10-Q

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

þ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended June 30, 2011

OR

o TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from                      to                     

Commission File Number 001-34496

PENN MILLERS HOLDING CORPORATION

(Exact name of registrant as specified in its charter)

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

72 North Franklin Street, Wilkes-Barre, PA 18773
(Address of principal executive offices) (Zip Code)

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

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

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

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

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

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes o No þ

At August 1, 2011, 5,080,252 shares of common stock, $0.01 par value, of Penn Millers Holding Corporation were outstanding.

PENN MILLERS HOLDING CORPORATION AND SUBSIDIARY

For the Quarter Ended June 30, 2011

INDEX

	Page
	Number
Part I — Financial Information
Item 1. Financial Statements		3
Consolidated Balance Sheets — June 30, 2011 (unaudited) and December 31, 2010		4
Consolidated Statements of Operations (unaudited) — Three and Six Months Ended June 30, 2011 and 2010		5
Consolidated Statements of Shareholders’ Equity (unaudited) — Six Months Ended June 30, 2011 and 2010		6
Consolidated Statements of Cash Flows (unaudited) — Six Months Ended June 30, 2011 and 2010		7
Notes to Consolidated Financial Statements (unaudited)		8
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations		28
Item 3. Quantitative and Qualitative Disclosures About Market Risk		44
Item 4. Controls and Procedures		45
Part II — Other Information
Item 1. Legal Proceedings		46
Item 1A. Risk Factors		46
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds		46
Item 4. (Removed and Reserved)		46
Item 5. Other Information		46
Item 6. Exhibits		46
EXHIBIT INDEX
SIGNATURES		47
Exhibit 10.1
Exhibit 31.1
Exhibit 31.2
Exhibit 32.1
Exhibit 32.2
EX-101 INSTANCE DOCUMENT
EX-101 SCHEMA DOCUMENT
EX-101 CALCULATION LINKBASE DOCUMENT
EX-101 LABELS LINKBASE DOCUMENT
EX-101 PRESENTATION LINKBASE DOCUMENT
EX-101 DEFINITION LINKBASE DOCUMENT

2

Part I — Financial Information

Item 1. Financial Statements

PENN MILLERS HOLDING CORPORATION AND SUBSIDIARY

Consolidated Balance Sheets

June 30, 2011 and December 31, 2010

(Dollars in thousands, except share data)

	June 30,			December 31,
	2011			2010
	(Unaudited)
Assets
Investments:
Fixed maturities:
Available for sale, at fair value (amortized cost $156,970 in 2011 and $158,193 in 2010)	$	162,096			162,771
Equity Securities:
Available for sale, at fair value (cost $11,274 in 2011 and $10,885 in 2010)		11,382			10,874
Cash and cash equivalents		4,732			6,510
Premiums and fees receivable		24,339			28,394
Reinsurance receivables and recoverables		20,906			24,912
Deferred policy acquisition costs		8,821			9,735
Prepaid reinsurance premiums		3,737			4,320
Accrued investment income		1,581			1,621
Property and equipment, net of accumulated depreciation		3,145			3,323
Income taxes receivable		783			1,253
Other		3,001			1,008
Total assets	$	244,523			254,721
Liabilities and Shareholders’ Equity
Liabilities:
Losses and loss adjustment expense reserves	$	106,630			109,973
Unearned premiums		38,254			42,807
Accounts payable and accrued expenses		7,917			8,913
Total liabilities		152,801			161,693
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 2011, 5,444,022 and 2010, 5,444,022; outstanding 2011, 4,524,415 shares and 2010, 4,462,131 shares		54			54
Additional paid-in capital		51,169			51,068
Accumulated other comprehensive income		2,522			2,054
Retained earnings		48,487			50,993
Unearned ESOP, 449,999 and 476,999 shares		(4,500	)		(4,770	)
Treasury stock, at cost, 469,608 and 504,892 shares		(6,010	)		(6,371	)
Total shareholders’ equity		91,722			93,028
Total liabilities and shareholders’ equity	$	244,523			254,721

See accompanying notes to consolidated financial statements.

3

PENN MILLERS HOLDING CORPORATION AND SUBSIDIARY

Consolidated Statements of Operations

(Unaudited)

Three months ended June 30, 2011 and 2010

(Dollars in thousands, except share data)

	2011			2010
Revenues:
Premiums earned	$	16,808			16,679
Investment income, net of investment expense		1,404			1,452
Realized investment gains, net:
Total other-than-temporary impairment losses		—			—
Portion of loss recognized in other comprehensive income		—			—
Other realized investment gains, net		64			1,294
Total realized investment gains, net		64			1,294
Other income		70			88
Total revenues		18,346			19,513
Losses and expenses:
Losses and loss adjustment expenses		16,990			15,885
Amortization of deferred policy acquisition costs		4,965			5,159
Underwriting and administrative expenses		1,349			712
Interest expense		1			—
Other expense, net		8			37
Total losses and expenses		23,313			21,793
Loss before income taxes		(4,967	)		(2,280	)
Income tax benefit		(555	)		(1,005	)
Net loss	$	(4,412	)		(1,275	)
Earnings per share (see note 14):
Basic net loss per common share	$	(0.98	)		(0.27	)
Diluted net loss per common share	$	(0.98	)		(0.27	)

See accompanying notes to consolidated financial statements.

4

PENN MILLERS HOLDING CORPORATION AND SUBSIDIARY

Consolidated Statements of Operations

(Unaudited)

Six months ended June 30, 2011 and 2010

(Dollars in thousands, except share data)

	2011			2010
Revenues:
Premiums earned	$	33,722			33,735
Investment income, net of investment expense		2,845			3,024
Realized investment gains, net:
Total other-than-temporary impairment losses		—			—
Portion of loss recognized in other comprehensive income		—			—
Other realized investment gains, net		852			1,666
Total realized investment gains, net		852			1,666
Other income		156			180
Total revenues		37,575			38,605
Losses and expenses:
Losses and loss adjustment expenses		27,263			29,257
Amortization of deferred policy acquisition costs		9,740			10,036
Underwriting and administrative expenses		3,249			1,831
Interest expense		16			—
Other expense, net		54			70
Total losses and expenses		40,322			41,194
Loss before income taxes		(2,747	)		(2,589	)
Income tax benefit		(241	)		(1,072	)
Net loss	$	(2,506	)		(1,517	)
Earnings per share (see note 14):
Basic net loss per common share	$	(0.56	)		(0.32	)
Diluted net loss per common share	$	(0.56	)		(0.32	)

See accompanying notes to consolidated financial statements.

