company’s investment portfolio is in a high-yield bond fund that invests primarily in U.S. debt securities. This is a publicly traded mutual fund in which the Company has an ownership stake in the overall assets of the fund, which is stated as a number of shares, and the Company is not a creditor in the underlying debt securities. Therefore, the mutual fund is classified as an equity security.

The Company believes, based on its analysis, that the fixed maturity and equity securities are 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 consolidated statements of operations in the future.

For the years ended December 31, 2010 and December 31, 2009, the Company incurred impairment charges of $0 and $197, respectively. The impairment in 2009 was related to one fixed maturity security and the carrying value of the security was written down to fair value in the second quarter of 2009. Subsequently, the security was sold in July 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

F-17

PENN MILLERS HOLDING CORPORATION AND SUBSIDIARY

Notes to Consolidated Financial Statements — (Continued)

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, 2010, fixed maturity securities issued by banks accounted for 10.7% of the bond portfolio’s book value.

(5)   Comprehensive (Loss) Income

Comprehensive (loss) income for the years ended December 31, 2010 and 2009 consisted of the following (all amounts net of taxes):

	2010			2009
Net (loss) income	$	(3,488	)		2,567
Other comprehensive (loss) income:
Unrealized gains on securities:
Unrealized investment holding gains arising during period		1,854			2,796
Less:
Reclassification adjustment for realized gains included in net (loss) income		(2,712	)		(119	)
Net unrealized investment (losses) gains		(858	)		2,677
Change in defined benefit pension plans		(70	)		(94	)
Recognition of prior service costs related to curtailment and settlement (see note 8)		463			1,095
Other comprehensive (loss) income		(465	)		3,678
Comprehensive (loss) income	$	(3,953	)		6,245

Accumulated other comprehensive income at December 31, 2010 and December 31, 2009 consisted of the following amounts (all amounts net of taxes):

	December 31,			December 31,
	2010			2009
Unrealized investment gains for continuing operations	$	2,722			3,580
Defined benefit pension plans — net actuarial loss		(668	)		(1,061	)
Accumulated other comprehensive income	$	2,054			2,519

See note 10 for additional information related to the allocation of tax between continuing operations and accumulated other comprehensive income.

(6)   Deferred Policy Acquisition Costs

Changes in deferred policy acquisition costs for the years ended December 31, 2010 and 2009 are as follows:

	2010			2009
Balance, January 1	$	10,053			10,601
Policy acquisition costs deferred		19,852			20,835
Amortization charged to operations		(20,170	)		(21,383	)
Balance, December 31	$	9,735			10,053

(7)   Property and Equipment

Property and equipment consisted of land and buildings with a cost of $5,784 and $5,746 and equipment, capitalized software costs, and other items with a cost of $9,317 and $9,177 at December 31, 2010 and 2009,

F-18

PENN MILLERS HOLDING CORPORATION AND SUBSIDIARY

Notes to Consolidated Financial Statements — (Continued)

respectively. Accumulated depreciation related to such assets was $11,778 and $11,154 at December 31, 2010 and 2009, respectively.

Rental expense under leases for continuing operations amounted to $100 and $100 for 2010 and 2009, respectively.

At December 31, 2010, the minimum aggregate rental and lease commitments for continuing operations are as follows:

2011		74
2012		45
2013		29
Total	$	148

(8)   Employee Benefit Plans

Retirement 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. In October 2009, the plan was amended and all participants’ accrued benefits under the plan were frozen. It is the Company’s policy to fund the plan in amounts not greater than the amount deductible for federal income tax purposes and not less than the minimum required contribution under the Pension Protection Act of 2006. The Company also sponsors a Supplemental Executive Retirement Plan (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.

On August 1, 2009, upon approval by the board of directors, the Company’s administrator amended the defined benefit pension plan, whereby all participants’ accrued benefits under the plan were frozen as of October 31, 2009. The Company recognized a curtailment benefit of $1,659 for the year ended December 31, 2009, which has been reflected in accumulated other comprehensive income in equity. Due to a decline in interest rates, this benefit was partially offset by an actuarial loss of $717.

On May 12, 2010, upon approval by the Board of Directors, the Company terminated the SERP for four of the five participants. The one remaining participant is a retired employee in pay status. The SERP benefit obligation was re-measured on that date and the Company recorded a net curtailment loss of $68 and a settlement gain of $747 which were classified as underwriting and administrative expenses in the consolidated statements of operations. The net curtailment loss of $68 was a result of the recognition of $472 of prior unrecognized service costs which was net of a $404 reduction of the projected benefit obligation to the accumulated benefit obligation. The settlement gain of $747 was the result of a further reduction of the accumulated benefit obligation to zero for the four former participants. On the re-measurement date, the weighted average discount rate was 5.41% compared to 5.67% at December 31, 2009. The accumulated benefit obligation for the one remaining participant in pay status at December 31, 2010 is $627.

F-19

PENN MILLERS HOLDING CORPORATION AND SUBSIDIARY

Notes to Consolidated Financial Statements — (Continued)

(a)   Obligations and Funded Status at December 31

	2010			2009
Change in benefit obligation:
Benefit obligation at beginning of year	$	9,059			9,773
Service and administrative costs		102			465
Interest cost		475			571
Benefit payments		(309	)		(732	)
Administrative expense payments		(65	)		(76	)
Actuarial loss		517			717
Curtailment		(404	)		(1,659	)
Settlement		(747	)		—
Benefit obligation at end of year		8,628			9,059
Change in plan assets:
Fair value of plan assets at beginning of year		5,268			4,941
Employer contributions		952			371
Benefit payments		(309	)		(732	)
Administrative expenses		(65	)		(76	)
Actual return on plan assets		806			764
Fair value of plan assets at end of year		6,652			5,268
Funded status (net liability recognized)	$	(1,976	)		(3,791	)

Amounts recognized in accumulated other comprehensive income:

	2010			2009
Unrecognized prior service cost	$	—			(487	)
Unrecognized net loss		(1,216	)		(1,122	)
Accumulated other comprehensive loss	$	(1,216	)		(1,609	)

See note 10 for additional information related to the allocation of tax between continuing operations and accumulated other comprehensive income.

The accumulated benefit obligation for the qualified defined benefit pension plan was $8,001 and $7,380 at December 31, 2010 and 2009, respectively.

(b)   Components of Net Periodic Benefit Cost

	2010			2009
Service and administrative costs	$	102			465
Interest cost		475			571
Expected return on plan assets		(414	)		(358	)
Amortization of prior service costs		15			41
Amortization of net loss		30			128
Net periodic pension expense	$	208			847

F-20

PENN MILLERS HOLDING CORPORATION AND SUBSIDIARY

Notes to Consolidated Financial Statements — (Continued)

(c)   Assumptions

Weighted average assumptions used to determine benefit obligations at December 31, 2010 and 2009 are as follows:

	Pension Plan						SERP
	2010			2009			2010			2009
Discount rate		5.31	%		5.84	%		5.01	%		5.67	%
Rate of compensation increase		—			—			—			5.00

Weighted average assumptions used to determine net periodic benefit cost for the years ended December 31, 2010 and 2009 are as follows:

	Pension Plan						SERP
	2010			2009			2010			2009
Discount rate		5.84	%		6.16	%		5.67	%		6.56	%
Expected long-term return on plan assets		7.50			7.50			N/A			N/A
Rate of compensation increase		—			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

Pension plan assets are invested for the exclusive benefit of the plan participants and beneficiaries and are intended, over time, to satisfy the benefit obligations under the plan. The Company maintains an investment policy for the pension plan, which is reviewed at least annually. 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 restricts traditionally risky investments.

The current target allocation for plan assets is 60% for equity securities and 40% for fixed income securities. Equity securities include investments in domestic large and small cap index funds, as well as an international developed markets index fund. The target asset allocation within equities is 70% domestic large cap, 15% domestic small cap, and 15% international developed markets. Fixed income securities are in an investment grade long term bond index fund. Investment asset allocation is measured and monitored on an ongoing basis.

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.

Fair Value Measurement — Pension Plan Assets

For a discussion of the methods employed by the Company to measure the fair value of invested assets, see note 3. The following discussion of fair value measurements apply exclusively to the Company’s pension plan assets.

The estimated fair value of the Company’s equity and debt mutual index funds is disclosed in Level 1 as the estimates are based on unadjusted market prices.

F-21

PENN MILLERS HOLDING CORPORATION AND SUBSIDIARY

Notes to Consolidated Financial Statements — (Continued)

The estimated fair value of money market mutual funds, which approximates cost, is included in the amount disclosed in Level 1 as the estimates are based on unadjusted market prices.

The following table presents the level within the fair value hierarchy at which the financial assets of the Company’s pension plan are measured on a recurring basis at December 31, 2010.

	Level 1		Level 2		Level 3		Total
December 31, 2010:
Equity mutual funds:
Vanguard Developed Markets Index Fund(a)	$	658		—		—		658
Vanguard Small Cap Index Fund(b)		687		—		—		687
Vanguard 500 Index Fund(c)		3,042		—		—		3,042
Debt mutual funds:
Vanguard Bond Index Fund(d)		2,227		—		—		2,227
Cash and cash equivalents		38		—		—		38
Total assets	$	6,652		—		—		6,652

	Level 1		Level 2		Level 3		Total
December 31, 2009:
Equity mutual funds:
Vanguard Developed Markets Index Fund(a)	$	472		—		—		472
Vanguard Small Cap Index Fund(b)		503		—		—		503
Vanguard 500 Index Fund(c)		2,314		—		—		2,314
Debt mutual funds:
Vanguard Bond Index Fund(d)		1,955		—		—		1,955
Cash and cash equivalents		24		—		—		24
Total assets	$	5,268		—		—		5,268

(a)	This category seeks to track the performance of a benchmark index that measures the investment return of stocks issued by companies located in the major markets of Europe and the Pacific region. It follows a passively managed, full replication approach.
(b)	This category seeks to track the performance of the MSCI® US Small Cap 1750 Index and it is a small-cap equity, diversified across growth and value styles. It follows a passively managed, full replication approach.
(c)	This category seeks to track the performance of a benchmark index that measures the investment return of large-capitalization stocks. The fund employs a passive management investment approach designed to track the performance of the Standard & Poor’s 500 index. It invests all, or substantially all, of its assets in the stocks that make up the index, holding each stock in approximately the same proportion as its weighting in the index.
(d)	This category seeks to track the performance of the Barclays Capital U.S. Long Government/Credit Float Adjusted Bond Index with diversified exposure to the long-term, investment-grade U.S. bond market. It is passively managed using index sampling.

F-22

PENN MILLERS HOLDING CORPORATION AND SUBSIDIARY

Notes to Consolidated Financial Statements — (Continued)

(e)   Cash Flows

Estimated Future Benefit Payments

The following benefit payments, which reflect expected future service, as appropriate, are expected to be paid:

2011	$	260
2012		598
2013		340
2014		286
2015		395
2016 — 2020		3,517

The Company’s minimum required contribution for the defined benefit pension plan in 2011 is $37.

The expected contribution in 2011 for the SERP plan will be a minimum of $47, representing the normal benefit payments to the lone participant in payment status.

Savings 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 $201 and $175 for 2010 and 2009, respectively.

ESOP

The Company sponsors an ESOP, which became effective on October 16, 2009. Eligible employees generally include those employees who have completed six months of service. All employees who had completed six months of service with the Company, prior to the effective date of the plan, were determined to have met the eligibility requirements on that date. ESOP shares are allocated to participants based on the ratio of their individual compensation during the plan year multiplied by a factor that corresponds with their combined age and years of service. A final allocation percentage is then determined by calculating the ratio of an individual’s initial compensation allocation percentage to the total of all eligible participants’ initial compensation allocation percentages.

The Company issued 539,999 shares of its common stock to the ESOP on October 16, 2009. The ESOP was funded entirely by an employer loan in the amount of $5,400, which will be repaid in ten equal installments. For the years ended December 31, 2010 and 2009, the Corporation made a cash contribution of $667 and $111, respectively, to the ESOP. The ESOP used these contributions to make the annual payment to the Corporation related to the outstanding balance of the loan. These shares held by the ESOP will be allocated over the same 10-year period to eligible employees. Shares purchased are held in a suspense account for allocation among participating employees as the loan is repaid.

F-23

PENN MILLERS HOLDING CORPORATION AND SUBSIDIARY

Notes to Consolidated Financial Statements — (Continued)

Suspense shares, allocated shares, shares committed to be released, average price per share and stock compensation expense for the periods ended December 31, 2010 and October 17, 2009 through December 31, 2009 are as follows:

			For the Period
	For the Year Ended		October 17 through
	December 31, 2010		December 31, 2009
Suspense shares		530,999		539,999
Allocated shares		9,000		—
Shares committed to be released		54,000		9,000
Average price per share	$	13.02		10.20
Stock compensation expense	$	703		92

Suspense shares represent shares held by the ESOP that have not been allocated to participant accounts. Allocated shares have been earned and allocated to participant accounts, while shares committed to be released have been earned, but have not yet been allocated to participant accounts.

As of December 31, 2010, the estimated fair value of unearned ESOP shares was $6,311.

(9)   Stock-Based Compensation

The Company accounts for its stock based compensation in accordance with Accounting Standards Codification (ASC) 718-10, Compensation — Stock Based Compensation. ASC 718-10 addresses all forms of share-based payment awards, including shares under stock options and restricted stock. ASC 718-10 requires all share-based payments to be recognized as expense, based upon their fair values, in the financial statements over the service period of the awards.

On May 12, 2010, the Company’s shareholders approved the Penn Millers Stock Incentive Plan (the Plan). The Plan authorizes the award of incentive stock options, nonqualified stock options, restricted stock and restricted stock units (including performance-based awards) to employees and non-management directors of the Company. According to the Plan, the maximum aggregate number of shares of common stock that may be awarded under the plan is 762,163 shares, subject to certain adjustments. The shares issued pursuant to the Plan may be from authorized but unissued common stock or treasury shares. Upon a change in control, or in the event that a participant terminates employment due to death or disability, the outstanding unvested awards will become fully vested.

On May 12, 2010, 141,122 shares of restricted stock were granted to executives of the Company. The restricted stock will be issued from treasury shares upon vesting. The restricted stock had a grant date fair value of $14.83 per share, which was the Company’s closing stock price on that date. The restricted stock vests 25% in the first year and 15% in each of the five years thereafter, based on the satisfaction of service conditions.

On May 12, 2010, 114,960 stock options were awarded to executives, non-management directors and select employees of the Company. The stock options, which vest over five years at 20% per year, have a contractual term of seven years, and vesting is based on the satisfaction of service conditions. The stock options were awarded at a grant date fair value of $5.22 per option as calculated using a Black-Scholes Merton valuation model with the following assumptions:

Expected volatility	—	36.00%
Expected term (in years)	—	5
Risk-free interest rate	—	2.26%
Expected dividend yield	—	0.00%

The expected volatility assumption was derived from share price data over the expected term of the options of fourteen companies the Company considers to be its peers based upon asset size, market capitalization, profitability

F-24

PENN MILLERS HOLDING CORPORATION AND SUBSIDIARY

Notes to Consolidated Financial Statements — (Continued)

level and other relevant factors. The expected term assumption was derived using the “simplified” approach for plain vanilla options as set forth in SEC Staff Accounting Bulletin (SAB) Topic 14 for new public companies. The risk-free interest rate assumption was based upon the implied yield on the measurement date of a zero-coupon U.S. Treasury bond with a maturity period equal to the options’ expected term. The Company does not expect to pay dividends; therefore, the expected dividend yield is assumed to be zero. No post-vesting restrictions exist for these options.

The total compensation cost recognized in the statements of operations and classified as underwriting and administrative expenses for all stock-based compensation awards, excluding the Company’s ESOP, was $385 for the year ended December 31, 2010. The related tax benefit recognized was $110 for the same period. The total compensation cost recognized in the statements of operations and classified as underwriting and administrative expenses for the Company’s ESOP was $703 and $92 for the years ended December 31, 2010 and 2009, respectively. The related tax benefit recognized was $184 and $31 for the same periods.

The total unrecognized compensation cost related to all nonvested Plan awards at December 31, 2010 was $2,137, which is expected to be recognized in future periods over a weighted average period of 4.9 years.

No equity awards were exercised or forfeited during the year ended December 31, 2010. No additional awards were granted during the year ended December 31, 2010.

The summary of stock-based award activity is as follows:

	Stock Options
			Weighted-		Restricted Stock Awards
	Number of		Average		Number of		Weighted-
	Shares		Exercise Price		Shares		Average Price
Outstanding at December 31, 2009		—	$	—		—	$	—
Granted		114,960		14.83		141,122		14.83
Exercised		—		—		—		—
Vested		—		—		—		—
Cancelled		—		—		—		—
Outstanding at December 31, 2010		114,960	$	14.83		141,122	$	14.83

(10)   Federal Income Tax

Components of the provision for income tax expense (benefit) from continuing operations for the years ended December 31, 2010 and 2009 are as follows:

	2010			2009
Current (benefit) expense:
Federal	$	(903	)		339
Deferred expense (benefit):
Federal		3,518			(685	)
Total tax expense (benefit)	$	2,615			(346	)

The Company’s net payment (refunds) for income taxes in 2010 and 2009 were $969 and $(907), respectively.

F-25

PENN MILLERS HOLDING CORPORATION AND SUBSIDIARY

Notes to Consolidated Financial Statements — (Continued)

A reconciliation of the expected and actual federal income tax expense (benefit) from continuing operations for the years ended December 31, 2010 and 2009 is as follows:

	2010			2009
Expected tax (benefit) expense at 34%	$	(297	)		1,041
State income tax benefit		(19	)		(80	)
Nontaxable investment income		(483	)		(385	)
Stock based compensation		77			—
Change in valuation allowance — federal taxes		3,468			(1,026	)
Change in valuation allowance — state taxes		19			80
Deferred tax on items in other comprehensive income		(159	)		—
Other items, net		9			24
Total tax expense (benefit)	$	2,615			(346	)

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, 2010 and 2009 are as follows:

	2010			2009
Deferred tax assets:
Discounting of unpaid losses	$	3,229			3,391
Unearned premium reserve		2,618			2,669
Accrued retirement benefit		689			1,112
Federal net operating losses		765			—
State net operating losses		648			629
Guaranty fund liability		500			510
Capital loss carryforwards		384			1,191
Alternative minimum tax credit carryforwards		272			—
Compensation related accruals		220			471
Other items		312			233
Gross deferred tax assets		9,637			10,206
Valuation allowance		(4,116	)		(629	)
Net deferred tax assets after valuation allowance		5,521			9,577
Deferred tax liabilities:
Deferred policy acquisition costs		3,310			3,418
Unrealized investment gains, net		1,553			1,845
Accrued premium tax credits		206			206
Depreciation and amortization		202			279
Prepaid expenses		134			125
Other items		116			186
Gross deferred tax liabilities		5,521			6,059
Net deferred tax asset	$	—			3,518

At December 31, 2010 and 2009, the Company had available $1,128 and $3,503, respectively, of federal capital loss carryforwards. The capital loss carryforwards have a five year carryforward and will completely expire in 2013. In addition, at December 31, 2010, the Company had available $2,252 of federal (net operating loss NOL) carryforwards. The federal NOL carryforwards have a twenty year carryforward and will completely expire in 2030.

F-26

PENN MILLERS HOLDING CORPORATION AND SUBSIDIARY

Notes to Consolidated Financial Statements — (Continued)

At December 31, 2010 and 2009, the Company had available $6,489 and $6,295, respectively, of state income tax NOL carryforwards. The Company concluded it is not more likely than not that state taxable income will be generated in the future to utilize the state NOL carryforwards. At December 31, 2010 and 2009, a valuation allowance of $648 and $629, respectively, was recorded against the deferred tax asset associated with the state income tax NOL carryforwards. The state NOL carryforwards have a twenty year carryforward and will expire from 2019 through 2030.

At December 31, 2010, the Company had available alternative minimum tax credit carryforwards of $272 that do not expire.

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 Company must assess the likelihood that any recorded deferred tax assets will be recovered against future taxable income. The Company considers many factors when assessing the likelihood of future realization of deferred tax assets, including recent cumulative earnings experience by taxing jurisdiction, expectations of future taxable income or loss, the carry-forward periods available to us for tax reporting purposes, and other relevant factors. To the extent the Company believes that recovery is not more likely than not, a valuation allowance must be established.

Although the Company’s current financial forecasts indicate that taxable income will be generated in the future, those forecasts were not considered sufficient positive evidence to overcome the observable negative evidence associated with its three year cumulative loss position. Accordingly, the Company recorded a full valuation allowance of $3,468 on its federal net deferred tax assets for the year ended December 31, 2010.

In any interim period, the Company may generate income or loss. To the extent that any income is generated, the related tax expense may be offset by a reduction in the valuation allowance. Conversely, any tax benefits arising from losses may be offset by an additional valuation allowance to reduce the net deferred tax asset to an amount that is more likely than not to be realized. Any reduction of the valuation allowance will be allocated to continuing operations and other comprehensive income based on the intraperiod tax allocation rules. The intraperiod tax allocation rules in FASB ASC 740, related to items charged directly to accumulated other comprehensive income, can result in disproportionate tax effects that remain in accumulated other comprehensive income until certain events occur. The following schedule shows the amounts and corresponding tax effects in accumulated other comprehensive income as of December 31, 2010 and 2009 and the related change for the year:

							Change for
	2010			2009			the Year
Net unrealized investment gains
Before tax gain		4,567			5,425			(858	)
Tax expense		(1,845	)		(1,845	)		—
After tax gain		2,722			3,580			(858	)
Defined benefit pension plans — net actuarial loss
Before tax loss		(1,216	)		(1,609	)		393
Tax benefit		548			548			—
After tax loss		(668	)		(1,061	)		393
Total Accumulated Other Comprehensive Income
Before tax income		3,351			3,816			(465	)
Tax expense		(1,297	)		(1,297	)		—
After tax income		2,054			2,519			(465	)

F-27

PENN MILLERS HOLDING CORPORATION AND SUBSIDIARY

Notes to Consolidated Financial Statements — (Continued)

As of December 31, 2010, 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 2007 through 2010 were open for examination as of December 31, 2010.

(11)   Reinsurance

Reinsurance is ceded by the Company on a pro rata and excess of loss basis, with the Company’s retention generally at $500 per occurrence in 2010 and 2009. The Company purchased catastrophe excess-of-loss reinsurance with a retention of $2,000 per event in 2009. Effective January 1, 2010, the Company increased its retention to $3,000 per event.

Effective January 1, 2010, the Company increased its participation in the per-risk reinsurance treaty. Losses between $500 and $1,000 are retained at a rate of 60.0% in 2010 versus a 52.5% retention rate in 2009.

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. As of December 31, 2010 and 2009, the Company has not ceded any losses under the aggregate stop loss contract. Effective January 1, 2010, the Company has not entered into a new stop loss contract.

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, 2010 and 2009 is as follows:

(a)   Premiums

	2010						2009
	Written			Earned			Written			Earned
Direct	$	86,524			86,638			88,356			90,332
Assumed		295			297			873			876
Ceded		(19,082	)		(18,838	)		(15,583	)		(15,850	)
Net	$	67,737			68,097			73,646			75,358

(b)   Losses and Loss Adjustment Expenses

	2010			2009
Direct	$	67,338			58,665
Assumed		423			462
Ceded		(14,075	)		(6,373	)
Net	$	53,686			52,754

F-28

PENN MILLERS HOLDING CORPORATION AND SUBSIDIARY

Notes to Consolidated Financial Statements — (Continued)

(c)   Unearned Premiums

	2010			2009
Direct	$	42,800			43,304
Assumed		7			9
Prepaid reinsurance (ceded)		(4,320	)		(4,076	)
Net	$	38,487			39,237

(d)   Loss and Loss Adjustment Expense Reserves

	2010		2009
Direct	$	101,876		97,889
Assumed		8,097		8,821
Gross	$	109,973		106,710

(12)   Liability for Losses and Loss Adjustment Expenses

Activity in the liability for losses and loss adjustment expenses is summarized as follows:

	2010			2009
Balance at January 1	$	106,710			108,065
Less reinsurance recoverables		18,356			22,625
Net liability at January 1		88,354			85,440
Incurred related to:
Current year		55,772			51,199
Prior years		(2,086	)		1,555
Total incurred		53,686			52,754
Paid related to:
Current year		24,755			21,296
Prior years		29,634			28,544
Total paid		54,389			49,840
Net liability at December 31		87,651			88,354
Add reinsurance recoverables		22,322			18,356
Balance at December 31	$	109,973			106,710

The Company recognized favorable development in the provision for insured events of prior years of $2,086 in 2010 and unfavorable development of $1,555 in 2009. Increases or decreases of this nature occur as the result of claim settlements during the current year, and as additional information is received regarding individual claims, causing changes from the original estimates of the cost of these claims. Recent loss development trends are also taken into account in evaluating the overall adequacy of unpaid losses and loss adjustment expenses.

The favorable prior year reserve development for 2010 of $2,086 includes reversals in additional reserves carried above the actuarial central estimate and was due to lower level of incurred loss emergence relative to expectations in the workers’ compensation, commercial auto, and liability lines of business in the Company’s agribusiness segment. Within the agribusiness segment, the commercial auto line of business was also impacted positively by favorable prior year claims settlements. This favorable development was partly offset by unfavorable

F-29

PENN MILLERS HOLDING CORPORATION AND SUBSIDIARY

Notes to Consolidated Financial Statements — (Continued)

development in the fire and allied lines of business due to updated information on previously reported large property claims. In the commercial business segment, the Company experienced net favorable prior year reserve development of $26. Favorable loss emergence, relative to expectations, in the commercial multi-peril line and favorable claims settlements in the fire and allied lines were offset by unfavorable development in the commercial auto liability line and other liability lines.

The net unfavorable development for 2009 of $1,555 is due to the $4,292 stop loss reversal on ceded losses that impacted all lines of business. Excluding the impact of the stop loss reversal, the net favorable development of $2,737 was primarily attributable to: favorable loss development of approximately $1,659 in the fire and allied, resulting from favorable settlements on prior years’ claims; favorable loss development of approximately $1,812 in the commercial multi-peril lines attributable to lower level emergence of incurred losses, relative to expectations, for the 2007 and 2008 accident years; and unfavorable development of approximately $1,501 in the Company’s workers’ compensation line due to a higher level of incurred loss emergence relative to expectations for the 2008 and 2007 accident years.

(13)   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.

Total retirement and severance expense of $118 and $363 was unpaid as of December 31, 2010 and 2009, respectively.

(14)   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. 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 $1,348 and $1,397 at December 31, 2010 and 2009, respectively. The accrual is expected to be paid as assessments are made over the next several years.

(15)   Segment Information

The Company’s operations are organized into three segments: agribusiness, commercial business, and other. These segments reflect the manner in which the Company currently manages the business based on type of customer, how the business is marketed, and the manner in which risks are underwritten. Within each segment, the Company underwrites and markets its insurance products through a packaged offering of coverages sold to generally consistent types of customers.

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

F-30

PENN MILLERS HOLDING CORPORATION AND SUBSIDIARY

Notes to Consolidated Financial Statements — (Continued)

Segment information for years ended December 31, 2010 and 2009 is as follows:

	2010			2009
Revenues:
Premiums earned:
Agribusiness	$	45,226			45,289
Commercial business		22,405			28,961
Other		466			1,108
Total premiums earned		68,097			75,358
Investment income, net of investment expense		5,700			5,648
Realized investment gains, net		2,712			199
Other income		325			223
Total revenues	$	76,834			81,428
Components of net (loss) income:
Underwriting (loss) income:
Agribusiness	$	(592	)		1,985
Commercial business		(7,922	)		(4,509	)
Other		(362	)		175
Total underwriting losses		(8,876	)		(2,349	)
Investment income, net of investment expense		5,700			5,648
Realized investment gains, net		2,712			199
Other income		325			223
Corporate expense		(539	)		(429	)
Interest expense		(31	)		(22	)
Other expense, net		(164	)		(209	)
(Loss) income from continuing operations, before income taxes		(873	)		3,061
Income tax expense (benefit)		2,615			(346	)
(Loss) income from continuing operations		(3,488	)		3,407
Discontinued operations:
Income from discontinued operations, before income taxes		—			39
Income tax expense		—			879
Loss from discontinued operations		—			(840	)
Net (loss) income	$	(3,488	)		2,567

F-31

PENN MILLERS HOLDING CORPORATION AND SUBSIDIARY

Notes to Consolidated Financial Statements — (Continued)

The following table sets forth the net premiums earned by major lines of business for our core insurance products in the years ended December 31, 2010 and 2009:

	2010		2009
Net premiums earned:
Agribusiness
Property	$	16,273		16,546
Commercial auto		11,569		11,632
Liability		9,192		9,196
Workers’ compensation		7,464		7,238
Other		728		677
Agribusiness subtotal		45,226		45,289
Commercial lines
Property & liability		13,542		17,731
Workers’ compensation		4,469		6,235
Commercial auto		4,172		4,746
Other		222		249
Commercial lines subtotal		22,405		28,961
Other		466		1,108
Total net premiums earned	$	68,097		75,358

(16)   Reconciliation of Statutory Filings to Amounts Reported Herein

A reconciliation of the Company’s statutory net income and surplus to net (loss) income and equity, under GAAP, is as follows:

	2010			2009
Net (loss) income:
Statutory net income	$	378			3,422
Deferred policy acquisition costs		(318	)		(548	)
Deferred federal income taxes		(3,518	)		685
Other, including noninsurance amounts		(30	)		(152	)
Discontinued operations		—			(840	)
GAAP net (loss) income	$	(3,488	)		2,567
Surplus:
Statutory capital and surplus	$	68,191			72,491
Equity of noninsurance entities		11,179			15,065
Deferred policy acquisition costs		9,735			10,053
Deferred federal income taxes		—			(3,760	)
Nonadmitted assets		659			2,150
Unrealized gains on fixed maturities, net of tax		3,022			3,581
Other items, net		242			468
GAAP shareholders’ equity	$	93,028			100,048

F-32

PENN MILLERS HOLDING CORPORATION AND SUBSIDIARY

Notes to Consolidated Financial Statements — (Continued)

The above statutory basis net income and capital and surplus amounts relate to the Company’s insurance subsidiaries, PMIC and AMIC.

The Company’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, 2010, the Company’s insurance subsidiaries were in compliance with its risk-based capital requirements. Applying the current regulatory restrictions as of December 31, 2010, approximately $6,819 would be available for distribution to the Company during 2011 without prior approval.

(17)   Discontinued Operations

In July 2008, the Company completed the sale of PSTS. As of December 31, 2009, results of operations from PSTS consisted of $50 in income before tax expense of $17.

In February 2009, the Company completed the sale of EIG, resulting in a pretax loss on sale of $6. As of December 31, 2009, results of operations from EIG consisted of a loss of $11 before income tax expense of $862.

(18)   Shareholders’ Equity

(a) On October 16, 2009, Penn Millers Mutual completed its conversion to stock form. The Corporation sold a total of 5,444,022 shares in a subscription and community offering at $10.00 per share, through which the Corporation received proceeds of $45,172, net of conversion and offering costs of $3,867. On July 28, 2009, the board of directors approved the implementation of an ESOP. The ESOP acquired 539,999 shares at $10.00 per share.

(b) In April 2009, the board of directors approved the authorization of 1,000,000 shares of no par preferred stock of the Corporation upon conversion. The authorized but unissued preferred shares may be issued in one or more series and the share of each series shall have such rights as fixed by the board of directors.

(c) The activity of the Corporation’s common stock was as follows:

	2010			2009
	(Number of shares)
Common stock issued
Balance, beginning December 31, 2009 and October 16, 2009		5,444,022			—
Issuance of shares		—			5,444,022
Balance, end of year		5,444,022			5,444,022
Treasury stock
Balance, beginning December 31, 2009 and October 16, 2009		217,761			—
Repurchase of shares		287,131			217,761
Issuance of shares — stock incentive plan		(141,122	)		—
Balance, end of year		363,770			217,761

(d) As of December 31, 2010, 271,562 shares remain to be purchased under the share repurchase plans approved by the Board of Directors. The authorization has no expiration date.

(19)   Earnings Per Share

Basic earnings per common share is computed by dividing net (loss) income by the weighted-average number of shares of common stock outstanding during the period. Diluted earnings per common share is computed by dividing net (loss) income by the weighted-average number of shares of common stock outstanding during the

F-33

PENN MILLERS HOLDING CORPORATION AND SUBSIDIARY

Notes to Consolidated Financial Statements — (Continued)

period increased to include the number of additional shares of common stock that would have been outstanding if the potentially dilutive securities had been issued. Potentially dilutive securities include outstanding stock options and unvested restricted stock. The dilutive effect of potentially dilutive securities is reflected in diluted earnings per common share by application of the treasury stock method. Under the treasury stock method, an increase in the fair market value of the Company’s common stock can result in a greater dilutive effect from potentially dilutive securities. Potentially dilutive securities representing approximately 33,543 and 0 shares of common stock for the periods ended December 31, 2010 and December 31, 2009, respectively, were excluded from the computation of diluted loss per common share for these periods because their effect would have been antidilutive.

As described in note 1, the Offering resulted in the issuance of common shares of the Company on October 16, 2009. The following table sets forth the computation of basic and diluted earnings per common share for the years ended December 31, 2010 and 2009:

				For the Period
	For the Year Ended			October 17 through
	December 31,			December 31,
	2010			2009
Numerator:
Net (loss) income	$	(3,488	)		929
Denominator:
Weighted average shares outstanding		4,565,503			4,820,280
Effect of dilutive securities		—			—
Weighted average shares diluted		4,565,503			4,820,280
Basic (loss) income per share	$	(0.76	)		0.19
Diluted (loss) income per share	$	(0.76	)		0.19

F-34

Item 9.   Changes in and Disagreements with Accountants on Accounting and Financial Disclosure

None

Item 9A.   Controls and Procedures

(a)   Evaluation of Disclosure Controls and Procedures

The Company’s Chief Executive Officer and Chief Financial Officer have evaluated the effectiveness of the design and operation of the Company’s disclosure controls and procedures as of December 31, 2010, and based on that evaluation they have concluded that these controls and procedures are effective as of that date.

(b)   Changes in Internal Control Over Financial Reporting

Our management is responsible for establishing and maintaining adequate internal control over financial reporting. Internal control over financial reporting (as defined in Rule 13a-15(f) and 15d-15(f) under the Exchange Act) is a process designed by, or under the supervision of, a company’s principal executive and principal financial officers and effected by the Board, management and other personnel, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles and includes those policies and procedures that:

•  Pertain to the maintenance of records that in reasonable detail accurately and fairly reflect the transactions and dispositions of the assets of the company;

•  Provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and

•  Provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.

Our management assessed the effectiveness of our internal control over financial reporting as of December 31, 2010. In making this assessment, management used the criteria set forth by the Committee of Sponsoring Organizations of the Treadway Commission (COSO) in Internal Control-Integrated Framework.

Based on its assessment, our management believes that, as of December 31, 2010, our internal control over financial reporting is effective.

No changes in our internal control over financial reporting (as such term is defined in Rule 13a-15(f) of the Exchange Act) occurred during the fourth quarter of 2010 that materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

Item 9B.   Other Information

None

PART III

Item 10.   Directors, Executive Officers and Corporate Governance

The information required by Item 10 is incorporated by reference to the information contained under the captions “Proposal No. 1 — Election of Directors,” “Executive Officers,” “Board of Directors and Governance Information — Penn Millers’ Commitment to Shareowner — Sensitive Governance — Conduct Codes,” “Section 16(a) Beneficial Ownership Reporting Compliance,” “Board of Directors and Governance Information — Committees of the Board and Meetings — Audit Committee,” and “Report of the Audit Committee” of our definitive Proxy Statement to be filed pursuant to Regulation 14A under the Securities Exchange Act of 1934, as amended, within 120 days after December 31, 2010.

76

Item 11.   Executive Compensation

The information required by Item 11 is incorporated by reference to the information contained under the captions “Executive Compensation” and “Director Compensation” of our definitive Proxy Statement to be filed pursuant to Regulation 14A under the Securities Exchange Act of 1934, as amended, within 120 days after December 31, 2010.

Item 12.   Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters

The information required by Item 12 is incorporated by reference to the information contained under the captions “Principal Shareholders” and “Beneficial Ownership by Management” of our definitive Proxy Statement to be filed pursuant to Regulation 14A under the Securities Exchange Act of 1934, as amended, within 120 days after December 31, 2010.

Item 13.   Certain Relationships and Related Transactions, and Director Independence

The information required by Item 13 is incorporated by reference to the information contained under the captions “Board of Directors and Governance Information — Director Independence” and “Board of Directors and Governance Information — Governance Committee — Transactions with Related Persons, Promoters and Certain Control Persons” of our definitive Proxy Statement to be filed pursuant to Regulation 14A under the Securities Exchange Act of 1934, as amended, within 120 days after December 31, 2010.

Item 14.   Principal Accounting Fees and Services

The information required by Item 14 is incorporated by reference to the information contained under the caption “Proposal No. 2 — Ratification of the Appointment of KPMG LLP as the Company’s Independent Registered Public Accounting Firm” of our definitive Proxy Statement to be filed pursuant to Regulation 14A under the Securities Exchange Act of 1934, as amended, within 120 days after December 31, 2010.

PART IV

Item 15.   Exhibits, Financial Statement Schedules

(a)(1) The consolidated financial statements filed as part of this Report are listed in the Index to the Consolidated Financial Statements under Part II Item 8 — “Financial Statements and Supplementary Data.”

(a)(2) The financial statement schedules or other required schedules are omitted because they are not required, or the required information is included in the consolidated financial statements or notes thereto.

(a)(3) Exhibits

The exhibits required by Item 601 of Regulation S-K are listed in the Exhibit Index. Exhibits marked with an asterisk are filed herewith.

EXHIBIT INDEX

2	.1	Penn Millers Mutual Holding Company Plan of Conversion from Mutual to Stock Form is incorporated by reference herein to Exhibit No. 2.1 to the Company’s Pre-Effective Amendment No. 1 to Form S-1, (Commission File No. 333-156936).
3	.1	Articles of Incorporation of Penn Millers Holding Corporation are incorporated by reference herein to Exhibit No. 3.1 to the Company’s Pre-Effective Amendment No. 1 to Form S-1, (Commission File No. 333-156936).
3	.2	Bylaws of Penn Millers Holding Corporation are incorporated by reference herein to Exhibit No. 3.2 to the Company’s Pre-Effective Amendment No. 1 to Form S-1, (Commission File No. 333-156936).

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4	.1	Form of certificate evidencing shares of common stock of Penn Millers Holding Corporation is incorporated by reference herein to Exhibit No. 4.1 to the Company’s Pre-Effective Amendment No. 1 to Form S-1, (Commission File No. 333-156936).
10	.1	Executive Employment Agreement between Penn Millers Mutual Holding Company, Penn Millers Holding Corporation, Penn Millers Insurance Company and Douglas A. Gaudet, as amended and restated, dated August 14, 2009, is incorporated by reference herein to Exhibit No. 10.2 to the Company’s Pre-Effective Amendment No. 4 to Form S-1, (Commission File No. 333-156936).
10	.2	Employment Agreement between Penn Millers Mutual Holding Company, Penn Millers Holding Corporation, Penn Millers Insurance Company and Michael O. Banks dated August 14, 2009, is incorporated by reference herein to Exhibit No. 10.3 to the Company’s Pre-Effective Amendment No. 4 to Form S-1, (Commission File No. 333-156936).
10	.3	Employment Agreement between Penn Millers Mutual Holding Company, Penn Millers Holding Corporation, Penn Millers Insurance Company and Kevin D. Higgins dated August 14, 2009 is incorporated by reference herein to Exhibit No. 10.4 to the Company’s Pre-Effective Amendment No. 4 to Form S-1, (Commission File No. 333-156936).
10	.4	Employment Agreement between Penn Millers Mutual Holding Company, Penn Millers Holding Corporation, Penn Millers Insurance Company and Harold W. Roberts dated August 14, 2009, is incorporated by reference herein to Exhibit No. 10.5 to the Company’s Pre-Effective Amendment No. 4 to Form S-1, (Commission File No. 333-156936).
10	.5	Employment Agreement between Penn Millers Mutual Holding Company, Penn Millers Holding Corporation, Penn Millers Insurance Company and Jonathan C. Couch dated August 14, 2009, is incorporated by reference herein to Exhibit No. 10.8 to the Company’s Pre-Effective Amendment No. 4 to Form S-1, (Commission File No. 333-156936).
10	.6	Employment Agreement, between Penn Millers Mutual Holding Company, Penn Millers Holding Corporation, Penn Millers Insurance Company and Keith A. Fry dated February 9, 2010 is incorporated by reference herein to Exhibit No. 10.1 to the Company’s Current Report on Form 8-K filed February 9, 2010, (Commission File No. 001-34496).
10	.7	Whole Account Accident Year Aggregate Excess of Loss Reinsurance Contract effective January 1, 2008 through January 1, 2009 is incorporated by reference herein to Exhibit No. 10.10 to the Company’s Pre-Effective Amendment No. 1 to Form S-1, (Commission File No. 333-156936).
10	.8	Property Catastrophe Excess of Loss Reinsurance Contract Effective January 1, 2011*
10	.9	Casualty Excess of Loss Reinsurance Contract Effective January 1, 2011*
10	.10	Umbrella Quota Share Reinsurance Contract Effective January 1, 2011*
10	.11	Property Excess of Loss Reinsurance Contract Effective January 1, 2011*
10	.12	Penn Millers Holding Corporation Supplemental Executive Retirement Plan, as amended and restated, effective January 1, 2006 is incorporated by reference herein to Exhibit No. 10.16 to the Company’s Form S-1 Registration Statement, (Commission File No. 333-156936).
10	.13	Amendment of the Penn Millers Holding Corporation Supplemental Executive Retirement Plan, effective October 31, 2009 is incorporated by reference to Exhibit 99.1 to the Company’s Current Report on Form 8-K filed January 29, 2010, (Commission File No. 001-34496).
10	.14	Penn Millers Holding Corporation Nonqualified Deferred Compensation and Company Incentive Plan, effective June 1, 2006 is incorporated by reference herein to Exhibit No. 10.17 to the Company’s Form S-1 Registration Statement, (Commission File No. 333-156936).
10	.15	2009 Success Sharing Program for Employees of Penn Millers is incorporated by reference herein to Exhibit No. 10.18 to the Company’s Pre-Effective Amendment No. 2 to Form S-1 Registration Statement, (Commission File No. 333-156936).
10	.16	Penn Millers Holding Corporation Employee Stock Ownership Plan is incorporated by reference herein to Exhibit No. 10.19 to the Company’s Pre-Effective Amendment No. 4 to Form S-1, (Commission File No. 333-156936).
10	.17	Penn Millers Stock Incentive Plan, effective as of May 12, 2010 is incorporated by reference herein to Exhibit No. 10.1 to the Company’s Current Report on Form 8-K filed May 14, 2010, (Commission File No. 001-34496).

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10	.18	Penn Millers Holding Corporation Open Market Share Purchase Incentive Plan is incorporated by reference herein to Exhibit No. 10.2 to the Company’s Current Report on Form 8-K filed May 14, 2010, (Commission File No. 001-34496).
10	.19	Form of Penn Millers Stock Incentive Plan Restricted Stock Agreement is incorporated by reference herein to Exhibit No. 10.3 to the Company’s Current Report on Form 8-K filed May 14, 2010, (Commission File No. 001-34496).
10	.20	Form of Penn Millers Stock Incentive Plan Restricted Stock Unit Agreement is incorporated by reference herein to Exhibit No. 10.4 to the Company’s Current Report on Form 8-K filed May 14, 2010, (Commission File No. 001-34496).
10	.21	Form of Penn Millers Stock Incentive Plan Stock Option Agreement for Incentive Stock Option is incorporated by reference herein to Exhibit No. 10.5 to the Company’s Current Report on Form 8-K filed May 14, 2010, (Commission File No. 001-34496).
10	.22	Form of Penn Millers Stock Incentive Plan Stock Option Agreement for Nonqualified Stock Option for Non-Management Directors is incorporated by reference herein to Exhibit No. 10.6 to the Company’s Current Report on Form 8-K filed May 14, 2010, (Commission File No. 001-34496).
10	.23	Form of Penn Millers Stock Incentive Plan Stock Option Agreement for Employees is incorporated by reference herein to Exhibit No. 10.7 to the Company’s Current Report on Form 8-K filed May 14, 2010, (Commission File No. 001-34496).
21	.1	Subsidiaries of Penn Millers Holding Corporation.*
23	.1	Consent of Independent Registered Public Accounting Firm.*
24	.1	Powers of Attorney (contained on signature page).*
31	.1	Certification of Chief Executive Officer in accordance with Section 302 of the Sarbanes-Oxley Act of 2002.*
31	.2	Certification of Chief Financial Officer in accordance with Section 302 of the Sarbanes-Oxley Act of 2002.*
32	.1	Certification of Chief Executive Officer in accordance with Section 906 of the Sarbanes-Oxley Act of 2002.*
32	.2	Certification of Chief Financial Officer in accordance with Section 906 of the Sarbanes-Oxley Act of 2002.*

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SIGNATURES

Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.

