Favorable loss development in the fire and allied line of $2,229 resulting from prior years’ claims settling for less than originally estimated. Many of our policies have high property exposures for which reported claims often require an extended amount of time to evaluate the claim due to the complexity in determining the value of the building and contents loss;

Favorable development in our workers’ compensation line of $1,652 due to the general observation of declines in claims severity on prior accident years; and

Favorable development of $1,124 in our commercial lines of business due to the general observation of declines in claims severity on prior accident years.

Underwriting Expenses

Our underwriting expense ratio represents the ratio of underwriting expenses (amortization of deferred policy acquisition costs and underwriting and administrative expenses directly attributable to our insurance operations) divided by net premiums earned. As one component of the combined ratio, along with the loss and 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 underwriting expense ratio was 33.1% for 2009, compared to 32.8% for 2008; an increase of 30 basis points. The increase in the expense ratio is primarily due to:

In 2008, the retentions on our excess of loss reinsurance program were significantly higher than they are in 2009. The lower amount paid for reinsurance in 2008 allowed us to retain more earned premium, which led to a lower underwriting expense ratio in 2008.

In 2009, 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, with partially offsetting lower loss and LAE ratios.

Total underwriting and administrative expenses, including amortization of deferred policy acquisition costs, was $25,382 for the year ended 2009 and $26,562 for the year ended 2008.

Amortization of deferred policy acquisition costs decreased $1,698 for 2009 as compared to 2008, as a result of the previously described decrease in earned premiums.

Underwriting and administrative expenses increased $518 primarily from increased compliance costs in preparing to become a public company and increased employee incentive costs based on company results.

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

Total underwriting and administrative expenses, including amortization of deferred policy acquisition costs, increased $2,399 in 2008; 9.9% higher than in 2007.

This increase is the result of a $1,151 increase in amortization of deferred policy acquisition costs resulting from a 6.0% increase in direct premiums earned and an increase in underwriting and administrative expense of $1,248 primarily from product development costs incurred in 2008 associated with the roll-out of our PennEdge product in early 2009.

Interest Expense

Interest expense was $22 for the year ended 2009, as compared to $184 for the year ended 2008. The decrease of $162 for the period is primarily due to the 2009 reversal of interest expense on our aggregate stop loss reinsurance contract. For additional information concerning the stop loss reinsurance contract, see Item 1 - “Business – Reinsurance.”

Interest expense for the year ended 2008 was $184 compared to $125 for the year ended 2007. The increase was primarily due to accrued interest on funds withheld related to the aggregate stop loss reinsurance contract, which we entered into effective January 1, 2008.

Other Expense

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

Other expense was $209 for the year ended 2009 and $365 for the year ended 2008. The decrease of $156 for the period is due primarily to higher levels of write-offs and aging of receivables in 2008 as compared to 2009, the positive impact of which we attribute to our decision to withdraw from certain unprofitable classes of business.

Other expense increased $181 in 2008 as compared to 2007, primarily due to increased write-offs and aging of receivables.

Income (Loss) from Continuing Operations, before Income Taxes

For the year ended 2009, we had pre-tax income from continuing operations of $3,061 compared to a pre-tax loss of $5,837 for the year ended 2008. This net increase was primarily attributable to:

Realized losses of $5,819 recognized in 2008, resulting from an other-than-temporary impairment charge of $2,922 on our equity portfolio and losses on sales of equity investments of $2,827;

Lower losses and LAE in 2009 from a significantly lower level of large losses, particularly relating to property losses. In addition to reduced severity, we observed some moderate declines in new claim frequency in 2009. There was a decline in catastrophe losses in 2009 compared to 2008.

The favorable effects of these items were offset by the reversal of our stop loss on ceded losses in 2009. The net cost of the stop loss contract in 2009 was $2,489, as compared to a net benefit of $884 in 2008.

For the year ended December 31, 2008 we had a pre-tax loss from continuing operations of $5,837 compared to pre-tax income of $1,845 in 2007. This decrease was largely attributable to the increase in catastrophe and non-catastrophe weather-related losses in 2008 and realized losses from other-than-temporary impairments and the sales of equity securities in 2008.

Income Tax (Benefit) Expense

For the year ended 2009, the income tax benefit for continuing operations was $346, or an effective rate of (11.3)%. The 2009 provision for income taxes includes a reversal of our deferred tax valuation reserve of $1,026 from 2008, as we have determined that it is more likely than not that we will be able to realize the full benefit of our deferred tax assets related to our capital losses.

For the year ended 2008, the income tax benefit for continuing operations was $1,378 of income tax benefit, or an effective rate of 23.6%, compared to $396 of income tax expense, or an effective rate of 21.5% for the year ended 2007. The 2008 provision for income taxes included expense associated with a valuation reserve of $1,026 attributable to our capital losses for which it was considered at that time to be more likely than not that we would not realize a tax benefit.

Net (Loss) Income from Discontinued Operations

Net (loss) income 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.

For the year ended 2008, the net loss from discontinued operations includes a goodwill impairment charge related to Eastern insurance Group of $2,600 after-tax.

For the year ended 2007, the net loss from discontinued operations of $363 included an after-tax charge of $438 for executive severance related to the agency operations, and an after-tax goodwill impairment of $106 for Penn Software.

Net Income (Loss)

For year ended 2009, we had net income of $2,567 compared to a net loss of $7,379 for 2008. As described above, the overall increase of $9,946 was primarily attributable to:

Lower realized investment losses in 2009 as compared to 2008 of $6,018;

A lower net loss from discontinued operations of $2,080;

Lower losses and LAE in 2009 of $4,636;

Lower amortization of deferred policy acquisition costs of $1,698;

A favorable tax benefit of $1,026 recorded in 2009;

The favorable items listed above were offset by lower earned premium in 2009 of $3,379.

For the year ended December 31, 2008, we had a net loss of $7,379 compared to net income of $1,086 for 2007. This decline in net income is primarily attributable to:

The change in net realized investment gains (losses) of $(5,117);

An increase in our losses and loss adjustment expenses of $7,607;

The loss from discontinued operations of $2,920 in 2008;

The amounts listed above were partially offset by increased earned premium in 2008 compared to 2007 of $7,767.

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:

	For the Years Ended December 31,
	2009			2008			2007

Direct premiums written	$	58,675		$	57,281		$	55,965
Net premiums written		46,787			45,110			41,402

Revenues:
Net premiums earned	$	45,289		$	45,298		$	40,245
Other income		31			182			245
Total revenues(1)	$	45,320			45,480			40,490

Operating income (loss):
Underwriting income	$	1,985		$	313		$	441
Other income		31			182			245
Interest & other expenses		(35	)		(202	)		(77	)

Total operating income	$	1,981		$	293		$	609

Loss and loss expense ratio		65.5	%		68.7	%		67.9	%
Underwriting expense ratio		30.1	%		30.6	%		31.0	%
GAAP combined ratio		95.6	%		99.3	%		98.9	%

(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.

Agribusiness Segment: Premiums Written and Premiums Earned

The components of premiums written and earned, for the years ended December 31, 2009, 2008 and 2007 of our agribusiness segment are as follows:

Agribusiness	2009						2008						2007
	Written			Earned			Written			Earned			Written			Earned
Direct	$	58,675		$	57,280		$	57,281		$	57,500		$	55,965		$	55,076
Ceded – Stop Loss Contract		615			615			(1,548	)		(1,548	)		—			—
Ceded – All other		(12,503	)		(12,606	)		(10,623	)		(10,654	)		(14,563	)		(14,831	)

Net	$	46,787		$	45,289		$	45,110		$	45,298		$	41,402		$	40,245

The agribusiness marketplace has been very competitive during the last three years, putting pressure on pricing. These competitive pressures are affecting our writing of new and renewal business and putting downward pressure on our existing rates. Our focus on underwriting discipline and rate adequacy in the midst of this soft market has resulted in our premium revenue growth being relatively modest during 2008 and 2009.

Direct premiums written increased from $57,281 for the year ended December 31, 2008 to $58,675 for the same period of 2009. The changes in direct premiums written for the period reflect slightly lower retention rates in 2009 as 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. However, we have been able to offset this reduced retention by winning new customers who are seeking a carrier with a stronger financial position or better service levels than their current carrier can provide.

Effective January 1, 2009, we modified our excess of loss reinsurance program and retained less of our losses as compared to 2008, which resulted in an increase in ceded premiums written and earned of $1,774 for 2009, as compared to 2008. The reversal of the stop loss had the effect of reducing ceded premiums for 2009 as compared to 2008. For the year ended 2009, our agribusiness segment benefitted from a net reversal of stop loss ceded premiums of $615, while the segment recognized ceded premiums of $1,548 in 2008. For additional information concerning the stop loss reinsurance contract, see Item 1 - “Business – Reinsurance.” The total net decrease in ceded premiums written for 2009 of $283, when added to the $1,394 increase in direct premiums written for the same period, resulted in growth of net premiums written of $1,677 for 2009 as compared to 2008. Net premiums earned were $45,289 and $45,298 for the years ended 2009 and 2008, respectively.

Direct premiums written increased 2.4% for the year ended December 31, 2008 compared to 2007. Effective January 1, 2008, we modified our reinsurance program by retaining more of our losses above $500, which resulted in a decrease in ceded premiums written. The 2.4% increase in gross premiums written for 2008, combined with the reduction in ceded premiums, resulted in net premiums written increasing by 9.0% for the year ended December 31, 2008 compared to 2007. As a result, growth in net premiums written in 2007 and 2008 continued to drive the growth in net premiums earned in 2008, in which net premiums earned increased by 12.6% compared to 2007.

Agribusiness Segment: Underwriting 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 2009, 2008 and 2007 in our agribusiness segment are as follows:

	For the Years Ended
Agribusiness	December 31,

	2009			2008			2007

Net premiums earned	$	45,289		$	45,298		$	40,245

Incurred losses and LAE:
Losses	$	29,843		$	32,023		$	29,968
Catastrophe losses		1,758			4,485			1,609
Stop loss ceded		568			(568	)		-
Prior year development (1)		(2,515	)		(4,803	)		(4,264	)
Total incurred losses and LAE	$	29,654		$	31,137		$	27,313

Loss and LAE ratios:
Losses		65.9	%		70.7	%		74.5	%
Catastrophe losses		3.9	%		9.9	%		4.0	%
Stop loss ceded		1.3	%		(1.4	)%		0.0	%
Prior year development (1)		(5.6	)%		(10.6	)%		(10.6	)%
Total Loss and LAE ratio		65.5	%		68.7	%		67.9	%

(1)

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

Our agribusiness segment incurred $29,654 of losses and LAE for the year ended 2009, as compared to $31,137 of losses and LAE for the year ended 2008. The decrease of $1,483 was primarily the result of:

$2,727 of lower incurred catastrophe losses in 2009, which were partially offset by a lower level of favorable prior year development in 2009 as compared to 2008 of $2,856 (excluding the impact of the stop loss reversal on ceded losses).

The reversal of the stop loss in the third quarter of 2009 resulted in $568 of ceded incurred losses being reversed for the agribusiness segment, compared to ceded losses incurred of $568 that were recognized in 2008. For additional information concerning the stop loss reinsurance contract, see Item 1 - “Business – Reinsurance.”

Losses and LAE increased $3,824 for the year ended December 31, 2008, 14.0% higher than in 2007. The increase in losses and loss adjustment expenses was primarily driven by growth in insured exposures, non-catastrophe weather related losses, increased automobile and liability losses, and the increase in the reinsurance retention for 2008. Catastrophe losses were $4,485 in 2008, compared to $1,609 in 2007. The increase in losses and LAE was partially offset by favorable prior year losses and LAE development of approximately $4,803 in 2008, compared to $4,264 in 2007.

Agribusiness Underwriting Expenses and GAAP Combined Ratio

Total underwriting and administrative expenses, including amortization of deferred policy acquisition costs were $13,650 for the year ended 2009 as compared to $13,848 for the same period in 2008, a decrease of $198. This decrease in underwriting expenses was due to lower amortization of deferred policy acquisition cost as a result of the relatively flat growth in premiums earned in 2009. This decrease relative to the smaller decrease in net premiums earned resulted in the underwriting expense ratio decreasing slightly from 30.6% for 2008 to 30.1% for 2009.

This decrease in the underwriting expense ratio, when added to the decline in the loss and LAE ratio, resulted in our combined ratio in our agribusiness segment decreasing from 99.3% for 2008 to 95.6% for 2009.

Total underwriting and administrative expenses, including amortization of deferred policy acquisition costs, increased by $1,357 in 2008, a 10.9% increase from 2007. The increase is due to increased amortization of deferred policy acquisition costs associated with the growth in premiums earned in 2008. This increase in underwriting expenses relative to the larger increase in net premiums earned resulted in the underwriting expense ratio declining from 31.0% for 2007 to 30.6% for 2008. This decline in the underwriting expense ratio was insufficient to offset the increase in losses and loss adjustment expense during 2008 primarily caused by the $2,876 increase in catastrophe losses. As a result, our combined ratio rose from 98.9% for 2007 to 99.3% for the same period in 2008.

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,
	2009			2008			2007
Direct Premiums Written:
Property	$	21,394		$	20,831		$	20,263
Commercial Auto		13,025			12,919			14,055
Liability		10,595			9,615			8,635
Workers’ Compensation		7,950			8,064			7,394
Other		5,711			5,852			5,618
Total	$	58,675		$	57,281		$	55,965

Net Premiums Earned:
Property	$	16,546		$	16,412		$	13,772
Commercial Auto		11,632			12,119			11,859
Liability		9,196			8,795			7,540
Workers’ Compensation		7,238			7,310			6,394
Other		677			662			680
Total	$	45,289		$	45,298		$	40,245

Loss and Loss Adjustment Expense Ratios:
Property		70.8	%		86.1	%		84.9	%
Commercial Auto		72.8	%		41.9	%		48.5	%
Liability		52.3	%		90.1	%		102.6	%
Workers’ Compensation		63.3	%		51.4	%		54.2	%
Other		11.2	%		37.7	%		(196.2	)%
Total		65.5	%		68.7	%		67.9	%

Property

Commercial property coverage protects businesses against the loss or loss of use, including its income-producing ability, of company property. As of December 31, 2009, 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 weather related losses in 2007 and 2008. The 2008 losses were mostly driven by several large, isolated weather related losses and a high frequency of small to moderate losses attributable to an unusually high number of catastrophic events. The 2007 losses were primarily concentrated in an unusual number of large, non-catastrophe related claims. The property loss ratio for 2009 was lower compared to prior years due to 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, 2009, our agribusiness segment had approximately 900 commercial automobile insurance policies in force. Our 2009 loss ratio for commercial auto increased due to an increase in severity attributable to an increase in the number of large claims and unfavorable development on previously reported claims.

Liability

Liability insurance includes commercial general liability, products liability, and professional liability covering our agribusiness insureds’ operations. As of December 31, 2009, our agribusiness segment had approximately 1,200 general liability insurance policies in force. Our liability loss ratio declined in 2009 as we observed a lower level of severity on newer claims and we experienced favorable development on the settlement of prior accident year claims.

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, 2009, our agribusiness segment had approximately 400 workers’ compensation insurance policies in force. Our calendar year loss ratio increased in 2009 as we experienced a lower level of favorable development on prior accident years compared to 2008 and 2007. However, on an accident year basis, 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 includes umbrella liability, system breakdown, employment practices liability, and surety insurance.