5

PENN MILLERS HOLDING CORPORATION AND SUBSIDIARY

Consolidated Statements of Shareholders’ Equity

(Unaudited)

Six months ended June 30, 2011 and 2010

(Dollars in thousands, except share data)

								Accumulated
					Additional			Other
	Common Stock				Paid-In			Comprehensive			Retained			Unearned			Treasury
	Shares		Amount		Capital			Income			Earnings			ESOP			Stock			Total
Balance at December 31, 2009		5,444,022	$	54		50,520			2,519			54,481			(5,310	)		(2,216	)		100,048
Net loss												(1,517	)								(1,517	)
Other comprehensive income, net of taxes:
Unrealized investment holding gain arising during period, net of related income tax expense of $539									1,046												1,046
Reclassification adjustment for realized gains included in net loss, net of related income tax expense of $566									(1,100	)											(1,100	)
Net unrealized investment loss																					(54	)
Defined benefit pension plans, net of related income tax expense of $19									37												37
Recognition of prior service costs related to curtailment and settlement, net of tax expense of $157 (see note 8)									306												306
Comprehensive loss																					(1,228	)
Stock-based compensation						81															81
ESOP shares released						70									270						340
Treasury stock purchased, 287,131 shares																		(4,155	)		(4,155	)
Balance at June 30, 2010		5,444,022	$	54		50,671			2,808			52,964			(5,040	)		(6,371	)		95,086
Balance at December 31, 2010		5,444,022	$	54		51,068			2,054			50,993			(4,770	)		(6,371	)		93,028
Net loss												(2,506	)								(2,506	)
Other comprehensive income, net of taxes:
Unrealized investment holding gain arising during period, net of related income tax expense of $516									1,002												1,002
Reclassification adjustment for realized gains included in net loss, net of related income tax expense of $290									(562	)											(562	)
Net unrealized investment gain																					440
Defined benefit pension plans, net of related income tax expense of $14									28												28
Comprehensive loss																					(2,038	)
Stock-based compensation						321															321
ESOP shares released						141									270						411
Treasury stock reissued, 35,284 shares						(361	)											361			—
Balance at June 30, 2011		5,444,022	$	54		51,169			2,522			48,487			(4,500	)		(6,010	)		91,722

See accompanying notes to consolidated financial statements.

6

PENN MILLERS HOLDING CORPORATION AND SUBSIDIARY

Consolidated Statements of Cash Flows

(Unaudited)

Six months ended June 30, 2011 and 2010

(Dollars in thousands)

	2011			2010
Cash flows from operating activities:
Net loss	$	(2,506	)		(1,517	)
Adjustments to reconcile net loss to net cash (used in) provided by operating activities:
Change in receivables, unearned premiums, and prepaid reinsurance		4,091			(4,046	)
Change in losses and loss adjustment expense reserves		(3,343	)		9,530
Change in accounts payable and accrued expenses		(954	)		(1,980	)
Change in current income taxes		470			(1,877	)
Deferred income taxes		(241	)		(186	)
Change in deferred acquisition costs		914			549
Change in accrual and amortization of investment income		561			589
Amortization and depreciation		320			313
ESOP share allocation		411			340
Amortization of stock-based compensation		321			81
Realized investment gains, net		(852	)		(1,666	)
Other, net		(146	)		(80	)
Net cash (used in) provided by operating activities		(954	)		50
Cash flows from investing activities:
Available-for-sale investments:
Purchases of fixed maturity securities		(23,197	)		(39,221	)
Purchases of equity securities		(389	)		(11,084	)
Sales of fixed maturity securities		21,407			29,602
Maturities of fixed maturity securities		1,500			12,900
Proceeds from disposition of corporate owned life insurance policies		—			2,682
Purchases of property and equipment, net		(145	)		(63	)
Net cash used in investing activities		(824	)		(5,184	)
Cash flows from financing activities:
Purchase of treasury stock		—			(4,155	)
Net cash used in financing activities		—			(4,155	)
Net decrease in cash		(1,778	)		(9,289	)
Cash and cash equivalents at beginning of period		6,510			20,220
Cash and cash equivalents at end of period	$	4,732			10,931

See accompanying notes to consolidated financial statements.

7

PENN MILLERS HOLDING CORPORATION AND SUBSIDIARY

(Unaudited)

Notes to Consolidated Financial Statements

(Dollars in thousands, except per share amounts)

(1) Basis of Presentation

The accompanying unaudited consolidated financial statements have been prepared in accordance with U.S. generally accepted accounting principles (GAAP) for interim financial information and pursuant to the instructions to Form 10-Q and Article 10 of Regulation S-X of the Securities Exchange Act of 1934, as amended. Accordingly, they do not include all of the information and notes required by GAAP for complete financial statements. Such information reflects all adjustments which are, in the opinion of management, necessary for a fair presentation of the financial position, results of operations, and cash flows for the interim periods. The results of operations for interim periods are not necessarily indicative of results to be expected for the full year. All material intercompany balances and accounts have been eliminated in consolidation. These financial statements should be read in conjunction with the financial statements and notes for the year ended December 31, 2010 included in the Company’s 2010 Annual Report on Form 10-K.

(2) Use of Estimates

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

(3) 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 41 states, in-force premiums for two states, New Jersey and Pennsylvania, accounted for approximately 18% of the Company’s in-force premiums written as of June 30, 2011. Consequently, changes in the New Jersey or Pennsylvania legal, regulatory, or economic environment could adversely affect the Company.

(4) Recent Accounting Standards

In June 2011, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update (ASU) 2011-05, Presentation of Comprehensive Income. This ASU improves the comparability, consistency, and transparency of financial reporting and increases the prominence of items reported in other comprehensive income. The updated guidance requires that all nonowner changes in stockholders’ equity be presented either in a single continuous statement of comprehensive income or in two separate but consecutive statements. In the two-statement approach, the first statement should present total net income and its components followed consecutively by a second statement that should present total other comprehensive income, the components of other comprehensive income, and the total of comprehensive income. The amendments in the ASU are effective for fiscal years, and interim periods within those years, beginning after December 15, 2011 and should be applied retrospectively. Early adoption is permitted, because compliance with the amendments is already permitted. The updated guidance will result in a change in the presentation of the Company’s financial statements but will not have any impact on the Company’s results of operations, financial position or liquidity.

8

PENN MILLERS HOLDING CORPORATION AND SUBSIDIARY

(Unaudited)

Notes to Consolidated Financial Statements

(Dollars in thousands, except per share amounts)

In May 2011, the FASB issued ASU 2011-04, Amendments to Achieve Common Fair Value Measurements and Disclosure Requirements in U.S. GAAP and IFRSs. The amendments in this ASU result in common fair value measurement and disclosure requirements in GAAP and IFRSs. Consequently, the amendments change the wording used to describe many of the requirements in GAAP for measuring fair value and for disclosing information about fair value measurements. For many of the requirements, the FASB does not intend for the amendments in this ASU to result in a change in the application of the requirements of Topic 820. The amendments in the ASU are effective for fiscal years, and interim periods within those years, beginning after December 15, 2011 and should be applied prospectively. Early adoption is not permitted. The Company is currently evaluating the impact that the adoption of this ASU will have on its financial statements and related disclosures.

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

All other standards and updates of those standards issued during the three months ended June 30, 2011 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.