	PENN MILLERS HOLDING CORPORATION
March 28, 2011	By:	/s/  Douglas A. Gaudet
		Douglas A. Gaudet, President and
		Chief Executive Officer
March 28, 2011	By:	/s/  Michael O. Banks
		Michael O. Banks, Executive Vice President and
		Chief Financial Officer

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POWER OF ATTORNEY

KNOW ALL PERSONS BY THESE PRESENTS, that each person whose signature appears below hereby constitutes and appoints Douglas A. Gaudet and Michael O. Banks, and each of them acting individually, his true and lawful attorney-in-fact and agent, each with full power of substitution and resubstitution, for him and in his name, place and stead, in any and all capacities, to sign any and all amendments to this Annual Report and to file the same, with all exhibits thereto, and other documents in connection therewith, with the Securities and Exchange Commission and any other regulatory authority, granting unto said attorney-in-fact and agent, full power and authority to do and perform each and every act and thing requisite and necessary to be done in connection therewith, as fully to all intents and purposes as such person might or could do in person, hereby ratifying and confirming all that said attorney-in-fact and agent, his substitute or substitutes, may lawfully do or cause to be done by virtue hereof.

Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and 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)	March 28, 2011
/s/  F. Kenneth Ackerman, Jr. F. Kenneth Ackerman, Jr.	Director and Chairman	March 28, 2011
/s/  Heather M. Acker Heather M. Acker	Director	March 28, 2011
/s/  E. Lee Beard E. Lee Beard	Director	March 28, 2011
Dorrance R. Belin, Esq.	Director	March 28, 2011
/s/  John L. Churnetski John L. Churnetski	Director	March 28, 2011
/s/  John M. Coleman John M. Coleman	Director	March 28, 2011
/s/  Kim E. Michelstein Kim E. Michelstein	Director	March 28, 2011
/s/  Robert A. Nearing, Jr. Robert A. Nearing, Jr.	Director	March 28, 2011
/s/  Donald A. Pizer Donald A. Pizer	Director	March 28, 2011
James M. Revie	Director	March 28, 2011

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EX-10.8

Exhibit 10.8

PROPERTY CATASTROPHE EXCESS OF LOSS REINSURANCE CONTRACT

EFFECTIVE JANUARY 1, 2011

issued to

PENN MILLERS INSURANCE COMPANY

AMERICAN MILLERS INSURANCE COMPANY

TW No. G22283.11/G22287.11/G22288.11/G26396.11
FINAL

PENN MILLERS INSURANCE COMPANY

AMERICAN MILLERS INSURANCE COMPANY

PROPERTY CATASTROPHE EXCESS OF LOSS REINSURANCE CONTRACT

EFFECTIVE JANUARY 1, 2011

INDEX

ARTICLE	SUBJECT	PAGE
ARTICLE 1	BUSINESS COVERED		1
ARTICLE 2	COMMENCEMENT AND TERMINATION		1
ARTICLE 3	SPECIAL TERMINATION		1
ARTICLE 4	EXCLUSIONS		3
ARTICLE 5	RETENTION AND LIMIT		5
ARTICLE 6	REINSTATEMENT		5
ARTICLE 7	PREMIUM		5
ARTICLE 8	DEFINITION OF LOSS OCCURRENCE		5
ARTICLE 9	NET RETAINED LINE		8
ARTICLE 10	NET LOSS		8
ARTICLE 11	EXTRA-CONTRACTUAL OBLIGATIONS/LOSS EXCESS OF POLICY LIMITS		9
ARTICLE 12	NOTICE OF LOSS AND LOSS SETTLEMENT		10
ARTICLE 13	ERRORS AND OMISSIONS		10
ARTICLE 14	OFFSET		11
ARTICLE 15	CURRENCY		11
ARTICLE 16	FEDERAL EXCISE TAX AND OTHER TAXES		11
ARTICLE 17	ACCESS TO RECORDS		11
ARTICLE 18	SERVICE OF SUIT		12
ARTICLE 19	CONFIDENTIALITY		13
ARTICLE 20	PRIVACY		13
ARTICLE 21	ARBITRATION		14
ARTICLE 22	INSOLVENCY		17
ARTICLE 23	RESERVES		17
ARTICLE 24	MODE OF EXECUTION		20
ARTICLE 25	LATE PAYMENTS		20
ARTICLE 26	VARIOUS OTHER TERMS		21
ARTICLE 27	INTERMEDIARY		23

ATTACHMENTS:

NUCLEAR INCIDENT EXCLUSION CLAUSE — PHYSICAL DAMAGE — REINSURANCE (BRMA 35B)

POOLS, ASSOCIATIONS AND SYNDICATES EXCLUSION CLAUSE

TRANSMISSION AND DISTRIBUTION LINES EXCLUSION — ABOVE GROUND

FUNGI COVERAGE LIMITATION

TERRORISM EXCLUSION CLAUSE (NMA 2930B)

INFORMATION TECHNOLOGY HAZARDS CLARIFICATION CLAUSE (NMA2912)

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C11-119542-003
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EXHIBIT I —	PROPERTY FIRST CATASTROPHE EXCESS OF LOSS REINSURANCE CONTRACT
EXHIBIT II —	PROPERTY SECOND CATASTROPHE EXCESS OF LOSS REINSURANCE CONTRACT
EXHIBIT III —	PROPERTY THIRD CATASTROPHE EXCESS OF LOSS REINSURANCE CONTRACT
EXHIBIT IV —	PROPERTY FOURTH CATASTROPHE EXCESS OF LOSS REINSURANCE CONTRACT

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PENN MILLERS INSURANCE COMPANY

AMERICAN MILLERS INSURANCE COMPANY

WILKES-BARRE, PENNSYLVANIA

PROPERTY CATASTROPHE EXCESS OF LOSS REINSURANCE CONTRACT

EFFECTIVE JANUARY 1, 2011

ARTICLE 1

BUSINESS COVERED

A. This Contract applies to all Loss Occurrences that occur with a date of loss during the term of this Contract and arising from those Policies, except as hereinafter excluded, classified by the Company as Fire, Allied Lines, Automobile Physical Damage (excluding Collision), Section I of Homeowners and Multiple Peril Policies, Inland Marine and Property Agri Business that are in force at the inception of this Contract or are written with a Policy periods (new and renewal) effective during the term of this Contract (“Business Covered”).

B. The term “Policies”, whenever used herein, shall mean all binders, policies, contracts, certificates and other obligations, whether oral or written, of insurance or reinsurance that are Business Covered.

C. The reinsurance of all Business Covered hereunder shall be subject in all respects to the same risks, terms, clauses, conditions, interpretations, alterations, modifications, cancellations and waivers as the respective insurances (or reinsurances) of the Company’s Policies and the Reinsurer shall pay losses as may be paid thereon, subject to the liability of the Company and the terms and conditions of this Contract.

ARTICLE 2

COMMENCEMENT AND TERMINATION

     This Contract shall incept at 12:01 a.m., Eastern Standard Time, January 1, 2011, and remain in force until 12:01 a.m., Eastern Standard Time, January 1, 2012. Should this Contract terminate while a Loss Occurrence is in progress, the entire loss arising out of the Loss Occurrence shall be subject to this Contract and its terms and conditions.

ARTICLE 3

SPECIAL TERMINATION

A. The Company or the Reinsurer may terminate, or commute Obligations arising under this Contract in accordance with Paragraph C. below, upon the happening of any one of the following circumstances at any time by the giving of thirty (30) days prior written notice to the other party:

1. A party ceases active underwriting operations or a State Insurance Department or other legal authority orders the Reinsurer to cease writing business in all jurisdictions; or

2. The Reinsurer has filed a plan to enter into a Scheme of Arrangement or similar procedure. “Scheme of Arrangement” is defined as a legislative or regulatory process that provides a solvent Reinsurer the opportunity to settle its obligations with the Company either (i) without the Company’s unrestrained consent or (ii) prior to the

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Company having the ability to determine, with exact certainty, the actual amount of the obligations still outstanding and ultimately due to the Company; or

3. A party has: a) become insolvent, b) been placed under supervision (voluntarily or involuntarily), c) been placed into liquidation or receivership, or d) had instituted against it proceedings for the appointment of a supervisor, receiver, liquidator, rehabilitator, conservator or trustee in bankruptcy, or other agent known by whatever name, to take possession of its assets or control of its operations; or

4. A reduction in the Reinsurer’s surplus, risk-based capital or financial strength rating occurs:

a. As respects Reinsurers domiciled in the United States of America, (i) the Reinsurer’s policyholders’ surplus (“PHS”) has been reduced by, whichever is greater, thirty percent (30%) of the amount of PHS at the inception of this Contract or thirty percent (30%) of the amount of PHS stated in its last filed quarterly or annual statutory statement with its state of domicile; or (ii) the Reinsurer’s total adjusted capital is less than two hundred percent (200%) of its authorized control level risk-based capital; or (iii) the Reinsurer’s A.M. Best’s insurer financial strength rating becomes less than “A-”.

b. As respects Reinsurers domiciled outside the United States of America, other than Lloyd’s Syndicates (i) the Reinsurer’s Capital & Surplus (“C&S”) has been involuntarily reduced by, whichever is greater, thirty percent (30%) of the published currency amount of C&S at the inception of this Contract or thirty percent (30%) of the published currency amount of C&S stated in its last filed financial statement with its local regulatory authority; or (ii) as respects Lloyd’s Syndicates, the Reinsurer’s total stamp capacity has been reduced by more than thirty percent (30%) of the amount of total stamp capacity which stood at the inception of this Contract. (This provision does not apply to any Lloyd’s Syndicate that voluntarily reduces its total stamp capacity.) or (iii) the Reinsurer’s A.M. Best’s insurer financial strength rating becomes less than “A-” or the Reinsurer’s Standard & Poor’s Insurance Rating becomes less than “BBB”. or

5. A party has entered into a definitive agreement to (a) become merged with, acquired or controlled by any company, corporation or individual(s) not controlling or affiliated with the party’s operations previously; or (b) directly or indirectly assign all or essentially all of its entire liability for obligations under this Contract to another party without the other party’s prior written consent; or

6. There is either:

a. a severance or obstruction of free and unfettered communication and/or normal commercial or financial intercourse between the United States of America and the country in which the Reinsurer is incorporated or has its principal office as a result of war, currency regulations or any circumstances arising out of political, financial or economic uncertainty; or

b. a severance (of any kind) of any two (2) or more of the following executives of the Reinsurer from active employment of the Reinsurer during the most recent forty five (45) day period: chief underwriting officer, chief actuary, chief executive officer or chief financial officer. This condition does not apply whenever the severance in employment is for the publicly announced purpose of the individual’s assuming within thirty (30) days a known position with another identified firm in the (re)insurance industry or related field.

B. In the event the Company elects to terminate, the Company shall, with the notice of termination, specify that termination will be on a Cut-Off basis, in which event the Company

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shall relieve the Reinsurer for losses occurring subsequent to the specified Termination Date, and that Reinsurer shall not receive deposit premium installments beyond the date at which termination of the Reinsurer is effected. In the event no losses occur prior to the specified termination date, the Reinsurer shall within thirty (30) days of the termination date return a pro rata portion of any ceded deposit premium paid hereunder, calculated as of the Termination Date, and cash in that amount (less applicable ceding commission, if any, allowed thereon) and the minimum premium provisions, if any, shall be waived. (The fraction of the deposit premium to be returned to the Company shall equal the number of days from the Termination Date until the original expiration date of the Contract period divided by the number of days in the original Contract period.) Upon final determination of the adjusted premium for the Contract period, the Reinsurer shall be credited with a portion of premium for this Contract, in the amount equal to the fraction of the number of days the terminated Reinsurer participated in the Contract period divided by the number of days in the Contract period multiplied by the reinsurance premium for the Contract period.

C. If both parties agree to commute, then within sixty (60) days after such agreement, the Company shall submit a statement of valuation of the total of the net present value (“capitalized”) of the ceded (1) Net Loss Reserves, (2) Loss Adjustment Expense Reserves, and (3) unearned premium reserve, after deduction for any ceding commission allowed thereon, (the “Valuation Statement”). If agreement cannot be reached, the effort can be abandoned or alternately the Company and the Reinsurers may mutually appoint an actuary or appraiser to investigate, determine the capitalized value of the reserves to be returned to the Company. Such actuary shall be an independent and neutral actuary, Casualty Actuarial Society, experienced in such matters and the mutually agreed actuary shall render a decision. In the event that the Company and the Reinsurer are unable to agree upon a single actuary within thirty (30) days, the parties shall ask the then current President of the Casualty Actuarial Society to appoint an actuary with those qualifications within another thirty (30) days. The decision of the actuary will be final and binding on both parties. The Company and the Reinsurer shall share equally the fees and expenses of the actuary. Upon payment of the amount so agreed or determined by the actuary to the Company, the Reinsurer and the Company shall each be completely released from all liability to each other under this Contract.

ARTICLE 4

EXCLUSIONS

A. This Contract shall not cover:

1. Policies or portions thereof classified by the Company as: Accident and Health, Aviation, Casualty, Crop Hail, Fidelity and Surety, and Ocean Marine.

2. Collision.

3. Policies of Excess of Loss Reinsurance.

4. Financial Guarantee and Insolvency.

5. Mortgage Impairment and Difference In Conditions business.

6. Flood damage, except under Automobile Physical Damage, Inland Marine, Homeowners or Commercial Multi-Peril Policies.

7. Loss or liability excluded by the provisions of the “Nuclear Incident Exclusion Clause — Physical Damage — Reinsurance (BRMA 35B)” attached to and forming part of this Contract.

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8. a. Pool, Association or Syndicate business except for participation in the Mutual Reinsurance Bureau, as excluded by the provisions of the “Pools Exclusion Clause”. Nevertheless, it is specifically agreed that liability accruing to the Company from its participation in the following shall not be excluded:

i.

The following so-called Coastal Pools: Alabama Insurance Underwriting Association Florida Windstorm Underwriting Association Louisiana Insurance Underwriting Association Mississippi Insurance Underwriting Association North Carolina Insurance Underwriting Association South Carolina Windstorm and Hail Underwriting Association Texas Catastrophe Property Insurance Association Georgia Insurance Underwriting Association

ii.

All “FAIR Plan” business

for all perils including riot and civil disorder otherwise protected hereunder shall not be excluded except, however, that this Contract does not include any increase in such liability resulting from:

a) the inability of any other participant in such FAIR Plan or Coastal Pool to meet its liability

b) any claim against such FAIR Plan or Coastal Pool, or any participant therein, including the Company, whether by way of subrogation or otherwise, brought by or on behalf of any insolvency fund (as defined in the Insolvency Funds Exclusion Clause incorporated in this Contract).

b. Fire and Lightning losses on Mill and Elevator properties processed through or not processed through the Association of American Mill & Elevator Mutual Insurance Companies, known as the Mill Mutuals, Itasca, Illinois and the Association of American Mill and Agri Insurers.

9. Loss/or Damage/or Costs/or Expenses arising from Seepage and/or Pollution and/or Contamination, other than Contamination from Smoke Damage. Nevertheless, this exclusion does not preclude payment of the cost of the removal of debris of property damaged by a loss otherwise covered hereunder, but subject always to a limit of not more than five thousand dollars ($5,000) plus twenty five percent (25%) of the Company’s property loss under original Policy.

10. Regarding interests which at time of loss or damage are on shore, no liability shall attach hereto in respect of any loss or damage which is occasioned by war, invasion, hostilities, acts of foreign enemies, civil war, rebellion, insurrection, military or usurped power, or martial law or confiscation by order of any government or public authority.

     This War Exclusion Clause shall not, however, apply to interests which at time of loss or damage are within the territorial limits of the United States of America (comprising the fifty States of the Union and the District of Columbia and including Bridges between the U.S.A. and Mexico, provided they are under United States ownership), Canada, St. Pierre and Miquelon, provided such interests are insured under Policies, endorsements, or binders containing a standard war or hostilities or warlike operations exclusion clause.

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11. Any liability of the Company arising, by contract, operation of law, or otherwise, from its participation or membership, whether voluntary or involuntary, in any insolvency fund is excluded from this Contract. “Insolvency Fund” includes any guaranty fund, insolvency fund, plan, pool, association, fund or other arrangement, howsoever denominated, established or governed, which provides for any assessment of or payment or assumption by the Company of part or all of any claim, debt, charge, fee, or other obligation of an insurer, or its successors or assigns, which has been declared by any competent authority to be insolvent, or which is otherwise deemed unable to meet any claim, debt, charge, fee or other obligation in whole or in part.

12. Transmission and Distribution Lines Exclusion — Above Ground (150M Exclusion).

13. Fungi Coverage Limitation (NMA 2955).

14. Terrorism (NMA 2930b).

15. Information Technology Hazard Clarification Clause (NMA 2912).

B. Any exclusion listed above (other than exclusions A(1), A(4), A(6), A(7), A(9), A(10), A(11), A(14) & A(15)) shall be automatically waived as respects a Policy issued by the Company on a risk with respect to which only a minor or incidental part of the operations covered involves the exclusion. An incidental part of an insured’s regular operations shall mean not greater than ten percent (10%) of the insured’s regular operations.

ARTICLE 5

RETENTION AND LIMIT

See EXHIBITS I, II, III, and IV attached to and forming part of this Contract.

ARTICLE 6

REINSTATEMENT

     See EXHIBITS I, II, III, and IV attached to and forming part of this Contract.

ARTICLE 7

PREMIUM

See EXHIBITS I, II, III, and IV attached to and forming part of this Contract.

ARTICLE 8

DEFINITION OF LOSS OCCURRENCE

A. The term “Loss Occurrence” shall mean the sum of all individual losses directly occasioned by any one disaster, accident or loss or series of disasters, accidents or losses arising out of one event which occurs within the area of one state of the United States or province of Canada and states or provinces contiguous thereto and to one another. However, the duration and extent of any one “Loss Occurrence” shall be limited to all individual losses

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sustained by the Company occurring during any period of one hundred sixty eight (168) consecutive hours arising out of and directly occasioned by the same event except that the term “Loss Occurrence” shall be further defined as follows:

1. As regards windstorm, hail, tornado, hurricane, cyclone, including ensuing collapse and water damage, all individual losses sustained by the Company occurring during any period of seventy two (72) consecutive hours arising out of and directly occasioned by the same event. However, the event need not be limited to one state or province or states or provinces contiguous thereto.

2. As regards riot, riot attending a strike, civil commotion, vandalism and malicious mischief, all individual losses sustained by the Company occurring during any period of seventy two (72) consecutive hours within the area of one municipality or county and the municipalities or counties contiguous thereto arising out of and directly occasioned by the same event. The maximum duration of seventy two (72) consecutive hours may be extended in respect of individual losses which occur beyond such seventy two (72) consecutive hours during the continued occupation of an assured’s premises by strikers, provided such occupation commenced during the aforesaid period.

3. As regards earthquake (the epicenter of which need not necessarily be within the territorial confines referred to in the opening paragraph of this Article) and fire following directly occasioned by the earthquake, only those individual fire losses which commence during the period of one hundred sixty eight (168) consecutive hours may be included in the Company’s “Loss Occurrence”.

4. As regards “Freeze”, only individual losses directly occasioned by collapse, breakage of glass and water damage (caused by bursting of frozen pipes and tanks) may be included in the Company’s “Loss Occurrence”.

5. As regards firestorms, brush fires and any other fires or series of fires, irrespective of origin (except as provided in A(2) and A(3) above), which spread through trees, grassland or other vegetation, all individual losses sustained by the Company which commence during any period of one hundred sixty eight (168) consecutive hours within a one hundred (100) mile radius of any fixed point selected by the Company where a claim has actually been made may be included in the Company’s “Loss Occurrence.” However, an individual loss subject to this subparagraph cannot be included in more than one “Loss Occurrence”.

B. Except for those “Loss Occurrences” referred to in A(1) and A(2) the Company may choose the date and time when any such period of consecutive hours commences provided that it is not earlier than the date and time of the occurrence of the first recorded individual loss sustained by the Company arising out of that disaster, accident or loss and provided that only one such period of one hundred sixty eight (168) consecutive hours shall apply with respect to one event.

C. However, as respects those “Loss Occurrences” referred to in A(1) and A(2), if the disaster, accident or loss occasioned by the event is of greater duration than seventy two (72) consecutive hours, then the Company may divide that disaster, accident or loss into two (2) or more “Loss Occurrences” provided no two (2) periods overlap and no individual loss is included in more than one such period and provided that no period commences earlier than the date and time of the occurrence of the first recorded individual loss sustained by the Company arising out of that disaster, accident or loss.

D. No individual losses occasioned by an event that would be covered by seventy two (72) hours clauses may be included in any “Loss Occurrence” claimed under the one hundred sixty eight (168) hours provision.

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ARTICLE 9

NET RETAINED LINE

A. This Contract applies only to that portion of any Policy which the Company retains net for its own account, and in calculating the amount of any loss hereunder and also in computing the amount or amounts in excess of which this Contract attaches, only loss or losses in respect of that portion of any Policy which the Company retains net for its own account shall be included.

B. The amount of the Reinsurers’ liability hereunder in respect of any loss or losses shall not be increased by reason of the inability of the Company to collect from any other Reinsurers, whether specific or general, any amounts which may have become due from such Reinsurers, whether such inability arises from the insolvency of such other Reinsurers or otherwise.

C. Inter-company reinsurance among the companies collectively called the “Company” shall be entirely disregarded for all purposes of this Contract.

D. Permission is hereby granted the Company to carry underlying reinsurance and layers of catastrophe reinsurance both below and above this layer of coverage and recoveries made thereunder shall be disregarded for all purposes of this Contract and shall inure to the sole benefit of the Company.

ARTICLE 10

NET LOSS

A. The term “Net Loss” shall mean the actual loss sustained by the Company from Business Covered hereunder including (i) sums paid in settlement of claims and suits and in satisfaction of judgments, (ii) prejudgment interest when added to a judgment, (iii) ninety percent (90%) of any Extra-Contractual Obligations (iv) ninety percent (90%) of any Losses Excess of Policy Limits, (v) any interest on judgments other than prejudgment interest when added to a judgment and (vi) all Loss Adjustment Expenses incurred by the Company. In the event that the Company’s original Policies and/or specific coverage parts of their original Policies are issued on a cost inclusive basis, such loss adjustment expenses shall be included within the Company’s Net Loss for the purposes of recovery hereunder.

B. “Loss Adjustment Expenses” shall mean: (i) expenses sustained in connection with adjustment, defense, settlement and litigation of claims and suits, satisfaction of judgments, resistance to or negotiations concerning a loss (which shall include the expenses and the pro rata share of the salaries of the Company’s field employees according to the time occupied in adjusting such Loss and the expenses of the Company’s employees while diverted from their normal duties to the service of field adjustment but shall not include any salaries of officers or normal overhead expenses of the Company), (ii) legal expenses and costs incurred in connection with coverage questions regarding specific claims and legal actions, including Declaratory Judgment Expenses, connected thereto, (iii) all interest on judgments other than prejudgment interest except when included in Net Loss, and (iv) expenses sustained to obtain recoveries, salvages or other reimbursements, or to secure the reversal or reduction of a verdict or judgment.

C. “Declaratory Judgment Expenses” as used in this Contract shall mean legal expenses paid by the Company in the investigation, analysis, evaluation, resolution or litigation of coverage issues between the Company and its insured(s), under Policies reinsured hereunder, for a specific loss or losses tendered under such Policies, which loss or losses are not excluded under this Contract.

D. All salvages, recoveries, payments and reversals or reductions of verdicts or judgments (net of the cost of obtaining such salvage, recovery, payment or reversal or reduction of a verdict or judgment) whether recovered, received or obtained prior or subsequent to loss settlement under this Contract, including amounts recoverable under other reinsurance whether

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collected or not, shall be applied as if recovered, received or obtained prior to the aforesaid settlement and shall be deducted from the actual losses sustained to arrive at the amount of the net loss. Nothing in this Article shall be construed to mean losses are not recoverable until the Net Loss to the Company finally has been ascertained.

E. The Reinsurers shall be subrogated, as respects any loss for which the Reinsurers shall actually pay or become liable, but only to the extent of the amount of payment by or the amount of liability to the Reinsurers, to all the rights of the Company against any person or other entity who may be legally responsible for damages as a result of said loss. Should the Company elect not to enforce such rights, the Reinsurers are hereby authorized and empowered to bring any appropriate action in the name of the Company or its policyholders, or otherwise to enforce such rights. The Reinsurers shall promptly remit to the Company the amount of any judgment awarded in such an action in excess of the amount of payment by, or the amount of liability to, the Reinsurers hereunder.

ARTICLE 11

EXTRA-CONTRACTUAL OBLIGATIONS/LOSS EXCESS OF POLICY LIMITS

A. “Extra-Contractual Obligations” means those liabilities not covered under any other provision of this Contract, other than Loss Excess of Policy Limits, including but not limited to compensatory, consequential, punitive, or exemplary damages together with any legal costs and expenses incurred in connection therewith, paid as damages or in settlement by the Company arising from an allegation or claim of its insured, its insured’s assignee, or other third party, which alleges negligence, gross negligence, bad faith or other tortious conduct on the part of the Company in the handling, adjustment, rejection, defense or settlement of a claim under a Policy that is the Business Covered.

B. “Loss Excess of Policy Limits” means any amount of loss, together with any legal costs and expenses incurred in connection therewith, paid as damages or in settlement by the Company in excess of its Policy Limits, but otherwise within the coverage terms of the Policy, arising from an allegation or claim of its insured, its insured’s assignee, or other third party, which alleges negligence, gross negligence, bad faith or other tortious conduct on the part of the Company in the handling of a claim under a Policy or bond that is the Business Covered, in rejecting a settlement within the Policy Limits, in discharging a duty to defend or prepare the defense in the trial of an action against its insured, or in discharging its duty to prepare or prosecute an appeal consequent upon such an action. For the avoidance of doubt, the decision by the Company to settle a claim for an amount within the coverage of the Policy but not within the Policy Limit when the Company has reasonable basis to believe that it may have legal liability to its insured or assignee or other third party on the claim will be deemed a Loss Excess of Policy Limits. The Company will provide Reinsurers an explanation relating to the Company’s motivation for settlement and use its best efforts to obtain the Reinsurers’ prior counsel and concurrence in the Company’s action. A reasonable basis shall mean it is more likely than not a trial would result in a verdict excess of the Policy Limits, in the opinion of counsel assigned to defend the insured or otherwise retained by the Company.

C. An Extra-Contractual Obligation or a Loss Excess of Policy Limits shall be deemed to have occurred on the same date as the loss covered under the Company’s original Policy and shall be considered part of the original loss (subject to other terms of this Contract).

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D. Neither an Extra-Contractual Obligation nor a Loss Excess of Policy Limits shall include a loss incurred by the Company as the result of any fraudulent or criminal act directed against the Company by any officer or director of the Company acting individually or collectively or in collusion with any other organization or party involved in the presentation, defense, or settlement of any claim under this Contract.

E. Recoveries, whether collectible or not, including any retentions and/or deductibles, from any other form of insurance or reinsurance which protect the Company against any loss or liability covered under this Article shall inure to the benefit of the Reinsurers and shall be deducted from the total amount of any Extra-Contractual Obligation and/or Loss Excess of Policy Limits in determining the amount of Extra-Contractual Obligation and/or Loss Excess of Policy Limits that shall be indemnified under this Article.

F. The Company shall be indemnified in accordance with this Article to the extent permitted by applicable law.

ARTICLE 12

NOTICE OF LOSS AND LOSS SETTLEMENT

A. The Company shall advise the Reinsurers promptly of all Loss Occurrences which, in the opinion of the Company, may result in a claim hereunder and of all subsequent developments thereto which, in the opinion of the Company, may materially affect the position of the Reinsurers. Inadvertent omission or oversight in giving such notice shall in no way affect the liability of the Reinsurers. However, the Reinsurers shall be informed of such omission or oversight promptly upon its discovery.

B. Prompt notice shall be given to the Reinsurers by the Company on any Loss Occurrence wherein the Company’s reserve exceeds fifty percent (50%) of the Company’s loss retention.

C. The Company shall have the right to settle all claims under its Policies. All loss settlements made by the Company, whether under strict Policy conditions or by way of compromise, that are the Business Covered and that are not an Ex-gratia Settlement shall be final and binding subject to the liability of the Company and the terms and conditions of this Contract. The Reinsurer shall follow the liability of the Company (to the extent provided in this Contract) and shall pay or allow, as the case may be, its share of each such settlement in accordance with this Contract all amounts for which it is obligated as soon as possible, but not later than ten (10) business days, of being furnished by the Company with reasonable evidence of the amount due. Reasonable evidence of the amount due shall consist of a certification by the Company, accompanied by proof of loss documentation the Company customarily presents with its claims payment requests, that the amount requested to be paid and submitted by the certification, is, upon information and belief, due and payable to the Company by the Reinsurers under the terms and conditions of this Contract.

ARTICLE 13

ERRORS AND OMISSIONS

     Inadvertent delays, errors or omissions made by the Company in connection with this Contract shall not relieve the Reinsurer from any liability which would have attached had such error or omission not occurred, provided always that such error or omission shall be rectified as soon as possible, provided that the liability of the Reinsurer shall not extend beyond the coverage provided by this Contract nor to extend coverage to Policies that are not the Business Covered hereunder. This Article shall not apply to a sunset provision, if any in this Contract, nor to a commutation made in connection with this Contract.

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ARTICLE 14

OFFSET

     The Company and the Reinsurer shall have the right to offset any balance or amounts due from one party to the other under the terms of this Contract. The party asserting the right of offset may exercise such right any time whether the balances due are on account of premiums or losses or otherwise and immediately inform the Intermediary accordingly. In the event of the insolvency of any party, offset shall be as permitted by applicable law.

ARTICLE 15

CURRENCY

A. Whenever the word “Dollars” or the “$” sign appears in this Contract, they shall be construed to mean United States Dollars and all transactions under this Contract shall be in United States Dollars.

B. Amounts paid or received by the Company in any other currency shall be converted to United States Dollars at the rate of exchange at the date such transaction is entered on the books of the Company.

ARTICLE 16

FEDERAL EXCISE TAX AND OTHER TAXES

A. To the extent that any portion of the reinsurance premium for this Contract is subject to the Federal Excise Tax (as imposed under Section 4371 of the Internal Revenue Code) and the Reinsurer is not exempt therefrom, the Reinsurers shall allow for the purpose of paying the Federal Excise Tax, a deduction by the Company of the applicable percentage of the premium payable hereon. In the event of any return of premium becoming due hereunder, the Reinsurers shall deduct the applicable same percentage from the return premium payable hereon and the Company or its agent shall take steps to recover the tax from the United States Government. In the event of any uncertainty, upon the written request of the Company, the Reinsurer will immediately file a certificate signed by a senior corporate officer of the Reinsurer certifying to its entitlement to the exemption from the Federal Excise Tax with respect to one or more transactions.

B. In consideration of the terms under which this Contract is issued, the Company undertakes not to claim any deduction of the premium hereon when making Canadian Tax returns or when making tax returns, other than Income or Profits Tax returns, to any State or Territory of the United States of America or to the District of Columbia.

ARTICLE 17

ACCESS TO RECORDS

A. The Company shall place at the disposal of the Reinsurer at all reasonable times, and the Reinsurer shall have the right to inspect (and make reasonable copies) through its designated representatives during the term of this Contract and thereafter, all non-privileged books, records and papers of the Company directly related to any reinsurance hereunder, or the subject matter hereof, provided that if the Reinsurer has ceased active market operations, this right of access shall be subject to that Reinsurer being current in all payments owed the Company that are not currently the subject of a formal dispute (such as the initiation of an Arbitration or Mediation). For the purposes of this Article, “non-privileged” refers to books, records and papers that are not subject to the Attorney-client privilege and Attorney-work product doctrine.

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B. “Attorney-client privilege” and “Attorney-work product” shall have the meanings ascribed to each by statute and/or the court of final adjudication in the jurisdiction whose laws govern the substantive law of a claim arising under a Policy reinsured under this Contract.

C. Notwithstanding anything to the contrary in this Contract, for any claim or loss under a Policy reinsured under this Contract, should the Reinsurer assert, pursuant to the Common Interest Doctrine (“Doctrine”), that it has the right to examine any document that the Company alleges is subject to the Attorney-client privilege or the Attorney-work product privilege, upon the Reinsurer providing to the Company substantiation of any law which reasonably supports the basis for the Reinsurer’s conclusion that the Doctrine applies and the Doctrine will be upheld as applying between the Company and the Reinsurer as against third parties pursuant to the substantive law(s) which govern the claim or loss, the Company shall give the Reinsurer access to such document.

D. Notwithstanding any other provision to the contrary, once a claim and all directly related claims are finally settled by the Company, the Reinsurer shall be entitled to review all reasonable and applicable claims records that support a Company request for payment of a claim hereunder for Net Loss for Business Covered hereunder. In the event that the Reinsurer shall have paid an amount for Net Loss to the Company and the records do not support the obligation of the Reinsurer to have paid the claim, the Company shall promptly return any payment made in error.

ARTICLE 18

SERVICE OF SUIT

A. This Article only applies to a Reinsurer domiciled outside of the United States and/or unauthorized in any state, territory or district of the United States having jurisdiction over the Company. Furthermore, this Article will not be read to conflict with or override any obligations of the parties to arbitrate their disputes under this Contract. This Article is intended as an aid to compelling arbitration if called for by this Contract or enforcing any such arbitration or arbitral award, not as an alternative to any Arbitration provision in this Contract that is applicable for resolving disputes arising out of this Contract.

B. In the event of any dispute, the Reinsurer, at the request of the Company, shall submit to the jurisdiction of a court of competent jurisdiction within the United States. Nothing in this Article constitutes or should be understood to constitute a waiver of any obligation to arbitrate disputes arising from this Contract or the Reinsurer’s rights to commence an action in any court of competent jurisdiction in the United States, to remove an action to a United States District Court, or to seek a transfer of a case to another court as permitted by the laws of the United States or of any state in the United States.

C. The Reinsurer, once the appropriate court is selected, whether such court is the one originally chosen by the Company and accepted by the Reinsurer or is determined by removal, transfer, or otherwise, as provided above, will comply with all requirements necessary to give said court jurisdiction and, in any suit instituted against any of them upon this Contract, will abide by the final decision of such court or any appellate court in the event of an appeal.

D. Service of process in any such suit against the Reinsurer may be made upon Mendes and Mount, 750 Seventh Avenue, New York, New York 10019-6829, — or in substitution therefore, the Firm identified by the Reinsurer on the Reinsurer’s signature page to this Contract, — (“Firm”) and in any suit instituted, the Reinsurer shall abide by the final decision of such court or of any appellate court in the event of an appeal.

E. The Firm is authorized and directed to accept service of process on behalf of the Reinsurer in any such suit and/or upon the request of the Company to give a written undertaking to the Company that they shall enter a general appearance upon the Reinsurer’s behalf in the event such a suit shall be instituted.

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F. Further, as required by and pursuant to any statute of any state, territory or district of the United States which makes provision therefore, the Reinsurer hereby designates the Superintendent, Commissioner or Director of Insurance or other officer specified for that purpose in the statute, or his successor or successors in office, as their true and lawful Attorney upon whom may be served any lawful process in any action, suit or proceeding instituted by or on behalf of the Company or any beneficiary hereunder arising out of this Contract, and hereby designates the above-named as the person to whom the said officer is authorized to mail such process or a true copy thereof.

ARTICLE 19

CONFIDENTIALITY

A. The information, data, statements, representations and other materials provided by the Company or the Reinsurer to the other arising from consideration and participation in this Contract whether contained in the reinsurance submission, this Contract, or in materials or discussions arising from or related to this Contract, may contain confidential or proprietary information as expressly indicated by the Disclosing Party (“Disclosing Party”) in writing from time to time to the other party of the respective parties (“Confidential Information”). This Confidential Information is intended for the sole use of the parties to this Contract (and their affiliates involved in management or operation of assumed reinsurance business, retrocessionaires, prospective retrocessionaires, intermediaries involved in such placements, respective auditors and legal counsel) as may be necessary in analyzing and/or accepting a participation in and/or executing their respective responsibilities under or related to this Contract. Disclosing or using Confidential Information relating to this Contract, without the prior written consent of the Disclosing Party, for any purpose beyond (i) the scope of this Contract, (ii) the reasonable extent necessary to perform rights and responsibilities expressly provided for under this Contract, (iii) the reasonable extent necessary to administer, report to and effect recoveries from retrocessional Reinsurers, (iv) the reporting to regulatory or other governmental authorities as may be legally required or (v) persons with a need to know the information, (all of the preceding persons or entities who are legally obligated by either written agreement or otherwise to maintain the confidentiality of the Confidential Information) is expressly forbidden. Copying, duplicating, disclosing, or using Confidential Information for any purpose beyond this expressed purpose is forbidden without the prior written consent of the Disclosing Party.

B. Should a party (“Receiving Party”) receive a third party demand pursuant to subpoena, summons, or court or governmental order, to disclose Confidential Information that has been provided by another party to this Contract, the Receiving Party shall make commercially reasonable efforts to provide the Disclosing Party with written notice of any subpoena, summons, or court or governmental order, at least ten (10) days prior to such release or disclosure. Unless the Disclosing Party has given its prior permission to release or disclose the Confidential Information, the Receiving Party shall not comply with the subpoena prior to the actual date required by the subpoena. If a protective order or appropriate remedy is not obtained, the Receiving Party may disclose only that portion of the Confidential Information that it is legally obligated to disclose. However, notwithstanding anything to the contrary in this Contract, in no event, to the extent permitted by law, shall this Article require the Receiving Party not to comply with the subpoena, summons, or court or governmental order.

ARTICLE 20

PRIVACY

A. Privacy Awareness. The Company and the Reinsurer are aware of and in compliance with their responsibilities and obligations under:

1. The Gramm-Leach-Bliley Act of 1999 (the “Act”) and applicable Federal and State laws and regulations implementing the Act. The Company and the Reinsurer will only use Non-Public Personal Information as permitted by law; and

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2. The applicable provisions of the Health Insurance Portability and Accountability Act (“HIPAA”) and the related requirements of any regulations promulgated thereunder including without limitation the Federal Privacy Regulations as contained in 45 CFR Part 160 and 164 (the “Federal Privacy Regulations”). The Company and the Reinsurer will only use protected health information as permitted by law.

B. Non-Disclosure. To the extent required or prohibited by applicable law or regulation, the Reinsurer shall not disclose any (a) Non-Public Personal Information or (b) protected health information (as defined in 45 CFR 164.501) it receives from the Company to anyone other than:

1. The Reinsurer, the Reinsurer’s affiliates, legal counsel, auditors, consultants, regulators, rating agencies and any other persons or entities to whom such disclosure is required to effect, administer, or enforce a reinsurance contract; or any retrocessional reinsurance contract applicable to the losses that are the subject of this Contract, or

2. Persons or entities to whom disclosure is required by applicable law or regulation.

C. Non-Public Personal Information. “Non-Public Personal Information” shall for the purpose of this Contract mean financial or health information that personally identifies an individual, including claimants under Policies reinsured under this Contract, and which information is not otherwise available to the public.

ARTICLE 21

ARBITRATION

A. Any and all disputes between the Company and the Reinsurer arising out of, relating to, or concerning this Contract, whether sounding in contract or tort and whether arising during or after termination of this Contract, shall be submitted to the decision of a board of arbitration composed of two (2) arbitrators and an umpire (“Board”) meeting at a site in the city in which the principal headquarters of the Company are located. The arbitration shall be conducted under the Federal Arbitration Act and shall proceed as set forth below.

B. A notice requesting arbitration, or any other notice made in connection therewith, shall be in writing and be sent certified or registered mail, return receipt requested to the affected parties. The notice requesting arbitration shall state in particulars all issues to be resolved in the view of the claimant, shall appoint the arbitrator selected by the claimant and shall set a tentative date for the hearing, which date shall be no sooner than ninety (90) days and no later than one hundred fifty (150) days from the date that the notice requesting arbitration is mailed. Within thirty (30) days of receipt of claimant’s notice, the respondent shall notify claimant of any additional issues to be resolved in the arbitration and of the name of its appointed arbitrator.

C. The members of the Board shall be impartial, disinterested and not currently representing any party participating in the arbitration, and shall be current or former senior officers of insurance or reinsurance concerns, experienced in the line(s) of business that are the subject of this Contract. The Company and the Reinsurer as aforesaid shall each appoint an arbitrator and the two (2) arbitrators shall choose an umpire before instituting the hearing. As time is of the essence, if the respondent fails to appoint its arbitrator within thirty (30) days after having received claimant’s written request for arbitration, the claimant is authorized to and shall appoint the second arbitrator. If the two (2) arbitrators fail to agree upon the appointment of an umpire within thirty (30) days after notification of the appointment of the second arbitrator, within ten (10) days thereof, the two (2) arbitrators shall request ARIAS U.S. (“ARIAS”) to apply its procedures to appoint an umpire for the arbitration with the qualifications set forth above in this Article. If the use of ARIAS procedures fails to name an umpire, either party may apply to a court of competent jurisdiction to appoint an umpire with the above required qualifications. The umpire shall promptly notify in writing all parties to the arbitration of his selection and of the

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scheduled date for the hearing. Upon resignation or death of any member of the Board, a replacement shall be appointed in the same fashion as the resigning or deceased member was appointed.

D. The claimant and respondent shall each submit initial briefs to the Board outlining the facts, the issues in dispute and the basis, authority, and reasons for their respective positions within thirty (30) days of the date of notice of appointment of the umpire. The claimant and the respondent may submit a reply brief to the Board within ten (10) days after filing of the initial brief(s). Initial and reply briefs may be amended by the submitting party at any time, but not later than ten (10) days prior to the date of commencement of the arbitration hearing. Reasonable responses shall be allowed at the arbitration hearing to new material contained in any amendments filed to the briefs but not previously responded to.

E. The Board shall make a decision and award with regard to the terms expressed in this Contract, the original intentions of the parties to the extent reasonably ascertainable, and the custom and usage of the insurance and reinsurance business that is the subject of this Contract. Notwithstanding any other provision of this Contract, the Board shall have the right and obligation to consider underwriting and submission-related documents in any dispute between the parties.

F. The Board shall be relieved of all judicial formalities and the decision and award shall be based upon a hearing in which evidence shall be allowed though the formal rules of evidence shall not strictly apply. Cross examination and rebuttal shall be allowed. The Board may request a post-hearing brief to be submitted within twenty (20) days of the close of the hearing.

G. The Board shall render its decision and award in writing within thirty (30) days following the close of the hearing or the submission of post-hearing briefs, whichever is later, unless the parties consent to an extension. Every decision by the Board shall be by a majority of the members of the Board and each decision and award by the majority of the members of the Board shall be final and binding upon all parties to the proceeding. Such decision shall be a condition precedent to any right of legal action arising out of the arbitrated dispute which either party may have against the other. However, the Board is not authorized to award punitive, exemplary or enhanced compensatory damages.

H. The Board may award (i) interest at a rate not in excess of that set forth in the Article entitled LATE PAYMENTS, calculated from the date the Board determines that any amounts due the prevailing party should have been paid to the prevailing party, and (ii) applicable Attorneys’ fees and costs.

I. Either party may apply to a court of competent jurisdiction for an order confirming any decision and the award; a judgment of that Court shall thereupon be entered on any decision or award. If such an order is issued, the Attorneys’ fees of the party so applying and court costs will be paid by the party against whom confirmation is sought.