Commercial Business

The results of our commercial business segment were as follows:

	For the Years Ended
	December 31,
	2009			2008			2007

Direct premiums written	$	29,449		$	37,458		$	37,860
Net premiums written		25,754			30,632			31,266

Revenues:
Net premiums earned	$	28,961		$	31,805		$	29,260
Other income		189			229			263
Total revenues (1)	$	29,150		$	32,034		$	29,523

Operating income (loss):
Underwriting (loss)	$	(4,509	)	$	(5,046	)	$	(1,913	)
Other income		189			229			263
Interest & other expenses		(118	)		(247	)		(113	)

Operating (loss)	$	(4,438	)	$	(5,064	)	$	(1,763	)

Loss and loss adjustment expense ratio		78.4	%		80.1	%		70.3	%
Underwriting expense ratio		37.2	%		35.8	%		36.2	%
GAAP Combined ratio		115.6	%		115.9	%		106.5	%

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

Commercial Business Segment: Premiums Written and Premiums Earned

The components of premiums written and earned, for the years ended December 31, 2009, 2008 and 2007 of our commercial business segment are as follows:

Commercial Business	2009						2008						2007
	Written			Earned			Written			Earned			Written			Earned
Direct	$	29,449		$	32,819		$	37,458		$	38,494		$	37,860		$	35,471
Ceded – Stop Loss Contract		1,102			1,102			(1,774	)		(1,774	)		—			—
Ceded – All other		(4,797	)		(4,960	)		(5,053	)		(4,915	)		(6,594	)		(6,211	)

Net	$	25,754		$	28,961		$	30,632		$	31,805		$	31,266		$	29,260

Our direct premiums written in our commercial business segment were $29,449 for the year ended 2009 and $37,458 for the year ended 2008. This decline of $8,009 is primarily attributable to:

The commercial insurance marketplace has been very competitive during the last three years, putting pressure on pricing. Our focus on underwriting discipline and rate adequacy in the midst of this soft market has made growth challenging at times;

We have elected to withdraw from certain unprofitable classes of business and terminate relationships with several underperforming producers;

These unfavorable items were partially offset by the reversal of the stop loss reinsurance contract that reduced ceded premiums for 2009 by $1,102. In 2008, there were ceded premiums of $1,774 recognized, as the commercial business segment ceded losses under the stop loss. For additional information concerning the stop loss reinsurance contract, see Item 1 “Business – Reinsurance.”

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, 2009, our PennEdge offering was approved in eight states, and we believe it has been well received by our agents and policyholders. For the year ended December 31, 2009, the direct premiums written of our PennEdge product were $1,202.

Net premiums earned were $28,961 and $31,805 for the years ended 2009 and 2008, respectively. This decrease in net premiums earned is due primarily to the decline in direct premiums written resulting from the runoff of unprofitable business and changes in our reinsurance program in 2009, the impacts of which were partly offset by the impact of the stop loss on ceded premiums of $2,876. For additional information concerning the stop loss reinsurance contract, see Item 1 - “Business – Reinsurance.” Direct premiums written decreased by $402 in the year ended 2008 compared to the same period in 2007.

Effective January 1, 2008, we modified our reinsurance program by retaining more of our losses above $500, which resulted in a decrease in ceded premiums written compared to 2007. This reduction in ceded premiums was mostly offset by the reinsurance of a new coverage we offered in 2008 and additional ceded premium incurred under our aggregate stop loss reinsurance treaty. We started offering employment practices liability insurance coverage in 2008 and have ceded all of the business to a reinsurer.

The decrease in direct premiums written for 2008, combined with the described changes to ceded premiums, resulted in net premiums written decreasing by 2.0% in the year ended 2008 compared to the same period of 2007. The growth in net premiums written in 2007 continued to drive the growth in net premiums earned in 2008, which increased 8.7% to $31,805.

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 2009, 2008 and 2007 in our commercial business segment are as follows:

	For the Years Ended
Commercial Business	December 31,

	2009			2008			2007

Net premiums earned	$	28,961		$	31,805		$	29,260

Incurred losses and LAE:
Losses	$	18,427		$	28,924		$	21,023
Catastrophe losses		221			397			377
Stop loss ceded		3,724			(3,724	)		-
Prior year development (1)		323			(117	)		(830	)
Total incurred losses and LAE	$	22,695		$	25,480		$	20,570

Loss and LAE ratios:
Losses		63.6	%		90.9	%		71.8	%
Catastrophe losses		0.8	%		1.2	%		1.3	%
Stop loss ceded		12.9	%		(11.7	)%		0.0	%
Prior year development (1)		1.1	%		(0.4	)%		(2.8	)%
Total Loss and LAE ratio		78.4	%		80.1	%		70.3	%

(1)

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

The decrease in the 2009 Loss and LAE ratio in our commercial business segment is due to:

Slightly lower catastrophic losses were offset by the reversal of the stop loss in the third quarter of 2009 that resulted in $3,724 of ceded incurred losses being reversed for the commercial business segment, compared to ceded losses incurred of $3,724 that were recognized in 2008. For additional information concerning the stop loss reinsurance contract, see the Item 1 - “Business – Reinsurance.”

Excluding the impact of this stop loss variance of $7,448, total incurred losses and LAE declined by $10,233 during 2009 compared to 2008.

This decrease is primarily attributable to the strategic decision to terminate relationships with unprofitable producers and to stop writing unprofitable classes of business, and overall lower severity of large losses in 2009 compared to 2008.

This decrease is partly offset by a $440 increase in prior year development (excluding the impact of the stop loss reversal).We have experienced a modest level of unfavorable development of $323 in this segment in 2009 compared to favorable prior year development of $117 experienced in 2008.

Losses and LAE increased $4,910 in the year ended December 31, 2008, a 23.9% increase from 2007.

The increase in losses and LAE is due to increases in non-catastrophe property losses, increased automobile and workers compensation losses;

Increase in the reinsurance retention for 2008; and

Favorable prior year losses and loss expense development of approximately $117 in 2008, compared to approximately $830 of favorable development in 2007.

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 $10,775 and $11,371 for the years ended 2009 and 2008, respectively. This decrease of $596 is primarily due to the reduction in our net premiums earned in 2009. The 5.2% lower underwriting expenses, combined with an 8.9% decline in net premiums earned, resulted in the underwriting expense ratio increasing from 35.8% in 2008 to 37.2% in 2009.

This increase in the underwriting expense ratio when netted against the decrease in the loss and LAE ratio resulted in our combined ratio of our commercial business segment decreasing from 115.9% in 2008 to 115.6% in 2009. Excluding the effects of the stop loss on our earned premium and losses, the combined ratio in our commercial business declined from 120.9% in 2008 to 106.8% in 2009, which reflects the improvement in the underwriting results that we believe is primarily attributable to the actions taken to remove unprofitable producers and classes of business from our book of business and lower large loss severity in 2009.

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

Commercial Business Segment – Lines of Business

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

	For the Years Ended
Commercial Business	December 31,
	2009			2008			2007
Direct Premiums Written:
Property & Liability	$	16,453		$	21,056		$	22,474
Workers’ Compensation		5,465			8,031			7,716
Commercial Auto		4,560			5,068			4,914
Other		2,971			3,303			2,756
Total	$	29,449		$	37,458		$	37,860

Net Premiums Earned:
Property & Liability	$	17,731		$	19,428		$	18,301
Workers’ Compensation		6,235			7,451			6,524
Commercial Auto		4,746			4,659			4,194
Other		249			267			241
Total	$	28,961		$	31,805		$	29,260

Loss and Loss Adjustment Expense Ratios:
Property & Liability		63.7	%		99.0	%		87.0	%
Workers’ Compensation		136.7	%		54.5	%		37.1	%
Commercial Auto		61.3	%		45.9	%		54.9	%
Other		(10.3	)%		17.2	%		(35.3	)%
Total		78.4	%		80.1	%		70.3	%

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, 2009, our commercial business segment had approximately 4,700 property and liability insurance policies in force. Similar to our agribusiness segment, our commercial business segment experienced unusually high levels of severe property related losses in 2007 and 2008. In 2009, a steep drop in large property losses led to the decline in our property and liability loss ratio.

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, 2009, our commercial business segment had approximately 1,500 workers compensation insurance policies in force. Our workers’ compensation line has experienced increasing loss ratios despite a decline in claim frequency for the past three accident years. This line has been adversely impacted by a higher than usual number of large claims. In addition, we have observed increasing claim severity as medical cost inflation continues to impact ultimate claim costs and economic conditions adversely impact the ability of injured workers to return to work.

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, 2009, our commercial business segment had approximately 900 commercial automobile insurance policies in force. Our commercial auto line of business has experienced positive trends in both claim frequency and severity over the past three accident years. However, the loss ratio increased in 2009, compared to 2007 and 2008, primarily as a result of a lower level of favorable prior year development.

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 began exiting in 2001, and assumed reinsurance contracts in which we previously participated on a voluntary basis. Participation in these assumed reinsurance contracts ceased in the 1980s and early 1990s. The most significant of these is a reinsurance agreement we entered into with Munich Re America (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, 2009 we had $5,260 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,
	2009			2008			2007

Assumed premiums written	$	1,105		$	1,625		$	1,451
Net premiums written		1,105			1,625			1,451

Revenues:
Net premiums earned	$	1,108		$	1,634		$	1,465
Total revenues	$	1,108		$	1,634		$	1,465

Underwriting income/(loss)	$	175		$	288		$	(998	)
Operating income/(loss)	$	175		$	288		$	(998	)

Loss and loss adjustment expense ratio		36.6	%		47.3	%		129.7	%
Underwriting expense ratio		47.7	%		35.1	%		38.4	%
GAAP Combined ratio		84.3	%		82.4	%		168.1	%

Both revenues and expenses in our other segment have experienced volatility over the last three years due to fluctuating rates of participation in our mandatory pools. This is reflected in net premiums earned of $1,108 in 2009, $1,634 in 2008 and $1,465 in 2007. Net premiums written were $520 lower in 2009 compared to 2008. The reduction is due to declines in premium assumed from the National Workers Compensation Reinsurance Pool. Our total claims and expenses were $933 in 2009, compared to $1,346 in 2008 and $2,463 in 2007.

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

	For the Years Ended
	December 31,
	2009			2008			2007

Mandatory Assumed Reinsurance	$	203		$	239		$	95
Personal Lines — runoff		177			335			(94	)
Voluntary Assumed Reinsurance — runoff		(205	)		(286	)		(999	)
Total operating income (loss)	$	175		$	288		$	(998	)

Financial Position

At December 31, 2009, we had total assets of $263,450, compared to total assets of $220,524 at December 31, 2008. Invested assets and cash and cash equivalents increased $53,502 in 2009 from the gross proceeds received in our public offering of $54,440 which was reduced by the loan to our ESOP of $5,400 and reduced by $3,374 of offering costs paid in 2009. Overall strengthening of the investment markets also contributed favorably to the increase in invested assets. Reinsurance recoverables and receivables were $1,135 lower in 2009 from the reversal of our stop loss.

At December 31, 2009, total liabilities were $163,402, compared to $169,769 at December 31, 2008. The $6,367 decrease was primarily due to the decrease in unearned premiums of $2,009 from reductions in premiums written in 2009; lower losses and LAE reserves of $1,355 from favorable loss experience and timing of claims payments; and debt decreased by $2,382 from extinguishments of debt in 2009.

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. Consistent with our expectations, the gross proceeds of $54,440 were allocated through December 31, 2009 as follows: conversion and offering expenses and commissions of $3,867; the loan to our ESOP of $5,400; pay down of our line of credit of $1,800; and 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.

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 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 will have the right to repurchase issued and outstanding shares of common stock until 5% of the shares, or 272,201, are repurchased, unless our board of directors expands the program. As of December 31, 2009, we repurchased 217,761 shares at an average cost of $10.18 per share. The repurchased shares will be held as treasury shares and may be used in connection with a future stock incentive plan, should such a plan be approved by our shareholders at our annual meeting.

Cash flows from continuing operations for the years ended December 31, 2009, 2008, and 2007 were as follows:

	For the Years Ended
	December 31,
	2009			2008			2007
Cash flows provided by operating activities	$	6,280		$	7,383		$	11,017
Cash flows used in investing activities		(39,087	)		(5,702	)		(13,373	)
Cash flows provided by (used in) financing activities		41,068			144			(562	)
Net increase (decrease) in cash and cash equivalents	$	8,261		$	1,825		$	(2,918	)

Cash flows from operating activities decreased by $1,103 for the period ended December 31, 2009 compared to the period ended December 31, 2008. The change is primarily due to increased claims payments and lower premium volume in 2009 compared to 2008.

Investing activities used $39,087 and $5,702 of net cash for the years ended December 31, 2009 and 2008, respectively. For 2009, net purchases of investments classified as available for sale were $41,509, as compared to $5,178 in 2008. The proceeds from our public offering were utilized to purchase 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 we received the final contingent payment from the early 2008 sale of the net assets Penn Software of $52.

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 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.

For the year ended December 31, 2008, cash flows from operating activities totaled $7,383 compared to $11,017 for the year ended December 31, 2007. This decrease in cash flows from operating activities was primarily due to increased claim payments partially offset by lower reinsurance payments. Cash flows used in investing activities totaled $5,702 for the year ended December 31, 2008, compared to $13,373 for the same period of 2007, primarily reflecting an increase in fixed maturity investments purchased and partially offset by an increase in equity investments sold.

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, 2009, the amount available for payment of dividends from Penn Millers Insurance Company in 2010 without the prior approval of the Pennsylvania Insurance Department is $7,249 based upon the insurance company’s 2009 annual statement. Prior to its payment of any dividend, Penn Millers Insurance Company is required to provide notice of the dividend to the Pennsylvania Insurance Department. This notice must be provided to the Pennsylvania Insurance Department 30 days prior to the payment of an extraordinary dividend and 10 days prior to the payment of an ordinary dividend. The Pennsylvania Insurance Department has the power to limit or prohibit dividend payments if Penn Millers Insurance Company is in violation of any law or regulation. These restrictions or any subsequently imposed restrictions may affect our future liquidity.

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 2009 we recognized compensation expense of $92 on 9,000 shares of our common stock that were committed to be released to participants’ accounts at December 31, 2009.

Contractual Obligations

The following table summarizes, as of December 31, 2009, our future payments under contractual obligations and estimated claims and claims related payments:

	Payments due by period

Contractual			Less than						More than
Obligations	Total		1 year		1-3 years		3-5 years		5 years
Estimated gross losses & loss adjustment expense payments	$	106,710	$	36,281	$	49,087	$	12,805	$	8,537
Defined benefit plan obligations		9,059		242		1,339		705		6,773
Operating lease obligations		225		98		127		—		—
Accrued severance costs		363		246		42		40		35
Total	$	116,357	$	36,867	$	50,595	$	13,550	$	15,345

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

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.

Recent Accounting Pronouncements

On July 1, 2009, the Accounting Standards Codification (ASC) became the Financial Accounting Standards Board’s (FASB) officially recognized source of authoritative GAAP applicable to all public and non-public non-governmental entities, superseding the then existing FASB, AICPA, EITF and related literature. Rules and interpretive releases of the SEC under the authority of federal securities laws are also sources of authoritative GAAP for SEC registrants. All other accounting literature is considered non-authoritative. The switch to the ASC affects the way companies refer to GAAP in financial statements and accounting policies. The adoption of this guidance in the second quarter of 2009 changed our references to GAAP but did not impact our consolidated financial statements.