(5) Fair Value Measurements

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

The fair value of a financial asset or financial liability is the amount at which the asset or liability could be bought or sold in a current transaction between willing parties, that is, other than in a forced or liquidated sale. In accordance with the guidance set forth by ASC 820, the Company’s financial assets and financial liabilities 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.

9

PENN MILLERS HOLDING CORPORATION AND SUBSIDIARY

(Unaudited)

Notes to Consolidated Financial Statements

(Dollars in thousands, except per share amounts)

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

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

Transfers between level categorizations may occur due to changes in the availability of market observable inputs. Transfers in and out of level categorizations are reported as having occurred at the beginning of the quarter in which the transfer occurred. There were no transfers between level categorizations during the six months ended June 30, 2011 and 2010.

The table below presents the balances of assets and liabilities measured at fair value on a recurring basis as of June 30, 2011 and December 31, 2010:

	Level 1		Level 2		Level 3		Total
June 30, 2011:
Fixed maturities, available for sale
U.S. treasuries	$	798		—		—	$	798
Agencies not backed by the full faith and credit of the U.S. government		—		14,964		—		14,964
State and political subdivisions		—		43,572		—		43,572
Commercial mortgage-backed securities		—		287		—		287
Residential mortgage-backed securities		—		23,446		—		23,446
Corporate securities		—		79,029		—		79,029
Total available for sale	$	798		161,298		—	$	162,096
Equity securities
High-yield bond mutual fund	$	11,382		—		—	$	11,382
Total equities	$	11,382		—		—	$	11,382
Total assets	$	12,180		161,298		—	$	173,478

10

PENN MILLERS HOLDING CORPORATION AND SUBSIDIARY

(Unaudited)

Notes to Consolidated Financial Statements

(Dollars in thousands, except per share amounts)

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

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

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

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

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

11

PENN MILLERS HOLDING CORPORATION AND SUBSIDIARY

(Unaudited)

Notes to Consolidated Financial Statements

(Dollars in thousands, except per share amounts)

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

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

All unadjusted fair value estimates for fixed maturity securities are priced by the pricing services as described above and are included in the amounts disclosed in Level 2. There have been no changes to these valuation techniques.

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

The fair value estimates of the Company’s investments provided by the independent pricing service at June 30, 2011 and December 31, 2010, were utilized, among other resources, in reaching a conclusion as to the fair value of investments. As of June 30, 2011 and December 31, 2010, all of the Company’s fixed maturity investments were priced using this one primary service. Management reviews the reasonableness of the pricing provided by the independent pricing service by employing various analytical procedures. The Company reviews all securities to identify recent downgrades, significant changes in pricing, and pricing anomalies on individual securities relative to other similar securities. This will include looking for relative consistency across securities in various common blocks or sectors, durations, and credit ratings. This review will also include all fixed maturity securities rated lower than “A” by Moody’s or Standard & Poor’s (S&P). If, after this review, management does not believe the pricing for any security is a reasonable estimate of fair value, then it will seek to resolve the discrepancy through discussions with the pricing service or its asset manager. The classification within the fair value hierarchy as presented in ASC 820 is then confirmed based on the final conclusions from the pricing review. The Company did not have any such discrepancies at June 30, 2011 and December 31, 2010.

The fair value of other financial instruments, principally receivables, accounts payable and accrued expenses, approximates their June 30, 2011 and December 31, 2010 carrying values.

12

PENN MILLERS HOLDING CORPORATION AND SUBSIDIARY

(Unaudited)

Notes to Consolidated Financial Statements

(Dollars in thousands, except per share amounts)

(6) Investments

The amortized cost and fair value of investments in fixed maturity and equity securities, which are all available for sale, at June 30, 2011 and December 31, 2010, are as follows:

			Gross		Gross
	Amortized		unrealized		unrealized		Estimated
	cost		gains		losses		fair value
June 30, 2011:
U.S. Treasuries	$	770		39		11	$	798
Agencies not backed by the full faith and credit of the U.S. government		14,621		343		—		14,964
State and political subdivisions		41,731		1,854		13		43,572
Commercial mortgage-backed securities		284		3		—		287
Residential mortgage-backed securities		22,775		717		46		23,446
Corporate securities		76,789		2,374		134		79,029
Total fixed maturities	$	156,970		5,330		204	$	162,096
Total equity securities	$	11,274		108		—	$	11,382
December 31, 2010:
U.S. Treasuries	$	721		32		17	$	736
Agencies not backed by the full faith and credit of the U.S. government		14,111		347		—		14,458
State and political subdivisions		43,224		1,564		229		44,559
Commercial mortgage-backed securities		1,589		73		—		1,662
Residential mortgage-backed securities		22,223		758		66		22,915
Corporate securities		76,325		2,325		209		78,441
Total fixed maturities	$	158,193		5,099		521	$	162,771
Total equity securities	$	10,885		—		11	$	10,874

13

PENN MILLERS HOLDING CORPORATION AND SUBSIDIARY

(Unaudited)

Notes to Consolidated Financial Statements

(Dollars in thousands, except per share amounts)

The amortized cost and estimated fair value of fixed maturity securities at June 30, 2011, by contractual maturity, are shown below:

	Amortized		Estimated
	cost		fair value
Due in one year or less	$	14,239	$	14,414
Due after one year through five years		91,127		94,462
Due after five years through ten years		19,404		20,082
Due after ten years		9,141		9,405
		133,911		138,363
Commercial mortgage-backed securities		284		287
Residential mortgage-backed securities		22,775		23,446
Total fixed maturities	$	156,970	$	162,096

The expected maturities may differ from contractual maturities in the foregoing table because borrowers may have the right to call or prepay obligations with or without call or prepayment penalties.

At June 30, 2011 and December 31, 2010, investments with a fair value of $4,408 and $4,348, respectively, were on deposit with regulatory authorities, as required by law.

Major categories of net investment income are as follows:

	For the three months ended						For the six months ended
	June 30,						June 30,
	2011			2010			2011			2010
Interest on fixed maturities	$	1,367		$	1,574		$	2,756		$	3,233
Dividends on equity securities		194			51			389			84
Interest on cash and cash equivalents		2			1			3			4
Total investment income		1,563			1,626			3,148			3,321
Investment expense		(159	)		(174	)		(303	)		(297	)
Investment income, net of investment expense	$	1,404		$	1,452		$	2,845		$	3,024

14

PENN MILLERS HOLDING CORPORATION AND SUBSIDIARY

(Unaudited)

Notes to Consolidated Financial Statements

(Dollars in thousands, except per share amounts)

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

	For the three months ended						For the six months ended
	June 30,						June 30,
	2011			2010			2011		2010
Fixed maturity securities:
Available for sale:
Gross gains	$	64		$	1,465		$	852	$	1,847
Gross losses		—			(171	)		—		(181	)
Realized investment gains, net	$	64		$	1,294		$	852	$	1,666
Change in difference between fair value and cost of investments:
Fixed maturity securities	$	1,703		$	581		$	548	$	1,040
Equity securities		(82	)		(1,363	)		119		(1,120	)
Total increase (decrease)	$	1,621		$	(782	)	$	667	$	(80	)

Income tax expense on net realized investment gains was $22 and $440 for the three months ended June 30, 2011 and 2010, respectively, and $290 and $566 for the six months ended June 30, 2011 and 2010, respectively. Deferred income tax expense applicable to net unrealized investment gains included in accumulated other comprehensive income was $2,072 and $1,845 at June 30, 2011 and December 31, 2010, respectively. See note 10 for additional information related to the allocation of tax between operations and accumulated other comprehensive income.