J. Except in the event of a consolidated arbitration, each party shall bear the expense of the one arbitrator appointed by or for it and shall jointly and equally bear with the other party the expense of any stenographer requested, and of the umpire. The remaining costs of the arbitration proceedings shall be finally allocated by the Board.

K. Subject to customary and recognized legal rules of privilege, each party participating in the arbitration shall have the obligation to produce those documents and as witnesses at the arbitration those of its employees, and those of its affiliates as any other participating party reasonably requests, providing always that the same witnesses and documents be obtainable and relevant to the issues before the arbitration and not be unduly burdensome or excessive in the opinion of the Board.

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L. The parties may mutually agree as to pre-hearing discovery prior to the arbitration hearing and in the absence of agreement, upon the request of any party, pre-hearing discovery may be conducted as the Board shall determine in its sole discretion to be in the interest of fairness, full disclosure, and a prompt hearing, decision and award by the Board.

M. The Board shall be the final judge of the procedures of the Board, the conduct of the arbitration, of the rules of evidence, the rules of privilege, discovery and production and of excessiveness and relevancy of any witnesses and documents upon the petition of any participating party. To the extent permitted by law, the Board shall have the authority to issue subpoenas and other orders to enforce their decisions. The Board shall also have the authority to issue interim decisions or awards in the interest of fairness, full disclosure, and a prompt and orderly hearing and decision and award by the Board.

N. Upon request made to the Board not later than ten (10) days after the umpire’s appointment, the Board may order a consolidated hearing as respects common issues between the Company and all affected Reinsurers participating in this Contract if the Board is satisfied in its discretion that the issues in dispute affect more than one Reinsurer and a consolidated hearing would be in the interest of fairness, and a prompt and cost effective resolution of the issues in dispute.

O. If the parties mutually agree to or the Board orders a consolidated hearing, all other affected participating Reinsurers shall join and participate in the arbitration under time frames established by the Board and will be bound by the Board’s decision and award unless excused by the Board in its discretion. A consolidated hearing shall not result in any change or modification of any Reinsurer’s liability for its participation, that is several, but not joint shall remain the same.

P. Any Reinsurer may decline to actively participate in a consolidated arbitration if in advance of the hearing, that Reinsurer shall file with the Board a written agreement in form satisfactory to the Board to be bound by the decision and award of the Board in the same fashion and to the same degree as if it actively participated in the arbitration.

Q. In the event of an order of consolidation by the Board, the arbitrator appointed by the original Reinsurer shall be subject to being, and may be, replaced within thirty (30) days of the decision to have a consolidated arbitration by an arbitrator named collectively by the Reinsurers or in the absence of agreement, by the Lead Reinsurer, or if there is no Lead Reinsurer involved in the dispute, the Reinsurer with the largest participation in this Contract affected by the dispute. In the event two (2) or more Reinsurers affected by the dispute each have the same largest participation, they shall agree among themselves as to the replacement arbitrator, if any, to be appointed. The umpire shall be the final determiner in the event of any dispute over replacement of that arbitrator. All other aspects of the arbitration shall be conducted as provided for in this Article provided that (1) each party actively participating in the consolidated arbitration will have the right to its own attorney, position, and related claims and defenses; (2) each party will not, in presenting its position, be prevented from presenting its position by the position set forth by any other party; and (3) the cost and expense of the arbitration, exclusive of Attorneys’ fees (which will be borne exclusively by the respective retaining party unless otherwise determined by the Board) but including the expense of any stenographer which shall be borne by each party actively participating in the consolidated arbitration or as the Board shall determine to be fair and appropriate under the circumstances.

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ARTICLE 22

INSOLVENCY

(This Article shall be deemed to read as required to meet the statutory insolvency clause requirements of the Company.)

A. In the event of insolvency or the appointment of a conservator, liquidator, or statutory successor of the Company, the portion of any risk or obligation assumed by the Reinsurer shall be payable to the conservator, liquidator, or statutory successor on the basis of claims allowed against the insolvent Company by any court of competent jurisdiction or by any conservator, liquidator, or statutory successor of the Company having authority to allow such claims, without diminution because of that insolvency, or because the conservator, liquidator, or statutory successor has failed to pay all or a portion of any claims.

B. Payments by the Reinsurer as above set forth shall be made directly to the Company or to its conservator, liquidator, or statutory successor, except where this Contract specifically provides another payee of such reinsurance or except as provided by applicable law and regulation (such as subsection (a) of section 4118 of the New York Insurance Laws) in the event of the insolvency of the Company.

C. In the event of the insolvency of the Company, the liquidator, receiver, conservator or statutory successor of the Company shall give written notice to the Reinsurer of the pendency of a claim against the insolvent Company on the Policy or Policies reinsured within a reasonable time after such claim is filed in the insolvency proceeding and during the pendency of such claim any Reinsurer may investigate such claim and interpose, at its own expense, in the proceeding where such claim is to be adjudicated any defense or defenses which it may deem available to the Company or its liquidator, receiver, conservator or statutory successor. The expense thus incurred by the Reinsurer shall be chargeable subject to court approval against the insolvent Company as part of the expense of liquidation to the extent of a proportionate share of the benefit which may accrue to the Company solely as a result of the defense undertaken by the Reinsurer.

D. Where two (2) or more Reinsurers are involved in the same claim and a majority in interest elect to interpose defense to such claim, the expense shall be apportioned in accordance with the terms of this Contract as though such expense had been incurred by the Company.

ARTICLE 23

RESERVES

A. If, at any time during the period of this Contract and thereafter the reinsurance provided by a Reinsurer participating in this Contract does not qualify for full statutory accounting credit for reinsurance by regulatory authorities having jurisdiction over the Company (whether by reason of lack of license, accreditation or otherwise) such that a financial penalty to the Company would result on any statutory statement or report the Company is required to make or file with insurance regulatory authorities (or a court of law in the event of insolvency), the Reinsurer shall secure the Reinsurer’s share of Obligations for which such full statutory credit is not granted by those authorities in a manner, form, and amount acceptable to the Company and to all applicable insurance regulatory authorities in accordance with this Article.

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B. The Reinsurer shall secure such Obligations, within thirty (30) days after the receipt of the Company’s written request regarding the Reinsurer’s share of Obligations under this Contract (but not later than December 31) of each year by either:

1. Clean, irrevocable, and unconditional evergreen letter(s) of credit issued and confirmed, if confirmation is required by the applicable insurance regulatory authorities, by a qualified United States financial institution as defined under the Insurance Law of the Company’s domiciliary state and acceptable to the Company and to insurance regulatory authorities;

2. A trust account meeting at least the standards of New York’s Insurance Regulation 114 and the Insurance Law of the Company’s domiciliary state; or

3. Cash advances or funds withheld or a combination of both, which will be under the exclusive control of the Company (“Funds Deposit”).

C. The “Obligations” referred to herein means, subject to the preceding paragraphs, the then current (as of the end of each calendar quarter) sum of any:

1. amount of the ceded unearned premium reserve for which the Reinsurer is responsible to the Company;

2. amount of Net Losses and Loss Adjustment Expenses and other amounts paid by the Company for which the Reinsurer is responsible to the Company but has not yet paid;

3. amount of ceded reserves for Net Losses and Loss Adjustment Expenses for which the Reinsurer is responsible to the Company;

4. amount of return and refund premiums paid by the Company for which the Reinsurer is responsible to the Company but has not yet paid.

D. The Company, or its successors in interest, may draw, at any time and from time to time, upon the:

1. Established letter of credit (or subsequent cash deposit);

2. Established trust account (or subsequent cash deposit); or

3. Funds Deposit;

without diminution or restriction because of the insolvency of either the Company or the Reinsurer for one or more of the following purposes set forth below.

E. Draws shall be made only for the following purposes:

1. To make payment to and reimburse the Company for the Reinsurer’s share of Net Loss and Loss Adjustment Expense and other amounts paid by the Company under its Policies and for which the Reinsurer is responsible under this Contract that is due to the Company but unpaid by the Reinsurer including but not limited to the Reinsurer’s share of premium refunds and returns; and

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2. To obtain a cash advance of the entire amount of the remaining balance under any letter of credit in the event that the Company:

a. has received notice of non-renewal or expiration of the letter of credit or trust account;

b. has not received assurances satisfactory to the Company of any required increase in the amount of the letter of credit or trust account, or its replacement or other continuation of the letter of credit or trust account at least thirty (30) days before its stated expiration date;

c. has been made aware that others may attempt to attach or otherwise place in jeopardy the security represented by the letter of credit or trust account; or

d. has concluded that the trustee or issuing (or confirming) bank’s financial condition is such that the value of the security represented by the letter of credit or trust account may be in jeopardy;

and under any of those circumstances where the Reinsurer’s entire Obligations, or part thereof, under this Contract remain un-liquidated and un-discharged at least thirty (30) days prior to the stated expiration date or at the time the Company learns of the possible jeopardy to the security represented by the letter of credit or trust account.

F. If the Company draws on the letter of credit or trust account to obtain a cash advance, the Company will hold the amount of the cash advance so obtained in the name of the Company in any qualified United States financial institution as defined under the Insurance Law of the Company’s domiciliary state in trust solely to secure the Obligations referred to above and for the use and purposes enumerated above and to return any balance thereof to the Reinsurer:

1. Upon the complete and final liquidation and discharge of all of the Reinsurer’s Obligations to the Company under this Contract; or

2. In the event the Reinsurer subsequently provides alternate or replacement security consistent with the terms hereof and acceptable to the Company.

G. The Company will prepare and forward at annual intervals or more frequently as determined by the Company, but not more frequently than quarterly to the Reinsurer a statement for the purposes of this Article, showing the Reinsurer’s share of Obligations as set forth above. If the Reinsurer’s share thereof exceeds the then existing balance of the security provided, the Reinsurer will, within fifteen (15) days of receipt of the Company’s statement, but never later than December 31 of any year, increase the amount of the letter of credit, (or subsequent cash deposit), trust account or Funds Deposit to the required amount of the Reinsurer’s share of Obligations set forth in the Company’s statement, but never later than December 31 of any year. If the Reinsurer’s share thereof is less than the then existing balance of the security provided, the Company will release the excess thereof to the Reinsurer upon the Reinsurer’s written request. The Reinsurer will not attempt to prevent the Company from holding the security provided or Funds Deposit so long as the Company is acting in accordance with this Article. The Company shall pay interest earned on the deposited amounts to the Reinsurers as the parties shall have agreed at the time of the deposit.

H. Any assets deposited to a trust account will be valued according to their current fair market value and will consist only of cash (U.S. legal tender), certificates of deposit issued by a qualified United States financial institution as defined under the Insurance Law of the Company’s domiciliary state and payable in cash, and investments of the types no less conservative than those specified in Section 1404 (a)(1)(2)(3)(8) and (10) of the New York Insurance Law and which are admitted assets under the Insurance Law of the Company’s

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domiciliary state. Investments issued by the parent, subsidiary, or affiliate of either the Company or the Reinsurer will not be eligible investments. All assets so deposited will be accompanied by all necessary assignments, endorsements in blank, or transfer of legal title to the trustee in order that the Company may negotiate any such assets without the requirement of consent or signature from the Reinsurer or any other entity.

I. All settlements of account between the Company and the Reinsurer will be made in cash or its equivalent. All income earned and received by the amount held in an established trust account will be added to the principal.

J. The Company’s “successors in interest” will include those by operation of law, including without limitation, any liquidator, rehabilitator, receiver, or conservator.

K. The Reinsurer will take any other reasonable steps that may be required for the Company to take full credit on its statutory financial statements for the reinsurance provided by this Contract.

ARTICLE 24

MODE OF EXECUTION

A. This Contract may be executed by:

1. an original written ink signature of paper documents;

2. an exchange of facsimile copies showing the original written ink signature of paper documents;

3. electronic signature technology employing computer software and a digital signature or digitizer pen pad to capture a person’s handwritten signature in such a manner that the signature is unique to the person signing, is under the sole control of the person signing, is capable of verification to authenticate the signature and is linked to the document signed in such a manner that if the data is changed, such signature is invalidated.

B. The use of any one or a combination of these methods of execution shall constitute a legally binding and valid signing of this Contract.

ARTICLE 25

LATE PAYMENTS

A. Payments from the Reinsurer to the Company for coverage providing pro rata forms of reinsurance shall have a due date as expressed in the Article entitled NOTICE OF LOSS AND LOSS SETTLEMENT. Payments from the Reinsurer to the Company for coverage providing excess of loss reinsurance shall have as a due date the date on which the proof of loss or demand for payment is received by the Reinsurer. Payment not received within sixty (60) days of the due date shall be deemed overdue (the “Overdue Date”). Payments due from the Reinsurer to the Company will not be considered overdue if the Reinsurer requests, in writing, that such payment be made by drawing on a letter of credit or other similar method of funding that has been established for this Contract, provided that there is an adequate balance in place, and further provided that such advice to draw is received by the Company within the sixty (60) day deadline set forth above. Payments from the Company to the Reinsurer will have a due date as the date specified in this Contract and will be overdue sixty (60) days thereafter. Premium adjustments will be overdue sixty (60) days from the Contract due date or one hundred twenty (120) days after the expiration or renewal date, whichever is greater.

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B. In the event that this Contract provides excess of loss reinsurance, the Company will provide the Reinsurer with a reasonable proof of loss and a copy of the claim adjuster’s report(s) or any other reasonable evidence of indemnification. If subsequent to receipt of this evidence, the information contained therein is unreasonably insufficient or not in substantial accordance with the contractual conditions of this Contract, then the payment due date as specified above will be deemed to be the date upon which the Reinsurer received the additional information necessary to approve payment of the claim and the claim is presented in a reasonably acceptable manner. This paragraph is only for the purpose of establishing when a claim payment is overdue, and will not alter the provisions of the Article entitled NOTICE OF LOSS AND LOSS SETTLEMENT or other pertinent contractual stipulations of this Contract.

C. If payment is made of overdue amounts within thirty (30) days of the Overdue Date, overdue amounts will bear simple interest from the Overdue Date at a rate determined by the annualized one month London Interbank Offered Rate for the first business day of the calendar month in which the amount becomes overdue, as published in The Wall Street Journal, plus two hundred (200) basis points to be calculated weekly. If payment is made of overdue amounts more than thirty (30) days after the due date, overdue amounts will bear simple interest from the Overdue Date at a rate determined by the annualized one month London Interbank Offered Rate for the first business day of the calendar month in which the amount becomes overdue, as published in The Wall Street Journal, plus four hundred (400) basis points to be calculated on a weekly basis, but in no event less than eight percent (8%) simple interest. If the sum of the compensating additional amount computed in respect of any overdue payment is less than one quarter of one percent (0.25%) of the amount overdue, or one thousand dollars ($1,000), whichever is greater, and/or the overdue period is one week or less, then the interest amount shall be waived. The basis point standards referred to above shall be doubled if the late payment is due from a Reinsurer who is no longer an active reinsurance market. Interest shall cease to accrue upon the party’s payment of an overdue amount to the Intermediary.

ARTICLE 26

VARIOUS OTHER TERMS

A. This Contract shall be binding upon and inure to the benefit of the Company and Reinsurer and their respective successors and assigns provided, however, that this Contract may not be assigned by either party without the prior written consent of the other which consent may be withheld by either party in its sole unfettered discretion. This provision shall not be construed to preclude the assignment by the Company of reinsurance recoverables to another party for collection.

B. The territorial limits of this Contract shall be identical with those of the Company’s Policies.

C. This Contract shall constitute the entire agreement between the parties with respect to the Business Covered hereunder. There are no understandings between the parties other than as expressed in this Contract. Any change or modification of this Contract shall be null and void unless made by amendment to the Contract and signed by both parties.

D. Except as may be provided in the Article entitled ARBITRATION, this Contract shall be governed by and construed according to the laws of the Commonwealth of Pennsylvania, exclusive of that state’s rules with respect to conflicts of law.

E. The headings preceding the text of the Articles and paragraphs of this Contract are intended and inserted solely for the convenience of reference and shall not affect the meaning, interpretation, construction or effect of this Contract.

F. This Contract is solely between the Company and the Reinsurer, and in no instance shall any insured, claimant or other third party have any rights under this Contract.

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G. If any provision of this Contract should be invalid under applicable laws, the latter shall control but only to the extent of the conflict without affecting the remaining provisions of this Contract.

H. The failure of the Company or Reinsurer to insist on strict compliance with this Contract or to exercise any right or remedy shall not constitute a waiver of any rights contained in this Contract nor estop the parties from thereafter demanding full and complete compliance nor prevent the parties from exercising any remedy.

I. Each party shall be excused for any reasonable failure or delay in performing any of its respective obligations under this Contract, if such failure or delay is caused by Force Majeure. “Force Majeure” shall mean any act of God, strike, lockout, act of public enemy, any accident, explosion, fire, storm, earthquake, flood, drought, peril of sea, riot, embargo, war or foreign, federal, state or municipal order or directive issued by a court or other authorized official, seizure, requisition or allocation, any failure or delay of transportation, shortage of or inability to obtain supplies, equipment, fuel or labor or any other circumstance or event beyond the reasonable control of the party relying upon such circumstance or event; provided, however, that no such Force Majeure circumstance or event shall excuse any failure or delay beyond a period exceeding thirty (30) days from the date such performance would have been due but for such circumstance or event.

J. All Articles of this Contract shall survive the termination of this Contract until all Obligations between the parties have been finally settled.

K. This Contract may be executed by the parties hereto in any number of counterparts, and by each of the parties hereto in separate counterparts, each of which counterparts, when so executed and delivered, shall be deemed to be an original, but all such counterparts shall together constitute but one and the same instrument.

L. Whenever the word “Company” is used in this Contract, such term shall mean each and all affiliated companies which are or may hereafter be under common control provided notice be given to the Reinsurers of any newly affiliated companies which may hereafter come under common control as soon as practicable, with full particulars as to how such affiliation is likely to affect this Contract. In the event that either party maintains that such affiliation calls for altering the terms of this Contract and an agreement for alteration not being arrived at, then the Business Covered of such newly affiliated company is covered at existing terms for a period not to exceed (90) ninety days after notice by either party that it does not wish to cover the business of the newly affiliated company at the existing terms.

M. The term “Reinsurer” shall refer to each Reinsurer participating severally and not jointly in this Contract. The subscribing (Re)insurers’ obligations under contracts of (re)insurance to which they subscribe are several and not joint and are limited solely to the extent of their individual subscriptions. The subscribing (Re)insurers are not responsible for the subscription of any co-subscribing (Re)insurer who for any reason does not satisfy all or part of its obligations.

N. For purposes of sending and receiving notices and payments required by this Contract other than in respect of the Articles entitled SERVICE OF SUIT and RESERVES herein, the reinsured company that is set forth first in the definition of “Company” is deemed the agent of all other reinsured companies referenced herein. In no event, however, shall any reinsured company be deemed the agent of another with respect to the terms of the Article entitled INSOLVENCY.

O. Whenever the content of this Contract requires, the gender of all words shall include the masculine, feminine and neuter, and the number of all words shall include the singular and the plural. This Contract shall be construed without regard to any presumption or other rule requiring construction against the party causing this Contract to be drafted.

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P. The Company shall furnish the Reinsurer, in accordance with regulatory requirements, periodic reporting of premiums and losses that relate to the Business Covered in this Contract as may be needed for Reinsurers’ completion of financial statements to regulatory authorities.

Q. When so requested in writing, the Company shall afford the Reinsurer or its representatives an opportunity to be associated with the Company, at the expense of the Reinsurer, in the defense of any claim, suit or proceeding involving this reinsurance, and the Company and the Reinsurer shall cooperate in every respect in the defense of such claim, suit or proceeding, provided the Company shall have the right to make any decision in the event of disagreement over any matter of defense or settlement.

ARTICLE 27

INTERMEDIARY

A. Towers Watson Pennsylvania Inc. (“Towers Watson”) is hereby recognized as the Intermediary negotiating this Contract for all business hereunder. All communications (including but not limited to notices, statements, premium, return premium, commissions, taxes, losses, loss adjustment expense, salvages and loss settlements) relating thereto shall be transmitted to the Company or the Reinsurer through Towers Watson, Centre Square East, 1500 Market Street, Philadelphia, Pennsylvania, 19102-4790. Payments by the Company to the Intermediary shall be deemed to constitute payment to the Reinsurer. Payments by the Reinsurer to the Intermediary shall be deemed to constitute payment to the Company only to the extent that such payments are actually received by the Company. In acting as Intermediary for this Contract, the Intermediary shall (i) comply with all aspects of New York Regulation 98 and shall (ii) be entitled to withdraw funds in accordance with section 32.3(a)(3) of that Regulation including commissions, excise tax and interest received on its premium and loss accounts, and shall also (iii) return to the Reinsurer any brokerage allowed by the Reinsurer and taken on premium ceded to the Reinsurer but refunded or returned to the Company.

B. Whenever notice is required within this Contract, such notice may be given by certified mail, registered mail, or overnight express mail. Notice shall be deemed to be given on the date received by the receiving party.

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NUCLEAR INCIDENT EXCLUSION CLAUSE — PHYSICAL DAMAGE —
REINSURANCE (BRMA 35B)

1.	This reinsurance does not cover any loss or liability accruing to the Company, directly or indirectly, and whether as Insurer or Reinsurer, from any Pool of Insurers or Reinsurers formed for the purpose of covering Atomic or Nuclear Energy risks.
2.	Without in any way restricting the operation of paragraph (1) of this Clause, this reinsurance does not cover any loss or liability accruing to the Company, directly or indirectly, and whether as Insurer or Reinsurer, from any insurance against Physical Damage (including business interruption or consequential loss arising out of such Physical Damage) to:

I.	Nuclear reactor power plants including all auxiliary property on the site, or
II.	Any other nuclear reactor installation, including laboratories handling radioactive materials in connection with reactor installations and “critical facilities” as such, or
III.	Installations for fabricating complete fuel elements or for processing substantial quantities of “special nuclear material” and for reprocessing, salvaging, chemically separating, storing or disposing of “spent” nuclear fuel or waste materials, or
IV.	Installations other than those listed in paragraph (2) III above using substantial quantities of radioactive isotopes or other products of nuclear fission.

3. Without in any way restricting the operations of paragraphs (1) and (2) hereof, this reinsurance does not cover any loss or liability by radioactive contamination accruing to the Company, directly or indirectly, and whether as Insurer or Reinsurer, from any insurance on property which is on the same site as a nuclear reactor power plant or other nuclear installation and which normally would be insured therewith except that this paragraph (3) shall not operate:

(a)	where Company does not have knowledge of such nuclear reactor power plant or nuclear installation, or
(b)	where said insurance contains a provision excluding coverage for damage to property caused by or resulting from radioactive contamination, however caused. However, on and after 1st January 1960, this sub-paragraph (b) shall only apply provided the said radioactive contamination exclusion provision has been approved by the Governmental Authority having jurisdiction thereof.

4.	Without in any way restricting the operations of paragraphs (1), (2) and (3) hereof, this reinsurance does not cover any loss or liability by radioactive contamination accruing to the Company, directly or indirectly, and whether as Insurer or Reinsurer, when such radioactive contamination is a named hazard specifically insured against.
5.	It is understood and agreed that this Clause shall not extend to risks using radioactive isotopes in any form where the nuclear exposure is not considered by the Company to be the primary hazard.
6.	The term “special nuclear material” shall have the meaning given it in the Atomic Energy Act of 1954 or by any law amendatory thereof.

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7. Company to be sole judge of what constitutes:

(a)	substantial quantities, and
(b)	the extent of installation, plant or site.

Notes: Without in any way restricting the operation of paragraph (1) hereof, it is understood and agreed that:

(a)	All Policies issued by the Company on or before 31st December 1957 shall be free from the application of the other provisions of this Clause until expiry date or 31st December 1960 whichever first occurs whereupon all the provisions of this Clause shall apply.
(b)	With respect to any risk located in Canada Policies issued by the Company on or before 31st December 1958 shall be free from the application of the other provisions of this Clause until expiry date or 31st December 1960 whichever first occurs whereupon all the provisions of this Clause shall apply.

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2.

POOLS, ASSOCIATIONS AND SYNDICATES EXCLUSION CLAUSE

A. It is agreed that the following is excluded hereunder:

(1)	All business derived directly or indirectly from any Pool, Association or Syndicate which maintains its own reinsurance facilities.
(2)	Any Pool or Scheme, (whether voluntary or mandatory) formed after 1st March, 1968 for the purpose of insuring property whether on a country-wide basis or in respect of designated areas. This exclusion shall not apply to so-called Automobile Insurance Plans or other Pools formed to provide coverage for Automobile Physical Damage.
(3)	Business written by the Company for the same perils, which is known at the time to be insured by, or in excess of underlying amounts placed in any Pool, Association or Syndicate formed for the purpose of writing oil, gas or petro-chemical plants and/or oil or gas drilling rigs.

Nevertheless, this exclusion does not apply:

(a)	where the Total Insured Value over all interests of the risk in question is less than $250,000,000.
(b)	to interests traditionally underwritten as Inland Marine or Stock and/or Contents written on a Blanket Basis.
(c)	to Contingent Business Interruption, except when the Company is aware that the key location is known at the time to be insured in any Pool, Association or Syndicate named above, other than as provided for under (a), above.
(d)	Risks as follows:
	offices, hotels, apartments, hospitals, educational establishments, public utilities (other than railroad schedules) and builder’s risks on the classes of risks specified in this subsection (d) only.

B. Where this Clause attaches to Catastrophe Excess of Loss Reinsurance Agreements, the following SECTIONS are added:

(1) Nevertheless the Reinsurers specifically agree that liability accruing to the Company from its participation in Residual Market Mechanisms including but not limited to:

(a)	“Coastal Pools”
(b)	All “Fair Plan” and “Rural Risk Plan” Business, and
(c)	California Earthquake Authority (“CEA”), and Citizens Property Insurance Corporation (Florida) (“CPIC”)

for all perils otherwise protected hereunder shall not be excluded, except that this reinsurance does not include any increase in such liability resulting from:

(i)	The inability of any other participant in such Residual Market Mechanisms to meet its liability.
(ii)	Any claim against such Residual Market Mechanisms or any participant therein, including the Company, whether by way of subrogation or otherwise, brought by or on behalf of any insolvency fund (as defined in the Insolvency Funds Exclusion Clause incorporated in this Contract).

(2)	In respect of the CEA, where an assessment is made against the Company by the CEA, the Company may include in its Ultimate Net Loss only that assessment directly attributable to each separate loss occurrence covered hereunder. The Company’s initial capital contribution to the CEA shall not be included in the Ultimate Net Loss.
(3)	In respect of the Citizens Property Insurance Corporation (“CPIC”), where an assessment is made against the Company by the Citizens Property Insurance Corporation, (“CPIC”)

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the maximum loss that the Company may include in the Ultimate Net Loss in respect of any loss occurrence hereunder shall not exceed the lesser of:

(a)	The Company’s assessment from CPIC for the accounting year in which the loss occurrence commenced, or
(b)	The product of the following:

(i)	The Company’s percentage participation in CPIC for the accounting year in which the loss occurrence commenced; and
(ii)	CPIC’s total losses in such loss occurrence.

Assessments for accounting years other than the accounting year in which the Loss Occurrence commenced may not be included in the Company’s Ultimate Net Loss hereunder.

Moreover, in respect of the CPIC, Ultimate Net Loss hereunder shall not include any monies expended to purchase or retire bonds as a consequence of being a member of the CPIC or to meet any obligations arising from the deferment by CPIC of the collection of monies.

NOTES: Wherever used herein the terms:

“Company” shall be understood to mean “Company”, “Reinsured”, “Reassured” or whatever other term is used in the attached reinsurance document to designate the reinsured company or companies.

“Agreement” shall be understood to mean “Agreement”, “Contract”, “Policy” or whatever other term is used to designate the attached reinsurance document.

“Coastal Pools” means liability accruing to the Company from its participation in state Residual Market Mechanisms formed to protect property located in those states of the United States of America which border the Gulf of Mexico, Hawaii, Florida, Georgia, South Carolina and North Carolina.

“Pool”, “Syndicate” or “Association” refers to a mandatory or voluntary collection of unaffiliated insurers, reinsurers or both, who are associated together and using a common underwriting manager, whether as an employee or as a third party contractor, for the purposes of accepting risk and providing insurance or reinsurance either severally or jointly.

“Reinsurers” shall be understood to mean “Reinsurers”, “Underwriters” or whatever other term is used in the attached reinsurance document to designate the Reinsurer or Reinsurers.

“Ultimate Net Loss” shall be understood to mean “Loss”, “Net Loss” or whatever other term is used to designate the amount of loss to which this reinsurance coverage and the limit and retention of the attached reinsurance document apply.

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2.

TRANSMISSION AND DISTRIBUTION LINES EXCLUSION — ABOVE GROUND
(150M EXCLUSION)

All above ground transmission and distribution lines, including wire, cables, poles, pylons, standards, towers, other supporting structures and any equipment of any type which may be attendant to such installations of any description, for the purpose of transmission and distribution of electrical power, telephone or telegraph signals, and all communication signals whether audio or visual.

This exclusion applies to all equipment other than those on or within 150 meters (or 500 feet) from the insured structure.

This exclusion applies both to physical loss or damage to the equipment and all business interruption, consequential loss, and/or other contingent losses related to transmission and distribution lines, other than contingent property damage/business interruption losses (including expenses), arising from loss and/or damage to lines of third parties.

LSW1633

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FUNGI COVERAGE LIMITATION (PROPERTY CATASTROPHE PROGRAM)

This reinsurance agreement excludes absolutely any loss, damage, cost expense, or liability arising from Fungi unless directly caused by or arising from one of the following listed perils:

Earthquake, Seaquake, Seismic and/or Volcanic Disturbance/Eruption, Hurricane, Rainstorm, Windstorm, Tornado, Cyclone, Typhoon, Tsunami, Flood, Hail, Freeze, Ice Storm, Weight of Snow or Ice, Avalanche, Meteor/Asteroid Impact, Landslip, Landslide, Mudslide, Bush Fire, Forest Fire, Lightning, Explosion, Fire, Aircraft and Vehicle Impact, Riots, Strikes and Civil Commotion.

Such losses arising from Fungi may only be included in the Company’s Ultimate Net Loss if they manifest themselves, and are reported to the Reinsured within twelve (12) months of the start of the event identified in relation to that Ultimate Net Loss.

Losses arising from Fungi shall not in and of themselves constitute an event for the purposes of recovery hereunder.

If this reinsurance contract includes cover for Extra-Contractual Obligations or Excess of Policy Limit payments, then such losses which arise out of claims where Fungi are present or alleged to be present may be included in the Ultimate Net Loss but only up to a maximum of twenty five percent (25%) of the Ultimate Net Loss.

For the purposes of this reinsurance contract, Fungi shall be taken to include any type or form of fungus, mold or mildew and any mycotoxins, spores, scents or by products produced or released by fungi.

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TERRORISM EXCLUSION
(Property Treaty Reinsurance)

Notwithstanding any provision to the contrary within this reinsurance contract or any endorsement thereto, it is agreed that this reinsurance contract excludes loss, damage, cost, or expense directly or indirectly caused by, contributed to by, resulting from, or arising out of or in connection with any act of terrorism, as defined herein, regardless of any other cause or event contributing concurrently or in any other sequence to the loss.

An act of terrorism includes any act, or preparation in respect of action, or threat of action designed to influence the government de jure or de facto of any nation or any political division thereof, or in pursuit of political, religious, ideological, or similar purposes to intimidate the public or a section of the public of any nation by any person or group(s) of persons whether acting alone or on behalf of or in connection with any organization(s) or government(s) de jure or de facto, and which:

(i)	involves violence against one or more persons; or
(ii)	involves damage to property; or
(iii)	endangers life other than that of the person committing the action; or
(iv)	creates a risk to health or safety of the public or a section of the public; or
(v)	is designed to interfere with or to disrupt an electronic system.

This reinsurance contract also excludes loss, damage, cost, or expense directly or indirectly caused by, contributed to by, resulting from, or arising out of or in connection with any action in controlling, preventing, suppressing, retaliating_against, or responding to any act of terrorism.

Notwithstanding the above and subject otherwise to the terms, conditions, and limitations of this reinsurance contract, in respect only of personal lines this reinsurance contract will pay actual loss or damage (but not related cost or expense) caused by any act of terrorism provided such act is not directly or indirectly caused by, contributed to by, resulting from, or arising out of or in connection with biological, chemical, radioactive, or nuclear pollution or contamination or explosion.

NMA2930b
19/12/01

TW No. G22283.11/G22287.11/G22288.11/G26396.11
FINAL

INFORMATION TECHNOLOGY HAZARDS CLARIFICATION CLAUSE

Losses arising directly or indirectly, out of:

(i) loss of, alteration of, or damage to

or

(ii)	a reduction in the functionality, availability or operation of
	a computer system, hardware, program, software, data, information repository, microchip, integrated circuit or similar device in computer equipment or non-computer equipment, whether the property of the policyholder of the reinsured or not, do not in and of themselves constitute an event unless arising out of one or more of the following perils:

fire, lightning, explosion, aircraft or vehicle impact, falling objects, windstorm, hail, tornado, cyclone, hurricane, earthquake, volcano, tsunami, flood, freeze or weight of snow.

23/11/00
NMA2912

TW No. G22283.11/G22287.11/G22288.11/G26396.11
FINAL

Exhibit I — Page 1.
TW No. G22287.11

EXHIBIT I

PROPERTY FIRST CATASTROPHE EXCESS OF LOSS
REINSURANCE CONTRACT

EFFECTIVE JANUARY 1, 2011

issued to

PENN MILLERS INSURANCE COMPANY

AMERICAN MILLERS INSURANCE COMPANY

WILKES-BARRE, PENNSYLVANIA

ARTICLE 5

RETENTION AND LIMIT

A. The Reinsurers shall be liable to, indemnify and reinsure the Company for each and every Loss Occurrence, for ninety five percent (95%) of the excess Net Loss above an initial Net Loss to the Company of three million dollars ($3,000,000) each and every Loss Occurrence; but the Reinsurers shall not be liable for more than one million nine hundred thousand dollars ($1,900,000) of Net Loss for each and every such Loss Occurrence.

B. The Company agrees to carry at its own risk and not reinsured in any way the remaining five percent (5%) of each excess Net Loss for which claim is made hereunder.

C. It is warranted that this Contract shall respond only when two (2) or more risks are involved in a Loss Occurrence.

ARTICLE 6

REINSTATEMENT

A. Each claim hereunder shall reduce the amount of the Reinsurers’ liability from the time of the occurrence of the loss by the sum paid, but the sum so exhausted immediately shall be reinstated from the time of the occurrence of the loss.

B. For each amount so reinstated, the Company agrees to pay an additional premium calculated by multiplying one hundred percent (100%) of the annual premium hereon by the product of the percentage that the amount reinstated bears to the limit (i.e., one million nine hundred thousand dollars ($1,900,000)) of this Contract. Nevertheless, the liability of the Reinsurers shall never be more than one million nine hundred thousand dollars ($1,900,000) in respect of any one Loss Occurrence, nor more than three million eight hundred thousand dollars ($3,800,000) in all in respect of all losses occurring during the term of this Contract.

C. A provisional reinstatement premium shall be paid by the Company at the time the Reinsurers pay the loss giving rise to the reinstatement premium through an offset of the provisional reinstatement premium due the Reinsurers against the loss payment due the Company, with only the net amount due to be remitted by the debtor party. The amount of this provisional reinstatement premium shall be based on one hundred percent (100%) of the estimated annual reinsurance premium hereunder.

TW No. G22283.11/G22287.11/G22288.11/G26396.11
FINAL

Exhibit I — Page 2.
TW No. G22287.11

D. As promptly as possible after the loss has been paid by the Reinsurers and the annual reinsurance premium hereunder has been finally determined, the Company shall prepare and submit to the Reinsurers a final statement of reinstatement premium due. Any reinstatement premium shown to be due the Reinsurers (less prior payments, if any) shall be remitted by the Company with its statement. Any return reinstatement premium shown to be due the Company shall be remitted by the Reinsurers as promptly as possible after receipt of the Company’s final statement.

E. In the event there are any mid-term terminations in the participation of any Reinsurer in this Contract, payment of any such reinstatement premium in full shall be paid to the Reinsurer who incurred the loss that generates the reinstatement premium.

ARTICLE 7

PREMIUM

A. As premium for the reinsurance provided hereunder, the Company shall pay the Reinsurers zero point nine five five six percent (0.9556%) of its Net Subject Earned Premium for the Contract period.

B. The Company shall pay the Reinsurers a deposit premium of two hundred sixty six thousand five hundred twelve dollars ($266,512) in equal quarterly installments of sixty six thousand six hundred twenty eight dollars ($66,628) on January 1, April 1, July 1 and October 1, 2011. This Contract shall be subject to a minimum premium of two hundred thirteen thousand two hundred seven dollars ($213,207).

C. As promptly as possible after the end of the Contract period, the Company shall provide a report to the Reinsurers setting forth the premium due hereunder, computed in accordance with the first paragraph, and any additional premium due the Reinsurers or return premium due the Company shall be remitted promptly.

D. “Net Subject Earned Premium” as used in this Contract shall mean the gross earned premium of the Company for the classes of business reinsured hereunder, less the earned portion of premium for reinsurance that inures to the benefit of this Contract.

attaching to and forming part of the

PROPERTY CATASTROPHE EXCESS OF LOSS REINSURANCE CONTRACT

EFFECTIVE JANUARY 1, 2011

issued to

PENN MILLERS INSURANCE COMPANY

AMERICAN MILLERS INSURANCE COMPANY

TW No. G22283.11/G22287.11/G22288.11/G26396.11
FINAL

Exhibit II — Page 1.
TW No. G22288.11

EXHIBIT II

PROPERTY SECOND CATASTROPHE EXCESS OF LOSS
REINSURANCE CONTRACT

EFFECTIVE JANUARY 1, 2011

issued to

PENN MILLERS INSURANCE COMPANY

AMERICAN MILLERS INSURANCE COMPANY

WILKES-BARRE, PENNSYLVANIA

ARTICLE 5

RETENTION AND LIMIT

A. The Reinsurers shall be liable to, indemnify and reinsure the Company for each and every Loss Occurrence, for ninety five percent (95%) of the excess Net Loss above an initial Net Loss to the Company of five million dollars ($5,000,000) each and every Loss Occurrence; but the Reinsurers shall not be liable for more than four million seven hundred fifty thousand dollars ($4,750,000) of Net Loss for each and every such Loss Occurrence.

B. The Company agrees to carry at its own risk and not reinsured in any way the remaining five percent (5%) of each excess Net Loss for which claim is made hereunder.

C. It is warranted that this Contract shall respond only when two (2) or more risks are involved in a Loss Occurrence.

ARTICLE 6

REINSTATEMENT

A. Each claim hereunder shall reduce the amount of the Reinsurers’ liability from the time of the occurrence of the loss by the sum paid, but the sum so exhausted immediately shall be reinstated from the time of the occurrence of the loss.

B. For each amount so reinstated, the Company agrees to pay an additional premium calculated by multiplying one hundred percent (100%) of the annual premium hereon by the product of the percentage that the amount reinstated bears to the limit (i.e., four million seven hundred fifty thousand dollars ($4,750,000)) of this Contract. Nevertheless, the liability of the Reinsurers shall never be more than four million seven hundred fifty thousand dollars ($4,750,000) in respect of any one Loss Occurrence, nor more than nine million five hundred thousand dollars ($9,500,000) in all in respect of all losses occurring during the term of this Contract.

C. A provisional reinstatement premium shall be paid by the Company at the time the Reinsurers pay the loss giving rise to the reinstatement premium through an offset of the provisional reinstatement premium due the Reinsurers against the loss payment due the Company, with only the net amount due to be remitted by the debtor party. The amount of this provisional reinstatement premium shall be based on one hundred percent (100%) of the estimated annual reinsurance premium hereunder.

TW No. G22283.11/G22287.11/G22288.11/G26396.11
FINAL

Exhibit II — Page 2.
TW No. G22288.11

D. As promptly as possible after the loss has been paid by the Reinsurers and the annual reinsurance premium hereunder has been finally determined, the Company shall prepare and submit to the Reinsurers a final statement of reinstatement premium due. Any reinstatement premium shown to be due the Reinsurers (less prior payments, if any) shall be remitted by the Company with its statement. Any return reinstatement premium shown to be due the Company shall be remitted by the Reinsurers as promptly as possible after receipt of the Company’s final statement.

E. In the event there are any mid-term terminations in the participation of any Reinsurer in this Contract, payment of any such reinstatement premium in full shall be paid to the Reinsurer who incurred the loss that generates the reinstatement premium.

ARTICLE 7

PREMIUM

A. As premium for the reinsurance provided hereunder, the Company shall pay the Reinsurers one point three two zero zero percent (1.3200%) of its Net Subject Earned Premium for the Contract period.

B. The Company shall pay the Reinsurers a deposit premium three hundred sixty eight thousand one hundred forty dollars ($368,140) in equal quarterly installments of ninety two thousand thirty five dollars ($92,035) on January 1, April 1, July 1 and October 1, 2011. This Contract shall be subject to a minimum premium of two hundred ninety four thousand five hundred ten dollars ($294,510).

C. As promptly as possible after the end of the Contract period, the Company shall provide a report to the Reinsurers setting forth the premium due hereunder, computed in accordance with the first paragraph, and any additional premium due the Reinsurers or return premium due the Company shall be remitted promptly.

D. “Net Subject Earned Premium” as used in this Contract shall mean the gross earned premium of the Company for the classes of business reinsured hereunder, less the earned portion of premium for reinsurance that inures to the benefit of this Contract.

attaching to and forming part of the

PROPERTY CATASTROPHE EXCESS OF LOSS REINSURANCE CONTRACT

EFFECTIVE JANUARY 1, 2011

issued to

PENN MILLERS INSURANCE COMPANY

AMERICAN MILLERS INSURANCE COMPANY

TW No. G22283.11/G22287.11/G22288.11/G26396.11
FINAL

Exhibit III — Page 3.
TW No. G22283.11

EXHIBIT III

PROPERTY THIRD CATASTROPHE EXCESS OF LOSS
REINSURANCE CONTRACT

EFFECTIVE JANUARY 1, 2011

issued to

PENN MILLERS INSURANCE COMPANY

AMERICAN MILLERS INSURANCE COMPANY

WILKES-BARRE, PENNSYLVANIA

ARTICLE 5

RETENTION AND LIMIT

A. The Reinsurers shall be liable to, indemnify and reinsure the Company for each and every Loss Occurrence, for ninety five percent (95%) of the excess Net Loss above an initial Net Loss to the Company of ten million dollars ($10,000,000) each and every Loss Occurrence; but the Reinsurers shall not be liable for more than fourteen million two hundred fifty thousand dollars ($14,250,000) of Net Loss for each and every such Loss Occurrence.

B. The Company agrees to carry at its own risk and not reinsured in any way the remaining five percent (5%) of each excess Net Loss for which claim is made hereunder.

C. It is warranted that this Contract shall respond only when two (2) or more risks are involved in a Loss Occurrence.

ARTICLE 6

REINSTATEMENT

A. Each claim hereunder shall reduce the amount of the Reinsurers’ liability from the time of the occurrence of the loss by the sum paid, but the sum so exhausted immediately shall be reinstated from the time of the occurrence of the loss.

B. For each amount so reinstated, the Company agrees to pay an additional premium calculated by multiplying one hundred percent (100%) of the annual premium hereon by the product of the percentage that the amount reinstated bears to the limit (i.e., fourteen million two hundred fifty thousand dollars ($14,250,000)) of this Contract. Nevertheless, the liability of the Reinsurers shall never be more than fourteen million two hundred fifty thousand dollars ($14,250,000) in respect of any one Loss Occurrence, nor more than twenty eight million five hundred thousand dollars ($28,500,000) in all in respect of all losses occurring during the term of this Contract.

C. A provisional reinstatement premium shall be paid by the Company at the time the Reinsurers pay the loss giving rise to the reinstatement premium through an offset of the provisional reinstatement premium due the Reinsurers against the loss payment due the

TW No. G22283.11/G22287.11/G22288.11/G26396.11
FINAL

Exhibit III — Page 4.
TW No. G22283.11

Company, with only the net amount due to be remitted by the debtor party. The amount of this provisional reinstatement premium shall be based on one hundred percent (100%) of the estimated annual reinsurance premium hereunder.