In December 2008, the FASB issued guidance on “Employer’s Disclosures about Postretirement Benefit Plan Assets.” New authoritative accounting guidance under FASB ASC 715, Compensation—Retirement Benefits provides guidance related to an employer’s disclosures about plan assets of defined benefit pension or other post-retirement benefit plans. Under ASC 715, disclosures should provide users of financial statements with an understanding of how investment allocation decisions are made, the factors that are pertinent to an understanding of investment policies and strategies, the major categories of plan assets, the inputs and valuation techniques used to measure the fair value of plan assets, the effect of fair value measurements using significant unobservable inputs on changes in plan assets for the period and significant concentrations of risk within plan assets. The new guidance was effective for fiscal years ending after December 15, 2009. The adoption of this guidance did not have an impact on our results of operations or financial condition.

In April 2009, the FASB issued guidance on “Determining Fair Value When the Volume and Level of Activity for the Asset or Liability Have Significantly Decreased and Identifying Transactions That Are Not Orderly.” New authoritative accounting guidance under FASB ASC 820, Fair Value Measurements and Disclosures affirms that the objective of fair value when the market for an asset is not active is the price that would be received to sell the asset in an orderly transaction, and clarifies and includes additional factors for determining whether there has been a significant decrease in market activity for an asset when the market for that asset is not active. ASC 820 requires an entity to base its conclusion about whether a transaction was not orderly on the weight of the evidence. The new accounting guidance amended prior guidance to expand certain disclosure requirements. This guidance was effective for interim and annual reporting periods ending after June 15, 2009, with prospective application. The adoption of this guidance did not have a material impact on our results of operations or financial condition.

In April 2009, the FASB issued guidance on “Recognition and Presentation of Other-Than-Temporary Impairments.” This update amends the other-than-temporary impairment guidance in GAAP for debt securities to make the guidance more operational and to improve the presentation and disclosure of other-than-temporary impairments on debt and equity securities in the financial statements. For debt securities that have fair values less than their amortized cost, this guidance modifies the prior requirements that to avoid recognizing an other-than-temporary impairment, management must assert that it has both the intent and ability to hold a security for a period of time sufficient to allow for an anticipated recovery in its fair value to its amortized cost basis. Instead, an entity should assess whether the entity (a) has the intent to sell the debt security or (b) more likely than not will be required to sell the debt security before its anticipated recovery. An entity must recognize an other-than-temporary impairment if either of these conditions is met. Also, if an entity does not expect to recover the entire amortized cost basis of a security, an other-than-temporary impairment shall be considered to have occurred. If the entity does not intend to sell the security and it is not more likely than not that the entity will be required to sell the security before recovery of its amortized cost basis less any current period credit loss, the other-than-temporary impairment shall be separated into (a) the amount representing the credit loss, which is recognized in earnings, and (b) the amount related to all other factors, which is recognized in other comprehensive income. This guidance was effective for interim and annual reporting periods ending after June 15, 2009. Adoption of this guidance did not have a material impact on our results of operations or financial condition.

In May 2009, additional new authoritative accounting guidance (Accounting Standards Update No. 2009-5) under ASC 820 was issued. This update provides guidance for measuring the fair value of a liability in circumstances in which a quoted price in an active market for the identical liability is not available. In such instances, a reporting entity is required to measure fair value utilizing a valuation technique that uses (i) the quoted price of the identical liability when traded as an asset, (ii) quoted prices for similar liabilities or similar liabilities when traded as assets, or (iii) another valuation technique that is consistent with the existing principles of ASC 820, such as an income approach or market approach. The new authoritative accounting guidance also clarifies that when estimating the fair value of a liability, a reporting entity is not required to include a separate input or adjustment to other inputs relating to the existence of a restriction that prevents the transfer of the liability. The adoption of this guidance in the third quarter of 2009 did not have an impact on our results of operations or financial condition.

Supplementary new authoritative accounting guidance (Accounting Standards Update No. 2010-06) under ASC 820 requires additional disclosures related to transfers between levels in the hierarchy of fair value measurement. The standard is effective for reporting periods beginning after December 15, 2009. The standard does not change how fair values are measured. Accordingly, the standard will not have an impact on us, other than possible additional disclosures.

In May 2009, the FASB issued guidance on “Subsequent Events.” This guidance establishes general standards of accounting for, and requires disclosure of, events that occur after the balance sheet date but before financial statements are issued or are available to be issued. This guidance was effective for interim or annual periods ending after June 15, 2009. This guidance was updated in February 2010 to remove the requirement for an SEC filer, as defined, to disclose the date through which subsequent events have been evaluated. Adoption of this guidance did not have an impact on our results of operations or financial condition.

All other standards and updates of those standards issued during the twelve months ended December 31, 2009 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

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

Interest Rate Risk

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

The average maturity of the debt securities in our investment portfolio at December 31, 2009, was 4.1 years. Our debt securities investments include U.S. government bonds, securities issued by government agencies, obligations of state and local governments and governmental authorities, corporate bonds and mortgage-backed securities, most of which are exposed to changes in prevailing interest rates and which may experience moderate fluctuations in fair value resulting from changes in interest rates. We carry these investments as available for sale. This allows us to manage our exposure to risks associated with interest rate fluctuations through active review of our investment portfolio by our management and board of directors and consultation with our external investment manager.

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

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

The table below shows the interest rate sensitivity of our fixed maturity investments measured in terms of fair value (which is equal to the carrying value for all of our investment securities that are subject to interest rate changes) at December 31, 2009:

Hypothetical Change in	Estimated Change
Interest Rates	in Fair Value			Fair Value

200 basis point increase	$	(12,063	)	$	155,092
100 basis point increase		(6,039	)		161,116
No change		—			167,155
100 basis point decrease		5,897			173,052
200 basis point decrease		11,748			178,903

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.

Equity Risk

Equity price risk is the risk that we will incur economic losses due to adverse changes in equity prices. In order to reduce our exposure to losses in our investment portfolio, during the fourth quarter of 2008 we sold all of our equity securities. As a result of our public offering we and our investment advisor have analyzed our portfolio allocations; and in accordance with the guidelines, goals and objectives of our investment policy, we have set a target allocation of 6% of our investment portfolio to be invested in passively-managed equity index funds that follow the broader U.S. stock market. We anticipate that this target allocation of 6% equities will be attained in the second quarter of 2010.

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, 2009 and 2008	F-2

Consolidated Statements of Operations for the Years Ended December 31, 2009, 2008 and 2007	F-3

Consolidated Statements of Shareholders’ Equity for the Years Ended December 31, 2009, 2008 and 2007	F-4

Consolidated Statements of Cash Flows for the Years Ended December 31, 2009, 2008 and 2007	F-5

Notes to the Consolidated Financial Statements	F-6

Financial Statement Schedules

Schedule II – Condensed Financial Information of Parent Company	F-42

Schedule III – Supplementary Insurance Information	F-45

Schedule IV – Reinsurance	F-47

Schedule V – Allowance for Uncollectible Premiums and Other Receivables	F-48

Schedule VI – Supplementary Information	F-49

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, 2009 and 2008, and the related consolidated statements of operations, shareholders’ equity, and cash flows for each of the years in the three-year period ended December 31, 2009. In connection with our audits of the consolidated financial statements, we also have audited the financial statement schedules II to VI. These consolidated financial statements and financial statement schedules are the responsibility of the Company’s management. Our responsibility is to express an opinion on these consolidated financial statements and financial statement schedules based on our audits.

We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.

In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Penn Millers Holding Corporation and subsidiary as of December 31, 2009 and 2008, and the results of their operations and their cash flows for each of the years in the three-year period ended December 31, 2009, in conformity with U.S. generally accepted accounting principles. Also in our opinion, the related financial statement schedules, when considered in relation to the basic consolidated financial statements taken as a whole, present fairly, in all material respects, the information set forth therein.

As discussed in note 2 to the consolidated financial statements, the Company adopted the provisions of Statement of Financial Accounting Standards No. 158, Employers’ Accounting for Defined Benefit Pension and Other Postretirement Plans (included in FASB ASC Topic 715, Compensation – Retirement Benefits), as of December 31, 2007.

/s/ KPMG LLP

Philadelphia, Pennsylvania

March 31, 2010

F-1

PENN MILLERS HOLDING CORPORATION AND SUBSIDIARY

Consolidated Balance Sheets

December 31, 2009 and 2008

(Dollars in thousands, except share data)

	December 31,			December 31,
	2009			2008
Assets
Investments:
Fixed maturities:
Available for sale, at fair value (amortized cost $161,730 in 2009 and $120,538 in 2008)	$	167,155			121,914
Cash and cash equivalents		20,220			11,959
Premiums and fees receivable		29,526			31,080
Reinsurance receivables and recoverables		19,502			20,637
Deferred policy acquisition costs		10,053			10,601
Prepaid reinsurance premiums		4,076			4,342
Accrued investment income		1,810			1,431
Property and equipment, net of accumulated depreciation		3,769			4,231
Income taxes receivable		—			1,508
Deferred income taxes		3,518			4,728
Other		3,821			3,864
Deferred offering costs		—			1,015
Assets held for sale		—			3,214
Total assets	$	263,450			220,524
Liabilities and Shareholders' Equity
Liabilities:
Losses and loss adjustment expense reserves	$	106,710			108,065
Unearned premiums		43,313			45,322
Accounts payable and accrued expenses		12,762			13,353
Income taxes payable		617			—
Borrowings under line of credit		—			950
Long-term debt		—			1,432
Liabilities held for sale		—			647
Total liabilities		163,402			169,769
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 2009, 5,444,022; outstanding 2009, 4,695,262 shares		54			—
Additional paid-in capital		50,520			—
Accumulated other comprehensive income (loss)		2,519			(1,159	)
Retained earnings		54,481			51,914
Unearned ESOP, 530,999 shares		(5,310	)		—
Treasury stock, at cost, 217,761 shares		(2,216	)		—
Total shareholders' equity		100,048			50,755
Total liabilities and shareholders' equity	$	263,450			220,524

See accompanying notes to consolidated financial statements.

F-2

PENN MILLERS HOLDING CORPORATION AND SUBSIDIARY

Consolidated Statements of Operations

Years ended December 31, 2009, 2008 and 2007

(Dollars in thousands, except share data)

	2009			2008			2007
Revenues:
Premiums earned	$	75,358			78,737			70,970
Investment income, net of investment expense		5,648			5,335			5,324
Realized investment gains (losses), net:
Total other-than-temporary impairment losses		(197	)		(2,922	)		(620	)
Portion of loss recognized in other comprehensive income		—			—			—
Other realized investment gains (losses), net		396			(2,897	)		(82	)
Total realized investment gains (losses), net		199			(5,819	)		(702	)
Other income		223			411			508
Total revenues		81,428			78,664			76,100
Losses and expenses:
Losses and loss adjustment expenses		52,754			57,390			49,783
Amortization of deferred policy acquisition costs		21,383			23,081			21,930
Underwriting and administrative expenses		3,999			3,481			2,233
Interest expense		22			184			125
Other expense, net		209			365			184
Total losses and expenses		78,367			84,501			74,255
Income (loss) from continuing operations, before income taxes		3,061			(5,837	)		1,845
Income tax (benefit) expense		(346	)		(1,378	)		396
Income (loss) from continuing operations		3,407			(4,459	)		1,449
Discontinued operations:
Income (loss) from discontinued operations, before income taxes		39			(3,090	)		(489	)
Income tax expense (benefit)		879			(170	)		(126	)
Loss from discontinued operations		(840	)		(2,920	)		(363	)
Net income (loss)	$	2,567			(7,379	)		1,086

	For the period October 17 through December 31, 2009
Earnings per share (see note 3):
Net income after conversion and public offering	$	929
Basic and diluted earnings per share after conversion and public offering	$	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, 2009, 2008 and 2007

(Dollars in thousands, except share data)

							Accumulated
					Additional		Other						Unearned
	Common Stock				Paid-In		Comprehensive			Retained			ESOP			Treasury
	Shares		Amount		Capital		Income (Loss)			Earnings			Shares			Stock			Total
Balance at December 31, 2006		—	$	—		—		2,323			58,207			—			—			60,530

Net income											1,086									1,086
Other comprehensive income, net of taxes:
Unrealized investment holding gain arising during period, net of related income tax expense of $179								348												348
Reclassification adjustment for realized losses included in net income, net of related income tax benefit of $222								431												431
Net unrealized investment gain																				779
Comprehensive income																				1,865
Adjustment to initially adopt SFAS No. 158, net of related income taxes of $512								(994	)											(994	)
Balance at December 31, 2007		—		—		—		2,108			59,293			—			—			61,401

Net loss											(7,379	)								(7,379	)
Other comprehensive loss, net of taxes:
Unrealized investment holding loss arising during period, net of related income tax benefit of $3,097								(6,012	)											(6,012	)
Reclassification adjustment for realized losses included in net loss, net of related income tax benefit of $1,965								3,813												3,813
Net unrealized investment loss																				(2,199	)
Defined benefit pension plan, net of related income tax benefit of $551								(1,068	)											(1,068	)
Comprehensive loss																				(10,646	)
Balance at December 31, 2008		—		—		—		(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

See accompanying notes to consolidated financial statements.

F-4

PENN MILLERS HOLDING CORPORATION AND SUBSIDIARY

Consolidated Statements of Cash Flows

Years ended December 31, 2009, 2008 and 2007

(Dollars in thousands)

	2009			2008			2007
Cash flows from operating activities:
Net income (loss)	$	2,567			(7,379	)		1,086
Loss from discontinued operations		840			2,920			363
Adjustments to reconcile net income (loss) to net cash provided by operating activities:
Change in receivables, unearned premiums, and prepaid reinsurance		1,366			(4,787	)		4,470
Change in losses and loss adjustment expense reserves		(1,355	)		12,109			6,551
Change in accounts payable and accrued expenses		926			(1,737	)		56
Deferred income taxes		(685	)		(1,068	)		(208	)
Change in deferred acquisition costs		548			413			(633	)
Amortization and depreciation		668			710			783
ESOP share allocation		92			—			—
Realized investment (gains) losses, net		(199	)		5,819			702
Other, net		1,512			383			(2,153	)
Cash provided by operating activities – continuing operations		6,280			7,383			11,017
Cash (used in) provided by operating activities – discontinued operations		—			(20	)		515
Net cash provided by operating activities		6,280			7,363			11,532
Cash flows from investing activities:
Available-for-sale investments:
Purchases		(69,637	)		(50,075	)		(27,852	)
Sales		21,328			32,927			7,048
Maturities		6,800			11,970			8,350
Proceeds on sale of net assets of subsidiaries		2,628			—			—
Purchases of property and equipment, net		(206	)		(524	)		(919	)
Cash used in investing activities – continuing operations		(39,087	)		(5,702	)		(13,373	)
Cash provided by (used in) investing activities – discontinued operations		285			(48	)		(261	)
Net cash used in investing activities		(38,802	)		(5,750	)		(13,634	)
Cash flows from financing activities:
Net proceeds from issuance of common stock		49,040			—			—
Purchase of treasury stock		(2,216	)		—			—
Initial public offering costs paid		(3,374	)		(493	)		—
Net borrowings on line of credit		(950	)		950			(250	)
Repayment of long-term debt		(1,432	)		(313	)		(312	)
Cash provided by (used in) financing activities – continuing operations		41,068			144			(562	)
Cash used in financing activities – discontinued operations		(285	)		(260	)		(290	)
Net cash provided by (used in) financing activities		40,783			(116	)		(852	)
Net increase (decrease) in cash		8,261			1,497			(2,954	)
Cash and cash equivalents at beginning of period		11,959			10,462			13,416
Cash and cash equivalents at end of period		20,220			11,959			10,462
Less cash of discontinued operations at end of period		—			—			328
Cash and cash equivalents of continuing operations at end of period	$	20,220			11,959			10,134

See accompanying notes to consolidated financial statements.