15

PENN MILLERS HOLDING CORPORATION AND SUBSIDIARY

(Unaudited)

Notes to Consolidated Financial Statements

(Dollars in thousands, except per share amounts)

The fair value and unrealized losses for securities temporarily impaired as of June 30, 2011 and December 31, 2010 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
2011:
U.S. Treasuries	$	290		11		—		—	$	290		11
Agencies not backed by the full faith and credit of the State and political subdivisions		1,126		13		—		—		1,126		13
Residential mortgage-backed securities		3,956		46		—		—		3,956		46
Corporate securities		6,739		113		824		21		7,563		134
Total temporarily impaired securities	$	12,111		183		824		21	$	12,935		204
2010:
U.S. Treasuries	$	284		17		—		—	$	284		17
State and political subdivisions		9,477		182		2,803		47		12,280		229
Residential mortgage-backed securities		3,094		64		361		2		3,455		66
Corporate securities		9,658		200		928		9		10,586		209
Total fixed maturity securities		22,513		463		4,092		58		26,605		521
Equity securities		10,874		11		—		—		10,874		11
Total temporarily impaired securities	$	33,387		474		4,092		58	$	37,479		532

These fixed maturity securities are classified as available for sale because the Company will, from time to time, sell securities that are not impaired, consistent with its investment goals and policies. Fair values of interest rate sensitive instruments may be affected by increases and decreases in prevailing interest rates which generally translate, respectively, into decreases and increases in fair values of fixed maturity investments. The fair values of interest rate sensitive instruments also may be affected by the credit worthiness of the issuer, prepayment options, relative values of other investments, the liquidity of the instrument, and other general market conditions. There are $824 in fixed maturity securities, at fair value, that at June 30, 2011, had been below cost for 12 months or longer. The $21 of unrealized losses on such securities relates to securities which carry an investment grade debt rating and have declined in fair value roughly in line with overall market conditions. The Company has evaluated each fixed maturity security and taken into account the severity and duration of the impairment, the current rating on the bond, and the outlook for the issuer according to independent analysts. The Company has found that the declines in fair value of these assets are most likely attributable to the current interest rate environment.

Per the Company’s current policy, a fixed maturity investment is other-than-temporarily impaired if the present value of the cash flows expected to be collected is less than the amortized cost of the security or where the Company intends to sell, or more likely than not will be required to sell, the security before recovery of its value.

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

16

PENN MILLERS HOLDING CORPORATION AND SUBSIDIARY

(Unaudited)

Notes to Consolidated Financial Statements

(Dollars in thousands, except per share amounts)

The Company believes, based on its analysis, that the fixed maturity and equity securities are not other-than-temporarily impaired. However, depending on developments involving both the issuers and overall economic conditions, these investments may be written down in the consolidated statements of operations in the future.

For the six months ended June 30, 2011 and 2010, no impairment charges had been incurred by the Company.

The Company does not engage in subprime residential mortgage lending. The only securitized financial assets that the Company owns are residential and commercial mortgage-backed securities of high credit quality. The Company’s exposure to subprime lending is limited to investments in corporate bonds of banks, which may contain some subprime loans on their balance sheets. These bonds are reported at fair value. As of June 30, 2011, fixed maturity securities issued by banks accounted for 12.9% of the bond portfolio’s book value.

(7) Comprehensive Income

Comprehensive loss for the three months and six months ended June 30, 2011 and 2010 consisted of the following (all amounts net of taxes):

	For the three months ended						For the six months ended
	June 30,						June 30,
	2011			2010			2011			2010
Net loss	$	(4,412	)	$	(1,275	)	$	(2,506	)	$	(1,517	)
Other comprehensive income:
Unrealized gains on securities:
Unrealized investment holding gains arising during period		1,458			337			1,292			1,046
Less:
Reclassification adjustment for realized gains included in net loss		(64	)		(854	)		(852	)		(1,100	)
Net unrealized investment gains (losses)		1,394			(517	)		440			(54	)
Defined benefit plans		7			16			28			37
Recognition of prior service costs related to curtailment and settlement (see note 9)		—			306			—			306
Other comprehensive income (loss)		1,401			(195	)		468			289
Comprehensive loss	$	(3,011	)	$	(1,470	)	$	(2,038	)	$	(1,228	)

17

PENN MILLERS HOLDING CORPORATION AND SUBSIDIARY

(Unaudited)

Notes to Consolidated Financial Statements

(Dollars in thousands, except per share amounts)

Accumulated other comprehensive income at June 30, 2011 and December 31, 2010 consisted of the following amounts (all amounts net of taxes):

	June 30,			December 31,
	2011			2010
Unrealized investment gains	$	3,162		$	2,722
Defined benefit pension plans — net actuarial loss		(640	)		(668	)
Accumulated other comprehensive income	$	2,522		$	2,054

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

(8) Employee Benefit Plans

Retirement Plans

The Company has a noncontributory defined benefit pension plan covering substantially all employees. Retirement benefits are a function of both the years of service and level of compensation. In October 2009, the plan was amended and all participants’ accrued benefits under the plan were frozen. It is the Company’s policy to fund the plan in amounts not greater than the amount deductible for federal income tax purposes and not less than the minimum required contribution under the Pension Protection Act of 2006. The Company also sponsored a Supplemental Executive Retirement Plan (SERP). The SERP, which was unfunded, provided 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.

In May 2010, upon approval by the Board of Directors, the Company terminated the SERP for four of the five participants. The one remaining participant is a retired employee in pay status. The accumulated benefit obligation for the one remaining participant in pay status at June 30, 2011 is $618.

18

PENN MILLERS HOLDING CORPORATION AND SUBSIDIARY

(Unaudited)

Notes to Consolidated Financial Statements

(Dollars in thousands, except per share amounts)

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

	For the three months ended						For the six months ended
	June 30,						June 30,
	2011			2010			2011			2010
Components of net periodic pension cost:
Service cost	$	17		$	28		$	34		$	76
Interest cost		123			129			246			252
Expected return on plan assets		(126	)		(97	)		(253	)		(195	)
Amortization of prior service costs		—			4			—			14
Amortization of net loss		21			21			42			42
Net periodic pension cost		35			85			69			189
Curtailment loss		—			68			—			68
Settlement gain		—			(747	)		—			(747	)
Net periodic pension cost and additional amounts recognized	$	35		$	(594	)	$	69		$	(490	)

The Company’s minimum required contribution to the pension plan in 2011 is expected to be $37.