D. As promptly as possible after the loss has been paid by the Reinsurers and the annual reinsurance premium hereunder has been finally determined, the Company shall prepare and submit to the Reinsurers a final statement of reinstatement premium due. Any reinstatement premium shown to be due the Reinsurers (less prior payments, if any) shall be remitted by the Company with its statement. Any return reinstatement premium shown to be due the Company shall be remitted by the Reinsurers as promptly as possible after receipt of the Company’s final statement.

E. In the event there are any mid-term terminations in the participation of any Reinsurer in this Contract, payment of any such reinstatement premium in full shall be paid to the Reinsurer who incurred the loss that generates the reinstatement premium.

ARTICLE 7

PREMIUM

A. As premium for the reinsurance provided hereunder, the Company shall pay the Reinsurers one point nine four three five percent (1.9435%) of its Net Subject Earned Premium for the Contract period.

B. The Company shall pay the Reinsurers a deposit premium of five hundred forty two thousand twenty eight dollars ($542,028) in equal quarterly installments of one hundred thirty five thousand five hundred seven dollars ($135,507) on January 1, April 1, July 1 and October 1, 2011. This Contract shall be subject to a minimum premium of four hundred thirty three thousand six hundred twenty one dollars ($433,621).

C. As promptly as possible after the end of the Contract period, the Company shall provide a report to the Reinsurers setting forth the premium due hereunder, computed in accordance with the first paragraph, and any additional premium due the Reinsurers or return premium due the Company shall be remitted promptly.

D. “Net Subject Earned Premium” as used in this Contract shall mean the gross earned premium of the Company for the classes of business reinsured hereunder, less the earned portion of premium for reinsurance that inures to the benefit of this Contract.

attaching to and forming part of the

PROPERTY CATASTROPHE EXCESS OF LOSS REINSURANCE CONTRACT

EFFECTIVE JANUARY 1, 2011

issued to

PENN MILLERS INSURANCE COMPANY

AMERICAN MILLERS INSURANCE COMPANY

TW No. G22283.11/G22287.11/G22288.11/G26396.11
FINAL

Exhibit IV — Page 1.
TW No. G26396.11

EXHIBIT IV

PROPERTY FOURTH CATASTROPHE EXCESS OF LOSS
REINSURANCE CONTRACT

EFFECTIVE JANUARY 1, 2011

issued to

PENN MILLERS INSURANCE COMPANY

AMERICAN MILLERS INSURANCE COMPANY

WILKES-BARRE, PENNSYLVANIA

ARTICLE 5

RETENTION AND LIMIT

A. The Reinsurers shall be liable to, indemnify and reinsure the Company for each and every Loss Occurrence, for ninety five percent (95%) of the excess Net Loss above an initial Net Loss to the Company of twenty five million dollars ($25,000,000) each and every Loss Occurrence; but the Reinsurers shall not be liable for more than nineteen million dollars ($19,000,000) of Net Loss for each and every such Loss Occurrence.

B. The Company agrees to carry at its own risk and not reinsured in any way the remaining five percent (5%) of each excess Net Loss for which claim is made hereunder.

C. It is warranted that this Contract shall respond only when two (2) or more risks are involved in a Loss Occurrence.

ARTICLE 6

REINSTATEMENT

A. Each claim hereunder shall reduce the amount of the Reinsurers’ liability from the time of the occurrence of the Loss by the sum paid, but the sum so exhausted immediately shall be reinstated from the time of the occurrence of the Loss.

B. For each amount so reinstated, the Company agrees to pay an additional premium calculated by multiplying one hundred percent (100%) of the annual premium hereon by the product of the percentage that the amount reinstated bears to the limit (i.e., nineteen million dollars ($19,000,000)) of this Contract. Nevertheless, the liability of the Reinsurers shall never be more than nineteen million dollars ($19,000,000) in respect of any one Loss Occurrence, nor more than thirty eight million dollars ($38,000,000) in all in respect of all losses occurring during the term of this Contract.

C. A provisional reinstatement premium shall be paid by the Company at the time the Reinsurers pay the Loss giving rise to the reinstatement premium through an offset of the provisional reinstatement premium due the Reinsurers against the Loss payment due the

TW No. G22283.11/G22287.11/G22288.11/G26396.11
FINAL

Exhibit IV — Page 2.
TW No. G26396.11

Company, with only the net amount due to be remitted by the debtor party. The amount of this provisional reinstatement premium shall be based on one hundred percent (100%) of the estimated annual reinsurance premium hereunder.

D. As promptly as possible after the Loss has been paid by the Reinsurers and the annual reinsurance premium hereunder has been finally determined, the Company shall prepare and submit to the Reinsurers a final statement of reinstatement premium due. Any reinstatement premium shown to be due the Reinsurers (less prior payments, if any) shall be remitted by the Company with its statement. Any return reinstatement premium shown to be due the Company shall be remitted by the Reinsurers as promptly as possible after receipt of the Company’s final statement.

E. In the event there are any mid-term terminations in the participation of any Reinsurer in this Contract, payment of any such reinstatement premium in full shall be paid to the Reinsurer who incurred the Loss that generates the reinstatement premium.

ARTICLE 7

PREMIUM

A. As premium for the reinsurance provided hereunder, the Company shall pay the Reinsurers one point six three five zero percent (1.6350%) of its Net Subject Earned Premium for the Contract period.

B. The Company shall pay the Reinsurers a deposit premium of four hundred fifty six thousand dollars ($456,000) in equal quarterly installments of one hundred fourteen thousand dollars ($114,000) on January 1, April 1, July 1 and October 1, 2011. This Contract shall be subject to a minimum premium of three hundred sixty four thousand eight hundred dollars ($364,800).

C. As promptly as possible after the end of the Contract period, the Company shall provide a report to the Reinsurers setting forth the premium due hereunder, computed in accordance with the first paragraph, and any additional premium due the Reinsurers or return premium due the Company shall be remitted promptly.

D. “Net Subject Earned Premium” as used in this Contract shall mean the gross earned premium of the Company for the classes of business reinsured hereunder, less the earned portion of premium for reinsurance that inures to the benefit of this Contract.

attaching to and forming part of the

PROPERTY CATASTROPHE EXCESS OF LOSS REINSURANCE CONTRACT

EFFECTIVE JANUARY 1, 2011

issued to

PENN MILLERS INSURANCE COMPANY

AMERICAN MILLERS INSURANCE COMPANY

TW No. G22283.11/G22287.11/G22288.11/G26396.11
FINAL

EX-10.9

Exhibit 10.9

CASUALTY EXCESS OF LOSS REINSURANCE CONTRACT

issued to

PENN MILLERS INSURANCE COMPANY
AMERICAN MILLERS INSURANCE COMPANY
Wilkes-Barre, Pennsylvania

Effective: January 1, 2011
U6W20002 1 of 39 DOC: January 21, 2011

CASUALTY EXCESS OF LOSS REINSURANCE CONTRACT

TABLE OF CONTENTS

Article		Page
	Preamble	4
1	Business Covered	4
2	Retention and Limit	5
3	Term	5
4	Special Termination	6
5	Territory	7
6	Exclusions	7
7	Special Acceptance	13
8	Premium	13
9	Reinstatement	14
10	Definitions	15
11	Excess Terrorism Recovery	18
12	Extra Contractual Obligations/Excess of Policy Limits	19
13	Net Retained Liability	20
14	Original Conditions	20
15	No Third Party Rights	20
16	Notice of Loss and Loss Settlements	20
17	Offset	21
18	Commutation	21
19	Late Payments	22
20	Currency	23
21	Unauthorized Reinsurance	23
22	Taxes	26
23	Access to Records	26
24	Confidentiality	26
25	Indemnification and Errors and Omissions	27
26	Insolvency	28
27	Arbitration	29
28	Service of Suit	30
29	Severability	31
30	Governing Law	31
31	Entire Agreement	31
32	Non-Waiver	32
33	Intermediary	32
34	Mode of Execution	32
	Company Signing Block	33

Effective: January 1, 2011
U6W20002 2 of 39 DOC: January 21, 2011

CASUALTY EXCESS OF LOSS REINSURANCE CONTRACT

TABLE OF CONTENTS

Attachments		Page
	Nuclear Incident Exclusion Clause — Liability — Reinsurance — U.S.A.	34

Effective: January 1, 2011
U6W20002 3 of 39 DOC: January 21, 2011

CASUALTY EXCESS OF LOSS REINSURANCE CONTRACT

(the “Contract”)

issued to

PENN MILLERS INSURANCE COMPANY
AMERICAN MILLERS INSURANCE COMPANY
Wilkes-Barre, Pennsylvania

(collectively, the “Company”)

by

THE SUBSCRIBING REINSURER(S) IDENTIFIED
IN THE INTERESTS AND LIABILITIES AGREEMENT(S)
ATTACHED TO AND FORMING PART OF THIS CONTRACT

(the “Reinsurer”)

Whenever the word “Company” is used in this Contract, such term shall mean each and all affiliated companies which are or may hereafter be under common control provided notice be given to the Reinsurer of any newly-affiliated companies which may hereafter come under common control as soon as practicable, with full particulars as to how such affiliation is likely to affect this Contract. In the event that either party maintains that such affiliation calls for altering the terms of this Contract and an agreement for alteration not being arrived at, then the Business Covered of such newly-affiliated company is covered at existing terms for a period not to exceed 90 days after notice by either party that it does not wish to cover the business of the newly-affiliated company at the existing terms.

ARTICLE 1

BUSINESS COVERED

This Contract is to indemnify the Company in respect of the liability that may accrue to the Company as a result of loss or losses under Policies classified by the Company as Casualty, in force at the inception of this Contract, or written or renewed during the term of this Contract by or on behalf of the Company, subject to the terms and conditions herein contained.

Effective: January 1, 2011
U6W20002 4 of 39 DOC: January 21, 2011

ARTICLE 2

RETENTION AND LIMIT

First Excess

The Reinsurer shall be liable in respect of each Loss Occurrence, for the Ultimate Net Loss over and above an initial Ultimate Net Loss of $1,000,000 each Loss Occurrence, subject to limits of liability to the Reinsurer of $4,000,000 each Loss Occurrence, and $4,000,000 for all losses occurring during the term of this Contract arising from Acts of Terrorism.

Second Excess

The Reinsurer shall be liable in respect of each Loss Occurrence, for the Ultimate Net Loss over and above an initial Ultimate Net Loss of $5,000,000 each Loss Occurrence, subject to a limit of liability to the Reinsurer of $5,000,000 each Loss Occurrence. Acts of Terrorism as defined herein are not covered under the Second Excess.

ARTICLE 3

TERM

A.	This Contract shall take effect at 12:01 a.m., Eastern Standard Time, January 1, 2011, and shall remain in effect until 12:01 a.m., Eastern Standard Time, January 1, 2012, applying to losses occurring during the term of this Contract.
B.	The Reinsurer shall have no liability for losses occurring after expiration of this Contract.
C.	However, at the Company’s option, the Reinsurer shall remain liable hereunder in respect of Policies in force at expiration, until the earlier of the expiration or next renewal of such Policies. In such event, the Company shall pay to the Reinsurer an additional premium equal to the rate set forth in the Premium Article, multiplied by the Gross Net Earned Premium Income during the runoff period, payable within 30 days after the end of each quarter.
D.	In the event this Contract expires on a run-off basis, the Reinsurer’s liability hereunder shall continue if the Company is required by statute or regulation to continue coverage, until the earliest date on which the Company may cancel the Policy.

Effective: January 1, 2011
U6W20002 5 of 39 DOC: January 21, 2011

ARTICLE 4

SPECIAL TERMINATION

A. The Company may terminate a Subscribing Reinsurer’s percentage share in this Contract at any time by giving written notice to the Subscribing Reinsurer in the event of any of the following circumstances:

1.	The Subscribing Reinsurer ceases underwriting operations.
2.	A state insurance department or other legal authority orders the Subscribing Reinsurer to cease writing business, or the Subscribing Reinsurer is placed under regulatory supervision.
3.	The Subscribing Reinsurer has become insolvent or has been placed into liquidation or receivership (whether voluntary or involuntary), or there have been instituted against it proceedings for the appointment of a receiver, liquidator, rehabilitator, conservator, trustee in bankruptcy, or other agent known by whatever name, to take possession of its assets or control of its operations.
4.	The Subscribing Reinsurer’s policyholders’ surplus (or the equivalent under the Subscribing Reinsurer’s accounting system) as reported in such financial statements of the Subscribing Reinsurer as designated by the Company, has been reduced by 20% of the amount thereof at any date during the prior 12-month period (including the period prior to the inception of this Contract).
5.	The Subscribing Reinsurer has merged with or has become acquired or controlled by any company, corporation, or individual(s) not controlling the Subscribing Reinsurer’s operations at the inception of this Contract.
6.	The Subscribing Reinsurer has retroceded its entire liability under this Contract without the Company’s prior written consent, except for retrocessions to members of the Subscribing Reinsurer’s holding company group.
7.	The Subscribing Reinsurer has been assigned an A.M. Best’s rating of less than “A-” and/or an S&P rating of less than “BBB+.” However, as respects Underwriting Members of Lloyd’s, London, a Lloyd’s Market Rating of less than “A-” by A.M. Best and/or less than “BBB+” by S&P shall apply.

B. Termination shall be effected on a run-off or cut-off basis as set forth in the Term Article, at the sole discretion of the Company. The reinsurance premium due the Subscribing Reinsurer hereunder (including any minimum reinsurance premium) shall be pro rated based on the period of the Subscribing Reinsurer’s participation hereon, and the Subscribing Reinsurer shall immediately return any excess reinsurance premium received. Reinstatement premium, if any, shall be calculated based on the Subscribing Reinsurer’s

Effective: January 1, 2011
U6W20002 6 of 39 DOC: January 21, 2011

	reinsurance premium earned during the period of the Subscribing Reinsurer’s participation hereon.
C.	Additionally, in the event of any of the circumstances listed in paragraph A of this Article, the Company shall have the option to commute the Subscribing Reinsurer’s liability for losses on Policies covered by this Contract. In the event the Company and the Subscribing Reinsurer cannot agree on the commutation amount, they shall appoint an actuary and/or appraiser to assess such amount and shall share equally any expense of the actuary and/or appraiser. If the Company and the Subscribing Reinsurer cannot agree on an actuary and/or appraiser, the Company and the Subscribing Reinsurer each shall nominate three individuals, of whom the other shall decline two, and the final appointment shall be made by drawing lots. Payment by the Subscribing Reinsurer of the amount of liability ascertained shall constitute a complete and final release of both parties in respect of liability arising from the Subscribing Reinsurer’s participation under this Contract.
D.	The Company’s option to require commutation under paragraph C above shall survive the termination or expiration of this Contract.

ARTICLE 5

TERRITORY

The territorial limits of this Contract shall be identical with those of the Company’s Policies.

ARTICLE 6

EXCLUSIONS

A. This Contract shall not cover:

1.	Reinsurance treaty business, including pro rata and excess of loss, assumed by the Company, but not to include business from affiliated companies;
2.	Business written on a co-indemnity basis not controlled by the Company;
3.	Loss or liability excluded by the provisions of the “Nuclear Incident Exclusion Clause — Liability — Reinsurance — USA” attached to and forming part of this Contract;
4.	Liability assumed by the Company as a member of a Syndicate, Pool or Underwriting Association; however, this does not apply to participation in assigned risk plans;
5.	Any liability of the Company arising by contract, operation of law, or otherwise, from its participation or membership, whether voluntary or involuntary, in any insolvency fund. “Insolvency Fund” includes any guaranty fund, insolvency fund, plan, pool, association, fund or other arrangement, howsoever denominated, established or

Effective: January 1, 2011
U6W20002 7 of 39 DOC: January 21, 2011

	governed, which provides for any assessment of or payment or assumption by the Company of part or all of any claim, debt, charge, fee, or other obligation of an insurer, or its successors or assigns, which has been declared by any competent authority to be insolvent, or which is otherwise deemed unable to meet any claim, debt, charge, fee or other obligation in whole or in part;
6.	Financial Guarantee and Insolvency;
7.	Loss resulting from an Act of Terrorism that involves the use, release, or escape of nuclear materials, or directly or indirectly results in nuclear reaction or radiation or radioactive contamination, or that is carried out by means of the dispersal or application of pathogenic or poisonous biological or chemical materials that are released;
8.	Regarding interests which at time of loss or damage are on shore, any loss or damage which is occasioned by war, invasion, hostilities, acts of foreign enemies, civil war, rebellion, insurrection, military or usurped power, or martial law or confiscation by order of any government or public authority. This War Exclusion Clause shall not however, apply to interests which at time of loss or damage are within the territorial limits of the United States of America (comprising the 50 states of the Union and the District of Columbia and including bridges between the U.S.A. and Mexico, provided they are under United States ownership), Canada, St. Pierre and Miquelon, provided such interests are insured under Policies, endorsements, or binders containing a standard war or hostilities or warlike operations exclusion clause;
9.	Umbrella Liability;
10.	Public Utilities;
11.	Pharmaceutical and Medical Device Manufacturers;
12.	Operation, navigation, or handling of ships, or vessels owned by the insured other than:

a.	Yachts, small pleasure crafts, sports fishing vessels, and
b.	Vessels operating exclusively in inland and/or coastal waters where legal liability on such vessels is incidental to the coverage provided either under a general liability Policy or under a comprehensive form of a Policy;

13. Ownership, maintenance or use of aircraft and aircraft flight operations, but this exclusion does not apply to Workers’ Compensation/Employers’ Liability coverage;

14. Repair, cleaning or demolition of any vessel or barge used as petroleum tanker;

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15.	Loss or liability excluded by whichever standard Insurance Services Office pollution exclusion(s) is included in the Policy under which such loss or liability arises.
	Notwithstanding the above, the Reinsurer agrees that this exclusion shall not apply to original Policies written in any state where the Standard ISO Pollution Exclusion(s) have not been approved or are not permitted to be included in or attached to original Policies.
	Further, the Reinsurer agrees that this exclusion shall not apply in any case where the Company has attached the Standard ISO Pollution Exclusion(s) to an original Policy but has sustained a loss as a result of that exclusion being deemed invalid or inapplicable by a court of law.
	Notwithstanding all of the foregoing, the Reinsurer agrees that this exclusion does not apply to environmental restoration coverage provided under an MCS-90 Endorsement attached to a commercial automobile Policy written in accordance with the Motor Carrier Act of 1980.
	Furthermore, the Reinsurer agrees that this exclusion does not apply to overspraying of anhydrous ammonia, fertilizers and agricultural chemicals, nor shall this exclusion apply to operations involving anhydrous ammonia, liquefied petroleum gas (LPG), or propane (including the transportation thereof) where the Company has attached the Solutions 2000 Liability PMAG-16 Pollution Exclusion Amendment to an original Policy. Furthermore, this exclusion does not apply to pollutants from mobile equipment where the Company has attached the Solutions 2000 Liability PMAG-16 Pollution Exclusion Amendment to an original Policy.
	Furthermore, the Reinsurer agrees that this exclusion does not apply to overspraying of anhydrous ammonia, fertilizers and agricultural chemicals, nor shall this exclusion apply to operations involving anhydrous ammonia, liquefied petroleum gas (LPG), or propane (including the transportation thereof) where the Company has attached the Solutions 2000 Liability PMAG-18 Pollution Exclusion Amendment to an original Policy. Furthermore, this exclusion does not apply to pollutants from a covered auto where the Company has attached the Solutions 2000 Liability PMAG-18 Pollution Exclusion Amendment to an original Policy.
	Furthermore, the Reinsurer agrees that this exclusion does not apply to operations meeting all standards of any statute, ordinance, regulation or license requirement of any federal, state or local government which apply to those operations, where the Company has attached the Solutions 2000 Liability PMAG-04 “Pesticide or Fertilizer Applicator Amended Exclusions with Amendment of Limits of Insurance” to an original Policy. Furthermore, this exclusion does not apply to fields on which the insured, or any contractor or subcontractor working on the behalf of the insured, is performing operations, where the Company has attached the Solutions 2000 Liability

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	PMAG-04 “Pesticide or Fertilizer Applicator Amended Exclusions with Amendment of Limits of Insurance” to an original Policy.
16.	Manufacture, handling, transit or use of explosives, unless incidental to routine agriculture operation;
17.	Manufacture of liquefied petroleum gas or petroleum;
18.	Buses other than buses used to transport employees of the insured or property;
19.	Loss or liability, whether direct or indirect, arising from the hazard of asbestos including the manufacturing, mining, storage, distribution, transportation, fabrication, installation or removal of asbestos or products containing asbestos;
20.	All mining operations;
21.	Products guarantee and/or recall and/or integrity impairment when written as such;
22.	Blasting;
23.	Nursing Homes;
24.	All Workers’ Compensation business classified by the Company as Employee Leasing Corporations, Professional Employment Organizations (PEOs), Temporary Agencies, Police, Firefighters and EMT Workers, whether professional or volunteer;
25.	Policies issued as excess coverage, other than insurance over a self-insured retention;
26.	Manufacturing of fireworks, fuses, nitroglycerine, celluloid and pyroxylin;
27.	Concerns when engaged in the demolition of buildings more than three stories in height except the insured’s own structures;
28.	Operation of animal shows, riding academies, circuses, carnivals, amusement parks or amusement devices; equestrian exposures of guides and outfitters are not excluded;
29.	Municipalities, when written as such, but this exclusion does not apply as respects:

a.	School districts;
b.	Municipally-owned buildings or properties;
c.	Municipalities named as an additional insured;

30. Auto Liability:

a. As a taxicab, public livery or bus;

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b.	Public emergency vehicles such as fire trucks or police cars;
c.	Ambulances;
d.	Rent-a-car and leasing operations;
e.	Vehicles carrying passengers for hire or reward;
f.	Automobiles used in organized speed contests including but not limited to racing, rallies, and speed trials;
g.	As a long haul public freight carrier or common carrier, except for incidental hauling of goods of others;

	However, this exclusion shall not exclude automobiles, buses and/or vans used to transport hotel/hospitality guests;
31.	Products Liability:

a.	The manufacture, sale or retail or wholesale distribution of aircraft, aircraft parts;
b.	The manufacture of extracts, drugs, medicines, cosmetics or hair, scalp or skin preparations;
c.	The manufacture of automobiles, buses, trucks and trailers, recreational vehicles, motorcycles or the manufacture of components critical to vehicle safety;
d.	Products liability written without an annual aggregate limit;

32. Malpractice or Professional Liability, except:

a.	Druggists’ Liability;
b.	Printers’ Liability;
c.	Barbers’ and Beauticians’ Liability (including nail salons);
d.	Agricultural Consultants’ Liability;
e.	Funeral Directors’ or Morticians’ Professional Liability;
f.	Pastoral Professional Liability written in conjunction with a liability risk;
g.	Incidental malpractice written in conjunction with a liability risk;

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h.	Opticians;
i.	Hearing Aid Providers;
j.	Florists;
k.	Veterinarians;
l.	Animal Services;

33.	Bridge construction when over three stories, over navigable waters, or over 100 feet in length;
34.	Construction or maintenance of tunnels or subways more than 50 feet in length, dams, levees, cofferdams (except dams and levees constructed on farm premises which are incidental to farm operations), or with respect to business classified as commercial business, towers over two stories high;
35.	Elevator construction and installation, except construction or installation of grain elevator facilities or related equipment;
36.	Occupational Accident when written as such;
37.	As respects Workers’ Compensation, and not Commercial General Liability Coverage, risks having maritime exposures or exposures including but not limited to:

a.	Risks subject to the U.S. Longshore and Harbor Worker’s Compensation Act (except incidental which is defined as less than 10% of Workers Compensation Policy premium);
b.	Operation of docks, quays, wharves, or drydocks;
c.	Operations subject to the Jones Act;
d.	Operations subject to the Outer Continental Shelf Act;

38.	Roofing Contractors;
39.	Scaffolding installations (except residential and commercial up to three stories);
40.	Tower, steeple, chimney, or shaft construction and work.

B. If any business falling within the scope of one or more of the exclusions is assigned to the Company under an Assigned Risk Plan, such exclusion(s) shall not apply to the portion of the limits of liability prescribed by the Assigned Risk Plan which come within the Company’s retention and limits of liability of the Reinsurer.

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C. If without the knowledge and contrary to the instructions of its supervisory underwriting personnel, insurance coverages are provided involving one or more of the above exclusions, except A(1), A(2), A(3), A(4), A(5), A(6), A(7), A(8), A(11), A(15), A(16), A(19), A(24), and A(25) either by an inadvertent acceptance or by an existing insured extending its operations, the reinsurance coverage provided hereunder shall apply from inception and for a period of 30 days or longer if required by law, but not to exceed the lesser of 18 months or Policy anniversary after said supervisory underwriting personnel receives knowledge thereof and promptly notifies the Reinsurer upon discovery.

D. Any exclusion listed above other than exclusions A(1), A(2), A(3), A(4), A(5), A(6), A(7), A(8), A(11), A(15), A(16), A(19), A(24), and A(25), shall be automatically waived as respects a Policy issued by the Company on a risk with respect to which only a minor or incidental part of the operations covered involves the exclusion. An incidental part of an insured’s regular operations shall mean not greater than 10% of the insured’s regular operations.

ARTICLE 7

SPECIAL ACCEPTANCE

Business that is not within the scope of this Contract may be submitted to Hannover Rückversicherung AG (the “Lead Reinsurer”) for special acceptance hereunder, and such business, if accepted by the Lead Reinsurer shall be covered hereunder, subject to the terms and conditions of this Contract, except as modified by the special acceptance. Any special acceptance agreed to by the Lead Reinsurer shall be binding on all Subscribing Reinsurers hereon. The Lead Reinsurer shall be deemed to have accepted a risk, if it has not responded within five days after receiving the underwriting information on such risk. Any renewal of a special acceptance agreed to for a predecessor contract to this Contract, shall automatically be covered hereunder.

ARTICLE 8

PREMIUM

First Excess

A. The Company shall pay the Reinsurer a deposit premium of $1,171,665 for the term of this Contract, to be paid in the amount of $292,916.25 on the first day of each calendar quarter.

B. As soon as practicable following the expiration of this Contract, the Company shall furnish to the Reinsurer a statement of the Gross Net Earned Premium Income for the term of this Contract and calculate a premium at a rate of 2.700% multiplied by the Company’s Gross Net Earned Premium Income. Should the premium so calculated exceed the deposit premium paid in accordance with paragraph A above, the Company shall immediately pay

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the Reinsurer the difference. Should the premium so calculated be less than the deposit premium paid in accordance with paragraph A above, the Reinsurer shall immediately pay the Company the difference, subject to a minimum premium for the term of this Contract of $937,332.

Second Excess

A. The Company shall pay the Reinsurer a deposit premium of $416,592 for the term of this Contract, to be paid in the amount of $104,148 on the first day of each calendar quarter.

B. As soon as practicable following the expiration of this Contract, the Company shall furnish to the Reinsurer a statement of the Gross Net Earned Premium Income for the term of this Contract and calculate a premium at a rate of 0.960% multiplied by the Company’s Gross Net Earned Premium Income. Should the premium so calculated exceed the deposit premium paid in accordance with paragraph A above, the Company shall immediately pay the Reinsurer the difference. Should the premium so calculated be less than the deposit premium paid in accordance with paragraph A above, the Reinsurer shall immediately pay the Company the difference, subject to a minimum premium for the term of this Contract of $333,274.

The Company shall furnish the Reinsurer with such information as may be required by the Reinsurer for completion of its NAIC annual statements.

ARTICLE 9

REINSTATEMENT

First Excess

Loss payments under this Contract shall reduce the limit of coverage afforded by the amounts paid, but the limit of coverage shall be reinstated from the time of the occurrence of the loss, and for each amount so reinstated, the Company agrees to pay, simultaneously with the Reinsurer’s loss payment, an additional premium calculated at pro rata of 100% of the Reinsurer’s premium for the First Excess for the term of this Contract, being pro rata only as to the fraction of the Reinsurer’s limit of liability under the First Excess (i.e., the fraction of $4,000,000) so reinstated. Nevertheless, the Reinsurer’s liability under the First Excess shall not exceed $4,000,000 in respect of any one Loss Occurrence, and shall not exceed $12,000,000 in respect of all losses covered under this Contract.

Second Excess

Loss payments under this Contract shall reduce the limit of coverage afforded by the amounts paid, but the limit of coverage shall be reinstated from the time of the occurrence of the loss, and for each amount so reinstated, the Company agrees to pay, simultaneously with the Reinsurer’s

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loss payment, an additional premium calculated at pro rata of 100% of the Reinsurer’s premium for the Second Excess for the term of this Contract, being pro rata only as to the fraction of the Reinsurer’s limit of liability under the Second Excess (i.e., the fraction of $5,000,000) so reinstated. Nevertheless, the Reinsurer’s liability under the Second Excess shall not exceed $5,000,000 in respect of any one Loss Occurrence, and shall not exceed $10,000,000 in respect of all losses covered under this Contract.

If at the time of a loss settlement hereon the reinsurance premium, as calculated in accordance with the Premium Article, is unknown, the above calculation of reinstatement premium shall be based upon the deposit premium, subject to adjustment when the reinsurance premium is finally established.

ARTICLE 10

DEFINITIONS

A.	1.	“Ultimate Net Loss” means the actual loss paid by the Company or which the Company becomes liable to pay, such loss to include Loss Adjustment Expense, 90% of any Extra Contractual Obligation and 90% of any Loss in Excess of Policy Limits as defined in the Extra Contractual Obligations/Excess of Policy Limits Article.
	2.	Salvages and all recoveries, including recoveries under all reinsurances that inure to the benefit of this Contract (whether recovered or not), shall be first deducted from such loss to arrive at the amount of liability attaching hereunder.
	3.	All salvages, recoveries or payments recovered or received subsequent to loss settlement hereunder shall be applied as if recovered or received prior to the aforesaid settlement, and all necessary adjustments shall be made by the parties hereto.
	4.	The Company shall be deemed to be “liable to pay” a loss when a judgment has been rendered that the Company does not plan to appeal, and/or the Company has obtained a release, and/or the Company has accepted a proof of loss.
	5.	Nothing in this clause shall be construed to mean that losses are not recoverable hereunder until the Company’s “Ultimate Net Loss” has been ascertained.

B. “Loss Adjustment Expense” means costs and expenses incurred by the Company in connection with the investigation, appraisal, adjustment, settlement, litigation, defense or appeal of a specific claim or loss, or alleged loss, including but not limited to:

1.	court costs;
2.	costs of supersedeas and appeal bonds;
3.	monitoring counsel expenses;

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4.	legal expenses and costs incurred in connection with coverage questions and legal actions connected thereto, including but not limited to declaratory judgment actions;
5.	post-judgment interest;
6.	pre-judgment interest, unless included as part of an award or judgment;
7.	a pro rata share of salaries and expenses of Company field employees, calculated in accordance with the time occupied in adjusting such loss, and expenses of other Company employees who have been temporarily diverted from their normal and customary duties and assigned to the field adjustment of losses covered by this Contract; and
8.	subrogation, salvage and recovery expenses.

“Loss Adjustment Expense” does not include salaries and expenses of the Company’s employees, except as provided in subparagraph (7) above, and office and other overhead expenses.

C. “Loss Occurrence” means any one accident, casualty, disaster, or occurrence or series of accidents, casualties, disasters, or occurrences arising out of or following on one event. Without limiting the generality of the foregoing, the same shall be held to include:

1.	As regards Products Bodily Injury Liability and Products Property Damage Liability, all loss or losses included under the definition of occurrence as set forth in the Company’s original Policies.
2.	As regards Bodily Injury Liability other than Products, all claims against any one insured for all injuries to one or more than one person resulting from infection, contagion, poisoning, or contamination proceeding from, or traceable to, the same causative agency.
3.	As regards Property Damage Liability other than Products, all loss or losses during a Policy year caused by a series of operations, events, or occurrences arising out of operations at any one specific site which cannot be attributed to any single one of such operations, events, or occurrences, but rather to the cumulative effect thereof. The date of such Loss Occurrence shall be deemed to be the date on which the first individual loss occurred.
4.	As regards Workers’ Compensation and Employer’s Liability, all loss resulting from an occupational or other disease suffered by an employee, which disease arises out of the employment and for which the employer is liable. The date of loss as respects each such employee shall be deemed to be the date when compensable disability commences. However, if, during a Policy year, the Company should sustain more than one loss arising out of such an occupational or other disease of one specific kind

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or class, suffered by more than one employee of one insured, all such losses shall be deemed to arise out of one Loss Occurrence, and the date of such Loss Occurrence shall be deemed to be the date on which the first individual loss became compensable.

D. “Occupational Disease” means any bodily injury (including resulting death) or disease suffered by an employee which fulfills all of the following conditions:

1.	It is not traceable to a definite compensable accident occurring during the employee’s present or past employment;
2.	It is not traceable to an event of 24 hours or less in duration;
3.	It has been caused by exposure to conditions present in the workers’ occupational environment;
4.	It has resulted in a disability or death.

E. “Cumulative Injury” means any bodily injury (including resulting death) or disease suffered by an employee which fulfills all of the following conditions:

1.	It is not traceable to a definite compensable accident occurring during the employee’s present or past employment;
2.	It is not traceable to an event of 24 hours or less in duration;
3.	It has occurred from, and has been aggravated by, a repetitive employment-related activity.

F. “Gross Net Earned Premium Income” means gross earned premium of the Company for the classes of business reinsured hereunder, less the earned portion of premiums ceded by the Company for reinsurance that inures to the benefit of this Contract.

G. “Policy” means any binder, policy, or contract of insurance or reinsurance issued, accepted or held covered provisionally or otherwise, by or on behalf of the Company.

H. “Act of Terrorism” shall mean any act, including both Certified Acts of Terrorism in accordance with the Terrorism Risk Insurance Act of 2002, the Terrorism Risk Insurance Extension Act of 2005 and the Terrorism Risk Insurance Program Reauthorization Act of 2007 and any subsequent extension and those not certified in respect of action, or threat of action designed to influence the government de jure or de facto of any nation or any political division thereof, or in pursuit of any political, religious, ideological or similar purpose to intimidate the public or a section of the public of any nation by any person or group(s) of persons whether acting alone or on behalf of or in connection with any organization(s) or government(s) de jure or de facto and which:

1. involves violence against one or more persons; or

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2.	involves damage to property; or
3.	endangers life other than that of the person committing the action; or
4.	creates a risk to health or safety of the public or a section of the public; or
5.	is designed to interfere with or to disrupt an electronic system; or
6.	involves loss, damage, cost, or expense directly or indirectly caused by, contributed to by, resulting from, or arising out of or in connection with any action in controlling, preventing, suppressing, retaliating against, or responding to any Act of Terrorism.

Loss or damage occasioned by riot, strikes, civil commotion, vandalism or malicious mischief as those terms have been interpreted by United States Courts to apply to insurance Policies shall not be construed to be Acts of Terrorism.

I. “Ex-gratia Settlements” means all settlements of losses tendered but not covered under the Company’s Policies, which Policies are otherwise reinsured hereunder, other than losses in Excess of Policy Limits and Extra Contractual Obligations as defined herein. Ex-gratia Settlements shall not include:

1.	Settlements of losses that are arguably within the contemplation of coverage under the Company’s Policies reinsured hereunder;
2.	Settlements made to avoid costs that could be incurred in connection with potential or actual litigation relating to coverage issues arising under the Company’s Policies reinsured hereunder;
3.	Losses already excluded under this Contract.

ARTICLE 11

EXCESS TERRORISM RECOVERY

A. A pro rata share of the amount, if any, by which financial assistance paid to the Company under the Terrorism Risk Insurance Act of 2002 as amended (“TRIA”) for Acts of Terrorism occurring during any one Program Year, combined with the Company’s total private-sector reinsurance recoveries for such Acts of Terrorism, exceeds the amount of Insured Losses paid by the Company for such Acts of Terrorism, shall be reimbursed by the Company to the Reinsurer. Such pro rata share shall be calculated by dividing:

1.	the Reinsurer’s payment under this Contract of Insured Losses for the Program Year; by
2.	the Company’s total private-sector reinsurance recoveries arising from all Act(s) of Terrorism covered under TRIA during the Program Year.

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B.	Payment shall be made as promptly as possible after the Company’s receipt of any recovery in excess of its Insured Losses. The Company shall provide the Reinsurer with all necessary data respecting the transactions covered under this Article.
C.	Such payment to the Reinsurer shall apply unless disallowed by the U.S. Department of the Treasury.
D.	“Act of Terrorism”, “Insured Losses” and “Program Year” shall follow the definitions provided in TRIA.

ARTICLE 12

EXTRA CONTRACTUAL OBLIGATIONS/EXCESS OF POLICY LIMITS

A.	This Contract shall cover Extra Contractual Obligations, as provided in the definition of Ultimate Net Loss. “Extra Contractual Obligations” shall be defined as those liabilities not covered under any other provision of this Contract and that arise from the handling of any claim on business covered hereunder, such liabilities arising because of, but not limited to, the following: failure by the Company to settle within the Policy limit, or by reason of alleged or actual negligence, fraud or bad faith in rejecting an offer of settlement or in the preparation of the defense or in the trial of any action against its insured or reinsured or in the preparation or prosecution of an appeal consequent upon such action.
B.	This Contract shall cover Loss in Excess of Policy Limits, as provided in the definition of Ultimate Net Loss. “Loss in Excess of Policy Limits” shall be defined as Loss in excess of the Policy limit, having been incurred because of, but not limited to, failure by the Company to settle within the Policy limit or by reason of alleged or actual negligence, fraud or bad faith in rejecting an offer of settlement or in the preparation of the defense or in the trial of any action against its insured or reinsured or in the preparation or prosecution of an appeal consequent upon such action.
C.	An Extra Contractual Obligation and/or Loss in Excess of Policy Limits shall be deemed to have occurred on the same date as the loss covered under the Company’s Policy, and shall constitute part of the original loss.
D.	For the purposes of the Loss in Excess of Policy Limits coverage hereunder, the word “Loss” shall mean any amounts for which the Company would have been contractually liable to pay had it not been for the limit of the original Policy.
E.	Loss Adjustment Expense in respect of Extra Contractual Obligations and/or Loss in Excess of Policy Limits shall be covered hereunder in the same manner as other Loss Adjustment Expense.
F.	However, this Article shall not apply where the loss has been incurred due to final legal adjudication of fraud of a member of the Board of Directors or a corporate officer of the

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	Company acting individually or collectively or in collusion with any individual or corporation or any other organization or party involved in the presentation, defense or settlement of any claim covered hereunder.
G.	In no event shall coverage be provided to the extent not permitted under law.

ARTICLE 13

NET RETAINED LIABILITY

A.	This Contract applies only to that portion of any loss that the Company retains net for its own account (prior to deduction of any reinsurance that inures solely to the benefit of the Company).
B.	The amount of the Reinsurer’s liability hereunder in respect of any loss or losses shall not be increased by reason of the inability of the Company to collect from any other reinsurer(s), whether specific or general, any amounts that may have become due from such reinsurer(s), whether such inability arises from the insolvency of such other reinsurer(s) or otherwise.

ARTICLE 14

ORIGINAL CONDITIONS

All reinsurance under this Contract shall be subject to the same terms, conditions, waivers and interpretations, and to the same modifications and alterations as the respective Policies of the Company. However, in no event shall this be construed in any way to provide coverage outside the terms and conditions set forth in this Contract.

ARTICLE 15

NO THIRD PARTY RIGHTS

This Contract is solely between the Company and the Reinsurer, and in no instance shall any insured, claimant or other third party have any rights under this Contract except as may be expressly provided otherwise herein.

ARTICLE 16

NOTICE OF LOSS AND LOSS SETTLEMENTS

A. The Company shall advise the Reinsurer promptly of all losses which, in the opinion of the Company, may result in a claim hereunder and of all subsequent developments thereto which, in the opinion of the Company, may materially affect the position of the Reinsurer.

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	Inadvertent omission or oversight in giving such notice shall in no way affect the liability of the Reinsurer. However, the Reinsurer shall be informed of such omission or oversight promptly upon its discovery.
B.	Prompt notice shall be given to the Reinsurer by the Company of any Loss Occurrence wherein the Company’s reserve exceeds 50% of the Company’s loss retention. In addition, the Company shall promptly advise the Reinsurer of all bodily injury losses involving the following major injuries:

1.	Fatality;
2.	Spinal cord injuries (quadriplegia, paraplegia);
3.	Brain damage (seizure, coma or physical/mental impairment);
4.	Severe burn injuries resulting in disfigurement or scarring;
5.	Total or partial blindness in one or both eyes;
6.	Amputation of a limb;
7.	Major organ (such as heart, lungs).

C. As respects losses subject to this Contract, all loss settlements made by the Company, whether under strict Policy terms or by way of compromise, shall be binding upon the Reinsurer, and the Reinsurer agrees to pay or allow, as the case may be, its share of each such settlement immediately upon receipt of proof of loss.

ARTICLE 17

OFFSET

Each party hereto shall have, and may exercise at any time and from time to time, the right to offset any and all balances due from a party to the other arising under this Contract. In the event of the insolvency of a party hereto, offsets shall only be allowed in accordance with the provisions of any applicable law governing offset entitlement.

ARTICLE 18

COMMUTATION

A. As respects Workers’ Compensation any loss or losses known to the Company that have not been finally settled and that may cause a claim under this Contract, the loss(es) may be commuted at the option of the Company not less than seven years after expiration of this Contract. In such event, the Company and the Reinsurer shall determine the commutation

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value of the outstanding loss(es). In the event the Company and the Reinsurer cannot agree on the commutation value, the Reinsurer and the Company shall mutually appoint an independent actuary who shall investigate and determine the commutation value. In the event the Reinsurer and the Company cannot reach an agreement on an independent actuary, each party shall appoint an actuary within 30 days after receipt of the written request for commutation. Upon such appointment, the two actuaries shall appoint a third actuary. If the two actuaries fail to agree on the selection of a third actuary within 30 days of their appointment, each of them shall name three individuals, of whom the other shall decline two, and the decision shall be made by drawing lots. The actuaries shall then investigate and capitalize such loss(es). All actuaries shall be fellows of the Casualty Actuarial Society or the American Academy of Actuaries, and shall be disinterested in the outcome of the commutation. If the Company does not agree with the commutation value, the Company shall have no obligation to commute.

B.

The Reinsurer’s proportion of the amount so determined shall be considered the Reinsurer’s total liability for the loss(es) and the lump sum payment thereof shall constitute a complete release of both parties from liability hereunder for the loss(es).

ARTICLE 19

LATE PAYMENTS

A. In the event any payment due from the Reinsurer to the Company after the expiration of this Contract is not received by the Intermediary by the payment due date, the Company may, by notifying the Intermediary in writing, require the Reinsurer to pay, and the Reinsurer agrees to pay, an interest penalty on the amount past due calculated for each such payment on the last business day of each month as follows:

1.	The number of full days that have expired since the overdue date or the last monthly calculation, whichever the lesser; times
2.	1/365th of the sum of the six-month United States Treasury Bill rate as quoted in The Wall Street Journal on the first business day of the month for which the calculation is made, plus 1%; times
3.	The amount past due, including accrued interest.

	Interest shall accumulate until payment of the original amount due plus interest penalties has been received by the Intermediary.
B.	This Article applies only to amounts for which the demand for payment is received by the Reinsurer after the Company has paid the entire reinsurance premium for the term of this Contract, as provided in the Premium Article.

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C.	The due date shall be the date on which the demand for payment is received by the Reinsurer, and the amount shall be deemed to be overdue 30 days thereafter.
D.	If the information contained in the Company’s demand for payment is insufficient or not in accordance with the conditions of this Contract, then within 30 days the Reinsurer shall request from the Company all additional information necessary to validate its claim and the payment due date as defined in paragraph C shall be deemed to be the date upon which the Reinsurer received the requested additional information. This paragraph is only for the purpose of establishing when a payment is overdue, and shall not alter the provisions of the Notice of Loss and Loss Settlements Article or other pertinent contractual stipulations.
E.	Should the Reinsurer dispute a claim presented by the Company and the timeframe set out in paragraph C be exceeded, interest as stipulated in paragraph A shall be payable for the entire overdue period, but only for the amount of the final settlement with the Reinsurer.
F.	In the event arbitration is necessary to settle a dispute, the panel shall have the authority to make a determination awarding interest to the Company. Interest, if any, awarded by the panel shall supersede the interest amounts outlined herein.
G.	Any interest owed pursuant to this Article may be waived by the Company. Waiver of such interest, however, shall not affect the Company’s rights to other interest amounts due as a result of this Article.