F-5

PENN MILLERS HOLDING CORPORATION AND SUBSIDIARY

Notes to Consolidated Financial Statements

(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 markets policies that combine property, liability, business interruption, crime coverage, workers’ compensation, commercial automobile, and umbrella liability coverage for small and middle market businesses. The types of businesses this segment targets include retail, service, hospitality, wholesalers, light 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.

F-6

PENN MILLERS HOLDING CORPORATION AND SUBSIDIARY

Notes to Consolidated Financial Statements

The Company owned Eastern Insurance Group (EIG), an insurance agency that placed business with both PMIC and unaffiliated insurance companies. In 2008, the Company committed to a plan to sell EIG’s business; and therefore, the assets and liabilities were classified as held-for-sale with the results of operations reported as discontinued operations in the accompanying consolidated financial statements. The Company sold substantially all of the assets of EIG in February 2009 (see note 18).

The Company owned Penn Software & Technology Services Inc. (PSTS) which provided both hardware and computer programming services to its clients. In 2007, management made a decision to sell PSTS; and as such, reported the assets and liabilities of PSTS as held-for-sale with the results of its operations as discontinued operations in the accompanying consolidated financial statements. The Company sold substantially all of the assets of PSTS in July 2008 (see note 18).

(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. The consolidated financial statements, along with related notes, reflect the reclassification of EIG and PSTS as assets and liabilities held-for-sale and discontinued operations. See note 18 for additional disclosure related to discontinued operations.

(b)

Use of Estimates

The preparation of consolidated financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, including loss reserves, contingent assets and liabilities, tax valuation reserves, valuation of defined benefit pension obligations, valuation of investments, including other-than-temporary impairment of investments, the disclosure of contingent assets and liabilities, at the date of the consolidated financial statements, and 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 33 states, direct premiums written for two states, New Jersey and Pennsylvania, accounted for more than 22% of the Company’s direct premium writings for 2009. Consequently, changes in the New Jersey or Pennsylvania legal, regulatory, or economic environment could adversely affect the Company.

Additionally, one producer, Arthur J. Gallagher Risk Management Services, which writes business for the Company through nine offices, accounted for 14% of the Company’s direct premium writings for 2009. Only one other producer accounted for more than 5% of the Company’s 2009 direct premium writings.

F-7

PENN MILLERS HOLDING CORPORATION AND SUBSIDIARY

Notes to Consolidated Financial Statements

(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 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 and 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 other-than-temporary impairments is charged to earnings and the remaining difference is included in other comprehensive income.

The fair value of investments is reported in note 4. The fair value of other financial instruments, principally receivables, accounts payable and accrued expenses, and debt approximates their December 31, 2009 and 2008 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-8

PENN MILLERS HOLDING CORPORATION AND SUBSIDIARY

Notes to Consolidated Financial Statements

(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 acquisitions costs limits the amount of such deferred costs to their estimated realizable value, which gives effect to the premium to be earned, related investment income, losses and loss adjustment expenses, and certain other costs expected to be incurred as the premium is earned. Future changes in estimates, the most significant of which is expected losses and loss adjustment expenses, may require adjustments to deferred policy acquisition 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, 2009, an impairment is not considered necessary.

(i)

Income Taxes

The Company and its subsidiary file a consolidated federal income tax return. Income 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 reserve is recorded when it is more likely than not that some portion or all of the deferred tax assets will not be realized. As of December 31, 2009, the Company had no material unrecognized tax benefits or accrued interest and penalties.

F-9

PENN MILLERS HOLDING CORPORATION AND SUBSIDIARY

Notes to Consolidated Financial Statements

(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. On that date, $3,867 of offering costs were netted against the offering proceeds in equity.

Deferred offering costs of $1,015 are reported separately on the consolidated balance sheet at December 31, 2008.

(k)

Goodwill

The Company had no goodwill on its consolidated balance sheets at December 31, 2009 and 2008 related to continuing operations.

Goodwill is tested annually for impairment, and is tested for impairment more frequently if events and circumstances indicate that the asset might be impaired. An impairment loss is recognized to the extent that the carrying amount exceeds the asset’s fair value. This determination is made at the reporting unit level and consists of two steps. First, the Company determines the fair value of a reporting unit and compares it to its carrying amount. Second, if the carrying amount of a reporting unit exceeds its fair value, an impairment loss is recognized for any excess of the carrying amount of the reporting unit’s goodwill over the implied fair value of that goodwill. The implied fair value of goodwill is determined by allocating the fair value of the reporting unit in a manner similar to a purchase price allocation. The residual fair value after this allocation is the implied fair value of the reporting unit goodwill. PSTS and EIG had goodwill, which was classified as assets held-for-sale. The Company performed the impairment tests as of December 31, 2008 and 2007 for PSTS and EIG. Goodwill of EIG was also tested as of September 30, 2008 after information obtained during the selling process and the further deterioration of economic conditions indicated that it was more likely than not that the fair value of the EIG reporting unit was below its carrying amount. Goodwill in PSTS was impaired by $160 as of December 31, 2007. PSTS was sold in July 2008, resulting in a pretax loss on sale of $117.

As of September 30, 2008, the Company determined that the carrying amount of the EIG reporting unit exceeded its fair value. The Company had not completed the second step of the goodwill impairment test, as of September 30, 2008. However, as a goodwill impairment loss was probable and could be reasonably estimated, the Company recognized its best estimate of that loss as of September 30, 2008. The Company estimated that EIG goodwill of $4,747 was impaired by $2,435. Management estimated the fair value of the reporting unit at September 30, 2008, based on various offers obtained during their process of selling EIG. The estimate was consistent with offers received subsequent to the end of the third quarter 2008.

The Company completed step two of the goodwill impairment test in the fourth quarter 2008 and recorded an adjustment of $165 to the goodwill impairment write-down that was recorded at September 30, 2008. The fair value of the reporting unit was based on the actual selling price of EIG as executed on February 2, 2009. The adjusted carrying amount of goodwill of $2,147 is in assets held-for-sale at December 31, 2008.

F-10

PENN MILLERS HOLDING CORPORATION AND SUBSIDIARY

Notes to Consolidated Financial Statements

The Company completed the sale of substantially all of EIG’s assets and liabilities on February 2, 2009 and received proceeds of $3,109 less estimated costs to sell of $248. In the first quarter of 2009, the Company recorded a pretax loss on sale of $6. The Company has recognized approximately $862 of capital income tax expense.

(l)

Discontinued Operations and Assets Held-for-Sale

Discontinued operations represent components of the Company that have either been disposed of or are classified as held-for-sale if both the operations and cash flows of the components have been or will be eliminated from ongoing operations of the Company as a result of the disposal and when the criteria for discontinued operations have been met. The results of operations of reporting units classified as discontinued operations are done so for all periods presented. The Company classifies assets and liabilities of reporting units as held-for-sale when the criteria for held-for-sale accounting are met. At the time a reporting unit qualifies for held-for-sale accounting, the reporting unit is evaluated to determine whether or not the carrying value exceeds its fair value less costs to sell. Any loss resulting from carrying value exceeding fair value less cost to sell is recorded in the period the reporting unit initially meets held-for-sale accounting. Management judgment is required to (1) assess the criteria required to meet held-for-sale accounting and (2) estimate fair value. Subsequent to initial classification as held for sale, the reporting unit is carried at the lower of its carrying amount or fair value less cost to sell. Changes to the fair value could result in an increase or decrease to previously recognized losses. The assets and liabilities of a disposed group, classified as held-for-sale, are presented separately in the appropriate asset and liability sections of the consolidated balance sheets for all periods presented.

(m)

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 $2,397 and $2,502 at December 31, 2009 and 2008, respectively, a substantial portion of which results from the Company’s participation in assumed reinsurance pools. The Company estimates this liability based on its pro rata share of asbestos and environmental case reserves reported by the pools and an additional estimate of incurred but not reported losses and loss adjustment expenses based on actuarial analysis of the historical development patterns. The estimation of the ultimate liability for these claims is difficult due to outstanding issues such as whether coverage exists, the definition of an occurrence, the determination of ultimate damages, and the allocation of such damages to financially responsible parties. Therefore, any estimation of these liabilities is subject to significantly greater than normal variation and uncertainty.

F-11

PENN MILLERS HOLDING CORPORATION AND SUBSIDIARY

Notes to Consolidated Financial Statements

(n)

Employee Benefit Plans

The Company records annual amounts relating to its defined benefit pension plan and nonqualified Supplemental Executive Retirement Plan (SERP) based on calculations that include various actuarial assumptions, such as discount rates, mortality, rates of return, and compensation increases. These estimates are highly susceptible to change from period to period based on the performance of plan assets, demographic changes, and market conditions. The Company reviews its actuarial assumptions on an annual basis and makes modifications to the assumptions based on current rates and trends. The Company believes that the assumptions used in recording its defined benefit pension plan and SERP obligations are reasonable based on its experience, market conditions, and input from its actuaries and investment advisors.

The Company utilizes the corridor method of amortizing actuarial gains and losses. The amortization of experience gains and losses is recognized only to the extent that the cumulative unamortized net actuarial gain or loss exceeds 10% of the greater of the projected benefit obligation and the fair value of plan assets at the beginning of the year. When required, the excess of the cumulative gain or loss balance is amortized over the expected average remaining service life of the employees covered by the plan. On December 31, 2007, the Company adopted the provisions SFAS No. 158, Employers’ Accounting for Defined Benefit Pension and Other Postretirement Plans (included in FASB ASC Topic 715, Compensation – Retirement Benefits). This statement requires recognition of the deferred gains and losses on the balance sheet with a corresponding charge to accumulated other comprehensive income (loss).

F-12

PENN MILLERS HOLDING CORPORATION AND SUBSIDIARY

Notes to Consolidated Financial Statements

(p)

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 equal to the fair market value of the Company’s common stock at the end of 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.

(r)

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.

(o)

Derivative Instruments

In 2005 the Company entered into an interest rate swap agreement in an effort to manage interest rate risk associated with its variable rate debt. The Company’s derivative instrument was executed with a financial institution (counterparty) and was subject to counterparty credit risk. Counterparty credit risk is the risk that the counterparty is unable to perform under the terms of the derivative instrument upon settlement of the derivative instrument.

The derivative was recorded in accounts payable and accrued expenses in the consolidated balance sheets at fair value with the associated gain/loss included in the consolidated statements of operations. On August 3, 2009 the variable rate debt was paid off and the interest rate swap terminated.

(q)

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.

(s)

Adoption of New Accounting Standards

On July 1, 2009, the Accounting Standards Codification (ASC) became the FASB’s officially recognized source of authoritative GAAP applicable to all public and non-public non-governmental entities, superseding existing FASB, AICPA, EITF and related literature. Rules and interpretive releases of the SEC under the authority of federal securities laws are also sources of authoritative GAAP for SEC registrants. All other accounting literature is considered non-authoritative. The switch to the ASC affects the way companies refer to GAAP in financial statements and accounting policies. The adoption of this guidance in the third quarter of 2009 did not have an impact on the Company’s results of operations or financial position.

In December 2008, the FASB issued guidance on “Employer’s Disclosures about Postretirement Benefit Plan Assets.” New authoritative accounting guidance under FASB ASC 715, Compensation—Retirement Benefits provides guidance related to an employer’s disclosures about plan assets of defined benefit pension or other post-retirement benefit plans. Under ASC 715 , disclosures should provide users of financial statements with an understanding of how investment allocation decisions are made, the factors that are pertinent to an understanding of investment policies and strategies, the major categories of plan assets, the inputs and valuation techniques used to measure the fair value of plan assets, the effect of fair value measurements using significant unobservable inputs on changes in plan assets for the period and significant concentrations of risk within plan assets. The new guidance was effective for fiscal years ending after December 15, 2009. The adoption of this guidance did not have an impact on the Company’s results of operations or financial position.

F-13

PENN MILLERS HOLDING CORPORATION AND SUBSIDIARY

Notes to Consolidated Financial Statements

F-14

PENN MILLERS HOLDING CORPORATION AND SUBSIDIARY

Notes to Consolidated Financial Statements

In May 2009, the FASB issued guidance on “Subsequent Events.” This guidance establishes general standards of accounting for, and requires disclosure of, events that occur after the balance sheet date but before financial statements are issued or are available to be issued. This guidance was effective for interim or annual periods ending after June 15, 2009. This guidance was updated in February 2010 to remove the requirement for an SEC filer, as defined, to disclose the date through which subsequent events have been evaluated. Adoption of this guidance did not have a material impact on the Company’s results of operations or financial position.

All other standards and updates of those standards issued during the twelve months ended December 31, 2009 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)	Earnings per Share

As described in note 1, the Offering resulted in the issuance of common shares of the Company on October 16, 2009. Basic earnings per share are computed by dividing net income for the period subsequent from October 16, 2009 to December 31, 2009 by the weighted average number of common shares outstanding for the period of 4,820,280. There were no dilutive potential common shares outstanding during this period. Consolidated net income for the period from October 17, 2009 to December 31, 2009 was $929, resulting in basic earnings per share of $0.19.

(4)	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 now a part of ASC 820.

The fair value of a financial asset or financial liability is the amount at which that asset or liability could be bought or sold in a current transaction between willing parties, that is, other than in a forced or liquidated sale. In accordance with the guidance set forth by ASC 820, the Company’s financial assets and financial liabilities measured at fair value are categorized into three levels, based on the markets in which the assets and liabilities are traded and the reliability of the assumptions used to determine fair value. These levels are:

Level 1 – Unadjusted quoted market prices for identical assets or liabilities in active markets that the Company has the ability to access. The Company classifies U.S. Treasury debt securities as Level 1.

Level 2 – Valuations based on observable inputs, other than quoted prices included in Level 1, for assets and liabilities traded in less active dealer or broker markets. Valuations are based on identical or comparable assets and liabilities.

Level 3 – Valuations for assets and liabilities that are derived from other valuation methodologies, including option pricing models, discounted cash flow models, and similar techniques, and not based on market exchange, dealer, or broker traded transactions. Level 3 valuations incorporate certain assumptions and projections that are often unobservable in determining the fair value assigned to such assets or liabilities.

F-15

PENN MILLERS HOLDING CORPORATION AND SUBSIDIARY

Notes to Consolidated Financial Statements

The table below presents the balances of assets and liabilities measured at fair value on a recurring basis as of December 31, 2009 and 2008:

	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 assets	$	4,612		162,543		—		167,155

	Level 1		Level 2		Level 3		Total
December 31, 2008:
Fixed maturities, available for sale
U.S. treasuries	$	9,310		—		—		9,310
Agencies not backed by the full faith and credit of the U.S. government		—		16,089		—		16,089
State and political subdivisions		—		32,957		—		32,957
Commercial mortgage-backed securities		—		3,932		—		3,932
Residential mortgage-backed securities		—		21,373		—		21,373
Corporate securities		—		38,253		—		38,253
Total assets	$	9,310		112,604		—		121,914

Accounts payable and accrued expenses	$	—		66		—		66
Total liabilities	$	—		66		—		66

The Company uses quoted values and other data provided by a nationally recognized independent pricing service in its process for determining fair values of its investments. The pricing service provides the Company one quote per instrument. For fixed maturity securities that have quoted prices in active markets, market quotations are provided. For fixed maturity securities that do not trade on a daily basis, the independent pricing service prepares estimates of fair value using a wide array of observable inputs including relevant market information, benchmark curves, benchmarking of like securities, sector groupings, and matrix pricing. The observable market inputs that the Company’s independent pricing service utilizes include (listed in order of priority for use) benchmark yields, reported trades, broker-dealer quotes, issuer spreads, two-sided markets, benchmark securities, market bids/offers, and other reference data on markets, industry, and the economy. Additionally, the independent pricing service uses an Option Adjusted Spread model to develop prepayment and interest rate scenarios.