(9) Stock-Based Compensation

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

On May 12, 2010, 141,122 shares of restricted stock were granted to executives of the Company. The restricted stock will be issued from treasury shares upon vesting. The restricted stock had a grant date fair value of $14.83 per share, which was the Company’s closing stock price on that date. The restricted stock vests 25% in the first year and 15% in each of the five years thereafter, based on the satisfaction of service conditions. As of June 30, 2011, 35,284 shares of restricted stock had vested. No additional grants have been awarded.

On May 12, 2010, 114,960 stock options were awarded to executives, non-management directors and select employees of the Company. The stock options, which vest over five years at 20% per year, have a contractual term of seven years, and vesting is based on the satisfaction of service conditions. The stock options were awarded at a grant date fair value of $5.22 per option as calculated using a Black-Scholes Merton valuation model. As of June 30, 2011, 23,599 stock options had vested.

19

PENN MILLERS HOLDING CORPORATION AND SUBSIDIARY

(Unaudited)

Notes to Consolidated Financial Statements

(Dollars in thousands, except per share amounts)

On May 11, 2011, 25,000 incentive stock options were awarded to executives and select employees of the Company. The incentive stock options, which vest over five years at 20% per year, have a contractual term of seven years, and vesting is based on the satisfaction of service conditions. An additional 14,000 in non-qualified stock options were awarded to non-management directors of the Company. The non-qualified stock options, which vest over three years at 33% per year, have a contractual term of seven years, and vesting is based on the satisfaction of service conditions. The incentive and non-qualified stock options were awarded at a grant date fair value of $5.21 and $4.86, respectively, per option as calculated using a Black-Scholes Merton valuation model with the following assumptions:

	Stock Options -			Stock Options -
	Incentive			Non-Qualified
Expected volatility -		30.00	%		30.00	%
Expected term (in years) -		5			4.5
Risk-free interest rate -		1.87	%		1.64	%
Expected dividend yield -		0.00	%		0.00	%

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

The total compensation cost recognized in the statements of operations and classified as underwriting and administrative expenses for all stock-based compensation awards, excluding the Company’s ESOP, was $175 and $321 for the three months and six months ended June 30, 2011, respectively. The related tax benefit recognized was $48 and $90 for the same periods. The total compensation cost recognized in the statements of operations and classified as underwriting and administrative expenses for all stock-based compensation awards, excluding the Company’s ESOP, was $81 for the three months and six months ended June 30, 2010. The related tax benefit recognized was $23 for the same periods.

The total compensation cost recognized in the statements of operations and classified as underwriting and administrative expenses for the Company’s ESOP was $219 and $411 for the three months and six months ended June 30, 2011, respectively. The related tax benefit recognized was $46 and $92 for the same periods. The total compensation cost recognized in the statements of operations and classified as underwriting and administrative expenses for the Company’s ESOP was $192 and $340 for the three months and six months ended June 30, 2010, respectively. The related tax benefit recognized was $46 and $92 for the same periods.

20

PENN MILLERS HOLDING CORPORATION AND SUBSIDIARY

(Unaudited)

Notes to Consolidated Financial Statements

(Dollars in thousands, except per share amounts)

The total unrecognized compensation cost related to all nonvested Plan awards at June 30, 2011 and 2010 was $1,802 and $2,523, respectively, which is expected to be recognized in future periods over a weighted average period of 4.4 years.

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

	Stock Options					Restricted Stock Awards
				Weighted-
	Number of			Average		Number of			Weighted-
	Shares			Exercise Price		Shares			Average Price
Outstanding at December 31, 2010		114,960		$	14.83		141,122		$	14.83
Granted		39,000			17.50		—			—
Exercised		—			—		—			—
Vested		—			—		(35,284	)		14.83
Canceled		(2,976	)		14.83		—			—
Outstanding at June 30, 2011		150,984		$	15.52		105,838		$	14.83
Exercisable at June 30, 2011		23,599		$	14.83

(10) Federal Income Tax

Deferred income taxes arise from the recognition of temporary differences between financial statement carrying amounts and the tax bases of the Company’s assets and liabilities. A valuation allowance is provided when it is more likely than not that some portion of the deferred tax asset will not be realized. The Company must assess the likelihood that any recorded deferred tax assets will be recovered against future taxable income. The Company considers many factors when assessing the likelihood of future realization of deferred tax assets, including recent cumulative earnings experience by taxing jurisdiction, expectations of future taxable income or loss, the carry-forward periods available for tax reporting purposes, and other relevant factors. To the extent the Company believes that recovery is not more likely than not, a valuation allowance must be established.

Although the Company’s current financial forecasts indicate that taxable income will be generated in the future, those forecasts were not considered sufficient positive evidence to overcome the observable negative evidence associated with its three year cumulative loss position. As a result, the Company carried a full valuation allowance on its total deferred tax assets of $4,937 and $4,116 at June 30, 2011 and December 31, 2010, respectively. Of the total valuation allowance, $4,321 and $3,468 was related to federal net deferred tax assets at June 30, 2011 and December 31, 2010, respectively. The remainder for each period was related to state income tax net operating loss carryforwards.

21

PENN MILLERS HOLDING CORPORATION AND SUBSIDIARY

(Unaudited)

Notes to Consolidated Financial Statements

(Dollars in thousands, except per share amounts)

In any interim period, the Company may generate income or loss. To the extent that any income is generated, the related tax expense may be offset by a reduction in the valuation allowance. Conversely, any tax benefits arising from losses may be offset by an additional valuation allowance to reduce the net deferred tax asset to an amount that is more likely than not to be realized. Any reduction of the valuation allowance will be allocated to operations and other comprehensive income based on the intraperiod tax allocation rules. The intraperiod tax allocation rules in FASB ASC 740, related to items charged directly to accumulated other comprehensive income, can result in disproportionate tax effects that remain in accumulated other comprehensive income until certain events occur. The following schedule shows the amounts and corresponding tax effects in accumulated other comprehensive income as of June 30, 2011 and December 31, 2010 and the related change for the period:

	June 30,			December 31,			Change for
	2011			2010			the Period
Net unrealized investment gains
Before tax gain	$	5,234		$	4,567		$	667
Tax expense		(2,072	)		(1,845	)		(227	)
After tax gain	$	3,162		$	2,722		$	440
Defined benefit pension plans - net actuarial loss
Before tax loss	$	(1,174	)	$	(1,216	)	$	42
Tax benefit		534			548			(14	)
After tax loss	$	(640	)	$	(668	)	$	28
Total Accumulated Other Comprehensive Income
Before tax income	$	4,060		$	3,351		$	709
Tax expense		(1,538	)		(1,297	)		(241	)
After tax income	$	2,522		$	2,054		$	468

As of June 30, 2011, the Company had no material unrecognized tax benefits or accrued interest and penalties. The Company’s policy is to account for interest as a component of interest expense and penalties as a component of other expense. Federal tax years 2007 through 2010 were open for examination as of June 30, 2011.

Income tax payments, net of refunds, were $823 in the first two quarters of 2010. No tax payments were made in 2011, however, a refund was received in the amount of $480.