ARTICLE 20

CURRENCY

A.	Where the word “Dollars” and/or the sign “$” appear in this Contract, they shall mean United States Dollars.
B.	For purposes of this Contract, where the Company receives premiums or pays losses in currencies other than United States Dollars, such premiums or losses shall be converted into United States Dollars at the actual rates of exchange at which these premiums or losses are entered in the Company’s books.

ARTICLE 21

UNAUTHORIZED REINSURANCE

A.	This Article applies only to the extent a Subscribing Reinsurer does not qualify for credit with any insurance regulatory authority having jurisdiction over the Company’s reserves.
B.	The Company agrees, in respect of its Policies or bonds falling within the scope of this Contract, that when it files with its insurance regulatory authority, or sets up on its books liabilities as required by law, it shall forward to the Reinsurer a statement showing the

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proportion of such liabilities applicable to the Reinsurer. The “Reinsurer’s Obligations” shall be defined as follows:

1.	unearned premium (if applicable);
2.	known outstanding losses that have been reported to the Reinsurer and Loss Adjustment Expense relating thereto;
3.	losses and Loss Adjustment Expense paid by the Company but not recovered from the Reinsurer;
4.	losses incurred but not reported and Loss Adjustment Expense relating thereto;
5.	all other amounts for which the Company cannot take credit on its financial statements unless funding is provided by the Reinsurer.

C.	The Reinsurer’s Obligations shall be funded by funds withheld, cash advances, Trust Agreement or a Letter of Credit (LOC). The Reinsurer shall have the option of determining the method of funding provided it is acceptable to the insurance regulatory authorities having jurisdiction over the Company’s reserves.
D.	When funding by an LOC, the Reinsurer agrees to apply for and secure timely delivery to the Company of a clean, irrevocable and unconditional LOC issued by a bank and containing provisions acceptable to the insurance regulatory authorities having jurisdiction over the Company’s reserves in an amount equal to the Reinsurer’s Obligations. Such LOC shall be issued for a period of not less than one year, and shall be automatically extended for one year from its date of expiration or any future expiration date unless 30 days (or such other time period as may be required by insurance regulatory authorities), prior to any expiration date the issuing bank shall notify the Company by certified or registered mail that the issuing bank elects not to consider the LOC extended for any additional period.
E.	The Reinsurer and the Company agree that any funding provided by the Reinsurer pursuant to the provisions of this Contract may be drawn upon at any time, notwithstanding any other provision of this Contract, and be utilized by the Company or any successor, by operation of law, of the Company including, without limitation, any liquidator, rehabilitator, receiver or conservator of the Company, for the following purposes, unless otherwise provided for in a separate Trust Agreement:

1.	to reimburse the Company for the Reinsurer’s Obligations, the payment of which is due under the terms of this Contract and that has not been otherwise paid;
2.	to make refund of any sum that is in excess of the actual amount required to pay the Reinsurer’s Obligations under this Contract (or in excess of 102% of the Reinsurer’s Obligations, if funding is provided by a Trust Agreement);

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3.

to fund an account with the Company for the Reinsurer’s Obligations. Such cash deposit shall be held in an interest bearing account separate from the Company’s other assets, and interest thereon not in excess of the prime rate shall accrue to the benefit of the Reinsurer. Any taxes payable on accrued interest shall be paid out of the assets in the account that are in excess of the Reinsurer’s Obligations (or in excess of 102% of the Reinsurer’s Obligations, if funding is provided by a Trust Agreement). If the assets are inadequate to pay taxes, any taxes due shall be paid by the Reinsurer;

4.

to pay the Reinsurer’s share of any other amounts the Company claims are due under this Contract.

F.	If the amount drawn by the Company is in excess of the actual amount required for E(1) or E(3), or in the case of E(4), the actual amount determined to be due, the Company shall promptly return to the Reinsurer the excess amount so drawn. All of the foregoing shall be applied without diminution because of insolvency on the part of the Company or the Reinsurer.
G.	The issuing bank shall have no responsibility whatsoever in connection with the propriety of withdrawals made by the Company or the disposition of funds withdrawn, except to ensure that withdrawals are made only upon the order of properly authorized representatives of the Company.
H.	At annual intervals, or more frequently at the discretion of the Company, but never more frequently than quarterly, the Company shall prepare a specific statement of the Reinsurer’s Obligations for the sole purpose of amending the LOC or other method of funding, in the following manner:

1.

If the statement shows that the Reinsurer’s Obligations exceed the balance of the LOC as of the statement date, the Reinsurer shall, within 30 days after receipt of the statement, secure delivery to the Company of an amendment to the LOC increasing the amount of credit by the amount of such difference. Should another method of funding be used, the Reinsurer shall, within the time period outlined above, increase such funding by the amount of such difference.

2.

If, however, the statement shows that the Reinsurer’s Obligations are less than the balance of the LOC (or that 102% of the Reinsurer’s Obligations are less than the trust account balance if funding is provided by a Trust Agreement), as of the statement date, the Company shall, within 30 days after receipt of written request from the Reinsurer, release such excess credit by agreeing to secure an amendment to the LOC reducing the amount of credit available by the amount of such excess credit. Should another method of funding be used, the Company shall, within the time period outlined above, decrease such funding by the amount of such excess.

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ARTICLE 22

TAXES

A. In consideration of the terms under which this Contract is issued, the Company undertakes not to claim any deduction of the premium hereon when making Canadian tax returns or when making tax returns, other than Income or Profits Tax returns, to any state or territory of the United States of America or to the District of Columbia.

B.	1.	Each Subscribing Reinsurer has agreed to allow, for the purpose of paying the Federal Excise Tax, the applicable percentage of the premium payable hereon (as imposed under the Internal Revenue Code) to the extent such premium is subject to Federal Excise Tax.
	2.	In the event of any return of premium becoming due hereunder, the Subscribing Reinsurer shall deduct the applicable percentage of the premium from the amount of the return, and the Company or its agent should take steps to recover the Tax from the U.S. Government.

ARTICLE 23

ACCESS TO RECORDS

The Reinsurer or its duly authorized representatives shall have the right to visit the offices of the Company to inspect, examine, audit, and verify any of the Policy, accounting or claim files (“Records”) relating to business reinsured under this Contract during regular business hours after giving five working days’ prior notice. This right shall be exercisable during the term of this Contract or after the expiration of this Contract. Notwithstanding the above, the Reinsurer shall not have any right of access to the Records of the Company if it is not current in all undisputed payments due the Company.

ARTICLE 24

CONFIDENTIALITY

A. The Reinsurer hereby acknowledges that the documents, information and data provided to it by the Company, whether directly or through an authorized agent, in connection with the placement and execution of this Contract (“Confidential Information”) are proprietary and confidential to the Company. Confidential Information shall not include documents, information or data that the Reinsurer can show:

1. are publicly known or have become publicly known through no unauthorized act of the Reinsurer;

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2.	have been rightfully received from a third person without obligation of confidentiality; or
3.	were known by the Reinsurer prior to the placement of this Contract without an obligation of confidentiality.

B. Absent the written consent of the Company, the Reinsurer shall not disclose any Confidential Information to any third parties, including any affiliated companies, except:

1.	when required by retrocessionaires subject to the business ceded to this Contract;
2.	when required by regulators performing an audit of the Reinsurer’s records and/or financial condition; or
3.	when required by external auditors performing an audit of the Reinsurer’s records in the normal course of business.

	Further, the Reinsurer agrees not to use any Confidential Information for any purpose not related to the performance of its obligations or enforcement of its rights under this Contract.
C.	Notwithstanding the above, in the event that the Reinsurer is required by court order, other legal process or any regulatory authority to release or disclose any or all of the Confidential Information, the Reinsurer agrees to provide the Company with written notice of same at least 10 days prior to such release or disclosure and to use its best efforts to assist the Company in maintaining the confidentiality provided for in this Article.
D.	The provisions of this Article shall extend to the officers, directors and employees of the Reinsurer and its affiliates, and shall be binding upon their successors and assigns.

ARTICLE 25

INDEMNIFICATION AND ERRORS AND OMISSIONS

A. The Reinsurer is reinsuring, subject to the terms and conditions of this Contract, the obligations of the Company under any Policy. The Company shall be the sole judge as to:

1.	what shall constitute a claim or loss covered under any Policy;
2.	the Company’s liability thereunder;
3.	the amount or amounts that it shall be proper for the Company to pay thereunder.

B. The Reinsurer shall be bound by the judgment of the Company as to the obligation(s) and liability(ies) of the Company under any Policy.

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C. Any inadvertent error, omission or delay in complying with the terms and conditions of this Contract shall not be held to relieve either party hereto from any liability that would attach to it hereunder if such error, omission or delay had not been made, provided such error, omission or delay is rectified immediately upon discovery.

ARTICLE 26

INSOLVENCY

A.	If more than one reinsured company is referenced within the definition of “Company” in the Preamble to this Contract, this Article shall apply severally to each such company. Further, this Article and the laws of the domiciliary state shall apply in the event of the insolvency of any company covered hereunder. In the event of a conflict between any provision of this Article and the laws of the domiciliary state of any company covered hereunder, that domiciliary state’s laws shall prevail.
B.	In the event of the insolvency of the Company, this reinsurance (or the portion of any risk or obligation assumed by the Reinsurer, if required by applicable law) shall be payable directly to the Company, or to its liquidator, receiver, conservator or statutory successor, either: (1) on the basis of the liability of the Company, or (2) on the basis of claims filed and allowed in the liquidation proceeding, whichever may be required by applicable statute, without diminution because of the insolvency of the Company or because the liquidator, receiver, conservator or statutory successor of the Company has failed to pay all or a portion of any claim. It is agreed, however, that the liquidator, receiver, conservator or statutory successor of the Company shall give written notice to the Reinsurer of the pendency of a claim against the Company indicating the Policy or bond reinsured, which claim would involve a possible liability on the part of the Reinsurer within a reasonable time after such claim is filed in the conservation or liquidation proceeding or in the receivership, and that during the pendency of such claim, the Reinsurer may investigate such claim and interpose, at its own expense, in the proceeding where such claim is to be adjudicated any defense or defenses that it may deem available to the Company or its liquidator, receiver, conservator or statutory successor. The expense thus incurred by the Reinsurer shall be chargeable, subject to the approval of the court, against the Company as part of the expense of conservation or liquidation to the extent of a pro rata share of the benefit that may accrue to the Company solely as a result of the defense undertaken by the Reinsurer.
C.	Where two or more reinsurers are involved in the same claim and a majority in interest elect to interpose defense to such claim, the expense shall be apportioned in accordance with the terms of this reinsurance Contract as though such expense had been incurred by the Company.
D.	As to all reinsurance made, ceded, renewed or otherwise becoming effective under this Contract, the reinsurance shall be payable as set forth above by the Reinsurer to the

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Company or to its liquidator, receiver, conservator or statutory successor, (except as provided by Section 4118(a)(1)(A) of the New York Insurance Law, provided the conditions of 1114(c) of such law have been met, if New York law applies) or except (1) where the Contract specifically provides another payee in the event of the insolvency of the Company, or (2) where the Reinsurer, with the consent of the direct insured or insureds, has assumed such Policy obligations of the Company as direct obligations of the Reinsurer to the payees under such Policies and in substitution for the obligations of the Company to such payees. Then, and in that event only, the Company, with the prior approval of the certificate of assumption on New York risks by the Superintendent of Insurance of the State of New York, or with the prior approval of such other regulatory authority as may be applicable, is entirely released from its obligation and the Reinsurer shall pay any loss directly to payees under such Policy.

ARTICLE 27

ARBITRATION

A.	Any dispute arising out of the interpretation, performance or breach of this Contract, including the formation or validity thereof, shall be submitted for decision to a panel of three arbitrators. Notice requesting arbitration shall be in writing and sent certified or registered mail, return receipt requested.
B.	One arbitrator shall be chosen by each party and the two arbitrators shall then choose an impartial third arbitrator who shall preside at the hearing. If either party fails to appoint its arbitrator within 30 days after being requested to do so by the other party, the latter, after 10 days’ prior notice by certified or registered mail of its intention to do so, may appoint the second arbitrator.
C.	If the two arbitrators do not agree on a third arbitrator within 60 days of their appointment, the third arbitrator shall be chosen in accordance with the procedures for selecting the third arbitrator in force on the date the arbitration is demanded, established by the AIDA Reinsurance and Insurance Arbitration Society — U.S. (ARIAS). The arbitrators shall be persons knowledgeable about insurance and reinsurance who have no personal or financial interest in the result of the arbitration. If a member of the panel dies, becomes disabled or is otherwise unwilling or unable to serve, a substitute shall be selected in the same manner as the departing member was chosen and the arbitration shall continue.
D.	Within 30 days after all arbitrators have been appointed, the panel shall meet and determine timely periods for briefs, discovery procedures and schedules of hearings.
E.	The panel shall be relieved of all judicial formality and shall not be bound by the strict rules of procedure and evidence. Notwithstanding anything to the contrary in this Contract, the arbitrators may at their discretion, consider underwriting and placement information provided by the Company to the Reinsurer, as well as any correspondence exchanged by

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	the parties that is related to this Contract. The arbitration shall take place in Wilkes-Barre, Pennsylvania, or at such other place as the parties shall agree. The decision of any two arbitrators shall be in writing and shall be final and binding. The panel is empowered to grant interim relief as it may deem appropriate.
F.	The panel shall interpret this Contract as an honorable engagement rather than as merely a legal obligation and shall make its decision considering the custom and practice of the applicable insurance and reinsurance business as promptly as possible after the hearings. Judgment upon an award may be entered in any court having jurisdiction thereof.
G.	Each party shall bear the expense of its own arbitrator and shall jointly and equally bear with the other party the cost of the third arbitrator. The remaining costs of the arbitration shall be allocated by the panel. The panel may, at its discretion, award such further costs and expenses as it considers appropriate, including but not limited to attorneys’ fees, to the extent permitted by law.

ARTICLE 28

SERVICE OF SUIT

A.	This Article applies only to those Subscribing Reinsurers not domiciled in the United States of America, and/or not authorized in any state, territory and/or district of the United States of America where authorization is required by insurance regulatory authorities.
B.	This Article shall not be read to conflict with or override the obligations of the parties to arbitrate their disputes as provided for in the Arbitration Article. This Article is intended as an aid to compelling arbitration or enforcing such arbitration or arbitral award, not as an alternative to the Arbitration Article for resolving disputes arising out of this Contract.
C.	In the event of the failure of the Reinsurer to pay any amount claimed to be due hereunder, the Reinsurer, at the request of the Company, shall submit to the jurisdiction of a court of competent jurisdiction within the United States. Nothing in this Article constitutes or should be understood to constitute a waiver of the Reinsurer’s rights to commence an action in any court of competent jurisdiction in the United States, to remove an action to a United States District Court, or to seek a transfer of a case to another court as permitted by the laws of the United States or of any state in the United States. The Reinsurer, once the appropriate court is selected, whether such court is the one originally chosen by the Company and accepted by the Reinsurer or is determined by removal, transfer, or otherwise, as provided for above, shall comply with all requirements necessary to give said court jurisdiction and, in any suit instituted against the Reinsurer upon this Contract, shall abide by the final decision of such court or of any appellate court in the event of an appeal.
D.	Service of process in such suit may be made upon Messrs. Mendes and Mount, 750 Seventh Avenue, New York, New York 10019-6829, or another party specifically

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designated in the applicable Interests and Liabilities Agreement attached hereto. The above-named are authorized and directed to accept service of process on behalf of the Reinsurer in any such suit.

E.

Further, pursuant to any statute of any state, territory or district of the United States that makes provision therefor, the Reinsurer hereby designates the Superintendent, Commissioner or Director of Insurance, or other officer specified for that purpose in the statute, or his successor or successors in office, as its true and lawful attorney upon whom may be served any lawful process in any action, suit or proceeding instituted by or on behalf of the Company or any beneficiary hereunder arising out of this Contract, and hereby designates the above-named as the person to whom the said officer is authorized to mail such process or a true copy thereof.

ARTICLE 29

SEVERABILITY

If any provision of this Contract shall be rendered illegal or unenforceable by the laws, regulations or public policy of any state, such provision shall be considered void in such state, but this shall not affect the validity or enforceability of any other provision of this Contract or the enforceability of such provision in any other jurisdiction.

ARTICLE 30

GOVERNING LAW

This Contract shall be governed as to performance, administration and interpretation by the laws of the Commonwealth of Pennsylvania, exclusive of conflict of law rules. However, with respect to credit for reinsurance, the rules of all applicable states shall apply.

ARTICLE 31

ENTIRE AGREEMENT

This Contract sets forth all of the duties and obligations between the Company and the Reinsurer and supersedes any and all prior or contemporaneous written agreements with respect to matters referred to in this Contract. This Contract may not be modified or changed except by an amendment to this Contract in writing signed by both parties.

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ARTICLE 32

NON-WAIVER

The failure of the Company or the Reinsurer to insist on compliance with this Contract or to exercise any right or remedy hereunder shall not constitute a waiver of any rights contained in this Contract nor prevent either party from thereafter demanding full and complete compliance nor prevent either party from exercising such remedy in the future.

ARTICLE 33

INTERMEDIARY

Guy Carpenter & Company, LLC, is hereby recognized as the Intermediary negotiating this Contract for all business hereunder. All communications (including notices, statements, premiums, return premiums, commissions, taxes, losses, Loss Adjustment Expenses, salvages, and loss settlements) relating thereto shall be transmitted to the Company or the Reinsurer through Guy Carpenter & Company, LLC, Two Logan Square, Philadelphia, Pennsylvania 19103-2772. Payments by the Company to the Intermediary shall be deemed payment to the Reinsurer. Payments by the Reinsurer to the Intermediary shall be deemed payment to the Company only to the extent that such payments are actually received by the Company.

ARTICLE 34

MODE OF EXECUTION

A. This Contract may be executed by:

1.	an original written ink signature of paper documents;
2.	an exchange of facsimile copies showing the original written ink signature of paper documents;
3.	electronic signature technology employing computer software and a digital signature or digitizer pen pad to capture a person’s handwritten signature in such a manner that the signature is unique to the person signing, is under the sole control of the person signing, is capable of verification to authenticate the signature and is linked to the document signed in such a manner that if the data is changed, such signature is invalidated.

B. The use of any one or a combination of these methods of execution shall constitute a legally binding and valid signing of this Contract. This Contract may be executed in one or more counterparts, each of which, when duly executed, shall be deemed an original.

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IN WITNESS WHEREOF, the Company has caused this Contract to be executed by its duly authorized representative(s) this _____day of __________, in the year of 20_.

PENN MILLERS INSURANCE COMPANY
AMERICAN MILLERS INSURANCE COMPANY

CASUALTY EXCESS OF LOSS REINSURANCE CONTRACT

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NUCLEAR INCIDENT EXCLUSION CLAUSE — LIABILITY — REINSURANCE — U.S.A.

(1)	This reinsurance does not cover any loss or liability accruing to the Reassured as a member of, or subscriber to, any association of insurers or reinsurers formed for the purpose of covering nuclear energy risks or as a direct or indirect reinsurer of any such member, subscriber or association.
(2)	Without in any way restricting the operation of paragraph (1) of this Clause it is understood and agreed that for all purposes of this reinsurance all the original policies of the Reassured (new, renewal and replacement) of the classes specified in Clause II of this paragraph (2) from the time specified in Clause III in this paragraph (2) shall be deemed to include the following provision (specified as the Limited Exclusion Provision):
	Limited Exclusion Provision.*

I. It is agreed that the policy does not apply under any liability coverage, to

injury, sickness, disease, death or destruction

bodily injury or property damage

	with respect to which an insured under the policy is also an insured under a nuclear energy liability policy issued by Nuclear Energy Liability Insurance Association, Mutual Atomic Energy Liability Underwriters or Nuclear Insurance Association of Canada, or would be an insured under any such policy but for its termination upon exhaustion of its limit of liability.
II.	Family Automobile Policies (liability only), Special Automobile Policies (private passenger automobiles, liability only), Farmers Comprehensive Personal Liability Policies (liability only), Comprehensive Personal Liability Policies (liability only) or policies of a similar nature; and the liability portion of combination forms related to the four classes of policies stated above, such as the Comprehensive Dwelling Policy and the applicable types of Homeowners Policies.
III.	The inception dates and thereafter of all original policies as described in II above, whether new, renewal or replacement, being policies which either

(a)	become effective on or after 1st May, 1960, or
(b)	become effective before that date and contain the Limited Exclusion Provision set out above;

provided this paragraph (2) shall not be applicable to Family Automobile Policies, Special Automobile Policies, or policies or combination policies of a similar nature, issued by the Reassured on New York risks, until 90 days following approval of the Limited Exclusion Provision by the Governmental Authority having jurisdiction thereof.

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(3) Except for those classes of policies specified in Clause II of paragraph (2) and without in any way restricting the operation of paragraph (1) of this Clause, it is understood and agreed that for all purposes of this reinsurance the original liability policies of the Reassured (new, renewal and replacement) affording the following coverages:

Owners, Landlords and Tenants Liability, Contractual Liability, Elevator Liability, Owners or Contractors (including railroad) Protective Liability, Manufacturers and Contractors Liability, Product Liability, Professional and Malpractice Liability, Storekeepers Liability, Garage Liability, Automobile Liability (including Massachusetts Motor Vehicle or Garage Liability)

shall be deemed to include, with respect to such coverages, from the time specified in Clause V of this paragraph (3), the following provision (specified as the Broad Exclusion Provision):

Broad Exclusion Provision.*

It is agreed that the policy does not apply:

I.	Under any Liability Coverage, to
	injury, sickness, disease, death or destruction
	bodily injury or property damage

(a)

with respect to which an insured under the policy is also an insured under a nuclear energy liability policy issued by Nuclear Energy Liability Insurance Association, Mutual Atomic Energy Liability Underwriters or Nuclear Insurance Association of Canada, or would be an insured under any such policy but for its termination upon exhaustion of its limit of liability; or

(b)

resulting from the hazardous properties of nuclear material and with respect to which (1) any person or organization is required to maintain financial protection pursuant to the Atomic Energy Act of 1954, or any law amendatory thereof, or (2) the insured is, or had this policy not been issued would be, entitled to indemnity from the United States of America, or any agency thereof, under any agreement entered into by the United States of America, or any agency thereof, with any person or organization.

II. Under any Medical Payments Coverage, or under any Supplementary Payments Provision relating to

immediate medical or surgical relief

first aid,

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to expenses incurred with respect to

bodily injury, sickness, disease or death

bodily injury

	resulting from the hazardous properties of nuclear material and arising out of the operation of a nuclear facility by any person or organization.
III.	Under any Liability Coverage, to

injury, sickness, disease, death or destruction

bodily injury or property damage

resulting from the hazardous properties of nuclear material, if

(a)	the nuclear material (1) is at any nuclear facility owned by, or operated by or on behalf of, an insured or (2) has been discharged or dispersed therefrom;
(b)	the nuclear material is contained in spent fuel or waste at any time possessed, handled, used, processed, stored, transported or disposed of by or on behalf of an insured; or
(c)	the

injury, sickness, disease, death or destruction

bodily injury or property damage

arises out of the furnishing by an insured of services, materials, parts or equipment in connection with the planning, construction, maintenance, operation or use of any nuclear facility, but if such facility is located within the United States of America, its territories or possessions or Canada, this exclusion (c) applies only to

injury to or destruction of property at such nuclear facility.

property damage to such nuclear facility and any property thereat.

IV.	As used in this endorsement:
	“hazardous properties” include radioactive, toxic or explosive properties; “nuclear material” means source material, special nuclear material or byproduct material;

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“source material”, “special nuclear material”, and “byproduct material” have the meanings given them in the Atomic Energy Act of 1954 or in any law amendatory thereof; “spent fuel” means any fuel element or fuel component, solid or liquid, which has been used or exposed to radiation in a nuclear reactor; “waste” means any waste material (1) containing byproduct material other than the tailings or wastes produced by the extraction or concentration of uranium or thorium from any ore processed primarily for its source material content and (2) resulting from the operation by any person or organization of any nuclear facility included under the first two paragraphs of the definition of nuclear facility; “nuclear facility” means

(a)	any nuclear reactor,
(b)	any equipment or device designed or used for (1) separating the isotopes of uranium or plutonium, (2) processing or utilizing spent fuel, or (3) handling, processing or packaging waste,
(c)	any equipment or device used for the processing, fabricating or alloying of special nuclear material if at any time the total amount of such material in the custody of the insured at the premises where such equipment or device is located consists of or contains more than 25 grams of plutonium or uranium 233 or any combination thereof, or more than 250 grams of uranium 235,
(d)	any structure, basin, excavation, premises or place prepared or used for the storage or disposal of waste,

	and includes the site on which any of the foregoing is located, all operations conducted on such site and all premises used for such operations; “nuclear reactor” means any apparatus designed or used to sustain nuclear fission in a self-supporting chain reaction or to contain a critical mass of fissionable material;
	With respect to injury to or destruction of property, the word “injury” or “destruction” includes all forms of radioactive contamination of property. “property damage” includes all forms of radioactive contamination of property.
V.	The inception dates and thereafter of all original policies affording coverages specified in this paragraph (3), whether new, renewal or replacement, being policies which become effective on or after 1st May, 1960, provided this paragraph (3) shall not be applicable to

(i)	Garage and Automobile Policies issued by the Reassured on New York risks, or
(ii)	statutory liability insurance required under Chapter 90, General Laws of Massachusetts,

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until 90 days following approval of the Broad Exclusion Provision by the Governmental Authority having jurisdiction thereof.

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(4) Without in any way restricting the operation of paragraph (1) of this Clause, it is understood and agreed that paragraphs (2) and (3) above are not applicable to original liability policies of the Reassured in Canada and that with respect to such policies this Clause shall be deemed to include the Nuclear Energy Liability Exclusion Provisions adopted by the Canadian Underwriters’ Association or the Independent Insurance Conference of Canada.

*NOTE. The words printed in italics in the Limited Exclusion Provision and in the Broad Exclusion Provision shall apply only in relation to original liability policies which include a Limited Exclusion Provision or a Broad Exclusion Provision containing those words.

NOTES: Wherever used herein the terms:

“Reassured”	shall be understood to mean “Company”, “Reinsured”, “Reassured” or whatever other term is used in the attached reinsurance document to designate the reinsured company or companies.
“Agreement”	shall be understood to mean “Agreement”, “Contract”, “Policy” or whatever other term is used to designate the attached reinsurance document.
“Reinsurers”	shall be understood to mean “Reinsurers”, “Underwriters” or whatever other term is used in the attached reinsurance document to designate the reinsurer or reinsurers.

21/9/67
NMA 1590 (amended)

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EX-10.10

Exhibit 10.10

UMBRELLA QUOTA SHARE AND EXCESS CESSIONS REINSURANCE CONTRACT

issued to

PENN MILLERS INSURANCE COMPANY
AMERICAN MILLERS INSURANCE COMPANY

Wilkes-Barre, Pennsylvania

Effective: January 1, 2011		DOC: January 21, 2011
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UMBRELLA QUOTA SHARE AND EXCESS CESSIONS REINSURANCE CONTRACT

TABLE OF CONTENTS

Article		Page
	Preamble	4
1	Business Covered	4
2	Retention and Limit	5
3	Term	5
4	Special Termination	6
5	Territory	7
6	Exclusions	7
7	Special Acceptance	13
8	Premium	13
9	Ceding Commission	14
10	Reports and Remittances	14
11	Definitions	15
12	Excess Terrorism Recovery	17
13	Extra Contractual Obligations/Excess of Policy Limits	17
14	Net Retained Liability	18
15	Original Conditions	19
16	No Third Party Rights	19
17	Notice of Loss and Loss Settlements	19
18	Salvage and Subrogation	19
19	Late Payments	20
20	Offset	21
21	Currency	21
22	Unauthorized Reinsurance	21
23	Taxes	23
24	Access to Records	24
25	Confidentiality	24
26	Indemnification and Errors and Omissions	25
27	Insolvency	26
28	Arbitration	27
29	Service of Suit	28
30	Severability	29
31	Governing Law	29
32	Entire Agreement	30
33	Non-Waiver	30
34	Intermediary	30
35	Mode of Execution	30
	Company Signing Block	32

Effective: January 1, 2011		DOC: January 21, 2011
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UMBRELLA QUOTA SHARE AND EXCESS CESSIONS REINSURANCE CONTRACT

TABLE OF CONTENTS

Attachments		Page
	Nuclear Incident Exclusion Clause — Liability - Reinsurance — U.S.A.	33

Effective: January 1, 2011		DOC: January 21, 2011
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UMBRELLA QUOTA SHARE AND EXCESS CESSIONS REINSURANCE CONTRACT

(the “Contract”)

issued to

PENN MILLERS INSURANCE COMPANY
AMERICAN MILLERS INSURANCE COMPANY
Wilkes-Barre, Pennsylvania

(collectively, the “Company”)

by

THE SUBSCRIBING REINSURER(S) IDENTIFIED
IN THE INTERESTS AND LIABILITIES AGREEMENT(S)
ATTACHED TO AND FORMING PART OF THIS CONTRACT

(the “Reinsurer”)

Whenever the word “Company” is used in this Contract, such term shall mean each and all affiliated companies which are or may hereafter be under common control provided notice be given to the Reinsurer of any newly-affiliated companies which may hereafter come under common control as soon as practicable, with full particulars as to how such affiliation is likely to affect this Contract. In the event that either party maintains that such affiliation calls for altering the terms of this Contract and an agreement for alteration not being arrived at, then the Business Covered of such newly-affiliated company is covered at existing terms for a period not to exceed 90 days after notice by either party that it does not wish to cover the business of the newly-affiliated company at the existing terms.

ARTICLE 1

BUSINESS COVERED

This Contract is to indemnify the Company in respect of the liability that may accrue to the Company as a result of loss or losses under Policies classified by the Company as Umbrella Liability, in force at the inception of this Contract, written or renewed during the term of this Contract by or on behalf of the Company, subject to the terms and conditions herein contained.

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ARTICLE 2

RETENTION AND LIMIT

Quota Share

The Company shall cede, and the Reinsurer shall accept as reinsurance, a 75% share of all business reinsured hereunder up to a maximum cession of Ultimate Net Loss of $750,000 (being 75% of $1,000,000) each loss, each Policy. The Reinsurer shall pay to the Company the Reinsurer’s quota share of Loss Adjustment Expense covered under this Contract.

First Excess of Loss

The Reinsurer shall be liable in respect of each loss, each Policy, for the Ultimate Net Loss over and above an initial Ultimate Net Loss of $1,000,000 each loss, each Policy, subject to a limit of liability to the Reinsurer of $4,000,000 each loss, each Policy.

Second Excess of Loss

The Reinsurer shall be liable in respect of each loss, each Policy, for the Ultimate Net Loss over and above an initial Ultimate Net Loss of $5,000,000 each loss, each Policy, subject to a limit of liability to the Reinsurer of $5,000,000 each loss, each Policy.

Notwithstanding the other provisions of this Article, the Reinsurer’s liability for all Loss Occurrences commencing during the term of this Contract resulting from Acts of Terrorism shall be limited to $1,000,000.

ARTICLE 3

TERM

A.	This Contract is effective at 12:01 a.m., Eastern Standard Time, January 1, 2011, and shall remain in effect until 12:01 a.m., Eastern Standard Time, January 1, 2012, applying to losses occurring during the term of this Contract.
B.	At expiration of this Contract, the Reinsurer shall remain liable for all Policies covered by this Contract that are in force at expiration, until the termination, expiration or renewal of such Policies, whichever occurs first.
C.	However, at expiration of this Contract, the Company shall have the option to require a return of the ceded unearned premium, net of ceding commission, as of the date of expiration, on business in force at that date, in which event the Reinsurer shall be released from liability for losses occurring after expiration.

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D. In the event this Contract expires on a run-off basis, the Reinsurer’s liability hereunder shall continue if the Company is required by statute or regulation to continue coverage, until the earliest date on which the Company may cancel the Policy.

ARTICLE 4

SPECIAL TERMINATION

A. The Company may terminate a Subscribing Reinsurer’s percentage share in this Contract at any time by giving written notice to the Subscribing Reinsurer in the event of any of the following circumstances:

1.	The Subscribing Reinsurer ceases underwriting operations.
2.	A state insurance department or other legal authority orders the Subscribing Reinsurer to cease writing business, or the Subscribing Reinsurer is placed under regulatory supervision.
3.	The Subscribing Reinsurer has become insolvent or has been placed into liquidation or receivership (whether voluntary or involuntary), or there have been instituted against it proceedings for the appointment of a receiver, liquidator, rehabilitator, conservator, trustee in bankruptcy, or other agent known by whatever name, to take possession of its assets or control of its operations.
4.	The Subscribing Reinsurer’s policyholders’ surplus (or the equivalent under the Subscribing Reinsurer’s accounting system) as reported in such financial statements of the Subscribing Reinsurer as designated by the Company, has been reduced by 20% of the amount thereof at any date during the prior 12-month period (including the period prior to the inception of this Contract).
5.	The Subscribing Reinsurer has merged with or has become acquired or controlled by any company, corporation, or individual(s) not controlling the Subscribing Reinsurer’s operations at the inception of this Contract.
6.	The Subscribing Reinsurer has retroceded its entire liability under this Contract without the Company’s prior written consent, except for retrocessions to members of the Subscribing Reinsurer’s holding company group.
7.	The Subscribing Reinsurer has been assigned an A.M. Best’s rating of less than “A-” and/or an S&P rating of less than “BBB+.” However, as respects Underwriting Members of Lloyd’s, London, a Lloyd’s Market Rating of less than “A-” by A.M. Best and/or less than “BBB+” by S&P shall apply.

B. Termination shall be effected on a run-off or cut-off basis as set forth in the Term Article, at the sole discretion of the Company. The reinsurance premium due the Subscribing Reinsurer hereunder (including any minimum reinsurance premium) shall be pro rated

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based on the period of the Subscribing Reinsurer’s participation hereon, and the Subscribing Reinsurer shall immediately return any excess reinsurance premium received. Reinstatement premium, if any, shall be calculated based on the Subscribing Reinsurer’s reinsurance premium earned during the period of the Subscribing Reinsurer’s participation hereon.

C.

Additionally, in the event of any of the circumstances listed in paragraph A of this Article, the Company shall have the option to commute the Subscribing Reinsurer’s liability for losses on Policies covered by this Contract. In the event the Company and the Subscribing Reinsurer cannot agree on the commutation amount, they shall appoint an actuary and/or appraiser to assess such amount and shall share equally any expense of the actuary and/or appraiser. If the Company and the Subscribing Reinsurer cannot agree on an actuary and/or appraiser, the Company and the Subscribing Reinsurer each shall nominate three individuals, of whom the other shall decline two, and the final appointment shall be made by drawing lots. Payment by the Subscribing Reinsurer of the amount of liability ascertained shall constitute a complete and final release of both parties in respect of liability arising from the Subscribing Reinsurer’s participation under this Contract.

D.

The Company’s option to require commutation under paragraph C above shall survive the termination or expiration of this Contract.

ARTICLE 5

TERRITORY

The territorial limits of this Contract shall be identical with those of the Company’s Policies.

ARTICLE 6

EXCLUSIONS

A. This Contract shall not cover:

1.	Reinsurance treaty business, including pro rata and excess of loss, assumed by the Company, but not to include business from affiliated companies;
2.	Business written on a co-indemnity basis not controlled by the Company;
3.	Loss or liability excluded by the provisions of the “Nuclear Incident Exclusion Clause — Liability — Reinsurance — USA” attached to and forming part of this Contract;
4.	Liability assumed by the Company as a member of a Syndicate, Pool or Underwriting Association; however, this does not apply to participation in assigned risk plans;
5.	Any liability of the Company arising by contract, operation of law, or otherwise, from its participation or membership, whether voluntary or involuntary, in any insolvency

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	fund. “Insolvency Fund” includes any guaranty fund, insolvency fund, plan, pool, association, fund or other arrangement, howsoever denominated, established or governed, which provides for any assessment of or payment or assumption by the Company of part or all of any claim, debt, charge, fee, or other obligation of an insurer, or its successors or assigns, which has been declared by any competent authority to be insolvent, or which is otherwise deemed unable to meet any claim, debt, charge, fee or other obligation in whole or in part;
6.	Financial Guarantee and Insolvency;
7.	Loss resulting from an Act of Terrorism that involves the use, release, or escape of nuclear materials, or directly or indirectly results in nuclear reaction or radiation or radioactive contamination, or that is carried out by means of the dispersal or application of pathogenic or poisonous biological or chemical materials that are released;
8.	Regarding interests which at time of loss or damage are on shore, any loss or damage which is occasioned by war, invasion, hostilities, acts of foreign enemies, civil war, rebellion, insurrection, military or usurped power, or martial law or confiscation by order of any government or public authority. This War Exclusion Clause shall not however, apply to interests which at time of loss or damage are within the territorial limits of the United States of America (comprising the 50 states of the Union and the District of Columbia and including bridges between the U.S.A. and Mexico, provided they are under United States ownership), Canada, St. Pierre and Miquelon, provided such interests are insured under Policies, endorsements, or binders containing a standard war or hostilities or warlike operations exclusion clause;
9.	Public Utilities;
10.	Pharmaceutical and Medical Device Manufacturers;
11.	Operation, navigation, or handling of ships, or vessels owned by the insured other than:

a.	Yachts, small pleasure crafts, sports fishing vessels, and
b.	Vessels operating exclusively in inland and/or coastal waters where legal liability on such vessels is incidental to the coverage provided either under a general liability Policy or under a comprehensive form of a Policy;

12.	Ownership, maintenance or use of aircraft and aircraft flight operations, but this exclusion does not apply to Workers’ Compensation/Employers’ Liability coverage;
13.	Repair, cleaning or demolition of any vessel or barge used as petroleum tanker;

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14.	Loss or liability excluded by whichever standard Insurance Services Office pollution exclusion(s) is included in the Policy under which such loss or liability arises.
	Notwithstanding the above, the Reinsurer agrees that this exclusion shall not apply to original Policies written in any state where the Standard ISO Pollution Exclusion(s) have not been approved or are not permitted to be included in or attached to original Policies.
	Further, the Reinsurer agrees that this exclusion shall not apply in any case where the Company has attached the Standard ISO Pollution Exclusion(s) to an original Policy but has sustained a loss as a result of that exclusion being deemed invalid or inapplicable by a court of law.
	Notwithstanding all of the foregoing, the Reinsurer agrees that this exclusion does not apply to environmental restoration coverage provided under an MCS-90 Endorsement attached to a commercial automobile Policy written in accordance with the Motor Carrier Act of 1980.
	Furthermore, the Reinsurer agrees that this exclusion does not apply to overspraying of anhydrous ammonia, fertilizers and agricultural chemicals, nor shall this exclusion apply to operations involving anhydrous ammonia, liquefied petroleum gas (LPG), or propane (including the transportation thereof) where the Company has attached the Solutions 2000 Liability PMAG-16 Pollution Exclusion Amendment to an original Policy. Furthermore, this exclusion does not apply to pollutants from mobile equipment where the Company has attached the Solutions 2000 Liability PMAG-16 Pollution Exclusion Amendment to an original Policy.
	Furthermore, the Reinsurer agrees that this exclusion does not apply to overspraying of anhydrous ammonia, fertilizers and agricultural chemicals, nor shall this exclusion apply to operations involving anhydrous ammonia, liquefied petroleum gas (LPG), or propane (including the transportation thereof) where the Company has attached the Solutions 2000 Liability PMAG-18 Pollution Exclusion Amendment to an original Policy. Furthermore, this exclusion does not apply to pollutants from a covered auto where the Company has attached the Solutions 2000 Liability PMAG-18 Pollution Exclusion Amendment to an original Policy.
	Furthermore, the Reinsurer agrees that this exclusion does not apply to operations meeting all standards of any statute, ordinance, regulation or license requirement of any federal, state or local government which apply to those operations, where the Company has attached the Solutions 2000 Liability PMAG-04 “Pesticide or Fertilizer Applicator Amended Exclusions with Amendment of Limits of Insurance” to an original Policy. Furthermore, this exclusion does not apply to fields on which the insured, or any contractor or subcontractor working on the behalf of the insured, is performing operations, where the Company has attached the Solutions 2000 Liability

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	PMAG-04 “Pesticide or Fertilizer Applicator Amended Exclusions with Amendment of Limits of Insurance” to an original Policy.
15.	Manufacture, handling, transit or use of explosives, unless incidental to routine agriculture operation;
16.	Manufacture of liquefied petroleum gas or petroleum;
17.	Buses other than buses used to transport employees of the insured or property;
18.	Loss or liability, whether direct or indirect, arising from the hazard of asbestos including the manufacturing, mining, storage, distribution, transportation, fabrication, installation or removal of asbestos or products containing asbestos;
19.	All mining operations;
20.	Products guarantee and/or recall and/or integrity impairment when written as such;
21.	Blasting;
22.	Nursing Homes;
23.	All Workers’ Compensation business classified by the Company as Employee Leasing Corporations, Professional Employment Organizations (PEOs), Temporary Agencies, Police, Firefighters and EMT Workers, whether professional or volunteer;
24.	Policies issued as excess coverage, other than insurance over a self-insured retention;
25.	Manufacturing of fireworks, fuses, nitroglycerine, celluloid and pyroxylin;
26.	Concerns when engaged in the demolition of buildings more than three stories in height except the insured’s own structures;
27.	Operation of animal shows, riding academies, circuses, carnivals, amusement parks or amusement devices; equestrian exposures of guides and outfitters are not excluded;
28.	Municipalities, when written as such, but this exclusion does not apply as respects:

a.	School districts;
b.	Municipally-owned buildings or properties;
c.	Municipalities named as an additional insured;

29. Auto Liability:

a. As a taxicab, public livery or bus;

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b.	Public emergency vehicles such as fire trucks or police cars;
c.	Ambulances;
d.	Rent-a-car and leasing operations;
e.	Vehicles carrying passengers for hire or reward;
f.	Automobiles used in organized speed contests including but not limited to racing, rallies, and speed trials;
g.	As a long haul public freight carrier or common carrier, except for incidental hauling of goods of others;

	However, this exclusion shall not exclude automobiles, buses and/or vans used to transport hotel/hospitality guests;
30.	Products Liability:

a.	The manufacture, sale or retail or wholesale distribution of aircraft, aircraft parts;
b.	The manufacture of extracts, drugs, medicines, cosmetics or hair, scalp or skin preparations;
c.	The manufacture of automobiles, buses, trucks and trailers, recreational vehicles, motorcycles or the manufacture of components critical to vehicle safety;
d.	Products liability written without an annual aggregate limit;

31. Malpractice or Professional Liability, except:

a.	Druggists’ Liability;
b.	Printers’ Liability;
c.	Barbers’ and Beauticians’ Liability (including nail salons);
d.	Agricultural Consultants’ Liability;
e.	Funeral Directors’ or Morticians’ Professional Liability;
f.	Pastoral Professional Liability written in conjunction with a liability risk;
g.	Incidental malpractice written in conjunction with a liability risk;
h.	Opticians;

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i.	Hearing Aid Providers;
j.	Florists;
k.	Veterinarians;
l.	Animal Services;

32.	Bridge construction when over three stories, over navigable waters, or over 100 feet in length;
33.	Construction or maintenance of tunnels or subways more than 50 feet in length, dams, levees, cofferdams (except dams and levees constructed on farm premises which are incidental to farm operations), or with respect to business classified as commercial business, towers over two stories high;
34.	Elevator construction and installation, except construction or installation of grain elevator facilities or related equipment;
35.	Occupational Accident when written as such;
36.	As respects Workers’ Compensation, and not Commercial General Liability Coverage, risks having maritime exposures or exposures including but not limited to:

a.	Risks subject to the U.S. Longshore and Harbor Worker’s Compensation Act (except incidental which is defined as less than 10% of Workers Compensation Policy premium);
b.	Operation of docks, quays, wharves, or drydocks;
c.	Operations subject to the Jones Act;
d.	Operations subject to the Outer Continental Shelf Act;

37.	Roofing Contractors;
38.	Scaffolding installations (except residential and commercial up to three stories);
39.	Tower, steeple, chimney, or shaft construction and work.