F-16

PENN MILLERS HOLDING CORPORATION AND SUBSIDIARY

Notes to Consolidated Financial Statements

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

The fair value estimates of the Company’s investments provided by the independent pricing service at December 31, 2009, were utilized, among other resources, in reaching a conclusion as to the fair value of investments. As of December 31, 2009, 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 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, 2009.

The fair value of other financial instruments, principally receivables, accounts payable and accrued expenses, borrowings under line of credit, and long-term debt approximates their December 31, 2009 and 2008 carrying values.

Included in accounts payable and accrued expenses at December 31, 2008 is an interest rate swap agreement (see note 5). Management estimated the fair value of the interest rate swap based on information obtained from a third-party financial institution counterparty. Management also considered the prevailing interest rate environment as a key input into the valuation of the swap.

F-17

PENN MILLERS HOLDING CORPORATION AND SUBSIDIARY

Notes to Consolidated Financial Statements

(5)	Investments

The amortized cost and fair value of investments in fixed maturity securities, which are all available for sale, at December 31, 2009 and 2008 are as follows:

			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
December 31, 2008:
U.S. Treasuries	$	8,530		780		—		9,310
Agencies not backed by the full faith and credit of the U.S. government		14,929		1,160		—		16,089
State and political subdivisions		31,775		1,292		110		32,957
Commercial mortgage-backed securities		4,600		3		670		3,933
Residential mortgage-backed securities		20,774		598		—		21,372
Corporate securities		39,930		414		2,091		38,253
Total fixed maturities	$	120,538		4,247		2,871		121,914

The amortized cost and estimated fair value of fixed maturity securities at December 31, 2009, by contractual maturity, are shown below:

	Amortized		Estimated
	cost		fair value
Due in one year or less	$	10,008		10,203
Due after one year through five years		73,532		76,405
Due after five years through ten years		40,196		41,719
Due after ten years		6,581		6,751
		130,317		135,078
Commercial mortgage-backed securities		3,806		3,775
Residential mortgage-backed securities		27,607		28,302
Total fixed maturities	$	161,730		167,155

F-18

PENN MILLERS HOLDING CORPORATION AND SUBSIDIARY

Notes to Consolidated Financial Statements

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, 2009 and 2008, investments with a fair value of $4,358 and $4,543, respectively, were on deposit with regulatory authorities, as required by law.

Major categories of net investment income are as follows:

	2009			2008			2007
Interest on fixed maturities	$	6,187			5,425			5,157
Dividends on equity securities		—			215			251
Interest on cash and cash equivalents		19			209			456
Total investment income		6,206			5,849			5,864
Investment expense		(558	)		(514	)		(540	)
Investment income, net of investment expense	$	5,648			5,335			5,324

F-19

PENN MILLERS HOLDING CORPORATION AND SUBSIDIARY

Notes to Consolidated Financial Statements

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

	2009			2008			2007
Fixed maturity securities:
Available for sale:
Gross gains	$	555			80			—
Gross losses		(178	)		(109	)		(77	)
Other-than-temporary impairment losses		(197	)		—			—
Equity securities:
Gross gains		—			2,211			524
Gross losses		—			(5,038	)		(480	)
Other-than-temporary impairment losses		—			(2,922	)		(620	)
Realized investment gains (losses), net		180			(5,778	)		(653	)
Change in value of interest rate swap		19			(41	)		(49	)
Realized investment gains (losses) after change in value of interest rate swap, net	$	199			(5,819	)		(702	)
Change in difference between fair value and cost of investments:
Fixed maturity securities for continuing operations	$	4,049			(420	)		1,519
Equity securities for continuing operations		—			(2,884	)		(337	)
Total for continuing operations		4,049			(3,304	)		1,182
Equity securities for discontinued operations		7			(28	)		(2	)
Total including discontinued operations	$	4,056			(3,332	)		1,180

Income tax expense (benefit) on net realized investment gains (losses) was $61, $(1,965) and $(222) for the years ended December 31, 2009, 2008, and 2007, respectively. Deferred income tax expense applicable to net unrealized investment gains included in equity was $1,845 and $468 at December 31, 2009 and 2008, respectively.

The Company entered into an interest rate swap agreement in 2005 to manage interest rate risk associated with its variable rate debt. The fixed interest rate as a result of the agreement was 5.55% for the full five year term of the debt. The notional amount of the swap was $1,432 at December 31, 2008. Investment gain (losses) of $19, $(41) and $(49) were recorded within net realized investment gains (losses) on the consolidated statements of operations in 2009, 2008 and 2007, respectively. On August 3, 2009 the variable rate debt was paid off and the interest rate swap terminated.

F-20

PENN MILLERS HOLDING CORPORATION AND SUBSIDIARY

Notes to Consolidated Financial Statements

The fair value and unrealized losses for securities temporarily impaired as of December 31, 2009 and 2008 are as follows:

	Less than 12 months				12 months or longer				Total
			Unrealized				Unrealized				Unrealized
Description of securities	Fair value		losses		Fair value		losses		Fair value		losses
2009:
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
2008:
State and political subdivisions	$	2,934		56		515		54		3,449		110
Commercial mortgage-backed securities		2,203		297		1,645		373		3,848		670
Corporate securities		10,732		1,008		9,907		1,083		20,639		2,091
Total temporarily impaired securities	$	15,869		1,361		12,067		1,510		27,936		2,871

The Company invests in high credit quality bonds. These fixed maturity investments are classified as available for sale because the Company will, from time to time, sell securities that are not impaired, consistent with its investment goals and policies. Fair values of interest rate sensitive instruments may be affected by increases and decreases in prevailing interest rates which generally translate, respectively, into decreases and increases in fair values of fixed maturity investments. The fair values of interest rate sensitive instruments also may be affected by the credit worthiness of the issuer, prepayment options, relative values of other investments, the liquidity of the instrument, and other general market conditions. There are $5,964 in fixed maturity securities, at fair value, that at December 31, 2009, had been below cost for over 12 months. The $138 of unrealized losses on such securities relates to securities, which carry an investment grade debt rating and have declined in fair value roughly in line with overall market conditions. The Company has evaluated each security and taken into account the severity and duration of the impairment, the current rating on the bond, and the outlook for the issuer according to independent analysts. The Company has found that the declines in fair value are most likely attributable to the current 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. The Company believes, based on its analysis, that these 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 income in the future.

As of December 31, 2009, the Company incurred impairment charges of $197 related to one fixed maturity security. The carrying value of the security was written down to fair value as of June 30, 2009 and the security was sold in July 2009. For December 31, 2008 and 2007, the Company recorded impairment charges of $2,922 and $620, respectively, on its investments.

F-21

PENN MILLERS HOLDING CORPORATION AND SUBSIDIARY

Notes to Consolidated Financial Statements

The Company does not engage in subprime residential mortgage lending. The only securitized financial assets that the Company owns are residential and commercial mortgage-backed securities of high credit quality. The Company’s exposure to subprime lending is limited to investments in corporate bonds of banks, which may contain some subprime loans on their balance sheets. These bonds are reported at fair value. As of December 31, 2009, fixed maturity securities issued by banks accounted for 7.8% of the bond portfolio’s book value. None of the Company’s fixed maturity securities have defaulted or required an impairment charge due to the subprime credit crisis.

(6)	Comprehensive Income (Loss)

Comprehensive income (loss) for the years ended December 31, 2009, 2008, and 2007 consisted of the following:

	2009			2008			2007
Net income (loss)	$	2,567			(7,379	)		1,086
Other comprehensive income (loss):
Unrealized gains (losses) on securities:
Unrealized investment holding gains (losses) arising during period		2,796			(6,012	)		348
Less:
Reclassification adjustment for realized (gains) losses included in net income (loss)		(119	)		3,813			431
Net unrealized investment gains (losses)		2,677			(2,199	)		779
Change in defined benefit pension plans		(94	)		(1,068	)		—
Curtailment benefit		1,095			—			—
Other comprehensive income (loss)		3,678			(3,267	)		779
Comprehensive income (loss)	$	6,245			(10,646	)		1,865

Accumulated other comprehensive income (loss) at December 31, 2009 and 2008 consisted of the following amounts (all amounts net of taxes):

	2009			2008

Unrealized investment gains for continuing operations	$	3,580			908
Unrealized investment losses for discontinued operations		—			(5	)
Defined benefit pension plan – net actuarial loss		(1,061	)		(2,062	)
Accumulated other comprehensive income (loss)	$	2,519			(1,159	)

F-22

PENN MILLERS HOLDING CORPORATION AND SUBSIDIARY

Notes to Consolidated Financial Statements

(7)	Deferred Policy Acquisition Costs

Changes in deferred policy acquisition costs for the years ended December 31, 2009, 2008, and 2007 are as follows:

	2009			2008			2007
Balance, January 1	$	10,601			11,014			10,381
Policy acquisition costs deferred		20,835			22,668			22,563
Amortization charged to operations		(21,383	)		(23,081	)		(21,930	)
Balance, December 31	$	10,053			10,601			11,014

(8)	Property and Equipment

Property and equipment consisted of land and buildings with a cost of $5,746 and $5,677 and equipment, capitalized software costs, and other items with a cost of $9,177 and $9,064 at December 31, 2009 and 2008, respectively. Accumulated depreciation related to such assets was $11,154 and $10,510 at December 31, 2009 and 2008, respectively.

Rental expense under leases for continuing operations amounted to $100, $140, and $245 for 2009, 2008, and 2007, respectively.

At December 31, 2009, the minimum aggregate rental and lease commitments for continuing operations are as follows:

2010	$	98
2011		70
2012		40
2013		17
Total	$	225

(9)	Borrowings

On July 22, 2009, the Company refinanced its long-term debt and lines of credit by entering into a new, four year $3,000 revolving line of credit with a commercial bank. The new line of credit note required monthly payments of accrued interest, with principal due no later than the maturity of the loan agreement, four years from the inception date. The initial interest rate on outstanding borrowings was based on the London Interbank Offered Rate (0.23% at December 31, 2009) plus 175 basis points.

On August 3, 2009, $1,800 from this new line of credit and cash from operations of $1,134 was used to pay off the long-term debt amount of $1,251 of principal and interest due at the settlement date, and the two then-existing lines of credit, at an aggregate amount of principal and interest of $1,683. The interest rate swap tied to the long-term debt was also terminated. On December 1, 2009, the Company paid the balance of $1,800 in full and closed the line of credit.

F-23

PENN MILLERS HOLDING CORPORATION AND SUBSIDIARY

Notes to Consolidated Financial Statements

Long-term debt related to continuing operations at December 31, 2009 and 2008 consisted of the following:

	2009		2008
Term loan agreement – due 2010	$	—		1,432
Long-term debt	$	—		1,432

Interest paid was $73, $90, and $108 as of December 31, 2009, 2008, and 2007, respectively.

(10)	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. 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 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 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 (loss) in equity. Due to a decline in interest rates, this benefit has been partially offset by an actuarial loss of $717.

F-24

PENN MILLERS HOLDING CORPORATION AND SUBSIDIARY

Notes to Consolidated Financial Statements

In 2008, as a result of the probable sale of EIG, the Company recognized a curtailment of its defined benefit pension plan. The recognized curtailment loss represents the balance of unrecognized prior service cost associated with the EIG employees, in the amount of $222. A reduction in projected benefit obligation of $123 was recognized at the same time.

(a)

Obligations and Funded Status at December 31

	2009			2008
Change in benefit obligation:
Benefit obligation at beginning of year	$	9,773			9,768
Service cost		465			664
Interest cost		571			573
Benefit payments		(732	)		(1,408	)
Administrative expenses		(76	)		(41	)
Actuarial loss		717			340
Curtailment		(1,659	)		(123	)
Benefit obligation at end of year		9,059			9,773
Change in plan assets:
Fair value of plan assets at beginning of year		4,941			6,239
Employer contributions		371			1,402
Benefit payments		(732	)		(1,408	)
Administrative expenses		(76	)		(41	)
Actual return on plan assets		764			(1,251	)
Fair value of plan assets at end of year		5,268			4,941
Funded status (net liability recognized)	$	(3,791	)		(4,832	)

Amounts recognized in accumulated other comprehensive income (loss):

	2009			2008
Unrecognized prior service cost	$	(487	)		(527	)
Unrecognized net loss		(1,122	)		(2,598	)
Accumulated other comprehensive loss	$	(1,609	)		(3,125	)

The accumulated benefit obligation for the qualified defined benefit pension plan was $7,380 and $6,894 at December 31, 2009 and 2008, respectively.

The accumulated benefit obligation and projected benefit obligation of the SERP were $1,294 and $1,679, respectively, at December 31, 2009 and $1,024 and $1,353, respectively, at December 31, 2008.

F-25

PENN MILLERS HOLDING CORPORATION AND SUBSIDIARY

Notes to Consolidated Financial Statements

(b)

Components of Net Periodic Benefit Cost

	2009			2008			2007
Service cost	$	465			664			656
Interest cost		571			573			582
Expected return on plan assets		(358	)		(462	)		(489	)
Amortization of prior service costs		41			62			62
Amortization of net loss		128			27			7
Net periodic pension expense		847			864			818
Curtailment loss		—			222			—
Net periodic pension expense and additional amounts recognized	$	847			1,086			818

(c)

Assumptions

Weighted average assumptions used to determine benefit obligations at December 31, 2009 and 2008 are as follows:

	Pension plan						SERP
	2009			2008			2009			2008
Discount rate		5.84	%		6.16	%		5.67	%		6.56	%
Rate of compensation increase		—			4.00			5.00			5.00

Weighted average assumptions used to determine net periodic benefit cost for the years ended December 31, 2009 and 2008 are as follows:

	Pension plan						SERP
	2009			2008			2009			2008
Discount rate		6.16	%		6.40	%		6.56	%		6.40	%
Expected long-term return on plan assets		7.50			7.50			N/A			N/A
Rate of compensation increase		4.00			4.00			5.00			5.00

Discount rates are selected considering yields available on high quality debt instruments at durations that approximate the timing of the benefit payments for the pension liabilities at the measurement date. The expected rate of return reflects the Company’s long-term expectation of earnings on the assets held in the plan trust, taking into account asset allocations, investment strategy, the views of the asset managers, and the historical performance.

F-26

PENN MILLERS HOLDING CORPORATION AND SUBSIDIARY

Notes to Consolidated Financial Statements

(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 by the finance committee. The overall investment strategy is to maintain appropriate liquidity to meet the cash requirements of the short-term plan obligations and to maximize the plan’s return while adhering to the policy’s objectives and risk guidelines, as well as the regulations set forth by various government entities. The policy sets forth asset allocation guidelines that emphasize U.S. investments with strong credit quality and restrict traditionally risky investments.

The current target allocations for plan assets are 60% for equity securities, 38% for fixed income securities, and 2% for cash. 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 include 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 4. The following discussion of fair value measurements applies exclusively to the Company's pension plan assets.

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

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, 2009.

F-27

PENN MILLERS HOLDING CORPORATION AND SUBSIDIARY

Notes to Consolidated Financial Statements

	Level 1		Level 2		Level 3		Total

Equity securities:
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 securities:
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 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 and provides high current income with high credit quality.