(11) Reinsurance

Reinsurance is ceded by the Company on a pro rata and excess of loss basis. The Company’s retention on any one risk in 2010 was $800 per occurrence. Effective January 1, 2011, the Company increased its retention on the per-risk reinsurance treaty to $1,000.

For 2010 and 2011, the Company purchased catastrophe excess-of-loss reinsurance with a retention of $3,000 per event and a limit of $42,000 of coverage. The Company has a 5% co-participation in any losses incurred above the $3,000 retention.

For umbrella coverages, the Company retains a 25% pro rata share of any losses on the first $1,000 of coverage. Losses in excess of $1,000 up to $10,000 are ceded 100% to reinsurers.

22

PENN MILLERS HOLDING CORPORATION AND SUBSIDIARY

(Unaudited)

Notes to Consolidated Financial Statements

(Dollars in thousands, except per share amounts)

The Company continues to maintain a whole account, accident year aggregate excess of loss (aggregate stop loss) contract. This contract covers the 2008 and 2009 accident years and provides reinsurance coverage for loss and allocated loss adjustment expense (ALAE) from all lines of business, in excess of a 72% loss and ALAE ratio. The reinsurance coverage has a limit of 20% of subject net earned premiums. As of June 30, 2011, the Company has not ceded any losses under the aggregate stop loss contract.

The Company has assumed reinsurance related 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 three months and six months ended June 30, 2011 and 2010 is as follows:

(a) Premiums

	For the three months ended June 30,
	2011						2010
	Written			Earned			Written			Earned
Direct	$	17,875		$	21,271		$	19,118		$	21,389
Assumed		86			55			(40	)		(84	)
Ceded		(4,100	)		(4,518	)		(4,406	)		(4,626	)
Net	$	13,861		$	16,808		$	14,672		$	16,679

	For the six months ended June 30,
	2011						2010
	Written			Earned			Written			Earned
Direct	$	37,932		$	42,428		$	39,967		$	42,915
Assumed		178			148			48			4
Ceded		(8,271	)		(8,854	)		(8,969	)		(9,184	)
Net	$	29,839		$	33,722		$	31,046		$	33,735

(b) Losses and Loss Adjustment Expenses

	For the three months ended						For the six months ended
	June 30,						June 30,
	2011			2010			2011			2010
Direct	$	20,550		$	23,786		$	30,219		$	39,739
Assumed		(85	)		89			4			(127	)
Ceded		(3,475	)		(7,990	)		(2,960	)		(10,355	)
Net	$	16,990		$	15,885		$	27,263		$	29,257

23

PENN MILLERS HOLDING CORPORATION AND SUBSIDIARY

(Unaudited)

Notes to Consolidated Financial Statements

(Dollars in thousands, except per share amounts)

(c) Unearned Premiums

	June 30,			December 31,
	2011			2010
Direct	$	38,217		$	42,800
Assumed		37			7
Prepaid reinsurance (ceded)		(3,737	)		(4,320	)
Net	$	34,517		$	38,487

(d) Loss and Loss Adjustment Expense Reserves

	June 30,		December 31,
	2011		2010
Direct	$	99,287	$	101,876
Assumed		7,343		8,097
Gross	$	106,630	$	109,973

(12) 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.

24

PENN MILLERS HOLDING CORPORATION AND SUBSIDIARY

(Unaudited)

Notes to Consolidated Financial Statements

(Dollars in thousands, except per share amounts)

Segment information for the three months and six months ended June 30, 2011 and 2010 is as follows:

	For the three months ended						For the six months ended
	June 30,						June 30,
	2011			2010			2011			2010
Revenues:
Premiums earned:
Agribusiness	$	11,999		$	11,125		$	23,592		$	22,167
Commercial business		4,719			5,591			9,909			11,472
Other		90			(37	)		221			96
Total premiums earned		16,808			16,679			33,722			33,735
Investment income, net of investment expense		1,404			1,452			2,845			3,024
Realized investment gains, net		64			1,294			852			1,666
Other income		70			88			156			180
Total revenues	$	18,346		$	19,513		$	37,575		$	38,605
Components of net loss:
Underwriting loss:
Agribusiness	$	(5,767	)	$	(4,110	)	$	(3,669	)	$	(4,592	)
Commercial business		(653	)		(588	)		(2,603	)		(2,536	)
Other		98			(218	)		39			50
Total underwriting loss		(6,322	)		(4,916	)		(6,233	)		(7,078	)
Investment income, net of investment expense		1,404			1,452			2,845			3,024
Realized investment gains, net		64			1,294			852			1,666
Other income		70			88			156			180
Corporate expense		(174	)		(161	)		(297	)		(311	)
Interest expense		(1	)		—			(16	)		—
Other expense, net		(8	)		(37	)		(54	)		(70	)
Loss before income taxes		(4,967	)		(2,280	)		(2,747	)		(2,589	)
Income tax benefit		(555	)		(1,005	)		(241	)		(1,072	)
Net loss	$	(4,412	)	$	(1,275	)	$	(2,506	)	$	(1,517	)

25

PENN MILLERS HOLDING CORPORATION AND SUBSIDIARY

(Unaudited)

Notes to Consolidated Financial Statements

(Dollars in thousands, except per share amounts)

The following table sets forth the net premiums earned by major lines of business for the Company’s core insurance products in the three months and six months ended June 30, 2011 and 2010:

	For the three months ended					For the six months ended
	June 30,					June 30,
	2011		2010			2011		2010
Net premiums earned:
Agribusiness
Property	$	4,353	$	4,014		$	8,579	$	7,897
Commercial auto		3,014		2,853			5,934		5,667
Liability		2,330		2,356			4,587		4,647
Workers’ compensation		2,117		1,722			4,128		3,602
Other		185		180			364		354
Agribusiness subtotal		11,999		11,125			23,592		22,167
Commercial lines
Property & liability		2,917		3,416			5,994		6,938
Workers’ compensation		808		1,066			1,875		2,309
Commercial auto		944		1,053			1,937		2,114
Other		50		56			103		111
Commercial lines subtotal		4,719		5,591			9,909		11,472
Other		90		(37	)		221		96
Total net premiums earned	$	16,808	$	16,679		$	33,722	$	33,735

(13) Shareholders’ Equity

As of June 30, 2011, 271,562 shares remain to be purchased under the share repurchase plans approved by the Board of Directors. The authorization has no expiration date.

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PENN MILLERS HOLDING CORPORATION AND SUBSIDIARY

(Unaudited)

Notes to Consolidated Financial Statements

(Dollars in thousands, except per share amounts)

(14) Earnings Per Share

Basic earnings per common share is computed by dividing net loss by the weighted-average number of shares of common stock outstanding during the period. Diluted earnings per common share is computed by dividing net income by the weighted-average number of shares of common stock outstanding during the period increased to include the number of additional shares of common stock that would have been outstanding if the potentially dilutive securities had been issued. Potentially dilutive securities include outstanding stock options and unvested restricted stock. The dilutive effect of potentially dilutive securities is reflected in diluted earnings per common share by application of the treasury stock method. Under the treasury stock method, an increase in the fair market value of the Company’s common stock can result in a greater dilutive effect from potentially dilutive securities. Dilutive securities are not included in the computation of diluted earnings per share when a company is in a loss position.