B.	If any business falling within the scope of one or more of the exclusions is assigned to the Company under an Assigned Risk Plan, such exclusion(s) shall not apply to the portion of the limits of liability prescribed by the Assigned Risk Plan which come within the Company’s retention and limits of liability of the Reinsurer.
C.	If without the knowledge and contrary to the instructions of its supervisory underwriting personnel, insurance coverages are provided involving one or more of the above

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exclusions, except A(1), A(2), A(3), A(4), A(5), A(6), A(7), A(8), A(10), A(14), A(15), A(18), A(23), and A(24) either by an inadvertent acceptance or by an existing insured extending its operations, the reinsurance coverage provided hereunder shall apply from inception and for a period of 30 days or longer if required by law, but not to exceed the lesser of 18 months or Policy anniversary after said supervisory underwriting personnel receives knowledge thereof and promptly notifies the Reinsurer upon discovery.

D.

Any exclusion listed above other than exclusions A(1), A(2), A(3), A(4), A(5), A(6), A(7), A(8), A(10), A(14), A(15), A(18), A(23), and A(24), shall be automatically waived as respects a Policy issued by the Company on a risk with respect to which only a minor or incidental part of the operations covered involves the exclusion. An incidental part of an insured’s regular operations shall mean not greater than 10% of the insured’s regular operations.

ARTICLE 7

SPECIAL ACCEPTANCE

Business that is not within the scope of this Contract may be submitted to Hannover Rückversicherung AG (the “Lead Reinsurer”) for special acceptance hereunder, and such business, if accepted by the Lead Reinsurer shall be covered hereunder, subject to the terms and conditions of this Contract, except as modified by the special acceptance. Any special acceptance agreed to by the Lead Reinsurer shall be binding on all Subscribing Reinsurers hereon. The Lead Reinsurer shall be deemed to have accepted a risk, if it has not responded within five days after receiving the underwriting information on such risk. Any renewal of a special acceptance agreed to for a predecessor contract to this Contract shall automatically be covered hereunder.

ARTICLE 8

PREMIUM

Quota Share

The Company shall cede to the Reinsurer its exact proportion of the Gross Net Written Premium Income accounted for by the Company.

First Excess of Loss

The Company shall cede to the Reinsurer a premium equal to the Gross Net Written Premium Income allocated by the Company to limits reinsured under the First Excess of Loss coverage of this Contract.

Second Excess of Loss

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The Company shall cede to the Reinsurer a premium equal to the Gross Net Written Premium Income allocated by the Company to limits reinsured under the Second Excess of Loss coverage of this Contract.

ARTICLE 9

CEDING COMMISSION

The Reinsurer shall allow the Company a commission on all premiums ceded to the Reinsurer hereunder as follows:

Quota Share:	32.0	%
First Excess:	32.0	%
Second Excess:	30.0	%

The Company shall allow the Reinsurer return commission on return premiums at the same rate.

ARTICLE 10

REPORTS AND REMITTANCES

A.	As soon as practicable after the inception of this Contract, the Company shall report and pay to the Reinsurer the Reinsurer’s share of the unearned premium subject to this Contract, less any ceding commission, as of the inception date of inception.
B.	The Company shall report reinsurance cessions to the Reinsurer in writing on a quarterly bordereau by individual Policy or quarterly account (the “Report”). Each Report shall be submitted within 15 days after the end of the quarter covered by the Report. Each Report shall specify the following information by individual Policy, to the extent that such information is available to the Company:

1.	Policy limits;
2.	Named Insured;
3.	Policy Number;
4.	Premium written for the first $1,000,000 of limits;
5.	Premium written for limits greater than $1,000,000; if any
6.	Effective/Expiration Date.

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C.	In addition to the information required by paragraph A above, the Report shall also reflect the total premiums written and ceding commission thereon during the quarter covered by the Report.
D.	Reinsurance premium due the Reinsurer shall be payable with the Report.

ARTICLE 11

DEFINITIONS

A.	1.	“Ultimate Net Loss” means the actual loss, as respects Umbrella Liability Coverage, paid by the Company or which the Company becomes liable to pay, such loss to include 90% of any Extra Contractual Obligation and 90% of any Loss in Excess of Policy Limits as defined in the Extra Contractual Obligations/Excess of Policy Limits Article, but excluding Loss Adjustment Expense, which shall be handled in accordance with subparagraph (4) below.
	2.	The Company shall be deemed to be “liable to pay” a loss when a judgment has been rendered that the Company does not plan to appeal, and/or the Company has obtained a release, and/or the Company has accepted a proof of loss.
	3.	Nothing in this clause shall be construed to mean that losses are not recoverable hereunder until the Company’s “Ultimate Net Loss” has been ascertained.
	4.	The Reinsurer shall pay to the Company the Reinsurer’s proportion of Loss Adjustment Expense in the ratio that the Reinsurer’s loss payment bears to the total Ultimate Net Loss. However, expense incurred in obtaining salvages or recoveries, or in the reduction or reversal of any award or judgment, shall be apportioned between the Company and the Reinsurer in the proportion that each benefits from such salvage, recovery, reduction, or reversal. Such payment shall be in addition to the limits stated in the Retention and Limit Article.

B. “Loss Adjustment Expense” means costs and expenses incurred by the Company in connection with the investigation, appraisal, adjustment, settlement, litigation, defense or appeal of a specific claim or loss, or alleged loss, including but not limited to:

1.	court costs;
2.	costs of supersedeas and appeal bonds;
3.	monitoring counsel expenses;
4.	legal expenses and costs incurred in connection with coverage questions and legal actions connected thereto, including but not limited to declaratory judgment actions, provided that the Reinsurer’s liability hereunder for the expense and costs described in this subparagraph (4) shall not exceed $500,000, any one Loss Occurrence;

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5.	post-judgment interest;
6.	pre-judgment interest, unless included as part of an award or judgment;
7.	a pro rata share of salaries and expenses of Company field employees, calculated in accordance with the time occupied in adjusting such loss, and expenses of other Company employees who have been temporarily diverted from their normal and customary duties and assigned to the field adjustment of losses covered by this Contract; and
8.	subrogation, salvage and recovery expenses.

	“Loss Adjustment Expense” does not include salaries and expenses of the Company’s employees, except as provided in subparagraph (7) above, and office and other overhead expenses.
C.	“Gross Net Written Premium Income” means gross written premium of the Company for the classes of business reinsured hereunder, less return premiums and less written premiums ceded by the Company for reinsurance that inures to the benefit of this Contract.
D.	“Policy” means any binder, policy, or contract of insurance or reinsurance issued, accepted or held covered provisionally or otherwise, by or on behalf of the Company.
F.	“Act of Terrorism” shall mean any act, including both Certified Acts of Terrorism in accordance with the Terrorism Risk Insurance Act of 2002, the Terrorism Risk Insurance Extension Act of 2005 and the Terrorism Risk Insurance Program Reauthorization Act of 2007 and any subsequent extension and those not certified in respect of action, or threat of action designed to influence the government de jure or de facto of any nation or any political division thereof, or in pursuit of any political, religious, ideological or similar purpose to intimidate the public or a section of the public of any nation by any person or group(s) of persons whether acting alone or on behalf of or in connection with any organization(s) or government(s) de jure or de facto and which:

1.	involves violence against one or more persons; or
2.	involves damage to property; or
3.	endangers life other than that of the person committing the action; or
4.	creates a risk to health or safety of the public or a section of the public; or
5.	is designed to interfere with or to disrupt an electronic system; or
6.	involves loss, damage, cost, or expense directly or indirectly caused by, contributed to by, resulting from, or arising out of or in connection with any action in controlling, preventing, suppressing, retaliating against, or responding to any Act of Terrorism.

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Loss or damage occasioned by riot, strikes, civil commotion, vandalism or malicious mischief as those terms have been interpreted by United States Courts to apply to insurance Policies shall not be construed to be Acts of Terrorism.

ARTICLE 12

EXCESS TERRORISM RECOVERY

A. A pro rata share of the amount, if any, by which financial assistance paid to the Company under the Terrorism Risk Insurance Act of 2002 as amended (“TRIA”) for Acts of Terrorism occurring during any one Program Year, combined with the Company’s total private-sector reinsurance recoveries for such Acts of Terrorism, exceeds the amount of Insured Losses paid by the Company for such Acts of Terrorism, shall be reimbursed by the Company to the Reinsurer. Such pro rata share shall be calculated by dividing:

1.	the Reinsurer’s payment under this Contract of Insured Losses for the Program Year; by
2.	the Company’s total private-sector reinsurance recoveries arising from all Act(s) of Terrorism covered under TRIA during the Program Year.

B.	Payment shall be made as promptly as possible after the Company’s receipt of any recovery in excess of its Insured Losses. The Company shall provide the Reinsurer with all necessary data respecting the transactions covered under this Article.
C.	Such payment to the Reinsurer shall apply unless disallowed by the U.S. Department of the Treasury.
D.	“Act of Terrorism”, “Insured Losses” and “Program Year” shall follow the definitions provided in TRIA.

ARTICLE 13

EXTRA CONTRACTUAL OBLIGATIONS/EXCESS OF POLICY LIMITS

A. This Contract shall cover Extra Contractual Obligations, as provided in the definition of Ultimate Net Loss and the Retention and Limit Article. “Extra Contractual Obligations” shall be defined as those liabilities not covered under any other provision of this Contract and that arise from the handling of any claim on business covered hereunder, such liabilities arising because of, but not limited to, the following: failure by the Company to settle within the Policy limit, or by reason of alleged or actual negligence, fraud or bad faith in rejecting an offer of settlement or in the preparation of the defense or in the trial of any action against its insured or reinsured or in the preparation or prosecution of an appeal consequent upon such action.

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B.	This Contract shall cover Loss in Excess of Policy Limits, as provided in the definition of Ultimate Net Loss and the Retention and Limit Article. “Loss in Excess of Policy Limits” shall be defined as Loss in excess of the Policy limit, having been incurred because of, but not limited to, failure by the Company to settle within the Policy limit or by reason of alleged or actual negligence, fraud or bad faith in rejecting an offer of settlement or in the preparation of the defense or in the trial of any action against its insured or reinsured or in the preparation or prosecution of an appeal consequent upon such action.
C.	An Extra Contractual Obligation and/or Loss in Excess of Policy Limits shall be deemed to have occurred on the same date as the loss covered under the Company’s Policy, and shall constitute part of the original loss.
D.	For the purposes of the Loss in Excess of Policy Limits coverage hereunder, the word “Loss” shall mean any amounts for which the Company would have been contractually liable to pay had it not been for the limit of the original Policy.
E.	Loss Adjustment Expense in respect of Extra Contractual Obligations and/or Loss in Excess of Policy Limits shall be covered hereunder in the same manner as other Loss Adjustment Expense.
F.	However, this Article shall not apply where the loss has been incurred due to final legal adjudication of fraud of a member of the Board of Directors or a corporate officer of the Company acting individually or collectively or in collusion with any individual or corporation or any other organization or party involved in the presentation, defense or settlement of any claim covered hereunder.
G.	In no event shall coverage be provided to the extent not permitted under law.

ARTICLE 14

NET RETAINED LIABILITY

A.	This Contract applies only to that portion of any loss that the Company retains net for its own account (prior to deduction of any reinsurance that inures solely to the benefit of the Company).
B.	The amount of the Reinsurer’s liability hereunder in respect of any loss or losses shall not be increased by reason of the inability of the Company to collect from any other reinsurer(s), whether specific or general, any amounts that may have become due from such reinsurer(s), whether such inability arises from the insolvency of such other reinsurer(s) or otherwise.

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ARTICLE 15

ORIGINAL CONDITIONS

All reinsurance under this Contract shall be subject to the same rates, terms, conditions, waivers and interpretations, and to the same modifications and alterations as the respective Policies of the Company. However, in no event shall this be construed in any way to provide coverage outside the terms and conditions set forth in this Contract.

ARTICLE 16

NO THIRD PARTY RIGHTS

This Contract is solely between the Company and the Reinsurer, and in no instance shall any insured, claimant or other third party have any rights under this Contract except as may be expressly provided otherwise herein.

ARTICLE 17

NOTICE OF LOSS AND LOSS SETTLEMENTS

A.	The Company shall advise the Reinsurer promptly of all losses that, in the opinion of the Company, may result in a claim hereunder and of all subsequent developments thereto that may materially affect the position of the Reinsurer.
B.	The Company alone and at its full discretion shall adjust, settle or compromise all claims and losses.
C.	As respects losses subject to this Contract, all loss settlements made by the Company, whether under strict Policy terms or by way of compromise, and any Extra Contractual Obligations and/or Loss in Excess of Policy Limits, shall be binding upon the Reinsurer, and the Reinsurer agrees to pay or allow, as the case may be, its share of each such settlement immediately upon receipt of proof of loss.

ARTICLE 18

SALVAGE AND SUBROGATION

A.	Salvages and all recoveries (including amounts due from all reinsurances that inure to the benefit of this Contract, whether recovered or not), shall be first deducted from such loss to arrive at the amount of liability attaching hereunder.
B.	All salvages, recoveries or payments recovered or received subsequent to loss settlement hereunder shall be applied as if recovered or received prior to the aforesaid settlement, and all necessary adjustments shall be made by the parties hereto.

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ARTICLE 19

LATE PAYMENTS

A. In the event any payment due from the Reinsurer to the Company after the expiration of this Contract is not received by the Intermediary by the payment due date, the Company may, by notifying the Intermediary in writing, require the Reinsurer to pay, and the Reinsurer agrees to pay, an interest penalty on the amount past due calculated for each such payment on the last business day of each month as follows:

1.	The number of full days that have expired since the overdue date or the last monthly calculation, whichever the lesser; times
2.	1/365th of the sum of the six-month United States Treasury Bill rate as quoted in The Wall Street Journal on the first business day of the month for which the calculation is made plus 1%; times
3.	The amount past due, including accrued interest.

	Interest shall accumulate until payment of the original amount due plus interest penalties has been received by the Intermediary.
B.	This Article applies only to amounts for which the demand for payment is received by the Reinsurer after the Company has paid the entire reinsurance premium for the term of this Contract, as provided in the Premium Article.
C.	The due date shall be the date on which the demand for payment is received by the Reinsurer, and the amount shall be deemed to be overdue 30 days thereafter.
D.	If the information contained in the Company’s demand for payment is insufficient or not in accordance with the conditions of this Contract, then within 30 days the Reinsurer shall request from the Company all additional information necessary to validate its claim and the payment due date as defined in paragraph C shall be deemed to be the date upon which the Reinsurer received the requested additional information. This paragraph is only for the purpose of establishing when a payment is overdue, and shall not alter the provisions of the Notice of Loss and Loss Settlements Article or other pertinent contractual stipulations.
E.	Should the Reinsurer dispute a claim presented by the Company and the timeframe set out in paragraph C be exceeded, interest as stipulated in paragraph A shall be payable for the entire overdue period, but only for the amount of the final settlement with the Reinsurer.
F.	In the event arbitration is necessary to settle a dispute, the panel shall have the authority to make a determination awarding interest to the Company. Interest, if any, awarded by the panel shall supersede the interest amounts outlined herein.

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G. Any interest owed pursuant to this Article may be waived by the Company. Waiver of such interest, however, shall not affect the Company’s rights to other interest amounts due as a result of this Article.

ARTICLE 20

OFFSET

Each party hereto shall have, and may exercise at any time and from time to time, the right to offset any and all balances due from a party to the other arising under this Contract. In the event of the insolvency of a party hereto, offsets shall only be allowed in accordance with the provisions of any applicable law governing offset entitlement.

ARTICLE 21

CURRENCY

A.	Where the word “Dollars” and/or the sign “$” appear in this Contract, they shall mean United States Dollars.
B.	For purposes of this Contract, where the Company receives premiums or pays losses in currencies other than United States Dollars, such premiums or losses shall be converted into United States Dollars at the actual rates of exchange at which these premiums or losses are entered in the Company’s books.

ARTICLE 22

UNAUTHORIZED REINSURANCE

A.	This Article applies only to the extent a Subscribing Reinsurer does not qualify for credit with any insurance regulatory authority having jurisdiction over the Company’s reserves.
B.	The Company agrees, in respect of its Policies or bonds falling within the scope of this Contract, that when it files with its insurance regulatory authority, or sets up on its books liabilities as required by law, it shall forward to the Reinsurer a statement showing the proportion of such liabilities applicable to the Reinsurer. The “Reinsurer’s Obligations” shall be defined as follows:

1.	unearned premium (if applicable);
2.	known outstanding losses that have been reported to the Reinsurer and Loss Adjustment Expense relating thereto;
3.	losses and Loss Adjustment Expense paid by the Company but not recovered from the Reinsurer;

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4.	losses incurred but not reported and Loss Adjustment Expense relating thereto;
5.	all other amounts for which the Company cannot take credit on its financial statements unless funding is provided by the Reinsurer.

C.	The Reinsurer’s Obligations shall be funded by funds withheld, cash advances, Trust Agreement or a Letter of Credit (LOC). The Reinsurer shall have the option of determining the method of funding provided it is acceptable to the insurance regulatory authorities having jurisdiction over the Company’s reserves.
D.	When funding by an LOC, the Reinsurer agrees to apply for and secure timely delivery to the Company of a clean, irrevocable and unconditional LOC issued by a bank and containing provisions acceptable to the insurance regulatory authorities having jurisdiction over the Company’s reserves in an amount equal to the Reinsurer’s Obligations. Such LOC shall be issued for a period of not less than one year, and shall be automatically extended for one year from its date of expiration or any future expiration date unless 30 days (or such other time period as may be required by insurance regulatory authorities), prior to any expiration date the issuing bank shall notify the Company by certified or registered mail that the issuing bank elects not to consider the LOC extended for any additional period.
E.	The Reinsurer and the Company agree that any funding provided by the Reinsurer pursuant to the provisions of this Contract may be drawn upon at any time, notwithstanding any other provision of this Contract, and be utilized by the Company or any successor, by operation of law, of the Company including, without limitation, any liquidator, rehabilitator, receiver or conservator of the Company, for the following purposes, unless otherwise provided for in a separate Trust Agreement:

1.	to reimburse the Company for the Reinsurer’s Obligations, the payment of which is due under the terms of this Contract and that has not been otherwise paid;
2.	to make refund of any sum that is in excess of the actual amount required to pay the Reinsurer’s Obligations under this Contract (or in excess of 102% of the Reinsurer’s Obligations, if funding is provided by a Trust Agreement);
3.	to fund an account with the Company for the Reinsurer’s Obligations. Such cash deposit shall be held in an interest bearing account separate from the Company’s other assets, and interest thereon not in excess of the prime rate shall accrue to the benefit of the Reinsurer. Any taxes payable on accrued interest shall be paid out of the assets in the account that are in excess of the Reinsurer’s Obligations (or in excess of 102% of the Reinsurer’s Obligations, if funding is provided by a Trust Agreement). If the assets are inadequate to pay taxes, any taxes due shall be paid by the Reinsurer;
4.	to pay the Reinsurer’s share of any other amounts the Company claims are due under this Contract.

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F.	If the amount drawn by the Company is in excess of the actual amount required for E(1) or E(3), or in the case of E(4), the actual amount determined to be due, the Company shall promptly return to the Reinsurer the excess amount so drawn. All of the foregoing shall be applied without diminution because of insolvency on the part of the Company or the Reinsurer.
G.	The issuing bank shall have no responsibility whatsoever in connection with the propriety of withdrawals made by the Company or the disposition of funds withdrawn, except to ensure that withdrawals are made only upon the order of properly authorized representatives of the Company.
H.	At annual intervals, or more frequently at the discretion of the Company, but never more frequently than quarterly, the Company shall prepare a specific statement of the Reinsurer’s Obligations for the sole purpose of amending the LOC or other method of funding, in the following manner:

1.

If the statement shows that the Reinsurer’s Obligations exceed the balance of the LOC as of the statement date, the Reinsurer shall, within 30 days after receipt of the statement, secure delivery to the Company of an amendment to the LOC increasing the amount of credit by the amount of such difference. Should another method of funding be used, the Reinsurer shall, within the time period outlined above, increase such funding by the amount of such difference.

2.

If, however, the statement shows that the Reinsurer’s Obligations are less than the balance of the LOC (or that 102% of the Reinsurer’s Obligations are less than the trust account balance if funding is provided by a Trust Agreement), as of the statement date, the Company shall, within 30 days after receipt of written request from the Reinsurer, release such excess credit by agreeing to secure an amendment to the LOC reducing the amount of credit available by the amount of such excess credit. Should another method of funding be used, the Company shall, within the time period outlined above, decrease such funding by the amount of such excess.

ARTICLE 23

TAXES

A. In consideration of the terms under which this Contract is issued, the Company undertakes not to claim any deduction of the premium hereon when making Canadian tax returns or when making tax returns, other than Income or Profits Tax returns, to any state or territory of the United States of America or to the District of Columbia.

B. 1. Each Subscribing Reinsurer has agreed to allow, for the purpose of paying the Federal Excise Tax, the applicable percentage of the premium payable hereon (as imposed under the Internal Revenue Code) to the extent such premium is subject to Federal Excise Tax.

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2. In the event of any return of premium becoming due hereunder, the Subscribing Reinsurer shall deduct the applicable percentage of the premium from the amount of the return, and the Company or its agent should take steps to recover the Tax from the U.S. Government.

ARTICLE 24

ACCESS TO RECORDS

The Reinsurer or its duly authorized representatives shall have the right to visit the offices of the Company to inspect, examine, audit, and verify any of the Policy, underwriting, accounting or claim files (“Records”) relating to business reinsured under this Contract during regular business hours after giving five working days’ prior notice. This right shall be exercisable during the term of this Contract or after the expiration of this Contract. Notwithstanding the above, the Reinsurer shall not have any right of access to the Records of the Company if it is not current in all undisputed payments due the Company.

ARTICLE 25

CONFIDENTIALITY

A. The Reinsurer hereby acknowledges that the documents, information and data provided to it by the Company, whether directly or through an authorized agent, in connection with the placement and execution of this Contract (“Confidential Information”) are proprietary and confidential to the Company. Confidential Information shall not include documents, information or data that the Reinsurer can show:

1.	are publicly known or have become publicly known through no unauthorized act of the Reinsurer;
2.	have been rightfully received from a third person without obligation of confidentiality; or
3.	were known by the Reinsurer prior to the placement of this Contract without an obligation of confidentiality.

B. Absent the written consent of the Company, the Reinsurer shall not disclose any Confidential Information to any third parties, including any affiliated companies, except:

1.	when required by retrocessionaires subject to the business ceded to this Contract;
2.	when required by regulators performing an audit of the Reinsurer’s records and/or financial condition; or
3.	when required by external auditors performing an audit of the Reinsurer’s records in the normal course of business.

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	Further, the Reinsurer agrees not to use any Confidential Information for any purpose not related to the performance of its obligations or enforcement of its rights under this Contract.
C.	Notwithstanding the above, in the event that the Reinsurer is required by court order, other legal process or any regulatory authority to release or disclose any or all of the Confidential Information, the Reinsurer agrees to provide the Company with written notice of same at least 10 days prior to such release or disclosure and to use its best efforts to assist the Company in maintaining the confidentiality provided for in this Article.
D.	The provisions of this Article shall extend to the officers, directors, shareholders and employees of the Reinsurer and its affiliates, and shall be binding upon their successors and assigns.

ARTICLE 26

INDEMNIFICATION AND ERRORS AND OMISSIONS

A. The Reinsurer is reinsuring, subject to the terms and conditions of this Contract, the obligations of the Company under any Policy. The Company shall be the sole judge as to:

1.	what shall constitute a claim or loss covered under any Policy;
2.	the Company’s liability thereunder;
3.	the amount or amounts that it shall be proper for the Company to pay thereunder.

B.	The Reinsurer shall be bound by the judgment of the Company as to the obligation(s) and liability(ies) of the Company under any Policy.
C.	Any inadvertent error, omission or delay in complying with the terms and conditions of this Contract shall not be held to relieve either party hereto from any liability that would attach to it hereunder if such error, omission or delay had not been made, provided such error, omission or delay is rectified immediately upon discovery.

ARTICLE 27

INSOLVENCY

A. If more than one reinsured company is referenced within the definition of “Company” in the Preamble to this Contract, this Article shall apply severally to each such company. Further, this Article and the laws of the domiciliary state shall apply in the event of the insolvency of any company covered hereunder. In the event of a conflict between any provision of this Article and the laws of the domiciliary state of any company covered hereunder, that domiciliary state’s laws shall prevail.

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B.	In the event of the insolvency of the Company, this reinsurance shall be payable directly to the Company, or to its liquidator, receiver, conservator or statutory successor, either: (1) on the basis of the liability of the Company, or (2) on the basis of claims filed and allowed in the liquidation proceeding, whichever may be required by applicable statute, without diminution because of the insolvency of the Company or because the liquidator, receiver, conservator or statutory successor of the Company has failed to pay all or a portion of any claim. It is agreed, however, that the liquidator, receiver, conservator or statutory successor of the Company shall give written notice to the Reinsurer of the pendency of a claim against the Company indicating the Policy or bond reinsured, which claim would involve a possible liability on the part of the Reinsurer within a reasonable time after such claim is filed in the conservation or liquidation proceeding or in the receivership, and that during the pendency of such claim, the Reinsurer may investigate such claim and interpose, at its own expense, in the proceeding where such claim is to be adjudicated any defense or defenses that it may deem available to the Company or its liquidator, receiver, conservator or statutory successor. The expense thus incurred by the Reinsurer shall be chargeable, subject to the approval of the court, against the Company as part of the expense of conservation or liquidation to the extent of a pro rata share of the benefit that may accrue to the Company solely as a result of the defense undertaken by the Reinsurer.
C.	Where two or more reinsurers are involved in the same claim and a majority in interest elect to interpose defense to such claim, the expense shall be apportioned in accordance with the terms of this reinsurance Contract as though such expense had been incurred by the Company.
D.	As to all reinsurance made, ceded, renewed or otherwise becoming effective under this Contract, the reinsurance shall be payable as set forth above by the Reinsurer to the Company or to its liquidator, receiver, conservator or statutory successor, (except as provided by Section 4118(a)(1)(A) of the New York Insurance Law, provided the conditions of 1114(c) of such law have been met, if New York law applies) or except (1) where the Contract specifically provides another payee in the event of the insolvency of the Company, or (2) where the Reinsurer, with the consent of the direct insured or insureds, has assumed such Policy obligations of the Company as direct obligations of the Reinsurer to the payees under such Policies and in substitution for the obligations of the Company to such payees. Then, and in that event only, the Company, with the prior approval of the certificate of assumption on New York risks by the Superintendent of Insurance of the State of New York, or with the prior approval of such other regulatory authority as may be applicable, is entirely released from its obligation and the Reinsurer shall pay any loss directly to payees under such Policy.

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ARTICLE 28

ARBITRATION

A.	Any dispute arising out of the interpretation, performance or breach of this Contract, including the formation or validity thereof, shall be submitted for decision to a panel of three arbitrators. Notice requesting arbitration shall be in writing and sent certified or registered mail, return receipt requested.
B.	One arbitrator shall be chosen by each party and the two arbitrators shall then choose an impartial third arbitrator who shall preside at the hearing. If either party fails to appoint its arbitrator within 30 days after being requested to do so by the other party, the latter, after 10 days’ prior notice by certified or registered mail of its intention to do so, may appoint the second arbitrator.
C.	If the two arbitrators do not agree on a third arbitrator within 60 days of their appointment, the third arbitrator shall be chosen in accordance with the procedures for selecting the third arbitrator in force on the date the arbitration is demanded, established by the AIDA Reinsurance and Insurance Arbitration Society — U.S. (ARIAS). The arbitrators shall be persons knowledgeable about insurance and reinsurance who have no personal or financial interest in the result of the arbitration. If a member of the panel dies, becomes disabled or is otherwise unwilling or unable to serve, a substitute shall be selected in the same manner as the departing member was chosen and the arbitration shall continue.
D.	Within 30 days after all arbitrators have been appointed, the panel shall meet and determine timely periods for briefs, discovery procedures and schedules of hearings.
E.	The panel shall be relieved of all judicial formality and shall not be bound by the strict rules of procedure and evidence. Notwithstanding anything to the contrary in this Contract, the arbitrators may at their discretion, consider underwriting and placement information provided by the Company to the Reinsurer, as well as any correspondence exchanged by the parties that is related to this Contract. The arbitration shall take place in Wilkes-Barre, Pennsylvania, or at such other place as the parties shall agree. The decision of any two arbitrators shall be in writing and shall be final and binding. The panel is empowered to grant interim relief as it may deem appropriate.
F.	The panel shall interpret this Contract as an honorable engagement rather than as merely a legal obligation and shall make its decision considering the custom and practice of the applicable insurance and reinsurance business as promptly as possible after the hearings. Judgment upon an award may be entered in any court having jurisdiction thereof.
G.	Each party shall bear the expense of its own arbitrator and shall jointly and equally bear with the other party the cost of the third arbitrator. The remaining costs of the arbitration shall be allocated by the panel. The panel may, at its discretion, award such further costs

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	and expenses as it considers appropriate, including but not limited to attorneys’ fees, to the extent permitted by law.
H.	At the Company’s option, if more than one Subscribing Reinsurer is involved in arbitration relating to this Contract, where there are common questions of law or fact and a possibility of conflicting awards or inconsistent results, all such Subscribing Reinsurers shall constitute and act as one party for purposes of this Article and communications shall be made by the Company to each of the Subscribing Reinsurers constituting the one party. However, the Subscribing Reinsurers shall have the right to assert several, rather than joint defenses or claims, and to be represented by separate counsel.
I.	If any Subscribing Reinsurer has subscribed to other reinsurance agreements with the Company, under which a dispute has arisen where there are common questions of law or fact with the dispute being arbitrated under this Contract, and a possibility of conflicting awards or inconsistent results, then the Subscribing Reinsurer, at the Company’s request, shall arbitrate all such reinsurance disputes involving the same loss in one consolidated proceeding, subject to the provisions of this Article. The provisions of this Article shall govern any arbitration involving multiple agreements between the Company and Subscribing Reinsurer, regardless of whether the other agreement(s) was entered into before or after the effective date of this Contract.
J.	If more than one of the Subscribing Reinsurers are involved in an arbitration as respondent, the time for the appointment of their party-appointed arbitrator shall be extended to 60 days. This provision shall not change the liability of each of the Subscribing Reinsurers under the terms of this Contract from several to joint.

ARTICLE 29

SERVICE OF SUIT

A.	This Article applies only to those Subscribing Reinsurers not domiciled in the United States of America, and/or not authorized in any state, territory and/or district of the United States of America where authorization is required by insurance regulatory authorities.
B.	This Article shall not be read to conflict with or override the obligations of the parties to arbitrate their disputes as provided for in the Arbitration Article. This Article is intended as an aid to compelling arbitration or enforcing such arbitration or arbitral award, not as an alternative to the Arbitration Article for resolving disputes arising out of this Contract.
C.	In the event of the failure of the Reinsurer to pay any amount claimed to be due hereunder, the Reinsurer, at the request of the Company, shall submit to the jurisdiction of a court of competent jurisdiction within the United States. Nothing in this Article constitutes or should be understood to constitute a waiver of the Reinsurer’s rights to commence an action in any court of competent jurisdiction in the United States, to remove an action to a United States District Court, or to seek a transfer of a case to another court as permitted by

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	the laws of the United States or of any state in the United States. The Reinsurer, once the appropriate court is selected, whether such court is the one originally chosen by the Company and accepted by the Reinsurer or is determined by removal, transfer, or otherwise, as provided for above, shall comply with all requirements necessary to give said court jurisdiction and, in any suit instituted against the Reinsurer upon this Contract, shall abide by the final decision of such court or of any appellate court in the event of an appeal.
D.	Service of process in such suit may be made upon Messrs. Mendes and Mount, 750 Seventh Avenue, New York, New York 10019-6829, or another party specifically designated in the applicable Interests and Liabilities Agreement attached hereto. The above-named are authorized and directed to accept service of process on behalf of the Reinsurer in any such suit.
E.	Further, pursuant to any statute of any state, territory or district of the United States that makes provision therefor, the Reinsurer hereby designates the Superintendent, Commissioner or Director of Insurance, or other officer specified for that purpose in the statute, or his successor or successors in office, as its true and lawful attorney upon whom may be served any lawful process in any action, suit or proceeding instituted by or on behalf of the Company or any beneficiary hereunder arising out of this Contract, and hereby designates the above-named as the person to whom the said officer is authorized to mail such process or a true copy thereof.

ARTICLE 30

SEVERABILITY

If any provision of this Contract shall be rendered illegal or unenforceable by the laws, regulations or public policy of any state, such provision shall be considered void in such state, but this shall not affect the validity or enforceability of any other provision of this Contract or the enforceability of such provision in any other jurisdiction.

ARTICLE 31

GOVERNING LAW

This Contract shall be governed as to performance, administration and interpretation by the laws of the Commonwealth of Pennsylvania, exclusive of conflict of law rules. However, with respect to credit for reinsurance, the rules of all applicable states shall apply.

ARTICLE 32

ENTIRE AGREEMENT

This Contract sets forth all of the duties and obligations between the Company and the Reinsurer and supersedes any and all prior or contemporaneous written agreements with respect to matters

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referred to in this Contract. This Contract may not be modified or changed except by an amendment to this Contract in writing signed by both parties.

ARTICLE 33

NON-WAIVER

The failure of the Company or the Reinsurer to insist on compliance with this Contract or to exercise any right or remedy hereunder shall not constitute a waiver of any rights contained in this Contract nor prevent either party from thereafter demanding full and complete compliance nor prevent either party from exercising such remedy in the future.

ARTICLE 34

INTERMEDIARY

Guy Carpenter & Company, LLC, is hereby recognized as the Intermediary negotiating this Contract for all business hereunder. All communications (including notices, statements, premiums, return premiums, commissions, taxes, losses, Loss Adjustment Expenses, salvages, and loss settlements) relating thereto shall be transmitted to the Company or the Reinsurer through Guy Carpenter & Company, LLC, Two Logan Square, Philadelphia, Pennsylvania 19103-2772. Payments by the Company to the Intermediary shall be deemed payment to the Reinsurer. Payments by the Reinsurer to the Intermediary shall be deemed payment to the Company only to the extent that such payments are actually received by the Company.

ARTICLE 35

MODE OF EXECUTION

A. This Contract may be executed by:

1.	an original written ink signature of paper documents;
2.	an exchange of facsimile copies showing the original written ink signature of paper documents;
3.	electronic signature technology employing computer software and a digital signature or digitizer pen pad to capture a person’s handwritten signature in such a manner that the signature is unique to the person signing, is under the sole control of the person signing, is capable of verification to authenticate the signature and is linked to the document signed in such a manner that if the data is changed, such signature is invalidated.

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B. The use of any one or a combination of these methods of execution shall constitute a legally binding and valid signing of this Contract. This Contract may be executed in one or more counterparts, each of which, when duly executed, shall be deemed an original.

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IN WITNESS WHEREOF, the Company has caused this Contract to be executed by its duly authorized representative(s) this _____day of __________, in the year of 20_.

PENN MILLERS INSURANCE COMPANY
AMERICAN MILLERS INSURANCE COMPANY

UMBRELLA QUOTA SHARE AND EXCESS CESSIONS REINSURANCE CONTRACT

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NUCLEAR INCIDENT EXCLUSION CLAUSE — LIABILITY — REINSURANCE — U.S.A.

(1)	This reinsurance does not cover any loss or liability accruing to the Reassured as a member of, or subscriber to, any association of insurers or reinsurers formed for the purpose of covering nuclear energy risks or as a direct or indirect reinsurer of any such member, subscriber or association.
(2)	Without in any way restricting the operation of paragraph (1) of this Clause it is understood and agreed that for all purposes of this reinsurance all the original policies of the Reassured (new, renewal and replacement) of the classes specified in Clause II of this paragraph (2) from the time specified in Clause III in this paragraph (2) shall be deemed to include the following provision (specified as the Limited Exclusion Provision):
	Limited Exclusion Provision.*

I. It is agreed that the policy does not apply under any liability coverage, to

     injury, sickness, disease, death or destruction

     bodily injury or property damage

	with respect to which an insured under the policy is also an insured under a nuclear energy liability policy issued by Nuclear Energy Liability Insurance Association, Mutual Atomic Energy Liability Underwriters or Nuclear Insurance Association of Canada, or would be an insured under any such policy but for its termination upon exhaustion of its limit of liability.
II.	Family Automobile Policies (liability only), Special Automobile Policies (private passenger automobiles, liability only), Farmers Comprehensive Personal Liability Policies (liability only), Comprehensive Personal Liability Policies (liability only) or policies of a similar nature; and the liability portion of combination forms related to the four classes of policies stated above, such as the Comprehensive Dwelling Policy and the applicable types of Homeowners Policies.
III.	The inception dates and thereafter of all original policies as described in II above, whether new, renewal or replacement, being policies which either

(a)	become effective on or after 1st May, 1960, or
(b)	become effective before that date and contain the Limited Exclusion Provision set out above;

provided this paragraph (2) shall not be applicable to Family Automobile Policies, Special Automobile Policies, or policies or combination policies of a similar nature, issued by the Reassured on New York risks, until 90 days following approval of the Limited Exclusion Provision by the Governmental Authority having jurisdiction thereof.

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(3) Except for those classes of policies specified in Clause II of paragraph (2) and without in any way restricting the operation of paragraph (1) of this Clause, it is understood and agreed that for all purposes of this reinsurance the original liability policies of the Reassured (new, renewal and replacement) affording the following coverages:

Owners, Landlords and Tenants Liability, Contractual Liability, Elevator Liability, Owners or Contractors (including railroad) Protective Liability, Manufacturers and Contractors Liability, Product Liability, Professional and Malpractice Liability, Storekeepers Liability, Garage Liability, Automobile Liability (including Massachusetts Motor Vehicle or Garage Liability)

shall be deemed to include, with respect to such coverages, from the time specified in Clause V of this paragraph (3), the following provision (specified as the Broad Exclusion Provision):

Broad Exclusion Provision.*

It is agreed that the policy does not apply:

I.	Under any Liability Coverage, to
	injury, sickness, disease, death or destruction
	bodily injury or property damage

(a)

with respect to which an insured under the policy is also an insured under a nuclear energy liability policy issued by Nuclear Energy Liability Insurance Association, Mutual Atomic Energy Liability Underwriters or Nuclear Insurance Association of Canada, or would be an insured under any such policy but for its termination upon exhaustion of its limit of liability; or

(b)

resulting from the hazardous properties of nuclear material and with respect to which (1) any person or organization is required to maintain financial protection pursuant to the Atomic Energy Act of 1954, or any law amendatory thereof, or (2) the insured is, or had this policy not been issued would be, entitled to indemnity from the United States of America, or any agency thereof, under any agreement entered into by the United States of America, or any agency thereof, with any person or organization.

II. Under any Medical Payments Coverage, or under any Supplementary Payments Provision relating to

immediate medical or surgical relief

first aid,

Effective: January 1, 2011		DOC: January 21, 2011
U6W20001	34 of 37

to expenses incurred with respect to

bodily injury, sickness, disease or death

bodily injury

resulting from the hazardous properties of nuclear material and arising out of the operation of a nuclear facility by any person or organization.

III. Under any Liability Coverage, to

injury, sickness, disease, death or destruction

bodily injury or property damage

resulting from the hazardous properties of nuclear material, if

(a)	the nuclear material (1) is at any nuclear facility owned by, or operated by or on behalf of, an insured or (2) has been discharged or dispersed therefrom;
(b)	the nuclear material is contained in spent fuel or waste at any time possessed, handled, used, processed, stored, transported or disposed of by or on behalf of an insured; or
(c)	the

injury, sickness, disease, death or destruction

bodily injury or property damage

arises out of the furnishing by an insured of services, materials, parts or equipment in connection with the planning, construction, maintenance, operation or use of any nuclear facility, but if such facility is located within the United States of America, its territories or possessions or Canada, this exclusion (c) applies only to

injury to or destruction of property at such nuclear facility.

property damage to such nuclear facility and any property thereat.

IV.

As used in this endorsement:

“hazardous properties” include radioactive, toxic or explosive properties; “nuclear material” means source material, special nuclear material or byproduct material; “source material”, “special nuclear material”, and “byproduct material” have the meanings given them in the Atomic Energy Act of 1954 or in any law amendatory thereof; “spent fuel” means any fuel element or fuel component, solid or liquid,

Effective: January 1, 2011		DOC: January 21, 2011
U6W20001	35 of 37

which has been used or exposed to radiation in a nuclear reactor; “waste” means any waste material (1) containing byproduct material other than the tailings or wastes produced by the extraction or concentration of uranium or thorium from any ore processed primarily for its source material content and (2) resulting from the operation by any person or organization of any nuclear facility included under the first two paragraphs of the definition of nuclear facility; “nuclear facility” means

(a)	any nuclear reactor,
(b)	any equipment or device designed or used for (1) separating the isotopes of uranium or plutonium, (2) processing or utilizing spent fuel, or (3) handling, processing or packaging waste,
(c)	any equipment or device used for the processing, fabricating or alloying of special nuclear material if at any time the total amount of such material in the custody of the insured at the premises where such equipment or device is located consists of or contains more than 25 grams of plutonium or uranium 233 or any combination thereof, or more than 250 grams of uranium 235,
(d)	any structure, basin, excavation, premises or place prepared or used for the storage or disposal of waste,

	and includes the site on which any of the foregoing is located, all operations conducted on such site and all premises used for such operations; “nuclear reactor” means any apparatus designed or used to sustain nuclear fission in a self-supporting chain reaction or to contain a critical mass of fissionable material;
	With respect to injury to or destruction of property, the word “injury” or “destruction” includes all forms of radioactive contamination of property. “property damage” includes all forms of radioactive contamination of property.
V.	The inception dates and thereafter of all original policies affording coverages specified in this paragraph (3), whether new, renewal or replacement, being policies which become effective on or after 1st May, 1960, provided this paragraph (3) shall not be applicable to

(i)	Garage and Automobile Policies issued by the Reassured on New York risks, or
(ii)	statutory liability insurance required under Chapter 90, General Laws of Massachusetts,

until 90 days following approval of the Broad Exclusion Provision by the Governmental Authority having jurisdiction thereof.

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(4) Without in any way restricting the operation of paragraph (1) of this Clause, it is understood and agreed that paragraphs (2) and (3) above are not applicable to original liability policies of the Reassured in Canada and that with respect to such policies this Clause shall be deemed to include the Nuclear Energy Liability Exclusion Provisions adopted by the Canadian Underwriters’ Association or the Independent Insurance Conference of Canada.

*NOTE. The words printed in italics in the Limited Exclusion Provision and in the Broad Exclusion Provision shall apply only in relation to original liability policies which include a Limited Exclusion Provision or a Broad Exclusion Provision containing those words.

NOTES:	Wherever used herein the terms:
	“Reassured”	shall be understood to mean “Company”, “Reinsured”, “Reassured” or whatever other term is used in the attached reinsurance document to designate the reinsured company or companies.
	“Agreement”	shall be understood to mean “Agreement”, “Contract”, “Policy” or whatever other term is used to designate the attached reinsurance document.
	“Reinsurers”	shall be understood to mean “Reinsurers”, “Underwriters” or whatever other term is used in the attached reinsurance document to designate the reinsurer or reinsurers.