(e)

Cash Flows

Estimated Future Benefit Payments

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

2010	$	242
2011		272
2012		679
2013		388
2014		298
2015 – 2019		8,760

F-28

PENN MILLERS HOLDING CORPORATION AND SUBSIDIARY

Notes to Consolidated Financial Statements

As a result of the defined benefit pension plan freeze, the Company's minimum required contribution in 2010 is expected to be $0. However, the Company expects to make a contribution of at least $500 in order to improve the adequacy of the funding position and take advantage of the tax benefits associated with making such a contribution.

The expected contribution for the SERP plan will be a minimum of $47, representing the normal benefit payments to the lone participant in payment status. However, the board is considering terminating the plan and replacing it with restricted stock grants if shareholders approve the Company's stock based incentive plan. If that occurs, then the one participant in pay status would receive a payment for the present value of the accrued benefit, estimated to be $595. The present value of the accrued benefit for the remainder of the participants is expected to be settled in restricted stock.

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 $175, $225, and $242 for 2009, 2008, and 2007, 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 is funded entirely by an employer loan in the amount of $5,400, which will be repaid in ten equal installments. 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-29

PENN MILLERS HOLDING CORPORATION AND SUBSIDIARY

Notes to Consolidated Financial Statements

Suspense shares, allocated shares, shares committed to be released, average price per share and stock compensation expense as of December 31, 2009, or for the period October 17, 2009 through December 31, 2009, are as follows (in thousands, except for share data):


Suspense shares		539,999
Allocated shares		—
Shares committed to be released		9,000
Average price per share	$	10.20
Stock compensation expense	$	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, 2009, the estimated fair value of unearned ESOP shares was $5,841.

For the year ended December 31, 2009, the Company made a cash contribution of $111 to the ESOP. The ESOP used these contributions to make the annual payment to the Company related to the outstanding balance of the loan. The transactions between the Company and the ESOP are eliminated for purposes of the consolidated statements of cash flows.

(11)	Federal Income Tax

Components of the provision for income tax (benefit) expense from continuing operations for the years ended December 31, 2009, 2008, and 2007 are as follows:

	2009			2008			2007
Current expense (benefit):
Federal	$	339			(310	)		604
Deferred benefit:
Federal		(685	)		(1,068	)		(208	)
Total tax (benefit) expense	$	(346	)		(1,378	)		396

The Company’s net (refunds) payments for income taxes in 2009, 2008, and 2007 were $(907), $23, and $1,963, respectively.

F-30

PENN MILLERS HOLDING CORPORATION AND SUBSIDIARY

Notes to Consolidated Financial Statements

A reconciliation of the expected and actual federal income tax (benefit) expense from continuing operations for the years ended December 31, 2009, 2008, and 2007 is as follows:

	2009			2008			2007
Expected tax at 34%	$	1,041			(1,985	)		627
State income tax benefit		(80	)		(35	)		(193	)
Nontaxable investment income		(385	)		(397	)		(378	)
Accrual adjustment		—			(58	)		96
Change in valuation reserve for capital loss carryforwards		(1,026	)		1,026			—
Change in valuation reserve for state NOL carryforwards		80			35			193
Other items, net		24			36			51
Total tax (benefit) expense	$	(346	)		(1,378	)		396

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, 2009 and 2008 are as follows:

	2009			2008
Deferred tax assets:
Discounting of unpaid losses	$	3,391			3,261
Unearned premium reserve		2,669			2,787
Capital losses carried forward		1,191			1,936
Accrued retirement benefit		1,112			1,462
Guaranty fund liability		510			456
Compensation related accruals		471			92
State net operating losses		629			571
Other items		233			545
Gross deferred tax assets		10,206			11,110
Valuation reserve		(629	)		(1,597	)
Net deferred tax assets after valuation reserve		9,577			9,513
Deferred tax liabilities:
Deferred policy acquisition costs		3,418			3,604
Unrealized investment gains, net		1,845			466
Depreciation and amortization		279			195
Accrued premium tax credits		206			191
Prepaid expenses		125			115
Other items		186			214
Gross deferred tax liabilities		6,059			4,785
Net deferred tax asset	$	3,518			4,728

At December 31, 2009 and 2008, the Company had available $3,503 and $5,694, respectively, of federal capital loss carryforwards and $6,295 and $5,721, respectively, of state income tax net operating loss (NOL) carryforwards. The capital loss carryforwards have a five year carryforward and will expire in 2013.

F-31

PENN MILLERS HOLDING CORPORATION AND SUBSIDIARY

Notes to Consolidated Financial Statements

A valuation reserve is required to be established for any portion of the deferred tax asset that management believes more likely than not will not be realized. As a result of declining interest rates and the improvement in the credit markets, the Company’s fixed maturity investments have appreciated in value by $4,049 for the period ended December 31, 2009. Due to this improvement and the resulting unrealized capital gains, the Company intends to accelerate the reversal of the deferred tax liability associated with these unrealized gains through the sale of said investments. Therefore, as of December 31, 2009, the Company reversed the valuation reserve of $1,026 that was recorded against the deferred tax asset associated with the capital loss carryforwards as of December 31, 2008.

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, 2009 and 2008, a valuation reserve of $629 and $571, respectively, was recorded against the deferred tax asset associated with the state income tax NOL carryforwards. The state NOL carryforwards have a 20 year carryforward and will expire from 2019 through 2029.

The Company has recorded income tax expense of $879 on discontinued operations, which relates primarily to the tax expense recorded on the sale of the assets of Eastern Insurance Group (EIG), whose book basis exceeded their tax basis. The Company has reviewed the potential of a tax position regarding a worthless stock deduction for its investment in EIG. The Company determined that the more-likely-than not recognition threshold would not be met. Therefore, if the Company were to conclude to take a tax return position on the 2009 Federal Income Tax Return, the benefit would need to be recorded as an uncertain tax position, with no current benefit recognized. The maximum favorable impact of this deduction is estimated to be $900, with reasonable possibility that the tax return position will not be taken.

As of December 31, 2009, the Company had no material unrecognized tax benefits or accrued interest and penalties. The Company’s policy is to account for interest as a component of interest expense and penalties as a component of other expense. Federal tax years 2006 through 2009 were open for examination as of December 31, 2009.

(12)	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 2009, 2008, and 2007. The Company purchased catastrophe excess-of-loss reinsurance with a retention of $2,000 per event in 2009, 2008, and 2007.

Effective January 1, 2009, the Company modified its reinsurance program in which the Company lowered its participation in the per-risk reinsurance treaty. Losses between $500 and $1,000 are retained at 52.5% in 2009 versus a 75% retention rate in 2008. Losses between $1,000 and $5,000 are retained at 0% in 2009 versus 25% in 2008.

The Company continues to maintain a whole account, accident year aggregate excess of loss (aggregate stop loss) contract. This contract covers the 2008 and 2009 accident years and provides reinsurance coverage for loss and allocated loss adjustment expense (ALAE) from all lines of business, in excess of a 72% loss and ALAE ratio. The reinsurance coverage has a limit of 20% of subject net earned premiums. In 2009, the Company experienced favorable development on accident year 2008 loss reserves subject to the treaty. In addition, accident year 2009 resulted in a loss ratio subject to the treaty for the twelve months ended December 31, 2009 of approximately 66%. As a result of this favorable development on the 2008 accident year and the lower 2009 accident year loss ratio, the benefit recognized under the stop loss as of December 31, 2008 has reversed.

F-32

PENN MILLERS HOLDING CORPORATION AND SUBSIDIARY

Notes to Consolidated Financial Statements

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, 2009, 2008, and 2007 is as follows:

(a)

Premiums

	2009						2008						2007
	Written			Earned			Written			Earned			Written			Earned
Direct	$	88,356			90,331			94,985			96,239			94,073			90,796
Assumed		873			876			1,379			1,387			1,203			1,215
Ceded		(15,583	)		(15,849	)		(18,997	)		(18,889	)		(21,157	)		(21,041	)
Net	$	73,646			75,358			77,367			78,737			74,119			70,970

(b)

Losses and Loss Adjustment Expenses

	2009			2008			2007
Direct	$	58,665			70,442			59,245
Assumed		462			1,003			1,845
Ceded		(6,373	)		(14,055	)		(11,307	)
Net	$	52,754			57,390			49,783

(c)

Unearned Premiums

	2009			2008			2007
Direct	$	43,304			45,310			46,576
Assumed		9			12			19
Prepaid reinsurance (ceded)		(4,076	)		(4,342	)		(4,234	)
Net	$	39,237			40,980			42,361

(d)

Loss and Loss Adjustment Expense Reserves

	2009		2008		2007
Direct	$	97,889		98,366		85,614
Assumed		8,821		9,699		10,342
Gross	$	106,710		108,065		95,956

F-33

PENN MILLERS HOLDING CORPORATION AND SUBSIDIARY

Notes to Consolidated Financial Statements

(13)	Liability for Losses and Loss Adjustment Expenses

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

	2009		2008			2007
Balance at January 1	$	108,065		95,956			89,405
Less reinsurance recoverables		22,625		18,727			20,089
Net liability at January 1		85,440		77,229			69,316
Incurred related to:
Current year		51,199		62,612			54,421
Prior years		1,555		(5,222	)		(4,638	)
Total incurred		52,754		57,390			49,783
Paid related to:
Current year		21,296		26,578			22,191
Prior years		28,544		22,601			19,679
Total paid		49,840		49,179			41,870
Net liability at period-end		88,354		85,440			77,229
Add reinsurance recoverables		18,356		22,625			18,727
Balance at period-end	$	106,710		108,065			95,956

The Company recognized unfavorable development in the provision for insured events of prior years of $1,555 in 2009 and favorable development of $5,222, and $4,638 in 2008 and 2007, respectively. Increases or decreases of this nature occur as the result of claim settlements during the current year, and as additional information is received regarding individual claims, causing changes from the original estimates of the cost of these claims. Recent loss development trends are also taken into account in evaluating the overall adequacy of unpaid losses and loss adjustment expenses.

Overall the Company experienced prior year unfavorable development of $1,555 in 2009. The development in 2009 is primarily attributable to unfavorable development in the workers’ compensation line of business of $2,173 and the commercial auto liability line of business of $740, partially offset by favorable development in the fire and allied line of business of $636 and the liability line of business of $478. The workers’ compensation development was the result of a higher level of incurred loss emergence relative to expectations for the 2008 and 2007 accident years and the reduction of ceded losses under the aggregate stop loss contract. The commercial auto liability development was primarily the result of adverse case development on previously reported claims. The overall development of $1,555 related to all of these lines of business has been adversely impacted by the reversal of the accident year 2008 ceded losses under the aggregate stop loss contract in the amount of $4,292.

The development in 2008 is primarily attributable to favorable development in the fire and allied line of business of $2,229, the workers’ compensation line of business of $1,652, and the commercial auto liability line of business of $1,124. The fire and allied lines development was the result of prior years’ claims settling for less than originally estimated. The development in the workers’ compensation and commercial auto lines was due to the general observation of declines in claims severity on prior accident years.

F-34

PENN MILLERS HOLDING CORPORATION AND SUBSIDIARY

Notes to Consolidated Financial Statements

The development in 2007 is primarily attributable to the workers’ compensation line of business of $2,757, the commercial auto liability line of business of $2,525, and fire and allied line of business of $1,064. The Company broadly observed some decreasing frequency and severity in the commercial auto liability line and decreasing severity in the workers’ compensation line. The fire and allied lines development was attributable to claims settling for less than originally reserved.

This development for 2007 was partly offset by $1,493 of unfavorable development in the commercial multi-peril line and reserve strengthening of $374 related to asbestos claims assumed from a terminated reinsurance pool. The commercial multi-peril line experienced an increase in newly reported claims for the 2005 accident year.

(14)	Commitments and Contingencies

The Company is involved in various claims and legal actions arising in the ordinary course of business. In the opinion of management, the ultimate disposition of these matters will not have a material adverse impact on the Company’s financial position or results of operations.

In 2008 and 2007, the Company incurred retirement and severance expense of $254 and $663, respectively, for terminated employees. Total retirement and severance expense of $363 and $831 was unpaid as of December 31, 2009 and 2008, respectively.

(15)	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 $1,397 and $1,528 at December 31, 2009 and 2008, respectively. The accrual is expected to be paid as assessments are made over the next several years.

(16)	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-35

PENN MILLERS HOLDING CORPORATION AND SUBSIDIARY

Notes to Consolidated Financial Statements

Segment information for the years ended December 31, 2009, 2008, and 2007 is as follows:

	2009			2008			2007
Revenues:
Premiums earned:
Agribusiness	$	45,289			45,298			40,245
Commercial business		28,961			31,805			29,260
Other		1,108			1,634			1,465
Total premiums earned		75,358			78,737			70,970
Investment income, net of investment expense		5,648			5,335			5,324
Realized investment gains (losses), net		199			(5,819	)		(702	)
Other income		223			411			508
Total revenues	$	81,428			78,664			76,100
Components of net income (loss):
Underwriting (loss) income:
Agribusiness	$	1,985			313			441
Commercial business		(4,509	)		(5,046	)		(1,913	)
Other		175			288			(998	)
Total underwriting losses		(2,349	)		(4,445	)		(2,470	)
Investment income, net of investment expense		5,648			5,335			5,324
Realized investment gains (losses), net		199			(5,819	)		(702	)
Other income		223			411			508
Corporate expense		(429	)		(770	)		(506	)
Interest expense		(22	)		(184	)		(125	)
Other expense, net		(209	)		(365	)		(184	)
Income (loss) from continuing operations, before income taxes		3,061			(5,837	)		1,845
Income tax (benefit) expense		(346	)		(1,378	)		396
Income (loss) from continuing operations	$	3,407			(4,459	)		1,449

F-36

PENN MILLERS HOLDING CORPORATION AND SUBSIDIARY

Notes to Consolidated Financial Statements

	2009			2008			2007
Discontinued operations:
Income (loss) from discontinued operations, before income taxes	$	39			(3,090	)		(489	)
Income tax expense (benefit)		879			(170	)		(126	)
Loss from discontinued operations		(840	)		(2,920	)		(363	)
Net income (loss)	$	2,567			(7,379	)		1,086

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, 2009, 2008 and 2007:

	2009		2008		2007
Net premiums earned:
Agribusiness
Property	$	16,546		16,412		13,772
Commercial auto		11,632		12,119		11,859
Liability		9,196		8,795		7,540
Workers' compensation		7,238		7,310		6,394
Other		677		662		680
Agribusiness subtotal		45,289		45,298		40,245
Commercial lines
Property & liability		17,731		19,428		18,301
Workers' compensation		6,235		7,451		6,524
Commercial auto		4,746		4,659		4,194
Other		249		267		241
Commercial lines subtotal		28,961		31,805		29,260
Other		1,108		1,634		1,465
Total net premiums earned	$	75,358		78,737		70,970

F-37

PENN MILLERS HOLDING CORPORATION AND SUBSIDIARY

Notes to Consolidated Financial Statements

(17)	Reconciliation of Statutory Filings to Amounts Reported Herein

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

	2009			2008			2007
Net income (loss):
Statutory net income (loss)	$	3,422			(4,718	)		878
Deferred policy acquisition costs		(548	)		(413	)		633
Deferred federal income taxes		685			1,068			208
Other, including noninsurance amounts		(152	)		(396	)		(270	)
Discontinued operations		(840	)		(2,920	)		(363	)
GAAP net income (loss)	$	2,567			(7,379	)		1,086
Surplus:
Statutory capital and surplus	$	72,491			42,569			50,795
Equity of noninsurance entities		15,065			(2,827	)		379
Deferred policy acquisition costs		10,053			10,601			11,014
Deferred federal income taxes		(3,760	)		(4,111	)		(3,700	)
Nonadmitted assets		2,150			3,342			1,598
Unrealized gains on fixed maturities, net of tax		3,581			908			1,185
Other items, net		468			273			130
GAAP shareholders' equity	$	100,048			50,755			61,401

The above statutory basis net income (loss) 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, 2009, the Company’s insurance subsidiaries were in compliance with their risk-based capital requirements. Applying the current regulatory restrictions as of December 31, 2009, approximately $7,249 would be available for distribution to the Company during 2010 without prior approval.