The following table sets forth the computation of basic and diluted earnings per common share for the three month and six month periods ended June 30, 2011 and 2010:

	For the three months ended						For the six months ended
	June 30,						June 30,
	2011			2010			2011			2010
Numerator:
Net loss	$	(4,412	)	$	(1,275	)	$	(2,506	)	$	(1,517	)
Denominator:
Weighted average shares outstanding		4,501,574			4,666,806			4,485,318			4,684,312
Effect of dilutive securities		—			—			—			—
Weighted average shares diluted		4,501,574			4,666,806			4,485,318			4,684,312
Basic loss per share	$	(0.98	)	$	(0.27	)	$	(0.56	)	$	(0.32	)
Diluted loss per share	$	(0.98	)	$	(0.27	)	$	(0.56	)	$	(0.32	)

Potentially dilutive securities representing approximately 47,343 and 54,024 shares of common stock for the three months and six months ended June 30, 2011, respectively, and 23,931 and 12,032 shares of common stock for the three months and six months ended June 30, 2010, respectively, were excluded from the computation of diluted loss per common share for these periods because their effect would have been antidilutive.

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Item 2.

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

Some of the statements contained in this document are “forward-looking statements” within the meaning of the Private Securities Litigation Reform Act of 1995. In some cases, you can identify forward-looking statements by terminology such as “may,” “will,” “should,” “expect,” “plan,” “intend,” “anticipate,” “believe,” “estimate,” “predict,” “potential” or “continue,” the negative of these terms or other terminology. Forward-looking statements are based on the opinions and estimates of management at the time the statements are made and are subject to certain risks and uncertainties that could cause actual results to differ materially from those anticipated in the forward-looking statements. These forward-looking statements include statements of goals, intentions and expectations; statements regarding prospects and business strategy; and estimates of future costs, benefits and results. The forward-looking statements are subject to numerous assumptions, risks and uncertainties, including, among other things, the factors discussed under the heading “Item 1A — Risk Factors” included herein and in the Company’s Annual Report on Form 10-K for the year ended December 31, 2010 that could affect the actual outcome of future events. All of these factors are difficult to predict and many are beyond our control.

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

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

The following discussion and analysis of our financial condition and results of operations should be read in conjunction with the consolidated financial statements and accompanying notes included thereto in our 2010 annual report on Form 10-K.

Overview

Our lead insurance company is Penn Millers Insurance Company, which is a Pennsylvania stock insurance company originally incorporated as a mutual insurance company in 1887. In 1999, Penn Millers Insurance Company converted from a mutual to a stock insurance company within a mutual holding company structure. This conversion created Penn Millers Mutual Holding Company (Penn Millers Mutual), a Pennsylvania mutual holding company, and established a “mid-tier” stock holding company, PMHC Corp. (PMHC), to hold all of the outstanding shares of Penn Millers Insurance Company. American Millers Insurance Company is a wholly owned subsidiary of Penn Millers Insurance Company that provides Penn Millers Insurance Company with excess of loss reinsurance.

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

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

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

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

Penn Millers Insurance Company has been assigned an “A-” (Excellent) rating by A.M. Best Company, Inc. (A.M. Best), which is the fourth highest out of fifteen possible ratings. The latest rating evaluation by A.M. Best occurred on May 31, 2011.

Business Segments

We provide a variety of property and casualty insurance products designed to meet the insurance needs of certain segments of the agricultural industry and the needs of small and middle market commercial businesses. We are licensed in 41 states, but we currently target the sales of our insurance products to 34 states. We discontinued writing personal insurance products in 2003 and now offer only commercial products. We report our operating results in three operating segments: agribusiness insurance, commercial business insurance, and our “other” segment. However, assets are not allocated to segments and are reviewed in the aggregate for decision-making purposes.

Our agribusiness insurance segment product includes property (fire and allied lines and inland marine), liability (general, products and umbrella), commercial automobile, and workers’ compensation insurance. We specialize in writing coverage for manufacturers, processors, and distributors of products for the agricultural industry. We do not write property or liability insurance for farms or farming operations unless written in conjunction with an eligible agribusiness operation; and we do not write any crop or weather insurance. We market our agribusiness lines through independent producers and our employees.

Our commercial business segment provides insurance coverage to small and middle market commercial businesses. We target select low to medium hazard businesses such as retailers, including beverage stores, floor covering stores, florists, grocery stores, office equipment and supplies stores, dry cleaners, printers, and shopping centers; artisan contractor businesses, such as electrical, plumbing, and landscaping; professional services, such as accountants, insurance agencies, medical offices, and optometrists; office buildings; and select manufacturing and wholesale businesses.

Our commercial business insurance segment product consists of a business owner’s policy called Solutions that combines the following: property and liability coverage for small businesses; workers’ compensation; commercial automobile; and umbrella liability coverage. The types of businesses we target under our Solutions offering include retail, service, wholesalers, and printers. These lines within our Solutions product are sold through approximately 260 independent agents in Pennsylvania, New Jersey, Connecticut, Massachusetts, Tennessee, Virginia, New York, and Maryland.

We also carry an insurance product called PennEdge which allows us to write customized coverages on mid-size commercial accounts. PennEdge is specifically tailored to unique business and industry segments, including wholesalers, manufacturers, printers and commercial laundries. In 2010, we added hunting and fishing lodges, clubs, guides and outfitters, and metal recyclers to our target classes of insureds. We choose our targeted segments based on the experience of our underwriting staff, the market opportunities available to our existing producers and where we believe there are opportunities to reach producers that have not traditionally carried our products. Currently, the PennEdge product is available in 24 states and is marketed through both our agribusiness and commercial business producers. For segment reporting purposes, and consistent with how we manage our business, the results of PennEdge are included in our commercial business segment.

Our third business segment, which we refer to as our “other” segment, includes the runoff of discontinued lines of insurance business and the results of mandatory assigned risk reinsurance programs that we must participate in as a condition of doing business in the states in which we operate.

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Financial Highlights of Results for the Three and Six Months Ended June 30, 2011:

Three Months Ended June 30, 2011

• Our net loss in the quarter was primarily driven by an unprecedented level of catastrophe and other weather-related losses of $7,737 (net of reinsurance) in the period, compared to our previously highest quarter of $5,587 (net of reinsurance) in the second quarter of 2010. Weather-related losses impacted our second quarter 2011 loss and LAE ratio by 46.0 loss ratio points. In the second quarter 2010, weather-related losses had an impact on our loss and LAE ratio of 33.5 loss ratio points.

• Shareholders’ equity decreased $2,617 in the second quarter of 2011 primarily from the net loss of $4,412 for the period, offset by net unrealized gains on investments of $1,394 (after-tax).

• Book value per share of $20.27 at June 30, 2011 compared to $21.08 at March 31, 2011.