21/9/67
NMA 1590 (amended)

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EX-10.11

Exhibit 10.11

PROPERTY EXCESS OF LOSS REINSURANCE CONTRACT

EFFECTIVE JANUARY 1, 2011

issued to

PENN MILLERS INSURANCE COMPANY

AMERICAN MILLERS INSURANCE COMPANY

TW No. G25573.11/G25574.11/G26233.11
FINAL

PENN MILLERS INSURANCE COMPANY

AMERICAN MILLERS INSURANCE COMPANY

PROPERTY EXCESS OF LOSS REINSURANCE CONTRACT

EFFECTIVE JANUARY 1, 2011

INDEX

ARTICLE	SUBJECT	PAGE
ARTICLE 1	BUSINESS COVERED		1
ARTICLE 2	COMMENCEMENT AND TERMINATION		1
ARTICLE 3	SPECIAL TERMINATION		1
ARTICLE 4	EXCLUSIONS		3
ARTICLE 5	RETENTION AND LIMIT		5
ARTICLE 6	REINSTATEMENT		5
ARTICLE 7	PREMIUM		5
ARTICLE 8	DEFINITION OF LOSS OCCURRENCE		5
ARTICLE 9	NET LOSS		6
ARTICLE 10	EXTRA CONTRACTUAL OBLIGATIONS/LOSS EXCESS OF POLICY LIMITS		7
ARTICLE 11	TERRORISM RECOVERY		8
ARTICLE 12	NET RETAINED LINE		9
ARTICLE 13	NOTICE OF LOSS AND LOSS SETTLEMENT		9
ARTICLE 14	ERRORS AND OMISSIONS		10
ARTICLE 15	OFFSET		10
ARTICLE 16	CURRENCY		10
ARTICLE 17	FEDERAL EXCISE TAX AND OTHER TAXES		10
ARTICLE 18	ACCESS TO RECORDS		11
ARTICLE 19	INSOLVENCY		11
ARTICLE 20	ARBITRATION		12
ARTICLE 21	SERVICE OF SUIT		14
ARTICLE 22	CONFIDENTIALITY		15
ARTICLE 23	PRIVACY		16
ARTICLE 24	RESERVES		16
ARTICLE 25	LATE PAYMENTS		19
ARTICLE 26	MODE OF EXECUTION		20
ARTICLE 27	VARIOUS OTHER TERMS		20
ARTICLE 28	INTERMEDIARY		22

ATTACHMENTS:

NUCLEAR INCIDENT EXCLUSION CLAUSE — PHYSICAL DAMAGE — REINSURANCE (BRMA 35B)

INFORMATION TECHNOLOGY HAZARDS CLARIFICATION CLAUSE (NMA2912)

EXHIBIT I — PROPERTY FIRST EXCESS OF LOSS REINSURANCE

EXHIBIT II — PROPERTY SECOND EXCESS OF LOSS REINSURANCE

EXHIBIT III — PROPERTY THIRD EXCESS OF LOSS REINSURANCE

TW No. G25573.11/G25574.11/G26233.11
C11-119542-002
FINAL

PENN MILLERS INSURANCE COMPANY

AMERICAN MILLERS INSURANCE COMPANY

PROPERTY EXCESS OF LOSS REINSURANCE CONTRACT

EFFECTIVE JANUARY 1, 2011

ARTICLE 1

BUSINESS COVERED

A. This Contract applies to all Loss Occurrences that occur with a date of loss during the term of this Contract and arising from those Policies, except as hereinafter excluded, classified by the Company as Property, that are in force at the inception of the term of this Contract or written with a Policy period (new or renewal) effective during the term of this Contract, including renewals (“Business Covered”).

B. The term “Policies”, whenever used herein, shall mean all binders, policies, contracts, certificates and other obligations, whether oral or written, of insurance or reinsurance that are Business Covered.

C. The reinsurance of all Business Covered hereunder shall be subject in all respects to the same risks, terms, clauses, conditions, interpretations, alterations, modifications, cancellations and waivers as the respective insurances (or reinsurances) of the Company’s Policies and the Reinsurer shall pay losses as may be paid thereon, subject to the liability of the Company and the terms and conditions of this Contract.

ARTICLE 2

COMMENCEMENT AND TERMINATION

A. This Contract shall incept at 12:01 a.m., Eastern Standard Time, January 1, 2011, and shall remain in force until 12:01 a.m., Eastern Standard Time, January 1, 2012.

B. Should this Contract terminate while a Loss Occurrence is in progress, Reinsurers shall remain liable for all losses resulting from such Loss Occurrence as if the entire loss had occurred during the term of this Contract.

ARTICLE 3

SPECIAL TERMINATION

A. The Company or the Reinsurer may terminate, or commute obligations arising under this Contract in accordance with Paragraph C. below, upon the happening of any one of the following circumstances at any time by the giving of thirty (30) days prior written notice to the other party:

1. A party ceases active underwriting operations or a State Insurance Department or other legal authority orders the Reinsurer to cease writing business in all jurisdictions; or

2. The Reinsurer has filed a plan to enter into a Scheme of Arrangement or similar procedure. “Scheme of Arrangement” is defined as a legislative or regulatory process that provides a solvent Reinsurer the opportunity to settle its obligations with the Company either (i) without the Company’s unrestrained consent or (ii) prior to the Company having the ability to determine, with exact certainty, the actual amount of the obligations still outstanding and ultimately due to the Company. or

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3. A party has: a) become insolvent, b) been placed under supervision (voluntarily or involuntarily), c) been placed into liquidation or receivership, or d) had instituted against it proceedings for the appointment of a supervisor, receiver, liquidator, rehabilitator, conservator or trustee in bankruptcy, or other agent known by whatever name, to take possession of its assets or control of its operations; or

4. A reduction in the Reinsurer’s surplus, risk-based capital or financial strength rating occurs:

a. As respects Reinsurers domiciled in the United States of America, (i) the Reinsurer’s policyholders’ surplus (“PHS”) has been reduced by, whichever is greater, thirty percent (30%) of the amount of PHS at the inception of this Contract or thirty percent (30%) of the amount of PHS stated in its last filed quarterly or annual statutory statement with its state of domicile; or (ii) the Reinsurer’s total adjusted capital is less than two hundred percent (200%) of its authorized control level risk-based capital; or (iii) the Reinsurer’s A.M. Best’s insurer financial strength rating becomes less than “A-”.

b. As respects Reinsurers domiciled outside the United States of America, other than Lloyd’s Syndicates (i) the Reinsurer’s Capital & Surplus (“C&S”) has been involuntarily reduced by, whichever is greater, thirty percent (30%) of the published currency amount of C&S at the inception of this Contract or thirty percent (30%) of the published currency amount of C&S stated in its last filed financial statement with its local regulatory authority; or (ii) as respects Lloyd’s Syndicates, the Reinsurer’s total stamp capacity has been reduced by more than thirty percent (30%) of the amount of total stamp capacity which stood at the inception of this Contract. (This provision does not apply to any Lloyd’s Syndicate that voluntarily reduces its total stamp capacity.) or (iii) the Reinsurer’s A.M. Best’s insurer financial strength rating becomes less than “A-” or the Reinsurer’s Standard & Poor’s Insurance Rating becomes less than “BBB”. or

5. A party has entered into a definitive agreement to (a) become merged with, acquired or controlled by any company, corporation or individual(s) not controlling or affiliated with the party’s operations previously; or (b) directly or indirectly assign all or essentially all of its entire liability for obligations under this Contract to another party without the other party’s prior written consent; or

6. There is either:

a. a severance or obstruction of free and unfettered communication and/or normal commercial or financial intercourse between the United States of America and the country in which the Reinsurer is incorporated or has its principal office as a result of war, currency regulations or any circumstances arising out of political, financial or economic uncertainty; or

b. a severance (of any kind) of any two (2) or more of the following executives of the Reinsurer from active employment of the Reinsurer during the most recent forty five (45) day period: chief underwriting officer, chief actuary, chief executive officer or chief financial officer. This condition does not apply whenever the severance in employment is for the publicly announced purpose of the individual’s assuming within thirty (30) days a known position with another identified firm in the (re)insurance industry or related field.

B. In the event the Company elects to terminate, the Company shall, with the notice of termination, specify that termination will be on a Cut-Off basis, in which event the Company shall relieve the Reinsurer for losses occurring subsequent to the specified termination date, and that Reinsurer shall not receive deposit premium installments beyond the date at which termination of the Reinsurer is effected. In the event no losses occur prior to the specified

TW No. G25573.11/G25574.11/G26233.11
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termination date, the Reinsurer shall within thirty (30) days of the termination date return a pro rata portion of any ceded deposit premium paid hereunder, calculated as of the termination date, and cash in that amount (less applicable ceding commission, if any, allowed thereon) and the minimum premium provisions, if any, shall be waived. (The fraction of the deposit premium to be returned to the Company shall equal the number of days from the termination date until the original expiration date of the Contract period divided by the number of days in the original Contract period.) Upon final determination of the adjusted premium for the Contract period, the Reinsurer shall be credited with a portion of premium for this Contract, in the amount equal to the fraction of the number of days the terminated Reinsurer participated in the Contract period divided by the number of days in the Contract period multiplied by the reinsurance premium for the Contract period.

C. If both parties agree to commute, then within sixty (60) days after such agreement, the Company shall submit a statement of valuation of the total of the net present value (“capitalized”) of the ceded (1) Net Loss Reserves, (2) Loss Adjustment Expense Reserves, and (3) unearned premium reserve, after deduction for any ceding commission allowed thereon, (the “Valuation Statement”). If agreement cannot be reached, the effort can be abandoned or alternately the Company and the Reinsurers may mutually appoint an actuary or appraiser to investigate, determine the capitalized value of the reserves to be returned to the Company. Such actuary shall be an independent and neutral actuary, Casualty Actuarial Society, experienced in such matters and the mutually agreed actuary shall render a decision. In the event that the Company and the Reinsurer are unable to agree upon a single actuary within thirty (30) days, the parties shall ask the then current President of the Casualty Actuarial Society to appoint an actuary with those qualifications within another thirty (30) days. The decision of the actuary will be final and binding on both parties. The Company and the Reinsurer shall share equally the fees and expenses of the actuary. Upon payment of the amount so agreed or determined by the actuary to the Company, the Reinsurer and the Company shall each be completely released from all liability to each other under this Contract.

ARTICLE 4

EXCLUSIONS

A. This Contract shall not cover:

1. Reinsurance treaty business, including pro rata and excess of loss, assumed by the Company but not to include business from affiliated companies.

2. Business written on a co-indemnity basis not controlled by the Company.

3. Damage to growing and standing crops, not to include nursery stock for wholesale or retail, and not to include crops, including mushrooms, growing in a building.

4. Policies of Excess of Loss Reinsurance.

5. Financial Guarantee and Insolvency.

6. Liability assumed by the Company as a member of a Syndicate, Pool or Underwriting Association; however, this does not apply to participation in assigned risk plans.

7. Any liability of the Company arising, by contract, operation of law, or otherwise, from its participation or membership, whether voluntary or involuntary, in any insolvency fund. “Insolvency Fund” includes any guaranty fund, insolvency fund, plan, pool, association, fund or other arrangement, howsoever denominated, established or governed, which provides for any assessment of or payment or assumption by the Company of part or all of any claim, debt, charge, fee or other obligation of an insurer,

TW No. G25573.11/G25574.11/G26233.11
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or its successors or assigns, which has been declared by any competent authority to be insolvent, or which is otherwise deemed unable to meet any claim, debt, charge, fee or other obligation in whole or in part.

8. Policies classified as Personal Accident, Health, Workers’ Compensation, Bodily Injury Liability (including Medical Payments), Property Damage Liability, Fidelity, Surety, Boiler and Machinery, Plate Glass and similar classes of insurance or reinsurance customarily written by casualty insurance companies.

9. Flood, except under Transportation or other Inland Marine or Multiple Peril Policies or under Automobile Physical Damage Policies or written as a part of the General Property Form or the Special Property Form.

10. Loss or liability excluded by the provisions of the “Nuclear Incident Exclusion Clause — Physical Damage — Reinsurance (BRMA 35B)” attached to and forming part of this Contract.

11. Seepage and/or Pollution as per original Policies. Furthermore, Reinsurers agree that this exclusion does not apply to overspraying of anhydrous ammonia, fertilizers and agricultural chemicals.

12. Transmission and Distribution Lines and their supporting structures other than those on or within one thousand (1,000) feet of the insured premises.

13. Information Technology Hazards Clarification Clause (NMA 2912).

14. Loss resulting from an act of certified or non-certified terrorism, as defined in the Article entitled RETENTION AND LIMIT of this Contract, that involves the use, release, or escape of nuclear materials, or directly or indirectly results in nuclear reaction or radiation or radioactive contamination; or that is carried out by means of the dispersal or application of pathogenic or poisonous biological or chemical materials that are released.

15. Regarding interests which at time of loss or damage are on shore, any loss or damage which is occasioned by war, invasion, hostilities, acts of foreign enemies, civil war, rebellion, insurrection, military or usurped power, or martial law or confiscation by order of any government or public authority.

     This War Exclusion Clause shall not, however, apply to interests which at time of loss or damage are within the territorial limits of the United States of America (comprising the fifty States of the Union and the District of Columbia and including Bridges between the U.S.A. and Mexico, provided they are under United States ownership), Canada, St. Pierre and Miquelon, provided such interests are insured under Policies, endorsements, or binders containing a standard war or hostilities or warlike operations exclusion clause.

B. As respects Paragraph A. above, if the Company, without the knowledge and consent of its Home Office, is bound on a risk excluded above (other than Exclusions A(5) Financial Guarantee and Insolvency, A(6) Syndicates, Pools or Underwriting Associations, A(7) Insolvency Funds Exclusion, A(9) Flood, A(10) Nuclear Incident Exclusion Clause, A(11) Seepage and/or Pollution Exclusion Clause, A(12) Transmission and Distribution Lines, A(13) Information Technology Hazards Clarification Clause (NMA 2912), A(14) NBC Terrorism, and A(15) War) such risk shall be covered hereunder until the Company receives knowledge thereof.

     The Company agrees to use due diligence in canceling such risk immediately after knowledge thereof is received by its Home Office. However, if any state regulatory authority or the laws or regulations of any state prohibit the Company from canceling a risk for any reason,

TW No. G25573.11/G25574.11/G26233.11
FINAL

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such risk shall remain covered hereunder until the Company is permitted to cancel the risk by the regulatory authority or the applicable laws or regulations. However, not to exceed eighteen (18) months.

C. Any exclusion listed above (other than exclusions A(5), A(6), A(7), A(9), A(10), A(11), A(12), A(13), A(14) and A(15)), shall be automatically waived as respects a Policy issued by the Company on a risk with respect to which only a minor or incidental part of the operations covered involves the exclusion. An incidental part of an insured’s regular operations shall mean not greater than ten percent (10%) of the insured’s regular operations.

ARTICLE 5

RETENTION AND LIMIT

     See Exhibits I, II and III attached to and forming part of this Contract.

ARTICLE 6

REINSTATEMENT

     See Exhibits I, II and III attached to and forming part of this Contract.

ARTICLE 7

PREMIUM

     See Exhibits I, II and III attached to and forming part of this Contract.

ARTICLE 8

DEFINITION OF LOSS OCCURRENCE

A. The term “Loss Occurrence” shall mean the sum of all individual losses directly occasioned by any one disaster, accident or loss or series of disasters, accidents or losses arising out of one event which occurs within the area of one state of the United States or province of Canada and states or provinces contiguous thereto and to one another. However, the duration and extent of any one “Loss Occurrence” shall be limited to all individual losses sustained by the Company occurring during any period of one hundred sixty eight (168) consecutive hours arising out of and directly occasioned by the same event except that the term “Loss Occurrence” shall be further defined as follows:

1. As regards windstorm, hail, tornado, hurricane, cyclone, including ensuing collapse and water damage, all individual losses sustained by the Company occurring during any period of seventy two (72) consecutive hours arising out of and directly occasioned by the same event. However, the event need not be limited to one state or province or states or provinces contiguous thereto.

2. As regards riot, riot attending a strike, civil commotion, vandalism and malicious mischief, all individual losses sustained by the Company occurring during any period of seventy two (72) consecutive hours within the area of one municipality or county and the municipalities or counties contiguous thereto arising out of and directly occasioned by the same event. The maximum duration of seventy two (72) consecutive hours may be extended in respect of individual losses which occur beyond such seventy two (72) consecutive hours during the continued occupation of an insured’s premises by strikers, provided such occupation commenced during the aforesaid period.

TW No. G25573.11/G25574.11/G26233.11
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3. As regards earthquake (the epicenter of which need not necessarily be within the territorial confines referred to in the opening paragraph of this Article) and fire following directly occasioned by the earthquake, only those individual fire losses which commence during the period of one hundred sixty eight (168) consecutive hours may be included in the Company’s “Loss Occurrence”.

4. As regards “Freeze”, only individual losses directly occasioned by collapse, breakage of glass and water damage (caused by bursting of frozen pipes and tanks) may be included in the Company’s “Loss Occurrence”.

5. As regards firestorms, brush fires and any other fires or series of fires, irrespective of origin (except as provided in A(2) and A(3) above), which spread through trees, grassland or other vegetation, all individual losses sustained by the Company which commence during any period of one hundred sixty eight (168) consecutive hours within a one hundred (100) mile radius of any fixed point selected by the Company where a claim has actually been made may be included in the Company’s “Loss Occurrence.” However, an individual loss subject to this subparagraph cannot be included in more than one Loss Occurrence.

B. For all “Loss Occurrences”, other than those referred to in A(2) of this Article, the Company may choose the date and time when any such period of consecutive hours commences provided that it is not earlier than the date and time of the occurrence of the first recorded individual loss sustained by the Company arising out of that disaster, accident or loss and provided that only one such period of one hundred sixty eight (168) consecutive hours shall apply with respect to one event except for any “Loss Occurrences” referred to in A(1) of this Article where only one such period of seventy two (72) consecutive hours shall apply with respect to one event.

C. As respects those “Loss Occurrences” referred to in A(2) of this Article, if the disaster, accident or loss occasioned by the event is of greater duration than seventy two (72) consecutive hours, then the Company may divide that disaster, accident or loss into two (2) or more “Loss Occurrences” provided no two (2) periods overlap and no individual loss is included in more than one such period and provided that no period commences earlier than the date and time of the occurrence of the first recorded individual loss sustained by the Company arising out of that disaster, accident or loss.

D. No individual losses occasioned by an event that would be covered by seventy two (72) hours clauses may be included in any “Loss Occurrence” claimed under the one hundred sixty eight (168) hours provision.

ARTICLE 9

NET LOSS

A. The term “Net Loss” shall mean the actual loss incurred by the Company from Business Covered hereunder including (i) sums paid in settlement of claims and suits and in satisfaction of judgments, (ii) prejudgment interest when added to a judgment, (iii) ninety percent (90%) of any Extra-Contractual Obligations (iv) ninety percent (90%) of any Losses Excess of Policy Limits, and (v) any interest on judgments other than prejudgment interest when added to a judgment. In the event that the Company’s original Policies and/or specific coverage parts of their original Policies are issued on a cost inclusive basis, such loss adjustment expenses shall be included within the Company’s Net Loss for the purposes of recovery hereunder.

B. All salvages, recoveries, payments and reversals or reductions of verdicts or judgments whether recovered, received or obtained prior or subsequent to loss settlement under this Contract, including amounts recoverable under other reinsurance whether collected or not, shall be applied as if recovered, received or obtained prior to the aforesaid settlement and shall be

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deducted from the actual losses sustained to arrive at the amount of the Net Loss. Nothing in this Article shall be construed to mean losses are not recoverable until the Net Loss to the Company finally has been ascertained.

C. All Loss Adjustment Expenses paid by the Company as a result of Net Losses covered hereunder shall be divided between the Company and the Reinsurers, without regard to the limit of this Contract, in proportion to their share of the Net Loss. “Loss Adjustment Expenses” shall mean and include but not be limited to: (i) expenses sustained in connection with adjustment, defense, settlement and litigation of claims and suits, satisfaction of judgments, resistance to or negotiations concerning a loss (which shall include the expenses and the pro rata share of the salaries of the Company’s field employees according to the time occupied in adjusting such loss and the expenses of the Company’s employees while diverted from their normal duties to the service of field adjustment but shall not include any salaries of officers or normal overhead expenses of the Company), (ii) legal expenses and costs incurred in connection with coverage questions regarding specific claims and legal actions, including Declaratory Judgment Expenses, connected thereto, (iii) all interest on judgments other than prejudgment interest when added to a judgment except when included in Net Loss, and (iv) expenses sustained to obtain recoveries, salvages or other reimbursements, or to secure the reversal or reduction of a verdict or judgment.

D. “Declaratory Judgment Expenses” as used in this Contract shall mean legal expenses paid by the Company in the investigation, analysis, evaluation, resolution or litigation of coverage issues between the Company and its insured(s), under Policies reinsured hereunder, for a specific loss or losses tendered under such Policies, which loss or losses are not excluded under this Contract.

E. In the event there are any recoveries, salvages, or reimbursements recovered subsequent to a loss settlement, or in the event a verdict or judgment is reversed or reduced, Loss Adjustment Expenses incurred in obtaining the recovery, salvage or reimbursement or in securing the reduction or reversal shall be divided between the Company and the Reinsurers in proportion to their share of the benefit therefrom, with the expenses incurred up to the time of the loss settlement or the original verdict or judgment being divided in proportion to the share of the Company and the Reinsurers in the original loss settlement or verdict or judgment.

ARTICLE 10

EXTRA CONTRACTUAL OBLIGATIONS/LOSS EXCESS OF POLICY LIMITS

A. “Extra-Contractual Obligations” means those liabilities not covered under any other provision of this Contract, other than Loss Excess of Policy Limits, including but not limited to compensatory, consequential, punitive, or exemplary damages together with any legal costs and expenses incurred in connection therewith, paid as damages or in settlement by the Company arising from an allegation or claim of its insured, its insured’s assignee, or other third party, which alleges negligence, gross negligence, bad faith or other tortious conduct on the part of the Company in the handling, adjustment, rejection, defense or settlement of a claim under a Policy that is the Business Covered.

B. “Loss Excess of Policy Limits” means any amount of loss, together with any legal costs and expenses incurred in connection therewith, paid as damages or in settlement by the Company in excess of its Policy Limits, but otherwise within the coverage terms of the Policy, arising from an allegation or claim of its insured, its insured’s assignee, or other third party, which alleges negligence, gross negligence, bad faith or other tortious conduct on the part of the Company in the handling of a claim under a Policy or bond that is the Business Covered, in rejecting a settlement within the Policy Limits, in discharging a duty to defend or prepare the defense in the trial of an action against its insured, or in discharging its duty to prepare or prosecute an appeal consequent upon such an action. For the avoidance of doubt, the decision by the Company to settle a claim for an amount within the coverage of the Policy but not within the Policy Limit when the Company has reasonable basis to believe that it may have legal

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liability to its insured or assignee or other third party on the claim will be deemed a Loss Excess of Policy Limits. The Company will provide Reinsurers an explanation relating to the Company’s motivation for settlement and use its best efforts to obtain the Reinsurers’ prior counsel and concurrence in the Company’s action. A reasonable basis shall mean it is more likely than not a trial would result in a verdict excess of the Policy Limits, in the opinion of counsel assigned to defend the insured or otherwise retained by the Company.

C. An Extra-Contractual Obligation or a Loss Excess of Policy Limits shall be deemed to have occurred on the same date as the loss covered under the Company’s original Policy and shall be considered part of the original loss (subject to other terms of this Contract).

D. Neither an Extra-Contractual Obligation nor a Loss Excess of Policy Limits shall include a loss incurred by the Company as the result of any fraudulent or criminal act directed against the Company by any officer or director of the Company acting individually or collectively or in collusion with any other organization or party involved in the presentation, defense, or settlement of any claim under this Contract.

E. Recoveries, whether collectible or not, including any retentions and/or deductibles, from any other form of insurance or reinsurance which protect the Company against any loss or liability covered under this Article shall inure to the benefit of the Reinsurers and shall be deducted from the total amount of any Extra-Contractual Obligation and/or Loss Excess of Policy Limits in determining the amount of Extra-Contractual Obligation and/or Loss Excess of Policy Limits that shall be indemnified under this Article.

F. The Company shall be indemnified in accordance with this Article to the extent permitted by applicable law.

ARTICLE 11

TERRORISM RECOVERY

A. As respects the Insured Losses of the Company for each Program Year, to the extent the Company’s total reinsurance recoverables for Insured Losses, whether collected or not, when combined with the financial assistance available to the Company under the Act exceeds the aggregate amount of Insured Losses paid by the Company, less any other recoveries or reimbursements, (the “Excess Recovery”), a share of the Excess Recovery shall be allocated to the Company and the Reinsurer. The Company’s share of the Excess Recovery shall be deemed to be an amount equal to the proportion that the Company’s Insured Losses bear to the Insurer’s total Insured Losses for each Program Year. The Reinsurer’s share of the Excess Recovery shall be deemed to be an amount equal to the proportion that the Reinsurer’s payment of Insured Losses under this Contract bears to the Company’s total collected reinsurance recoverables for Insured Losses. The Company shall provide the Reinsurer with all necessary data respecting the transactions covered under this Article.

B. The method set forth herein for determining an Excess Recovery is intended to be consistent with the United States Treasury Department’s construction and application of Section 103 (g)(2) of the Act. To the extent it is inconsistent, it shall be amended to conform with such construction and application, nevertheless the Company shall be the sole judge as to the allocation of TRIA Recoveries to this or to other reinsurance Contracts.

C. “Act” as used herein shall mean the Terrorism Risk Insurance Act of 2002, the Terrorism Risk Insurance Extension Act of 2005, and the Terrorism Risk Insurance Program Reauthorization Act of 2007 (“TRIPRA”) and any subsequent amendment thereof or any regulations promulgated thereunder. “Company” shall have the same meaning as “Insurer” under the Act and “Insured Losses”, and “Program Year” shall follow the definitions as provided in the Act.

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ARTICLE 12

NET RETAINED LINE

A. This Contract applies only to that portion of any insurance or reinsurance which the Company retains net for its own account and, in calculating the amount of any loss hereunder and also in computing the amount or amounts in excess of which this Contract attaches, only loss or losses in respect of that portion of any insurance or reinsurance which the Company retains net for its own account shall be included.

B. It is agreed, however, that the amount of the Reinsurers’ liability hereunder in respect of any loss or losses shall not be increased by reason of the inability of the Company to collect from any other Reinsurers, whether specific or general, any amounts which may have become due from them, whether such inability arises from the insolvency of such other Reinsurers or otherwise.

C. Inter-company reinsurance among the companies collectively called the “Company” shall be entirely disregarded for all purposes of this Contract.

D. Permission is hereby granted the Company to carry (i) underlying reinsurance and (ii) layers of catastrophe reinsurance both below and above this layer of coverage and recoveries made on the latter shall be disregarded for all purposes of this Contract and shall inure to the sole benefit of the Company.

ARTICLE 13

NOTICE OF LOSS AND LOSS SETTLEMENT

A. The Company shall advise the Reinsurers promptly of all Loss Occurrences which, in the opinion of the Company, may result in a claim hereunder and of all subsequent developments thereto which, in the opinion of the Company, may materially affect the position of the Reinsurers. Inadvertent omission or oversight in giving such notice shall in no way affect the liability of the Reinsurers. However, the Reinsurers shall be informed of such omission or oversight promptly upon its discovery.

B. Prompt notice shall be given to the Reinsurers by the Company on any Loss Occurrence wherein the Company’s reserve exceeds fifty percent (50%) of the Company’s loss retention.

C. The Company shall have the right to settle all claims under its Policies. All loss settlements made by the Company, whether under strict policy conditions or by way of compromise, that are the Business Covered and that are not an ex-gratia settlement shall be final and binding subject to the liability of the Company and the terms and conditions of this Contract. The Reinsurer shall follow the liability of the Company (to the extent provided in this Contract) and shall pay or allow, as the case may be, its share of each such settlement in accordance with this Contract all amounts for which it is obligated as soon as possible, but not later than ten (10) business days, of being furnished by the Company with reasonable evidence of the amount due. Reasonable evidence of the amount due shall consist of a certification by the Company, accompanied by proof of loss documentation the Company customarily presents with its claims payment requests, that the amount requested to be paid and submitted by the certification, is, upon information and belief, due and payable to the Company by the Reinsurers under the terms and conditions of this Contract.

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ARTICLE 14

ERRORS AND OMISSIONS

     Inadvertent delays, errors or omissions made by the Company in connection with this Contract shall not relieve the Reinsurer from any liability which would have attached had such error or omission not occurred, provided always that such error or omission shall be rectified as soon as possible, provided that the liability of the Reinsurer shall not extend beyond the coverage provided by this Contract nor to extend coverage to Policies that are not the Business Covered hereunder. This Article shall not apply to a sunset provision, if any in this Contract, nor to a commutation made in connection with this Contract.

ARTICLE 15

OFFSET

     The Company and the Reinsurer shall have the right to offset any balance or amounts due from one party to the other under the terms of this Contract. The party asserting the right of offset may exercise such right any time whether the balances due are on account of premiums or losses or otherwise and immediately inform the Intermediary accordingly. In the event of the insolvency of any party, offset shall be as permitted by applicable law.

ARTICLE 16

CURRENCY

A. Whenever the word “Dollars” or the “$” sign appears in this Contract, they shall be construed to mean United States Dollars and all transactions under this Contract shall be in United States Dollars.

B. Amounts paid or received by the Company in any other currency shall be converted to United States Dollars at the rate of exchange at the date such transaction is entered on the books of the Company.

ARTICLE 17

FEDERAL EXCISE TAX AND OTHER TAXES

A. To the extent that any portion of the reinsurance premium for this Contract is subject to the Federal Excise Tax (as imposed under Section 4371 of the Internal Revenue Code) and the Reinsurer is not exempt therefrom, the Reinsurers shall allow for the purpose of paying the Federal Excise Tax, a deduction by the Company of the applicable percentage of the premium payable hereon. In the event of any return of premium becoming due hereunder, the Reinsurers shall deduct the applicable same percentage from the return premium payable hereon and the Company or its agent shall take steps to recover the tax from the United States Government. In the event of any uncertainty, upon the written request of the Company, the Reinsurer will immediately file a certificate signed by a senior corporate officer of the Reinsurer certifying to its entitlement to the exemption from the Federal Excise Tax with respect to one or more transactions.

B. In consideration of the terms under which this Contract is issued, the Company undertakes not to claim any deduction of the premium hereon when making Canadian Tax returns or when making tax returns, other than Income or Profits Tax returns, to any State or Territory of the United States of America or to the District of Columbia.

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ARTICLE 18

ACCESS TO RECORDS

A. The Company shall place at the disposal of the Reinsurer at all reasonable times, and the Reinsurer shall have the right to inspect (and make reasonable copies) through its designated representatives during the term of this Contract and thereafter, all non-privileged books, records and papers of the Company directly related to any reinsurance hereunder, or the subject matter hereof, provided that if the Reinsurer has ceased active market operations, this right of access shall be subject to that Reinsurer being current in all payments owed the Company that are not currently the subject of a formal dispute (such as the initiation of an Arbitration or Mediation). For the purposes of this Article, “non-privileged” refers to books, records and papers that are not subject to the Attorney-client privilege and Attorney-work product doctrine.

B. “Attorney-client privilege” and “Attorney-work product” shall have the meanings ascribed to each by statute and/or the court of final adjudication in the jurisdiction whose laws govern the substantive law of a claim arising under a Policy reinsured under this Contract.

C. Notwithstanding anything to the contrary in this Contract, for any claim or loss under a Policy reinsured under this Contract, should the Reinsurer assert, pursuant to the Common Interest Doctrine (“Doctrine”), that it has the right to examine any document that the Company alleges is subject to the Attorney-client privilege or the Attorney-work product privilege, upon the Reinsurer providing to the Company substantiation of any law which reasonably supports the basis for the Reinsurer’s conclusion that the Doctrine applies and the Doctrine will be upheld as applying between the Company and the Reinsurer as against third parties pursuant to the substantive law(s) which govern the claim or loss, the Company shall give the Reinsurer access to such document.

D. Notwithstanding any other provision to the contrary, once a claim and all directly related claims are finally settled by the Company, the Reinsurer shall be entitled to review all reasonable and applicable claims records that support a Company request for payment of a claim hereunder for Net Loss for Business Covered hereunder. In the event that the Reinsurer shall have paid an amount for Net Loss to the Company and the records do not support the obligation of the Reinsurer to have paid the claim, the Company shall promptly return any payment made in error.

ARTICLE 19

INSOLVENCY

(This Article shall be deemed to read as required to meet the statutory insolvency clause requirements of the Company.)

A. In the event of insolvency or the appointment of a conservator, liquidator, or statutory successor of the Company, the portion of any risk or obligation assumed by the Reinsurer shall be payable to the conservator, liquidator, or statutory successor on the basis of claims allowed against the insolvent Company by any court of competent jurisdiction or by any conservator, liquidator, or statutory successor of the Company having authority to allow such claims, without diminution because of that insolvency, or because the conservator, liquidator, or statutory successor has failed to pay all or a portion of any claims.

B. Payments by the Reinsurer as above set forth shall be made directly to the Company or to its conservator, liquidator, or statutory successor, except where this Contract specifically provides another payee of such reinsurance or except as provided by applicable law and regulation (such as subsection (a) of section 4118 of the New York Insurance Laws) in the event of the insolvency of the Company.

C. In the event of the insolvency of the Company, the liquidator, receiver, conservator or statutory successor of the Company shall give written notice to the Reinsurer of the pendency of

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a claim against the insolvent Company on the Policy or Policies reinsured within a reasonable time after such claim is filed in the insolvency proceeding and during the pendency of such claim any Reinsurer may investigate such claim and interpose, at its own expense, in the proceeding where such claim is to be adjudicated any defense or defenses which it may deem available to the Company or its liquidator, receiver, conservator or statutory successor. The expense thus incurred by the Reinsurer shall be chargeable subject to court approval against the insolvent Company as part of the expense of liquidation to the extent of a proportionate share of the benefit which may accrue to the Company solely as a result of the defense undertaken by the Reinsurer.

D. Where two (2) or more Reinsurers are involved in the same claim and a majority in interest elect to interpose defense to such claim, the expense shall be apportioned in accordance with the terms of this Contract as though such expense had been incurred by the Company.

ARTICLE 20

ARBITRATION

A. Any and all disputes between the Company and the Reinsurer arising out of, relating to, or concerning this Contract, whether sounding in contract or tort and whether arising during or after termination of this Contract, shall be submitted to the decision of a Board of arbitration composed of two (2) arbitrators and an umpire (“Board”) meeting at a site in the city in which the principal headquarters of the Company are located. The arbitration shall be conducted under the Federal Arbitration Act and shall proceed as set forth below.

B. A notice requesting arbitration, or any other notice made in connection therewith, shall be in writing and be sent certified or registered mail, return receipt requested to the affected parties. The notice requesting arbitration shall state in particulars all issues to be resolved in the view of the claimant, shall appoint the arbitrator selected by the claimant and shall set a tentative date for the hearing, which date shall be no sooner than ninety (90) days and no later than one hundred fifty (150) days from the date that the notice requesting arbitration is mailed. Within thirty (30) days of receipt of claimant’s notice, the respondent shall notify claimant of any additional issues to be resolved in the arbitration and of the name of its appointed arbitrator.

C. The members of the Board shall be impartial, disinterested and not currently representing any party participating in the arbitration, and shall be current or former senior officers of insurance or reinsurance concerns, experienced in the line(s) of business that are the subject of this Contract. The Company and the Reinsurer as aforesaid shall each appoint an arbitrator and the two (2) arbitrators shall choose an umpire before instituting the hearing. As time is of the essence, if the respondent fails to appoint its arbitrator within thirty (30) days after having received claimant’s written request for arbitration, the claimant is authorized to and shall appoint the second arbitrator. If the two (2) arbitrators fail to agree upon the appointment of an umpire within thirty (30) days after notification of the appointment of the second arbitrator, within ten (10) days thereof, the two (2) arbitrators shall request ARIAS U.S. (“ARIAS”) to apply its procedures to appoint an umpire for the arbitration with the qualifications set forth above in this Article. If the use of ARIAS procedures fails to name an umpire, either party may apply to a court of competent jurisdiction to appoint an umpire with the above required qualifications. The umpire shall promptly notify in writing all parties to the arbitration of his selection and of the scheduled date for the hearing. Upon resignation or death of any member of the Board, a replacement shall be appointed in the same fashion as the resigning or deceased member was appointed.

D. The claimant and respondent shall each submit initial briefs to the Board outlining the facts, the issues in dispute and the basis, authority, and reasons for their respective positions within thirty (30) days of the date of notice of appointment of the umpire. The claimant and the respondent may submit a reply brief to the Board within ten (10) days after filing of the initial brief(s). Initial and reply briefs may be amended by the submitting party at any time, but not later

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than ten (10) days prior to the date of commencement of the arbitration hearing. Reasonable responses shall be allowed at the arbitration hearing to new material contained in any amendments filed to the briefs but not previously responded to.

E. The Board shall make a decision and award with regard to the terms expressed in this Contract, the original intentions of the parties to the extent reasonably ascertainable, and the custom and usage of the insurance and reinsurance business that is the subject of this Contract. Notwithstanding any other provision of this Contract, the Board shall have the right and obligation to consider underwriting and submission-related documents in any dispute between the parties.

F. The Board shall be relieved of all judicial formalities and the decision and award shall be based upon a hearing in which evidence shall be allowed though the formal rules of evidence shall not strictly apply. Cross examination and rebuttal shall be allowed. The Board may request a post-hearing brief to be submitted within twenty (20) days of the close of the hearing.

G. The Board shall render its decision and award in writing within thirty (30) days following the close of the hearing or the submission of post-hearing briefs, whichever is later, unless the parties consent to an extension. Every decision by the Board shall be by a majority of the members of the Board and each decision and award by the majority of the members of the Board shall be final and binding upon all parties to the proceeding. Such decision shall be a condition precedent to any right of legal action arising out of the arbitrated dispute which either party may have against the other. However, the Board is not authorized to award punitive, exemplary or enhanced compensatory damages.

H. The Board may award (i) interest at a rate not in excess of that set forth in the Article entitled LATE PAYMENTS, calculated from the date the Board determines that any amounts due the prevailing party should have been paid to the prevailing party, and (ii) applicable Attorneys’ fees and costs.

I. Either party may apply to a court of competent jurisdiction for an order confirming any decision and the award; a judgment of that Court shall thereupon be entered on any decision or award. If such an order is issued, the Attorneys’ fees of the party so applying and court costs will be paid by the party against whom confirmation is sought.

J. Except in the event of a consolidated arbitration, each party shall bear the expense of the one arbitrator appointed by or for it and shall jointly and equally bear with the other party the expense of any stenographer requested, and of the umpire. The remaining costs of the arbitration proceedings shall be finally allocated by the Board.

K. Subject to customary and recognized legal rules of privilege, each party participating in the arbitration shall have the obligation to produce those documents and as witnesses at the arbitration those of its employees, and those of its affiliates as any other participating party reasonably requests, providing always that the same witnesses and documents be obtainable and relevant to the issues before the arbitration and not be unduly burdensome or excessive in the opinion of the Board.

L. The parties may mutually agree as to pre-hearing discovery prior to the arbitration hearing and in the absence of agreement, upon the request of any party, pre-hearing discovery may be conducted as the Board shall determine in its sole discretion to be in the interest of fairness, full disclosure, and a prompt hearing, decision and award by the Board.

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M. The Board shall be the final judge of the procedures of the Board, the conduct of the arbitration, of the rules of evidence, the rules of privilege, discovery and production and of excessiveness and relevancy of any witnesses and documents upon the petition of any participating party. To the extent permitted by law, the Board shall have the authority to issue subpoenas and other orders to enforce their decisions. The Board shall also have the authority to issue interim decisions or awards in the interest of fairness, full disclosure, and a prompt and orderly hearing and decision and award by the Board.

N. Upon request made to the Board not later than ten (10) days after the umpire’s appointment, the Board may order a consolidated hearing as respects common issues between the Company and all affected Reinsurers participating in this Contract if the Board is satisfied in its discretion that the issues in dispute affect more than one Reinsurer and a consolidated hearing would be in the interest of fairness, and a prompt and cost effective resolution of the issues in dispute.

O. If the parties mutually agree to or the Board orders a consolidated hearing, all other affected participating Reinsurers shall join and participate in the arbitration under time frames established by the Board and will be bound by the Board’s decision and award unless excused by the Board in its discretion. A consolidated hearing shall not result in any change or modification of any Reinsurer’s liability for its participation, that is several, but not joint shall remain the same.

P. Any Reinsurer may decline to actively participate in a consolidated arbitration if in advance of the hearing, that Reinsurer shall file with the Board a written agreement in form satisfactory to the Board to be bound by the decision and award of the Board in the same fashion and to the same degree as if it actively participated in the arbitration.

Q. In the event of an order of consolidation by the Board, the arbitrator appointed by the original Reinsurer shall be subject to being, and may be, replaced within thirty (30) days of the decision to have a consolidated arbitration by an arbitrator named collectively by the Reinsurers or in the absence of agreement, by the Lead Reinsurer, or if there is no Lead Reinsurer involved in the dispute, the Reinsurer with the largest participation in this Contract affected by the dispute. In the event two (2) or more Reinsurers affected by the dispute each have the same largest participation, they shall agree among themselves as to the replacement arbitrator, if any, to be appointed. The umpire shall be the final determiner in the event of any dispute over replacement of that arbitrator. All other aspects of the arbitration shall be conducted as provided for in this Article provided that (1) each party actively participating in the consolidated arbitration will have the right to its own attorney, position, and related claims and defenses; (2) each party will not, in presenting its position, be prevented from presenting its position by the position set forth by any other party; and (3) the cost and expense of the arbitration, exclusive of Attorneys’ fees (which will be borne exclusively by the respective retaining party unless otherwise determined by the Board) but including the expense of any stenographer which shall be borne by each party actively participating in the consolidated arbitration or as the Board shall determine to be fair and appropriate under the circumstances.

ARTICLE 21

SERVICE OF SUIT

A. This Article only applies to a Reinsurer domiciled outside of the United States and/or unauthorized in any state, territory or district of the United States having jurisdiction over the Company. Furthermore, this Article will not be read to conflict with or override any obligations of the parties to arbitrate their disputes under this Contract. This Article is intended as an aid to compelling arbitration if called for by this Contract or enforcing any such arbitration or arbitral award, not as an alternative to any Arbitration provision in this Contract that is applicable for resolving disputes arising out of this Contract.

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B. In the event of any dispute, the Reinsurer, at the request of the Company, shall submit to the jurisdiction of a court of competent jurisdiction within the United States. Nothing in this Article constitutes or should be understood to constitute a waiver of any obligation to arbitrate disputes arising from this Contract or the Reinsurer’s rights to commence an action in any court of competent jurisdiction in the United States, to remove an action to a United States District Court, or to seek a transfer of a case to another court as permitted by the laws of the United States or of any state in the United States.

C. The Reinsurer, once the appropriate court is selected, whether such court is the one originally chosen by the Company and accepted by the Reinsurer or is determined by removal, transfer, or otherwise, as provided above, will comply with all requirements necessary to give said court jurisdiction and, in any suit instituted against any of them upon this Contract, will abide by the final decision of such court or any appellate court in the event of an appeal.

D. Service of process in any such suit against the Reinsurer may be made upon Mendes and Mount, 750 Seventh Avenue, New York, New York 10019-6829, — or in substitution therefore, the Firm identified by the Reinsurer on the Reinsurer’s signature page to this Contract, — (“Firm”) and in any suit instituted, the Reinsurer shall abide by the final decision of such court or of any appellate court in the event of an appeal.

E. The Firm is authorized and directed to accept service of process on behalf of the Reinsurer in any such suit and/or upon the request of the Company to give a written undertaking to the Company that they shall enter a general appearance upon the Reinsurer’s behalf in the event such a suit shall be instituted.

F. Further, as required by and pursuant to any statute of any state, territory or district of the United States which makes provision therefore, the Reinsurer hereby designates the Superintendent, Commissioner or Director of Insurance or other officer specified for that purpose in the statute, or his successor or successors in office, as their true and lawful attorney upon whom may be served any lawful process in any action, suit or proceeding instituted by or on behalf of the Company or any beneficiary hereunder arising out of this Contract, and hereby designates the above-named as the person to whom the said officer is authorized to mail such process or a true copy thereof.

ARTICLE 22

CONFIDENTIALITY

A. The information, data, statements, representations and other materials provided by the Company or the Reinsurer to the other arising from consideration and participation in this Contract whether contained in the reinsurance submission, this Contract, or in materials or discussions arising from or related to this Contract, may contain confidential or proprietary information as expressly indicated by the Disclosing Party (“Disclosing Party”) in writing from time to time to the other party of the respective parties (“Confidential Information”). This Confidential Information is intended for the sole use of the parties to this Contract (and their affiliates involved in management or operation of assumed reinsurance business, retrocessionaires, prospective retrocessionaires, intermediaries involved in such placements, respective auditors and legal counsel) as may be necessary in analyzing and/or accepting a participation in and/or executing their respective responsibilities under or related to this Contract. Disclosing or using Confidential Information relating to this Contract, without the prior written consent of the Disclosing Party, for any purpose beyond (i) the scope of this Contract, (ii) the reasonable extent necessary to perform rights and responsibilities expressly provided for under this Contract, (iii) the reasonable extent necessary to administer, report to and effect recoveries from retrocessional Reinsurers, (iv) the reporting to regulatory or other governmental authorities as may be legally required or (v) persons with a need to know the information, (all of the preceding persons or entities who are legally obligated by either written agreement or

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otherwise to maintain the confidentiality of the Confidential Information) is expressly forbidden. Copying, duplicating, disclosing, or using Confidential Information for any purpose beyond this expressed purpose is forbidden without the prior written consent of the Disclosing Party.