(18)	Discontinued Operations

In July 2008, the Company entered into an asset purchase agreement and sold the assets of PSTS for $150. The Company recorded a pre-tax loss on sale of $117. In September 2009, the Company received $52 for the contingent portion of the sale price, which was recognized at that time.

The results of operations for PSTS were reported within discontinued operations in the accompanying consolidated statements of operations for all periods presented.

F-38

PENN MILLERS HOLDING CORPORATION AND SUBSIDIARY

Notes to Consolidated Financial Statements

Operating results from PSTS for the years ended December 31, 2009, 2008, and 2007 are as follows:

	2009		2008			2007
Net revenue	$	—		720			1,458
Income (loss) from discontinued operations, before income taxes	$	50		(53	)		(196	)
Income tax expense (benefit)		17		(18	)		(59	)
Income (loss) from discontinued operations	$	33		(35	)		(137	)

In 2008, the Company’s board of directors approved a plan to explore the sale of EIG. The decision resulted from continued evaluation of the Company’s long term strategic plans and the role that the insurance brokerage segment played in that strategy. In the third quarter of 2008, the board approved a plan for a public offering and, at the same time, fully committed to the sale of EIG in order to concentrate solely on insurance underwriting as a long term core competency.

At September 30, 2008, the Company tested the goodwill carrying value of EIG for impairment. The possibility of impairment was evident based on information obtained in the selling process and the deterioration of local and national economic conditions. As a result of the impairment test, the Company recognized an impairment to goodwill of $2,435 within discontinued operations at September 30, 2008 (unaudited), which represented its best estimate, as discussed in note 2. The Company completed the sale of EIG on February 2, 2009. Pursuant to the asset purchase agreement, the Company sold substantially all of EIG’s assets and liabilities for proceeds of $3,109, less estimated costs to sell of $248. Based on the fair value determined by the final terms of the sale and finalization of step 2 of the goodwill impairment test, the Company recorded an additional write down of goodwill at December 31, 2008 of $165. In the first quarter of 2009, the Company recorded a pretax loss on sale of $6.

The Company completed the sale of EIG on February 2, 2009 recording a pre-tax loss on sale in the first quarter 2009. A portion of the proceeds of the sale was used to pay off $285 of acquisition payables in liabilities held-for-sale.

The results of operations for EIG were reported within discontinued operations in the accompanying consolidated statements of operations for all periods presented.

EIG’s operating results for the years ended December 31, 2009, 2008, and 2007 are as follows:

	2009			2008			2007
Net revenue	$	—			3,437			4,130
Loss from discontinued operations, before income taxes	$	(11	)		(3,037	)		(293	)
Income tax expense (benefit)		862			(152	)		(67	)
Loss from discontinued operations	$	(873	)		(2,885	)		(226	)

F-39

PENN MILLERS HOLDING CORPORATION AND SUBSIDIARY

Notes to Consolidated Financial Statements

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

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

Operating results from total discontinued operations for the years ended December 31, 2009, 2008, and 2007 are as follows:

	2009			2008			2007
Net revenue	$	—			4,157			5,588
Income (loss) from discontinued operations, before income taxes	$	39			(3,090	)		(489	)
Income tax expense (benefit)		879			(170	)		(126	)
Loss from discontinued operations	$	(840	)		(2,920	)		(363	)

EIG is the only segment with reportable activity in assets and liabilities held-for-sale as of December 31, 2008.

F-40

PENN MILLERS HOLDING CORPORATION AND SUBSIDIARY

Notes to Consolidated Financial Statements

(19)	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:

	2009
	(number of shares)
Common stock issued
Balance, beginning October 16, 2009		—
Issuance of shares		5,444,022
Balance, end of year		5,444,022
Treasury stock
Balance, beginning October 16, 2009		—
Repurchase of shares		217,761
Balance, end of year		217,761

(d)

As of December 31, 2009, 54,440 shares remained under the share repurchase authorization that was approved by the board of directors in October 2009. The authorization has no expiration date.

(20)	Quarterly Financial Data (unaudited)

The Company’s unaudited quarterly financial information for continuing operations is as follows:

	First Quarter				Second Quarter						Third Quarter						Fourth Quarter
	2009		2008		2009			2008			2009			2008			2009		2008
	(Unaudited, in thousands, except per share data)

Total revenues	$	19,465		23,249		20,208			20,940			22,302			18,271			19,453		16,204
Total losses and expenses		18,575		19,880		20,359			22,303			21,453			20,168			17,980		22,150
Income (loss) from continuing operations, before income taxes		890		3,369		(151	)		(1,363	)		849			(1,897	)		1,473		(5,946	)
Income tax expense (benefit)		205		985		(98	)		(491	)		(569	)		(354	)		116		(1,518	)
Income (loss) from continuing operations (1)		685		2,384		(53	)		(872	)		1,418			(1,543	)		1,357		(4,428	)

Net income per share (2) (3)
Basic		N/A		N/A		N/A			N/A			N/A			N/A			0.19		N/A

(1)

During the preparation of the second quarter 2009 financial statements, the Company discovered an error in the accrual of ceded premium for the 2009 accident year under the aggregate stop loss contract in effect for 2008 and 2009. Pursuant to SAB No. 108, Quantifying Financial Statement Misstatements, it was determined the misstatements were not material. An adjustment of ($166) to net income is reflected in the first quarter financial information above.

(2)

Earnings per share data reflects only the net income for the period from October 17, 2009 through December 31, 2009, the period subsequent to the conversion and sale of stock. Net income during this period was $929.

(3)

Earnings per share for the periods prior to October 17, 2009 are not applicable.

F-41

PENN MILLERS HOLDING CORPORATION

Schedule II - Condensed Financial Information of Parent Company

Condensed Balance Sheet

December 31, 2009

(Dollars in thousands, except share data)

	2009
Assets
Investments in common stock of subsidiary (equity method)	$	83,316
Investments:
Fixed maturities investments:
Available for sale, at fair value (amortized cost $5,060 in 2009)		5,022
Cash and cash equivalents		13,199
Accrued investment income		35
Receivables from affiliates		1,887
Deferred income taxes		1,261
Other		327
Total assets	$	105,047
Liabilities and Shareholders' Equity
Liabilities:
Accounts payable and accrued expenses	$	4,443
Income taxes payable		556
Total liabilities		4,999
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 2009, 5,444,022; outstanding 2009, 4,695,262 shares		54
Additional paid-in capital		50,520
Accumulated other comprehensive income		2,519
Retained earnings		54,481
Unearned ESOP, 530,999 shares		(5,310	)
Treasury stock, at cost, 217,761 shares		(2,216	)
Total shareholders' equity		100,048
Total liabilities and shareholders' equity	$	105,047

(Continued)

F-42

PENN MILLERS HOLDING CORPORATION

Schedule II - Condensed Financial Information of Parent Company

Condensed Statement of Operations

For the Period from October 17, 2009 to December 31, 2009

(Dollars in thousands)

	2009
Revenues:
Investment income, net of investment expense	$	13
Total revenues		13
Losses and expenses:
Administrative expenses		333
Interest expense		7
Total losses and expenses		340
Operating loss		(327	)
Income tax benefit		(110	)
Loss before equity in income of subsidiaries		(217	)
Equity in income of subsidiaries		2,784
Net income	$	2,567

(Continued)

F-43

PENN MILLERS HOLDING CORPORATION

Schedule II - Condensed Financial Information of Parent Company

Condensed Statement of Cash Flows

Year ended December 31, 2009

(Dollars in thousands)

	2009
Cash flows from operating activities:
Net income	$	2,567
Adjustments to reconcile net income to net cash provided by operating activities:
Equity in undistributed income of subsidiaries		(2,784	)
Deferred income taxes		36
ESOP share allocation		92
Other, net		(65	)
Net cash used in operating activities		(154	)
Cash flows from investing activities:
Investments in subsidiaries		(24,540	)
Available-for-sale investments:
Purchases		(5,069	)
Net cash used in investing activities		(29,609	)
Cash flows from financing activities:
Net proceeds from issuance of common stock		49,040
Purchase of treasury stock		(2,216	)
Initial public offering costs paid		(2,062	)
Net borrowings on line of credit		(1,800	)
Net cash provided by financing activities		42,962

Net increase in cash		13,199
Cash and cash equivalents at beginning of period		—
Cash and cash equivalents at end of period	$	13,199

See accompanying notes to consolidated financial statements and report of independent registered public accounting firm.

F-44

PENN MILLERS HOLDING COMPANY AND SUBSIDIARY

Schedule III - Supplementary Insurance Information

Years ended December 31, 2009, 2008 and 2007

			Future Policy
	Deferred		Benefits,				Other Policy
	Policy		Losses, Claims				Claims
	Acquisition		and Loss		Unearned		and Benefits		Net premium
	Costs		Expenses		Premiums		Payable		Earned
	(Dollars in thousands)
December 31, 2009
Agribusiness	$	6,386		49,555		28,727		—		45,289
Commercial business		3,665		48,167		14,577		—		28,961
Other		2		8,988		9		—		1,108
Total	$	10,053		106,710		43,313		—		75,358
December 31, 2008
Agribusiness	$	5,981		47,212		27,352		—		45,298
Commercial business		4,616		50,680		17,957		—		31,805
Other		4		10,173		13		—		1,634
Total	$	10,601		108,065		45,322		—		78,737
December 31, 2007
Agribusiness	$	6,429		42,881		27,552		—		40,245
Commercial business		4,579		41,805		19,021		—		29,260
Other		6		11,270		22		—		1,465
Total	$	11,014		95,956		46,595		—		70,970

(Continued)

F-45

PENN MILLERS HOLDING COMPANY AND SUBSIDIARY

Schedule III - Supplementary Insurance Information

Years ended December 31, 2009, 2008 and 2007

			Benefits,
	Net		Claims, Losses				Other
	Investment		and Settlement		Amortization		Operating		Premium
	Income		Expenses		of DPAC		Expenses		Written
	(Dollars in thousands)
December 31, 2009
Agribusiness	$			29,654		12,741				46,787
Commercial business				22,695		8,368				25,754
Other				405		274				1,105
Total	$	5,648		52,754		21,383		3,999		73,646
December 31, 2008
Agribusiness	$			31,137		13,024				45,110
Commercial business				25,480		9,628				30,632
Other				773		429				1,625
Total	$	5,335		57,390		23,081		3,481		77,367
December 31, 2007
Agribusiness	$			27,313		12,436				41,402
Commercial business				20,570		9,042				31,266
Other				1,900		452				1,451
Total	$	5,324		49,783		21,930		2,233		74,119

See note 16 of the notes to the consolidated financial statements.

See accompanying notes to consolidated financial statements and report of independent registered public accounting firm.

F-46

PENN MILLERS HOLDING COMPANY AND SUBSIDIARY

Schedule IV - Reinsurance

Years ended December 31, 2009, 2008 and 2007

									Percentage
			Ceded to		Assumed from				of Amount
	Gross		Other		Other		Net		Assumed to
	Amount		Companies		Companies		Amount		Net
	(Dollars in thousands)
Premiums earned:
2009	$	90,331		15,849		876		75,358		1.16	%
2008		96,239		18,889		1,387		78,737		1.76
2007		90,796		21,041		1,215		70,970		1.71

See accompanying notes to consolidated financial statements and report of independent registered public accounting firm.

F-47

PENN MILLERS HOLDING COMPANY AND SUBSIDIARY

Schedule V - Allowance for Uncollectible Premiums and Other Receivables

Years ended December 31, 2009, 2008 and 2007

	2009			2008			2007
	(Dollars in thousands)
Beginning balance	$	364			295			250
Additions		203			335			202
Deletions		(287	)		(266	)		(157	)
Ending balance	$	280			364			295

See accompanying notes to consolidated financial statements and report of independent registered public accounting firm.

F-48

PENN MILLERS HOLDING COMPANY AND SUBSIDIARY

Schedule VI - Supplementary Information

Years ended December 31, 2009, 2008 and 2007

	Deferred		Reserve for		Discount on
	Policy		Losses and		Reserve for
	Acquisition		Loss Adj.		Losses and Loss		Unearned		Net Earned		Net Investment
	Costs		Expenses		Adj. Expenses		Premium		Premiums		Income
	(Dollars in thousands)
2009	$	10,053		106,710		—		43,313		75,358		5,648
2008		10,601		108,065		—		45,322		78,737		5,335
2007		11,014		95,956		—		46,595		70,970		5,324

								Paid Losses and
	Losses and LAE Incurred					Amortization		Adjustment		Net Written
	Current Year		Prior Year			of DPAC		Expenses		Premiums
2009	$	51,199		1,555			21,383		49,840		73,646
2008		62,612		(5,222	)		23,081		49,179		77,367
2007		54,421		(4,638	)		21,930		41,870		74,119

See accompanying notes to consolidated financial statements and report of independent registered public accounting firm.

F-49

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 have evaluated the effectiveness of the design and operation of the Company’s disclosure controls and procedures as of December 31, 2009, 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

The Company has implemented certain control enhancements over the processes and controls related to reinsurance contract accounting compliance and documenting the review of significant terms and conditions of reinsurance contracts, generally.

There were no other changes in the Company’s internal control over financial reporting during the quarter ended December 31, 2009 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

This annual Report on Form 10-K does not include a report of management’s assessment regarding internal control over financial reporting or an attestation report of the Company’s Registered Public Accounting Firm due to a transition period established by the rules of the Securities and Exchange Commission for newly public companies. We expect to include a report of management’s assessment of internal control over financial reporting and an attestation report of our Registered Public Accounting Firm in our annual Report on Form 10-K for the year ended December 31, 2010.

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 Compensation — Our Named 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, 2009.

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, 2009.

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, 2009.

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, 2009.

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 Independent 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, 2009.

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 submitted herewith for the years 2009, 2008 and 2007 are listed in the Index to the Consolidated Financial Statements under Part II Item 8 – “Financial Statements and Supplementary Data.”All other schedules are omitted because they are not applicable 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).

	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	Separation and General Release Agreement between Eastern Insurance Group, Penn Millers Mutual Holding Company, its affiliates and William H. Spencer, Jr. is incorporated by reference herein to Exhibit No. 10.9 to the Company’s Form S-1 Registration Statement, (Commission File No. 333-156936).

	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, 2010*

	10.9	Property & Casualty Excess of Loss Reinsurance Contract Effective January 1, 2010*

	10.10	Casualty Excess of Loss Reinsurance Contract Effective January 1, 2010*

	10.11	Umbrella Quota Share Reinsurance Contract Effective January 1, 2010*

	10.12	Property Excess of Loss Reinsurance Contract Effective January 1, 2010*

	10.13	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).

	10.14	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).

	10.15	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).

	10.16	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-1Registration Statement, (Commission File No. 333-156936).

	10.17	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).

	10.18	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).