B. Should a party (“Receiving Party”) receive a third party demand pursuant to subpoena, summons, or court or governmental order, to disclose Confidential Information that has been provided by another party to this Contract, the Receiving Party shall make commercially reasonable efforts to provide the Disclosing Party with written notice of any subpoena, summons, or court or governmental order, at least ten (10) days prior to such release or disclosure. Unless the Disclosing Party has given its prior permission to release or disclose the Confidential Information, the Receiving Party shall not comply with the subpoena prior to the actual date required by the subpoena. If a protective order or appropriate remedy is not obtained, the Receiving Party may disclose only that portion of the Confidential Information that it is legally obligated to disclose. However, notwithstanding anything to the contrary in this Contract, in no event, to the extent permitted by law, shall this Article require the Receiving Party not to comply with the subpoena, summons, or court or governmental order.

ARTICLE 23

PRIVACY

A. Privacy Awareness. The Company and the Reinsurer are aware of and in compliance with their responsibilities and obligations under:

1. The Gramm-Leach-Bliley Act of 1999 (the “Act”) and applicable Federal and State laws and regulations implementing the Act. The Company and the Reinsurer will only use Non-Public Personal Information as permitted by law; and

2. The applicable provisions of the Health Insurance Portability and Accountability Act (“HIPAA”) and the related requirements of any regulations promulgated thereunder including without limitation the Federal Privacy Regulations as contained in 45 CFR Part 160 and 164 (the “Federal Privacy Regulations”). The Company and the Reinsurer will only use protected health information as permitted by law.

B. Non-Disclosure. To the extent required or prohibited by applicable law or regulation, the Reinsurer shall not disclose any (a) Non-Public Personal Information or (b) protected health information (as defined in 45 CFR 164.501) it receives from the Company to anyone other than:

1. The Reinsurer, the Reinsurer’s affiliates, legal counsel, auditors, consultants, regulators, rating agencies and any other persons or entities to whom such disclosure is required to effect, administer, or enforce a reinsurance contract; or any retrocessional reinsurance contract applicable to the losses that are the subject of this Contract, or

2. Persons or entities to whom disclosure is required by applicable law or regulation.

C. Non-Public Personal Information. “Non-Public Personal Information” shall for the purpose of this Contract mean financial or health information that personally identifies an individual, including claimants under Policies reinsured under this Contract, and which information is not otherwise available to the public.

ARTICLE 24

RESERVES

A. If, at any time during the period of this Contract and thereafter the reinsurance provided by a Reinsurer participating in this Contract does not qualify for full statutory accounting credit for reinsurance by regulatory authorities having jurisdiction over the Company (whether by

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reason of lack of license, accreditation or otherwise) such that a financial penalty to the Company would result on any statutory statement or report the Company is required to make or file with insurance regulatory authorities (or a court of law in the event of insolvency), the Reinsurer shall secure the Reinsurer’s share of Obligations for which such full statutory credit is not granted by those authorities in a manner, form, and amount acceptable to the Company and to all applicable insurance regulatory authorities in accordance with this Article.

B. The Reinsurer shall secure such Obligations, within thirty (30) days after the receipt of the Company’s written request regarding the Reinsurer’s share of Obligations under this Contract (but not later than December 31) of each year by either:

1. Clean, irrevocable, and unconditional evergreen letter(s) of credit issued and confirmed, if confirmation is required by the applicable insurance regulatory authorities, by a qualified United States financial institution as defined under the Insurance Law of the Company’s domiciliary state and acceptable to the Company and to insurance regulatory authorities;

2. A trust account meeting at least the standards of New York’s Insurance Regulation 114 and the Insurance Law of the Company’s domiciliary state; or

3. Cash advances or funds withheld or a combination of both, which will be under the exclusive control of the Company (“Funds Deposit”).

C. The “Obligations” referred to herein means, subject to the preceding paragraphs, the then current (as of the end of each calendar quarter) sum of any:

1. amount of the ceded unearned premium reserve for which the Reinsurer is responsible to the Company;

2. amount of Net Losses and Loss Adjustment Expenses and other amounts paid by the Company for which the Reinsurer is responsible to the Company but has not yet paid;

3. amount of ceded reserves for Net Losses and Loss Adjustment Expenses for which the Reinsurer is responsible to the Company;

4. amount of return and refund premiums paid by the Company for which the Reinsurer is responsible to the Company but has not yet paid.

D. The Company, or its successors in interest, may draw, at any time and from time to time, upon the:

1. Established letter of credit (or subsequent cash deposit);

2. Established trust account (or subsequent cash deposit); or

3. Funds Deposit;

without diminution or restriction because of the insolvency of either the Company or the Reinsurer for one or more of the following purposes set forth below.

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E. Draws shall be made only for the following purposes:

1. To make payment to and reimburse the Company for the Reinsurer’s share of Net Loss and Loss Adjustment Expense and other amounts paid by the Company under its Policies and for which the Reinsurer is responsible under this Contract that is due to the Company but unpaid by the Reinsurer including but not limited to the Reinsurer’s share of premium refunds and returns; and

2. To obtain a cash advance of the entire amount of the remaining balance under any letter of credit in the event that the Company:

a. has received notice of non-renewal or expiration of the letter of credit or trust account;

b. has not received assurances satisfactory to the Company of any required increase in the amount of the letter of credit or trust account, or its replacement or other continuation of the letter of credit or trust account at least thirty (30) days before its stated expiration date;

c. has been made aware that others may attempt to attach or otherwise place in jeopardy the security represented by the letter of credit or trust account; or

d. has concluded that the trustee or issuing (or confirming) bank’s financial condition is such that the value of the security represented by the letter of credit or trust account may be in jeopardy;

and under any of those circumstances where the Reinsurer’s entire Obligations, or part thereof, under this Contract remain unliquidated and undischarged at least thirty (30) days prior to the stated expiration date or at the time the Company learns of the possible jeopardy to the security represented by the letter of credit or trust account.

F. If the Company draws on the letter of credit or trust account to obtain a cash advance, the Company will hold the amount of the cash advance so obtained in the name of the Company in any qualified United States financial institution as defined under the Insurance Law of the Company’s domiciliary state in trust solely to secure the Obligations referred to above and for the use and purposes enumerated above and to return any balance thereof to the Reinsurer:

1. Upon the complete and final liquidation and discharge of all of the Reinsurer’s Obligations to the Company under this Contract; or

2. In the event the Reinsurer subsequently provides alternate or replacement security consistent with the terms hereof and acceptable to the Company.

G. The Company will prepare and forward at annual intervals or more frequently as determined by the Company, but not more frequently than quarterly to the Reinsurer a statement for the purposes of this Article, showing the Reinsurer’s share of Obligations as set forth above. If the Reinsurer’s share thereof exceeds the then existing balance of the security provided, the Reinsurer will, within fifteen (15) days of receipt of the Company’s statement, but never later than December 31 of any year, increase the amount of the letter of credit, (or subsequent cash deposit), trust account or Funds Deposit to the required amount of the Reinsurer’s share of Obligations set forth in the Company’s statement, but never later than December 31 of any year. If the Reinsurer’s share thereof is less than the then existing balance of the security provided, the Company will release the excess thereof to the Reinsurer upon the Reinsurer’s written request. The Reinsurer will not attempt to prevent the Company from holding the security provided or Funds Deposit so long as the Company is acting in accordance with this Article. The Company shall pay interest earned on the deposited amounts to the Reinsurers as the parties shall have agreed at the time of the deposit.

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H. Any assets deposited to a trust account will be valued according to their current fair market value and will consist only of cash (U.S. legal tender), certificates of deposit issued by a qualified United States financial institution as defined under the Insurance Law of the Company’s domiciliary state and payable in cash, and investments of the types no less conservative than those specified in Section 1404 (a)(1)(2)(3)(8) and (10) of the New York Insurance Law and which are admitted assets under the Insurance Law of the Company’s domiciliary state. Investments issued by the parent, subsidiary, or affiliate of either the Company or the Reinsurer will not be eligible investments. All assets so deposited will be accompanied by all necessary assignments, endorsements in blank, or transfer of legal title to the trustee in order that the Company may negotiate any such assets without the requirement of consent or signature from the Reinsurer or any other entity.

I. All settlements of account between the Company and the Reinsurer will be made in cash or its equivalent. All income earned and received by the amount held in an established trust account will be added to the principal.

J. The Company’s “successors in interest” will include those by operation of law, including without limitation, any liquidator, rehabilitator, receiver, or conservator.

K. The Reinsurer will take any other reasonable steps that may be required for the Company to take full credit on its statutory financial statements for the reinsurance provided by this Contract.

ARTICLE 25

LATE PAYMENTS

A. Payments from the Reinsurer to the Company for coverage providing pro rata forms of reinsurance shall have a due date as expressed in the Article entitled NOTICE OF LOSS AND LOSS SETTLEMENT. Payments from the Reinsurer to the Company for coverage providing excess of loss reinsurance shall have as a due date the date on which the proof of loss or demand for payment is received by the Reinsurer. Payment not received within sixty (60) days of the due date shall be deemed overdue (the “Overdue Date”). Payments due from the Reinsurer to the Company will not be considered overdue if the Reinsurer requests, in writing, that such payment be made by drawing on a letter of credit or other similar method of funding that has been established for this Contract, provided that there is an adequate balance in place, and further provided that such advice to draw is received by the Company within the sixty (60) day deadline set forth above. Payments from the Company to the Reinsurer will have a due date as the date specified in this Contract and will be overdue sixty (60) days thereafter. Premium adjustments will be overdue sixty (60) days from the Contract due date or one hundred twenty (120) days after the expiration or renewal date, whichever is greater.

B. In the event that this Contract provides excess of loss reinsurance, the Company will provide the Reinsurer with a reasonable proof of loss and a copy of the claim adjuster’s report(s) or any other reasonable evidence of indemnification. If subsequent to receipt of this evidence, the information contained therein is unreasonably insufficient or not in substantial accordance with the contractual conditions of this Contract, then the payment due date as specified above will be deemed to be the date upon which the Reinsurer received the additional information necessary to approve payment of the claim and the claim is presented in a reasonably acceptable manner. This paragraph is only for the purpose of establishing when a claim payment is overdue, and will not alter the provisions of the Article entitled NOTICE OF LOSS AND LOSS SETTLEMENT or other pertinent contractual stipulations of this Contract.

C. If payment is made of overdue amounts within thirty (30) days of the Overdue Date, overdue amounts will bear simple interest from the Overdue Date at a rate determined by the annualized one month London Interbank Offered Rate for the first business day of the calendar month in which the amount becomes overdue, as published in The Wall Street Journal, plus two hundred (200) basis points to be calculated weekly. If payment is made of overdue amounts

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more than thirty (30) days after the Overdue Date, overdue amounts will bear simple interest from the Overdue Date at a rate determined by the annualized one month London Interbank Offered Rate for the first business day of the calendar month in which the amount becomes overdue, as published in The Wall Street Journal, plus four hundred (400) basis points to be calculated on a weekly basis, but in no event less than eight percent (8%) simple interest. If the sum of the compensating additional amount computed in respect of any overdue payment is less than one quarter of one percent (0.25%) of the amount overdue, or one thousand dollars ($1,000), whichever is greater, and/or the overdue period is one week or less, then the interest amount shall be waived. The basis point standards referred to above shall be doubled if the late payment is due from a Reinsurer who is no longer an active reinsurance market. Interest shall cease to accrue upon the party’s payment of an overdue amount to the Intermediary.

ARTICLE 26

MODE OF EXECUTION

A. This Contract may be executed by:

1. an original written ink signature of paper documents;

2. an exchange of facsimile copies showing the original written ink signature of paper documents;

3. electronic signature technology employing computer software and a digital signature or digitizer pen pad to capture a person’s handwritten signature in such a manner that the signature is unique to the person signing, is under the sole control of the person signing, is capable of verification to authenticate the signature and is linked to the document signed in such a manner that if the data is changed, such signature is invalidated.

B. The use of any one or a combination of these methods of execution shall constitute a legally binding and valid signing of this Contract.

ARTICLE 27

VARIOUS OTHER TERMS

A. This Contract shall be binding upon and inure to the benefit of the Company and Reinsurer and their respective successors and assigns provided, however, that this Contract may not be assigned by either party without the prior written consent of the other which consent may be withheld by either party in its sole unfettered discretion. This provision shall not be construed to preclude the assignment by the Company of reinsurance recoverables to another party for collection.

B. The territorial limits of this Contract shall be identical with those of the Company’s Policies.

C. This Contract shall constitute the entire agreement between the parties with respect to the Business Covered hereunder. There are no understandings between the parties other than as expressed in this Contract. Any change or modification of this Contract shall be null and void unless made by amendment to the Contract and signed by both parties.

D. Except as may be provided in the Article entitled ARBITRATION, this Contract shall be governed by and construed according to the laws of the Commonwealth of Pennsylvania, exclusive of that state’s rules with respect to conflicts of law.

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E. The headings preceding the text of the Articles and paragraphs of this Contract are intended and inserted solely for the convenience of reference and shall not affect the meaning, interpretation, construction or effect of this Contract.

F. This Contract is solely between the Company and the Reinsurer, and in no instance shall any insured, claimant or other third party have any rights under this Contract.

G. If any provision of this Contract should be invalid under applicable laws, the latter shall control but only to the extent of the conflict without affecting the remaining provisions of this Contract.

H. The failure of the Company or Reinsurer to insist on strict compliance with this Contract or to exercise any right or remedy shall not constitute a waiver of any rights contained in this Contract nor estop the parties from thereafter demanding full and complete compliance nor prevent the parties from exercising any remedy.

I. Each party shall be excused for any reasonable failure or delay in performing any of its respective obligations under this Contract, if such failure or delay is caused by Force Majeure. “Force Majeure” shall mean any act of God, strike, lockout, act of public enemy, any accident, explosion, fire, storm, earthquake, flood, drought, peril of sea, riot, embargo, war or foreign, federal, state or municipal order or directive issued by a court or other authorized official, seizure, requisition or allocation, any failure or delay of transportation, shortage of or inability to obtain supplies, equipment, fuel or labor or any other circumstance or event beyond the reasonable control of the party relying upon such circumstance or event; provided, however, that no such Force Majeure circumstance or event shall excuse any failure or delay beyond a period exceeding thirty (30) days from the date such performance would have been due but for such circumstance or event.

J. All Articles of this Contract shall survive the termination of this Contract until all Obligations between the parties have been finally settled.

K. This Contract may be executed by the parties hereto in any number of counterparts, and by each of the parties hereto in separate counterparts, each of which counterparts, when so executed and delivered, shall be deemed to be an original, but all such counterparts shall together constitute but one and the same instrument.

L. Whenever the word “Company” is used in this Contract, such term shall mean each and all affiliated companies which are or may hereafter be under common control provided notice be given to the Reinsurers of any newly affiliated companies which may hereafter come under common control as soon as practicable, with full particulars as to how such affiliation is likely to affect this Contract. In the event that either party maintains that such affiliation calls for altering the terms of this Contract and an agreement for alteration not being arrived at, then the Business Covered of such newly affiliated company is covered at existing terms for a period not to exceed (90) ninety days after notice by either party that it does not wish to cover the business of the newly affiliated company at the existing terms.

M. The term “Reinsurer” shall refer to each Reinsurer participating severally and not jointly in this Contract. The subscribing (Re)insurers’ obligations under contracts of (re)insurance to which they subscribe are several and not joint and are limited solely to the extent of their individual subscriptions. The subscribing (Re)insurers are not responsible for the subscription of any co-subscribing (Re)insurer who for any reason does not satisfy all or part of its obligations.

N. For purposes of sending and receiving notices and payments required by this Contract other than in respect of the Articles entitled SERVICE OF SUIT and RESERVES herein, the reinsured company that is set forth first in the definition of “Company” is deemed the agent of all other reinsured companies referenced herein. In no event, however, shall any reinsured

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company be deemed the agent of another with respect to the terms of the Article entitled INSOLVENCY.

O. Whenever the content of this Contract requires, the gender of all words shall include the masculine, feminine and neuter, and the number of all words shall include the singular and the plural. This Contract shall be construed without regard to any presumption or other rule requiring construction against the party causing this Contract to be drafted.

P. The Company shall furnish the Reinsurer, in accordance with regulatory requirements, periodic reporting of premiums and losses that relate to the Business Covered in this Contract as may be needed for Reinsurers’ completion of financial statements to regulatory authorities.

Q. When so requested in writing, the Company shall afford the Reinsurer or its representatives an opportunity to be associated with the Company, at the expense of the Reinsurer, in the defense of any claim, suit or proceeding involving this reinsurance, and the Company and the Reinsurer shall cooperate in every respect in the defense of such claim, suit or proceeding, provided the Company shall have the right to make any decision in the event of disagreement over any matter of defense or settlement.

ARTICLE 28

INTERMEDIARY

A. Towers Watson Pennsylvania Inc. (“Towers Watson”) is hereby recognized as the Intermediary negotiating this Contract for all business hereunder. All communications (including but not limited to notices, statements, premium, return premium, commissions, taxes, losses, loss adjustment expense, salvages and loss settlements) relating thereto shall be transmitted to the Company or the Reinsurer through Towers Watson, Centre Square East, 1500 Market Street, Philadelphia, Pennsylvania, 19102-4790. Payments by the Company to the Intermediary shall be deemed to constitute payment to the Reinsurer. Payments by the Reinsurer to the Intermediary shall be deemed to constitute payment to the Company only to the extent that such payments are actually received by the Company. In acting as Intermediary for this Contract, the Intermediary shall (i) comply with all aspects of New York Regulation 98 and shall (ii) be entitled to withdraw funds in accordance with section 32.3(a)(3) of that Regulation including commissions, excise tax and interest received on its premium and loss accounts, and shall also (iii) return to the Reinsurer any brokerage allowed by the Reinsurer and taken on premium ceded to the Reinsurer but refunded or returned to the Company.

B. Whenever notice is required within this Contract, such notice may be given by certified mail, registered mail, or overnight express mail. Notice shall be deemed to be given on the date received by the receiving party.

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NUCLEAR INCIDENT EXCLUSION CLAUSE — PHYSICAL DAMAGE — REINSURANCE
(BRMA 35B)

1.	This reinsurance does not cover any loss or liability accruing to the Company, directly or indirectly, and whether as Insurer or Reinsurer, from any Pool of Insurers or Reinsurers formed for the purpose of covering Atomic or Nuclear Energy risks.
2.	Without in any way restricting the operation of paragraph (1) of this Clause, this reinsurance does not cover any loss or liability accruing to the Company, directly or indirectly, and whether as Insurer or Reinsurer, from any insurance against Physical Damage (including business interruption or consequential loss arising out of such Physical Damage) to:

I.	Nuclear reactor power plants including all auxiliary property on the site, or
II.	Any other nuclear reactor installation, including laboratories handling radioactive materials in connection with reactor installations and “critical facilities” as such, or
III.	Installations for fabricating complete fuel elements or for processing substantial quantities of “special nuclear material” and for reprocessing, salvaging, chemically separating, storing or disposing of “spent” nuclear fuel or waste materials, or
IV.	Installations other than those listed in paragraph (2) III above using substantial quantities of radioactive isotopes or other products of nuclear fission.

3. Without in any way restricting the operations of paragraphs (1) and (2) hereof, this reinsurance does not cover any loss or liability by radioactive contamination accruing to the Company, directly or indirectly, and whether as Insurer or Reinsurer, from any insurance on property which is on the same site as a nuclear reactor power plant or other nuclear installation and which normally would be insured therewith except that this paragraph (3) shall not operate:

(a)	where Company does not have knowledge of such nuclear reactor power plant or nuclear installation, or
(b)	where said insurance contains a provision excluding coverage for damage to property caused by or resulting from radioactive contamination, however caused. However, on and after 1st January 1960, this sub-paragraph (b) shall only apply provided the said radioactive contamination exclusion provision has been approved by the Governmental Authority having jurisdiction thereof.

4.	Without in any way restricting the operations of paragraphs (1), (2) and (3) hereof, this reinsurance does not cover any loss or liability by radioactive contamination accruing to the Company, directly or indirectly, and whether as Insurer or Reinsurer, when such radioactive contamination is a named hazard specifically insured against.
5.	It is understood and agreed that this Clause shall not extend to risks using radioactive isotopes in any form where the nuclear exposure is not considered by the Company to be the primary hazard.
6.	The term “special nuclear material” shall have the meaning given it in the Atomic Energy Act of 1954 or by any law amendatory thereof.
7.	Company to be sole judge of what constitutes:

(a)	substantial quantities, and
(b)	the extent of installation, plant or site.

Notes: Without in any way restricting the operation of paragraph (1) hereof, it is understood and agreed that:

(a)	All Policies issued by the Company on or before 31st December 1957 shall be free from the application of the other provisions of this Clause until expiry date or 31st December 1960 whichever first occurs whereupon all the provisions of this Clause shall apply.
(b)	With respect to any risk located in Canada Policies issued by the Company on or before 31st December 1958 shall be free from the application of the other provisions of this Clause until expiry date or 31st December 1960 whichever first occurs whereupon all the provisions of this Clause shall apply.

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INFORMATION TECHNOLOGY HAZARDS CLARIFICATION CLAUSE

Losses arising directly or indirectly, out of:

(i) loss of, alteration of, or damage to

or

(ii)	a reduction in the functionality, availability or operation of
	a computer system, hardware, program, software, data, information repository, microchip, integrated circuit or similar device in computer equipment or non-computer equipment, whether the property of the policyholder of the reinsured or not, do not in and of themselves constitute an event unless arising out of one or more of the following perils:

fire, lightning, explosion, aircraft or vehicle impact, falling objects, windstorm, hail, tornado, cyclone, hurricane, earthquake, volcano, tsunami, flood, freeze or weight of snow.

23/11/00
NMA2912

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EXHIBIT I — Page 1.
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EXHIBIT I

PROPERTY FIRST EXCESS OF LOSS REINSURANCE CONTRACT

EFFECTIVE JANUARY 1, 2011

issued to

PENN MILLERS INSURANCE COMPANY

AMERICAN MILLERS INSURANCE COMPANY

ARTICLE 5

RETENTION AND LIMIT

A. The Reinsurers shall be liable to, indemnify and reinsure the Company for each and every Risk, in each and every Loss Occurrence for one hundred percent (100%) of the excess Net Loss above an initial Net Loss to the Company of one million dollars ($1,000,000) but the Reinsurers shall not be liable for more than four million dollars ($4,000,000) of Net Loss in each and every Risk, in each and every Loss Occurrence, nor shall Reinsurers be liable for more than eight million dollars ($8,000,000) of Net Loss in excess loss from any one Loss Occurrence.

B. The Reinsurers shall be liable to, indemnify and reinsure the Company for each and every Risk, each and every Loss Occurrence, involving a certified or non certified Act of Terrorism, irrespective of the number and kinds of perils involved, for one hundred percent (100%) of the excess Net Loss above an initial Net Loss to the Company of one million dollars ($1,000,000) each and every Risk; but the Reinsurers shall not be liable for more than four million dollars ($4,000,000) of Net Loss for each and every Risk, and not more than four million dollars ($4,000,000) of Net Loss during the term of this Contract.

C. Coverage for loss caused by Mold, as defined within the terms of the Company’s Policy, shall be limited to an annual amount not to exceed eight hundred thousand dollars ($800,000), namely twenty percent (20%) of the layer limit.

D. The Company shall be the sole judge of what constitutes “one risk” and the Probable Maximum Loss applicable to such risk.

E. An “Act of Terrorism” shall mean any act, including both Certified Acts of Terrorism in accordance with the Terrorism Risk Insurance Act of 2002 (“TRIA”), the Terrorism Risk Insurance Extension Act of 2005 (“TRIEA”) and the Terrorism Risk Insurance Program Reauthorization Act of 2007 (“TRIPRA”) and any subsequent extension and those not so certified, or preparation in respect of action, or threat of action designed to influence the government de jure or de facto of any nation or any political division thereof, or in pursuit of any political, religious, ideological, or similar purpose to intimidate the public or a section of the public of any nation by any person or group(s) of persons whether acting alone or on behalf of or in connection with any organization(s) or government(s) de jure or de facto, and which:

1.	involves violence against one or more persons; or
2.	involves damage to property; or
3.	endangers life other than that of the person committing the action; or
4.	creates a risk to health or safety of the public or a section of the public; or

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5.	is designed to interfere with or to disrupt an electronic system; or
6.	involves loss, damage, cost, or expense directly or indirectly caused by, contributed to by, resulting from, or arising out of or in connection with any action in controlling, preventing, suppressing, retaliating against, or responding to any Act of Terrorism.

Loss or damage occasioned by riot, strikes, civil commotion, vandalism or malicious mischief as those terms have been interpreted by United States Courts to apply to insurance Policies shall not be construed to be an “Act of Terrorism”.

ARTICLE 6

REINSTATEMENT

A. Each claim hereunder shall reduce the amount of the Reinsurers’ limit of liability from the time of the occurrence of the loss by the sum paid, but the sum so exhausted shall be reinstated immediately from the time of the occurrence of the Loss.

B. For the first four million dollars ($4,000,000) so reinstated, there shall be no additional premium. For the next four million dollars ($4,000,000) so reinstated thereafter, there shall be no additional premium. For the next four million dollars ($4,000,000) so reinstated thereafter, the Company agrees to pay an additional premium calculated by multiplying one hundred percent (100%) of the annual reinsurance premium hereon by the product of the percentage that the amount reinstated bears to the limit (i.e., four million dollars ($4,000,000)) of this Contract. Nevertheless, the liability of the Reinsurers shall never be more than four million dollars ($4,000,000) in respect of any one Loss, eight million dollars ($8,000,000) in respect of any one Loss Occurrence, nor more than sixteen million dollars ($16,000,000) in all in respect of all losses occurring during the Contract period.

C. A provisional statement of reinstatement premium due the Reinsurers shall be prepared by the Company and submitted to the Reinsurers as soon as practicable after payment of a claim hereunder. The provisional reinstatement premium shall be based on one hundred percent (100%) of the estimated annual reinsurance premium hereunder. The amount of reinstatement premium due Reinsurers shall be offset against the loss payment due the Company with only the net amount due to be remitted by the debtor party.

D. As promptly as possible after the annual reinsurance premium hereunder has been finally determined, the Company shall prepare and submit to the Reinsurers a final statement of reinstatement premium due. Any reinstatement premium shown to be due the Reinsurers (less prior payments, if any) shall be remitted by the Company with its statement. Any return reinstatement premium shown to be due the Company shall be remitted by the Reinsurers as promptly as possible after receipt of the Company’s final statement.

E. In the event there are any mid-term terminations in the participation of any Reinsurer in this Contract, payment of any such reinstatement premium in full shall be paid to the Reinsurer who incurred the loss that generates the reinstatement premium.

ARTICLE 7

PREMIUM

A. The premium payable to Reinsurers shall be calculated by applying a rate of thirteen point two zero percent (13.20%) to the Company’s Subject Matter Premium Income.

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B. The term “Subject Matter Premium Income” shall mean the Company’s gross net premiums earned on the Business Covered hereunder less premiums paid on reinsurance, if any, recoveries under which would reduce the Net Loss to this Contract.

C. The Company shall pay the Reinsurers a deposit premium of four million eight hundred six thousand three hundred seventy six dollars ($4,806,376) shall be paid to Reinsurers in four (4) equal installments of one million two hundred one thousand five hundred ninety four dollars ($1,201,594) each on January 1, April 1, July 1 and October 1, 2011. As promptly as possible after the termination of this Contract, however no longer than sixty (60) days, the Company shall render a report to the Reinsurers showing the actual reinsurance premium due hereunder, calculated as provided in Paragraph A. of this Article; and, if the premium so calculated is greater than the previously paid deposit premium, the balance shall be remitted by the Company with its report. However, in no event shall the premium to the Reinsurers for the Contract be less than three million eight hundred forty five thousand one hundred dollars ($3,845,100).

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EXHIBIT II — Page 1.
TW No. G25574.11

EXHIBIT II

PROPERTY SECOND EXCESS OF LOSS REINSURANCE CONTRACT

EFFECTIVE JANUARY 1, 2011

issued to

PENN MILLERS INSURANCE COMPANY

AMERICAN MILLERS INSURANCE COMPANY

ARTICLE 5

RETENTION AND LIMIT

A. The Reinsurers shall be liable to, indemnify and reinsure the Company for each and every Risk, in each and every Loss Occurrence for one hundred percent (100%) of the excess Net Loss above an initial Net Loss to the Company of five million dollars ($5,000,000) but the Reinsurers shall not be liable for more than five million dollars ($5,000,000) of Net Loss in each and every Risk in each and every Loss Occurrence, nor shall Reinsurers be liable for more than ten million dollars ($10,000,000) of Net Loss in excess loss from any one Loss Occurrence.

B. The Reinsurers shall be liable to, indemnify and reinsure the Company for the Company’s Net Loss, each and every Risk, involving a certified or non certified Act of Terrorism, irrespective of the number and kinds of perils involved, for one hundred percent (100%) of the excess Net Loss above an initial Net Loss to the Company of five million dollars ($5,000,000) of Net Loss each and every Risk; but the Reinsurers shall not be liable for more than five million dollars ($5,000,000) of Net Loss for each and every Risk, and not more than five million dollars ($5,000,000) of Net Loss during the term of this Contract.

C. Coverage for loss caused by Mold, as defined within the terms of the Company’s Policy, shall be limited to an annual amount not to exceed one million dollars ($1,000,000), namely twenty percent (20%) of the layer limit.

D. The Company shall be the sole judge of what constitutes “one risk” and the Probable Maximum Loss applicable to such risk.

E. An “Act of Terrorism” shall mean any act, including both Certified Acts of Terrorism in accordance with the Terrorism Risk Insurance Act of 2002 (“TRIA”), the Terrorism Risk Insurance Extension Act of 2005 (“TRIEA”) and Terrorism Risk Insurance Program Reauthorization Act of 2007 (“TRIPRA”) and the and any subsequent extension and those not so certified, or preparation in respect of action, or threat of action designed to influence the government de jure or de facto of any nation or any political division thereof, or in pursuit of any political, religious, ideological, or similar purpose to intimidate the public or a section of the public of any nation by any person or group(s) of persons whether acting alone or on behalf of or in connection with any organization(s) or government(s) de jure or de facto, and which:

1.	involves violence against one or more persons; or
2.	involves damage to property; or
3.	endangers life other than that of the person committing the action; or
4.	creates a risk to health or safety of the public or a section of the public; or

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5.	is designed to interfere with or to disrupt an electronic system; or
6.	involves loss, damage, cost, or expense directly or indirectly caused by, contributed to by, resulting from, or arising out of or in connection with any action in controlling, preventing, suppressing, retaliating against, or responding to any Act of Terrorism.

Loss or damage occasioned by riot, strikes, civil commotion, vandalism or malicious mischief as those terms have been interpreted by United States Courts to apply to insurance Policies shall not be construed to be an “Act of Terrorism”.

ARTICLE 6

REINSTATEMENT

A. Each claim hereunder shall reduce the amount of the Reinsurers’ limit of liability from the time of the Occurrence of the loss by the sum paid, but the sum so exhausted shall immediately be reinstated from the time of the occurrence of the loss.

B. For the first five million dollars ($5,000,000) so reinstated, the Company agrees to pay an additional premium calculated by multiplying fifty percent (50%) of the annual reinsurance premium hereon by the product of the percentage that the amount reinstated bears to the limit (i.e., five million dollars ($5,000,000)) of this Contract. For the next five million dollars ($5,000,000) so reinstated thereafter, the Company agrees to pay an additional premium calculated by multiplying one hundred percent (100%) of the annual reinsurance premium hereon by the product of the percentage that the amount reinstated bears to the limit (i.e., five million dollars ($5,000,000)) of this Contract. Nevertheless, the liability of the Reinsurers shall never be more than five million dollars ($5,000,000) in respect of any one loss, ten million dollars ($10,000,000) in respect of any one Loss Occurrence, nor more than fifteen million dollars ($15,000,000) in all in respect of all losses occurring during the Contract period.

C. A provisional reinstatement premium shall be paid by the Company at the time the Reinsurers pay the loss giving rise to the reinstatement premium through an offset of the provisional reinstatement premium due the Reinsurers against the loss payment due the Company, with only the net amount due to be remitted by the debtor party. The amount of this provisional reinstatement premium shall be based on one hundred percent (100%) of the estimated annual reinsurance premium hereunder.

D. As promptly as possible after the loss has been paid by the Reinsurers and the annual reinsurance premium hereunder has been finally determined, the Company shall prepare and submit to the Reinsurers a final statement of reinstatement premium due. Any reinstatement premium shown to be due the Reinsurers (less prior payments, if any) shall be remitted by the Company with its statement. Any return reinstatement premium shown to be due the Company shall be remitted by the Reinsurers as promptly as possible after receipt of the Company’s final statement.

E. In the event there are any mid-term terminations in the participation of any Reinsurer in this Contract, payment of any such reinstatement premium in full shall be paid to the Reinsurer who incurred the loss that generates the reinstatement premium.

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FINAL

EXHIBIT II — Page 3.
TW No. G25574.11

PREMIUM

A. The premium payable to Reinsurers shall be calculated by applying a rate of one point eight zero percent (1.80%) to the Company’s Subject Matter Premium Income.

B. The term “Subject Matter Premium Income” shall mean the Company’s gross net premiums earned on the business covered hereunder less premiums paid on reinsurance, if any, recoveries under which would reduce the Net Loss to this Contract.

C. The Company shall pay the Reinsurers a deposit premium of six hundred fifty five thousand four hundred sixteen dollars ($655,416) shall be paid to Reinsurers in four (4) equal installments of one hundred sixty three thousand eight hundred fifty four dollars ($163,854) each on January 1, April 1, July 1 and October 1, 2011. As promptly as possible after the termination of this Contract, however no longer than sixty (60) days, the Company shall render a report to the Reinsurers showing the actual reinsurance premium due hereunder, calculated as provided in Paragraph A. of this Article; and, if the premium so calculated is greater than the previously paid deposit premium, the balance shall be remitted by the Company with its report. However, in no event shall the premium to the Reinsurers for the Contract be less than five hundred twenty four thousand three hundred thirty two dollars ($524,332).

TW No. G25573.11/G25574.11/G26233.11
FINAL

EXHIBIT III — Page 1.
TW No. G25574.11

EXHIBIT III

PROPERTY THIRD EXCESS OF LOSS REINSURANCE CONTRACT

EFFECTIVE JANUARY 1, 2011

issued to

PENN MILLERS INSURANCE COMPANY

AMERICAN MILLERS INSURANCE COMPANY

ARTICLE 5

RETENTION AND LIMIT

A. The Reinsurers shall be liable to, indemnify and reinsure the Company for each and every risk, in each and every Loss Occurrence, for one hundred percent (100%) of the excess Net Loss above an initial Net Loss to the Company of ten million dollars ($10,000,000) but the Reinsurers shall not be liable for more than ten million dollars ($10,000,000) of Net Loss in each and every risk, in each and every Loss Occurrence, nor shall Reinsurers be liable for more than ten million dollars ($10,000,000) Net Loss in excess loss from any one Loss Occurrence.

B. The Reinsurers shall be liable to, indemnify and reinsure the Company for each and every Risk, each and every Loss Occurrence, involving a Certified or Non Certified Act of Terrorism, irrespective of the number of kinds of perils involved, for one hundred percent (100%) of the excess Net Loss above an initial Net Loss to the Company of ten million dollars ($10,000,000) of Net Loss each and every Risk; but the Reinsurers shall not be liable for more than ten million dollars ($10,000,000) of Net Loss for each and every Risk, and not more than ten million dollars ($10,000,000) of Net Loss during the term of this Contract.

C. Coverage for loss caused by Mold, as defined within the terms of the Company’s Policy, shall be limited to an annual amount not to exceed two million dollars ($2,000,000), namely twenty percent (20%) of the layer limit.

D. The Company shall be the sole judge of what constitutes “one risk” and the Probable Maximum Loss applicable to such risk.

E. An “Act of Terrorism” shall mean any act, including both Certified Acts of Terrorism in accordance with the Terrorism Risk Insurance Act of 2002 (“TRIA”), the Terrorism Risk Insurance Extension Act of 2005 (“TRIEA”) and the Terrorism Risk Insurance Program Reauthorization Act of 2007 (“TRIPRA”) and any subsequent extension and those not so certified, or preparation in respect of action, or threat of action designed to influence the government de jure or de facto of any nation or any political division thereof, or in pursuit of any political, religious, ideological, or similar purpose to intimidate the public or a section of the public of any nation by any person or group(s) of persons whether acting alone or on behalf of or in connection with any organization(s) or government(s) de jure or de facto, and which:

1.	involves violence against one or more persons; or
2.	involves damage to property; or
3.	endangers life other than that of the person committing the action; or

TW No. G25573.11/G25574.11/G26233.11
FINAL

EXHIBIT III — Page 2.
TW No. G25574.11

4.	creates a risk to health or safety of the public or a section of the public; or
5.	is designed to interfere with or to disrupt an electronic system; or
6.	involves loss, damage, cost, or expense directly or indirectly caused by, contributed to by, resulting from, or arising out of or in connection with any action in controlling, preventing, suppressing, retaliating against, or responding to any Act of Terrorism.

Loss or damage occasioned by riot, strikes, civil commotion, vandalism or malicious mischief as those terms have been interpreted by United States Courts to apply to insurance Policies shall not be construed to be an “Act of Terrorism”.

ARTICLE 6

REINSTATEMENT

A. Each claim hereunder shall reduce the amount of the Reinsurers’ limit of liability from the time of the occurrence of the loss by the sum paid, but the sum so exhausted shall be reinstated immediately from the time of the occurrence of the loss.

B. For each amount so reinstated, the Company shall pay an additional premium calculated by multiplying one hundred percent (100%) of the reinsurance premium earned by the Reinsurer hereon by the percentage that the amount reinstated bears to the limit (i.e., ten million dollars ($10,000,000)) of this Contract. Nevertheless, the liability of the Reinsurers shall never be more than ten million dollars ($10,000,000) of Net Loss in respect of any one Loss Occurrence, nor more than twenty million dollars ($20,000,000) in Net Loss in all in respect of all losses occurring during the Contract period.

C. A provisional statement of reinstatement premium due the Reinsurers shall be prepared by the Company and submitted to the Reinsurers as soon as practicable after payment of a claim hereunder. The provisional reinstatement premium shall be based on one hundred percent (100%) of the estimated annual reinsurance premium earned by the Reinsurer hereunder. The amount of reinstatement premium due Reinsurers shall be offset against the loss payment due the Company with only the net amount due to be remitted by the debtor party.

D. As promptly as possible after the annual reinsurance premium earned hereunder has been finally determined, the Company shall prepare and submit to the Reinsurers a final statement of reinstatement premium due. Any reinstatement premium shown to be due the Reinsurers (less prior payments, if any) shall be remitted by the Company with its statement. Any return reinstatement premium shown to be due the Company shall be remitted by the Reinsurers as promptly as possible after receipt of the Company’s final statement.

E. In the event there are any mid-term terminations in the participation of any Reinsurer in this Contract, payment of any such reinstatement premium in full shall be paid to the Reinsurer who incurred the loss that generates the reinstatement premium.

ARTICLE 7

PREMIUM

A. The premium payable to Reinsurers shall be calculated by applying a rate of one point three eight percent (1.38%) to the Company’s Subject Matter Premium Income.

B. The term “Subject Matter Premium Income” shall mean the Company’s gross net premiums earned on the Business Covered hereunder less premiums paid on reinsurance, if any, recoveries under which would reduce the Net Loss to this Contract.

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FINAL

EXHIBIT III — Page 3.
TW No. G25574.11

C. The Company shall pay the Reinsurers a deposit premium of five hundred two thousand four hundred eighty four dollars ($502,484) shall be paid to Reinsurers in four (4) equal installments of one hundred twenty five thousand six hundred twenty one dollars ($125,621) each on January 1, April 1, July 1 and October 1, 2011. As promptly as possible after the termination of this Contract, however no longer than sixty (60) days, the Company shall render a report to the Reinsurers showing the actual reinsurance premium due hereunder, calculated as provided in Paragraph A. of this Article; and, if the premium so calculated is greater than the previously paid deposit premium, the balance shall be remitted by the Company with its report. However, in no event shall the premium to the Reinsurers for the Contract be less than four hundred one thousand nine hundred eighty eight dollars ($401,988).

TW No. G25573.11/G25574.11/G26233.11
FINAL

EX-21.1

Exhibit 21.1

Subsidiaries of Penn Millers Holding Corporation

PMMHC Corp.

Penn Millers Insurance Company

American Millers Insurance Company

Penn Millers Agency, Inc.

EX-23.1

Exhibit 23.1

Consent of Independent Registered Public Accounting Firm

The Board of Directors
Penn Millers Holding Corporation:

We consent to the incorporation by reference in the registration statement (No. 333-170599) on Form S-8 of Penn Millers Holding Corporation of our report dated March 28, 2011, with respect to the consolidated balance sheets of Penn Millers Holding Corporation and subsidiary as of December 31, 2010 and 2009, and the related consolidated statements of operations, shareholders’ equity and cash flows for the years then ended, which report appears in the December 31, 2010 annual report on Form 10-K of Penn Millers Holding Corporation.

/s/ KPMG LLP

Philadelphia, PA
March 28, 2011

EX-31.1

Exhibit 31.1

Certification pursuant to Rule 13a — 14(a), as adopted pursuant to
Section 302 of the Sarbanes-Oxley Act of 2002

I, Douglas A. Gaudet, President and Chief Executive Officer, certify that:

1. I have reviewed this Annual Report on Form 10-K of Penn Millers Holding Corporation (the registrant);

2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;

4. The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a — 15(e) and 15d — 15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a — 15(f) and 15d — 15(f)) for the registrant and have:

(a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;

(b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;

(c) Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and

(d) Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and

5. The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):

(a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and

(b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.

/s/  Douglas A. Gaudet

Douglas A. Gaudet

President and Chief Executive Officer

March 28, 2011

EX-31.2

Exhibit 31.2

Certification pursuant to Rule 13a — 14(a), as adopted pursuant to
Section 302 of the Sarbanes-Oxley Act of 2002

I, Michael O. Banks, Executive Vice President and Chief Financial Officer, certify that:

1. I have reviewed this Annual Report on Form 10-K of Penn Millers Holding Corporation (the registrant);

2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;

4. The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a — 15(e) and 15d — 15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a — 15(f) and 15d — 15(f)) for the registrant and have:

(a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;

(b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;

(c) Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and

(d) Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and

5. The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):

(a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and

(b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.

/s/  Michael O. Banks

Michael O. Banks

Executive Vice President and Chief Financial Officer

March 28, 2011

EX-32.1

Exhibit 32.1

Certification pursuant to 18 U.S.C. Section 1350, as adopted pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002

I, Douglas A. Gaudet, the President and Chief Executive Officer of Penn Millers Holding Corporation, (the Company) hereby certify, pursuant to 18 U.S.C. Section 1350, as adopted pursuant

to Section 906 of the Sarbanes-Oxley Act of 2002, that:

1. the Annual Report on Form 10-K of the Company for the year ended December 31, 2010 (the Report), which this certification accompanies, fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and

2. the information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.

/s/  Douglas A. Gaudet

Douglas A. Gaudet

President and Chief Executive Officer

March 28, 2011

EX-32.2

Exhibit 32.2

Certification pursuant to 18 U.S.C. Section 1350, as adopted pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002

I, Michael O. Banks, the Executive Vice President and Chief Financial Officer of Penn Millers Holding Corporation, (the Company) hereby certify, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that:

1. the Annual Report on Form 10-K of the Company for the year ended December 31, 2010 (the Report), which this certification accompanies, fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and

2. the information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.

/s/  Michael O. Banks

Michael O. Banks

Executive Vice President and Chief Financial Officer

March 28, 2011