	21.1	Subsidiaries of Penn Millers Holding Corporation.*

	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.*

SIGNATURES

Pursuant to the requirements of the 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 31, 2010	By:	/s/ Douglas A. Gaudet
		Douglas A. Gaudet, President and
		Chief Executive Officer

March 31, 2010	By:	/s/ Michael O. Banks
		Michael O. Banks, Executive Vice President and
		Chief Financial Officer

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	Director	March 31, 2010
Douglas A. Gaudet	President and Chief Executive Officer
	(Principal Executive Officer)

/s/ J. Harvey Sproul, Jr.	Director and Chairman	March 31, 2010
J. Harvey Sproul, Jr.

/s/ F. Kenneth Ackerman, Jr.	Director and Vice Chairman	March 31, 2010
F. Kenneth Ackerman, Jr.

/s/ Heather M. Acker	Director	March 31, 2010
Heather M. Acker

/s/ Dorrance R. Belin, Esq.	Director	March 31, 2010
Dorrance R. Belin, Esq.

/s/ John L. Churnetski	Director	March 31, 2010
John L. Churnetski

/s/ John M. Coleman	Director	March 31, 2010
John M. Coleman

/s/ Kim E. Michelstein	Director	March 31, 2010
Kim E. Michelstein

/s/ Robert A. Nearing, Jr.	Director	March 31, 2010
Robert A. Nearing, Jr.

/s/ Donald A. Pizer	Director	March 31, 2010
Donald A. Pizer

/s/ James M. Revie	Director	March 31, 2010
James M. Revie

Title of each class		Name of each exchange of which registered

Common Stock, par value $0.01 per share		NASDAQ Global Market

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

Consolidated				Agribusiness Segment				Commercial Business Segment
State	% of Total			State	% of Total			State	% of Total

New Jersey		11.3	%	Illinois		9.9	%	New Jersey		33.4	%
Pennsylvania		10.6	%	North Carolina		9.8	%	Pennsylvania		23.8	%
Illinois		6.6	%	Georgia		9.4	%	Virginia		11.5	%
North Carolina		6.5	%	Arkansas		8.4	%	Connecticut		10.9	%
Georgia		6.2	%	Louisiana		7.0	%	Massachusetts		9.0	%
Virginia		4.7	%	Ohio		4.9	%	Tennessee		6.5	%
Arkansas		5.6	%	Missouri		4.7	%	New York		4.3	%
Connecticut		4.0	%	Kansas		4.3	%	Maryland		0.6	%
All others (1)		44.5	%	Pennsylvania		3.9	%	Ohio		0.0	%
Total		100.0	%	Minnesota		3.9	%	Total		100.0	%
				Florida		3.7	%
				Mississippi		3.6	%
				All others (1)		26.5	%
				Total		100.0	%

	Net Premiums Earned by Product Line
	For the Years Ended December 31,
	2009		% of Total			2008		% of Total			2007		% of Total
Product Line:
Property – Agribusiness	$	16,546		22.0	%	$	16,412		20.8	%	$	13,772		19.4	%
Liability – Agribusiness		9,196		12.2	%		8,795		11.1	%		7,540		10.6	%
Property and liability – Commercial Business (1)		17,731		23.5	%		19,428		24.7	%		18,301		25.8	%
Workers’ compensation – Agribusiness and Commercial Business		13,473		17.9	%		14,761		18.8	%		12,918		18.2	%
Commercial auto – Agribusiness and Commercial Business		16,378		21.7	%		16,778		21.3	%		16,053		22.6	%
Other (2)		2,034		2.7	%		2,563		3.3	%		2,386		3.4	%
Total	$	75,358		100.0	%	$	78,737		100.0	%	$	70,970		100.0	%

	2009						2010
				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		52.5	%		47.5	%		60.0	%		40.0	%
$4 million in excess of $1 million		0	%		100	%		0	%		100	%
$15 million in excess of $5 million		0	%		100	%		0	%		100	%

		Page
		Number
PART I		3
Item 1.	Business	25
Item 1A.	Risk Factors	33
Item 1B.	Unresolved Staff Comments	33
Item 2.	Properties	33
Item 3.	Legal Proceedings	33
Item 4.	Removed and Reserved	33
PART II		33
Item 5.	Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities	33
Item 6.	Selected Financial Data	36
Item 7.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	38
Item 7A.	Quantitative and Qualitative Disclosures about Market Risk	69
Item 8.	Financial Statements and Supplementary Data	70
Item 9.	Changes in and Disagreements with Accountants on Accounting and Financial Disclosure	71
Item 9A.	Controls and Procedures	71
Item 9B.	Other Information	71
PART III		71
Item 10.	Directors, Executive Officers and Corporate Governance	71
Item 11.	Executive Compensation	72
Item 12.	Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters	72
Item 13.	Certain Relationships and Related Transactions, and Director Independence	72
Item 14.	Principal Accounting Fees and Services	72
Part IV		72
Item 15.	Exhibits, Financial Statement Schedules	72
SIGNATURES		74

	Net Premiums Earned by Business Segment
	For the Years Ended December 31,
	2009		% of Total			2008		% of Total			2007		% of Total
Business Segment:
Agribusiness	$	45,289		60.1	%	$	45,298		57.5	%	$	40,245		56.7	%
Commercial Business		28,961		38.4	%		31,805		40.4	%		29,260		41.2	%
Other		1,108		1.5	%		1,634		2.1	%		1,465		2.1	%
Total	$	75,358		100.0	%	$	78,737		100.0	%	$	70,970		100.0	%

										Accrue for Assumed
										Commutation and			Cumulative			Net
	Recorded at			Experience in			Cumulative			Profit Sharing			Accounting			Recorded in
	December 31, 2008			2009			Total			in 2009			Impact			2009

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

	Losses & Loss
	Expense
	Recoverable		Percentage of
	On Unpaid		Total			A.M. Best
	Claims		Recoverable			Rating

Hannover Rueckversicherung AG	$	6,151		34	%		A
Swiss Re America Group		3,623		20	%		A
Transatlantic Reinsurance Company		2,425		13	%		A
Partner Reinsurance Co. of the U.S.		1,619		9	%		A+
Employers Mutual Casualty Co.		1,500		8	%		A-
Aspen Insurance UK Limited		448		2	%		A
General Reinsurance Corporation		410		2	%		A++
Platinum Underwriters Reinsurance, Inc.		401		2	%		A
All Other		1,779		10	%	A- or better

Total	$	18,356		100	%

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 the Years Ended December 31,
	1999		2000		2001		2002		2003		2004		2005		2006		2007		2008		2009
	(in thousands)
Liability for unpaid losses and LAE, net of reinsurance recoverables	$	30,165	$	29,476	$	35,656	$	42,731	$	48,072	$	55,804	$	61,032	$	69,316	$	77,229	$	85,440	$	88,354

Cumulative amount of liability paid through
One year later		10,393		12,523		15,441		15,279		18,849		19,288		21,262		19,681		22,591		28,544		—
Two years later		15,977		20,032		23,640		25,731		27,719		28,977		32,372		31,974		35,344		—		—
Three years later		20,104		25,184		28,897		31,372		34,125		35,481		40,950		40,378		—		—		—
Four years later		23,386		28,118		32,311		35,104		37,135		41,365		45,128		—		—		—		—
Five years later		24,935		30,318		33,755		36,561		39,446		43,494		—		—		—		—		—
Six years later		26,699		31,333		34,786		37,978		40,937		—		—		—		—		—		—
Seven years later		27,451		32,039		35,847		38,932		—		—		—		—		—		—		—
Eight years later		28,000		33,002		36,408		—		—		—		—		—		—		—		—
Nine years later		28,755		33,531		—		—		—		—		—		—		—		—		—
Ten years later		29,281		—		—		—		—		—		—		—		—		—		—

Liability re-estimated as of
One year later		28,506			34,545			38,657			44,764			49,658			54,729		61,017			64,679		72,004		86,995		—
Two years later		31,763			34,864			40,138			44,591			48,718			54,948		61,081			63,847		70,030		—		—
Three years later		30,869			35,865			40,527			44,424			49,954			54,510		59,884			62,422		—		—		—
Four years later		30,885			36,594			40,416			45,405			49,617			54,411		58,891			—		—		—		—
Five years later		31,910			37,108			40,696			45,603			49,284			53,575		—			—		—		—		—
Six years later		32,448			37,402			41,157			45,744			48,918			—		—			—		—		—		—
Seven years later		33,127			38,193			41,513			45,308			—			—		—			—		—		—		—
Eight years later		33,820			38,590			41,271			—			—			—		—			—		—		—		—
Nine years later		34,273			38,315			—			—			—			—		—			—		—		—		—
Ten years later		34,214			—			—			—			—			—		—			—		—		—		—
Cumulative total redundancy (deficiency)	$	(4,049	)	$	(8,839)		$	(5,615	)	$	(2,577	)	$	(846	)	$	2,229	$	2,141		$	6,894	$	7,199	$	(1,555)		—

Gross liability — end of year	$	39,188		$	37,056		$	47,084		$	53,462		$	69,463		$	73,287	$	83,849		$	89,405	$	95,956	$	108,065	$	106,710

Reinsurance recoverables		9,023			7,580			11,428			10,731			21,391			17,483		22,817			20,089		18,727		22,625		18,356

Net liability — end of year	$	30,165		$	29,476		$	35,656		$	42,731		$	48,072		$	55,804	$	61,032		$	69,316	$	77,229	$	85,440	$	88,354

Gross re-estimated liability — latest	$	55,017		$	58,052		$	62,316		$	65,004		$	67,864		$	71,753	$	85,218		$	80,225	$	88,574	$	102,391

Re-estimated reinsurance recoverables — latest		20,803			19,737			21,045			19,696			18,946			18,178		26,327			17,803		18,544		15,396

Net re-estimated liability — latest	$	34,214		$	38,315		$	41,271		$	45,308		$	48,918		$	53,375	$	58,891		$	62,422	$	70,030	$	86,995

Gross cumulative redundancy (deficiency)	$	(15,829	)	$	(20,996	)	$	(15,232	)	$	(11,542	)	$	1,599		$	1,534	$	(1,369	)	$	9,180	$	7,382	$	5,674

	At December 31,
	2009				2008
	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	$	16,933	$	17,441	$	14,929	$	16,089

U.S. treasury securities		4,499		4,612		8,530		9,310

State and political subdivisions		37,415		39,334		31,775		32,957

Corporate securities		71,470		73,691		39,930		38,253

Commercial mortgage-backed securities		3,806		3,775		4,600		3,933

Residential mortgage-backed securities		27,607		28,302		20,774		21,372
Total fixed maturities	$	161,730	$	167,155	$	120,538	$	121,914

	Estimated		Percent
Rating (1)	Fair Value		of Total (2)

Agencies not backed by the full faith and credit of the U.S. government	$	17,441		10.4	%
U.S. treasury securities		4,612		2.8	%
AAA		58,249		34.9	%
AA		34,572		20.7	%
A		42,538		25.4	%
BBB		9,743		5.8	%
Total	$	167,155		100.0	%

	Amortized Cost		Estimated Fair Value (1)

Less than one year	$	10,008	$	10,203
One though five years		73,532		76,405
Five through ten years		40,196		41,719
Greater than ten years		6,581		6,751
Commercial mortgaged-backed securities (2)		3,806		3,775
Residential mortgaged-backed securities (2)		27,607		28,302
Total fixed maturities	$	161,730	$	167,155

	Fair Value at		Fair Value at
Insurer	December 31, 2009		December 31, 2008
AMBAC	$	3,321	$	3,259
FGIC		5,524		2,772
FSA		9,494		8,829
MBIA		4,356		8,004

Total	$	22,695	$	22,864

	At December 31, 2009				At December 2008
Rating	With Guarantee Fair Value		Without Guarantee Fair Value		With Guarantee Fair Value

AAA	$	9,476	$	1,097	$	8,832
AA		11,021		16,054		11,868
A		2,198		5,544		2,164

Total	$	22,695	$	22,695	$	22,864

Period:	Share Price Range
	High		Low
October 17, 2009 - December 31, 2009	$	11.08	$	10.00

Period	Total Number of Shares Purchased (2)		Average Price Paid Per Share		Total Number of Shares Purchased as Part of Publicly Announced Plans or Programs (1)		Maximum Number of Shares that May Yet Be Purchased Under the Program (1)
November 1 - November 30, 2009		64,307	$	10.20		64,307		207,894
December 1 - December 31, 2009		153,454	$	10.17		153,454		54,440

	At or for the years ended
	December 31,
	2009 (1)			2008			2007			2006		2005 (5)
	(Dollars in thousands)
Statement of Operations Data:
Direct premiums written	$	88,356		$	94,985		$	94,073		$	84,544	$	84,084
Net premiums written	$	73,646		$	77,367		$	74,119		$	67,525	$	62,057
Net premiums earned	$	75,358		$	78,737		$	70,970		$	64,645	$	64,723
Net investment income		5,648			5,335			5,324			4,677		4,444
Other net realized investment gains (losses)		396			(2,897	)		(82	)		349		565
Other-than-temporary impairment losses		(197	)		(2,922	)		(620	)		—		(141	)
Other income		223			411			508			345		277
Total revenues	$	81,428		$	78,664		$	76,100		$	70,016	$	69,868

Expenses
Losses and loss adjustment expense	$	52,754		$	57,390		$	49,783		$	43,766	$	40,242
Amortization of deferred policy acquisition costs		21,383			23,081			21,930			20,080		21,556
Underwriting and administrative expenses		3,999			3,481			2,233			3,216		7,662
Interest expense		22			184			125			222		195
Other expense, net		209			365			184			314		266
Total losses and expenses	$	78,367		$	84,501		$	74,255		$	67,598	$	69,921

Income (loss) from continuing operations, before income taxes	$	3,061		$	(5,837	)	$	1,845		$	2,418	$	(53	)
Income tax expense (benefit)		(346	)		(1,378	)		396			506		(295	)
Income (loss) from continuing operations	$	3,407		$	(4,459	)	$	1,449		$	1,912	$	242
Income (loss) from discontinued operations		(840	)		(2,920	)		(363	)		168		47
Net income (loss)	$	2,567		$	(7,379	)	$	1,086		$	2,080	$	289

Balance Sheet Data (at period end):
Total investments, cash and cash equivalents	$	187,375		$	133,873		$	136,312		$	126,655	$	116,898
Total assets		263,450			220,524			219,613			207,768		197,897
Losses and loss adjustment expense reserves		106,710			108,065			95,956			89,405		83,849
Unearned premiums		43,313			45,322			46,595			43,294		39,984
Total liabilities		163,402			169,769			158,212			147,238		140,128
Total shareholders’ equity		100,048			50,755			61,401			60,530		57,769

(4)	The sum of the loss and loss adjustment expense ratio and the underwriting expense ratio. A combined ratio greater than 100% means a company has an underwriting loss.

(5)	2005 has been adjusted, as of January 1, 2005, to reflect the adoption of Staff Accounting Bulletin (SAB) No. 108, Quantifying Financial Statement Misstatements.

	As of		As of
	December 31,		December 31,
	2009		2008
Case reserves	$	55,258	$	57,976
IBNR reserves		33,096		27,464
Net unpaid losses and LAE		88,354		85,440
Reinsurance recoverable on unpaid losses and LAE		18,356		22,625
Reserves for unpaid losses and LAE	$	106,710	$	108,065

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

As of December 31, 2009

					Total		Actuarially Determined 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 of December 31, 2008

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

Reinsurance recoverables		11,634		10,991		22,625
Gross reserves	$	69,610	$	38,455	$	108,065

Reserve Range for Unpaid	Aggregate Loss and		Percentage Change
Losses and LAE	LAE Reserve		in Equity (1)
Low End	$	78,154		6.7	%
Recorded	$	88,354		—
High End	$	91,086		(1.8	)%