Six Months Ended June 30, 2011

• Catastrophe and other weather-related losses in the first six months of 2011 were $8,938 in the period, compared to $7,924 in the same period of 2010. On a year to date basis, the impact on our 2011 loss and LAE ratio from weather-related losses was 26.5 loss ratio points, compared to 23.5 loss ratio points in 2010.

• Shareholders’ equity decreased $1,306 in the first six months of 2011 primarily from net loss of $2,506 for the period. Net unrealized gains from investments were $440 (after-tax) on a year to date basis.

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

• Book value per share of $20.27 at June 30, 2011 compared to $20.85 at December 31, 2010.

Results of Operations

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

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

We evaluate our insurance operations by monitoring certain key measures of growth and profitability. In addition to reviewing our financial performance based on results determined in accordance with U.S. generally accepted accounting principles (GAAP), we utilize certain non-GAAP financial measures that we believe are valuable in managing our business and for comparison to our peers. These non-GAAP measures are underwriting income (loss), combined ratios and written premiums. In addition, where we feel it enhances the presentation to the reader, we may present certain GAAP financial measures in a manner to reflect the impact of certain unusual or non-recurring situations.

The major components of operating revenues and net income can be seen in footnote 12 to our Consolidated Financial Statements under Item 1 of this Report on Form 10-Q.

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Insurance Operations Outlook

The property and casualty insurance industry is in the midst of a soft market that is characterized by low premium growth, declining prices and excess capacity. Also, we and our peers are operating in a sluggish economy with lower exposures, and some property and casualty insurance premium has evaporated with business closings in the economic downturn. There has been some industry consolidation, especially in agribusiness, and insurers continue to consider the right mix of markets and product lines to achieve the best pricing while maintaining underwriting discipline. In addition to premium pricing, our investment yields are also facing downward pressure. Investment income is lower through the first six months of 2011; and as our fixed maturity investments mature, it is difficult to reinvest the proceeds in investments that provide a comparable return without excessive risk.

While the current economic and pricing environments have presented challenges, we have positioned our long-term business model in order to capitalize on market opportunities when a hard market returns.

Our business strategy is intended to capitalize on our core competencies in agribusiness and utilize our strengths to continue to expand our PennEdge distribution in our commercial business segment. We have taken certain actions in order to position the Company to take advantage of growth opportunities that we believe will become available when the economic outlook improves, such as:

• Identifying niche segments where competition is limited and we can add value through personal service to our producers and insureds;

• Expanding our reach into geographies that complement our existing network;

• Growing our network of producers that we believe will refer significant, profitable business to us; and

• Differentiating our coverage offerings by entering into strategic alliances in both our agribusiness and commercial business segments to offer equipment breakdown, employment practices liability, miscellaneous professional liability, and pollution coverages.

Revenues

Total revenues for the three and six month periods of 2011 were $18,346 and $37,575, a 6.0% and 2.7% decrease over the same periods in 2010. The decrease is attributable to a lower level of realized investment gains in 2011, as well as lower investment income.

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The components of premiums written and earned for the three and six months ended June 30, 2011 and 2010 are as follows:

	Three Months Ended June 30,					Six Months Ended June 30,
	2011		2010			2011		2010
Direct premiums written
Agribusiness	$	12,184	$	11,815		$	27,250	$	26,381
Commercial business		5,656		7,256			10,609		13,494
Other		35		47			73		92
Direct premiums written — total		17,875		19,118			37,932		39,967
Assumed premiums written		86		(40	)		178		48
Gross premiums written	$	17,961	$	19,078		$	38,110	$	40,015
Ceded premiums written
Agribusiness	$	3,016	$	3,125		$	6,228	$	6,481
Commercial business		1,084		1,281			2,043		2,488
Ceded premiums written — total	$	4,100	$	4,406		$	8,271	$	8,969
Net premiums written
Agribusiness	$	9,168	$	8,690		$	21,022	$	19,900
Commercial business		4,572		5,975			8,566		11,006
Other		121		7			251		140
Net premiums written — total	$	13,861	$	14,672		$	29,839	$	31,046
Net premiums earned
Agribusiness	$	11,999	$	11,125		$	23,592	$	22,167
Commercial business		4,719		5,591			9,909		11,472
Other		90		(37	)		221		96
Net premiums earned — total	$	16,808	$	16,679			33,722	$	33,735

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

Direct premiums written in our agribusiness segment increased from $11,815 for the three months ended June 30, 2010 to $12,184 for the three months ended June 30, 2011, a 3.1% increase. Direct premiums written in our agribusiness segment increased from $26,381 for the six months ended June 30, 2010 to $27,250 for the six months ended June 30, 2011, a 3.3% increase. For the three month period, the increase is due to a higher level of renewal business, which was partly offset by lower new business writings. For the six month period, the increase is attributable to the higher level of new business that was written in the first quarter. Renewal premium for 2011 to date is flat compared to the same period in 2010.

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Our direct premiums written in our commercial business segment were $5,656 and $7,256 for the three months ended June 30, 2011 and 2010, respectively. For the six months ended June 30, 2011 and 2010, direct premiums written were $10,609 and $13,494, respectively. The factors that contributed to the three month net decline of $1,600 or 22.1% and the six month net decline of $2,885 or 21.4% are further described below:

• We continue to withdraw from certain unprofitable classes of business. This decision has resulted in significantly lower premium volume in our commercial business segment, but we believe that our development of PennEdge and our cost containment efforts in Solutions will improve our underwriting profit. Our goal is to have a smaller but more profitable Solutions book of business.

• We have begun aggressive financial underwriting on our commercial business accounts. We have begun non-renewing accounts with the poorest commercial credit and financial stress scores, and we have begun seeking significant price increases on those accounts with below average scores. We believe there is a direct correlation between these scores and the likelihood that an account will experience losses.

As of June 30, 2011 our PennEdge offering has been approved in 24 states. While we believe it has been well received by our agents and policyholders, the PennEdge product was launched in a competitive market. We believe the greatest opportunities for growth will come when the market hardens and, therefore, we will not seek aggressive growth at substandard pricing. For the three months ended June 30, 2011, the direct premiums written for our PennEdge product were $1,271, an increase of $317 over the same period in 2010. For the six months ended June 30, 2011, the direct premiums written of our PennEdge product were $2,120, an increase of $552 over the same period in 2010.

While the PennEdge product has begun to regain the momentum it was building throughout 2010, our Solutions product has continued to decline as a result of our aggressive pricing and underwriting actions. Despite the pricing increases we have taken thus far in 2011, we are retaining more of the business at desirable rates than we had anticipated.

For all segments, ceded premiums written were lower in the three and six months ended June 30, 2011, compared to the same periods of 2010, mostly due to the decreases in direct premium volume. Reinsurance costs have also decreased as a result of the increased retention on our per risk excess of loss reinsurance treaty, which has been partly offset by higher reinsurance rates.

Our net premiums earned were $16,808 and $16,679 for the three months ended June 30, 2011 and 2010, respectively. For the three month period, the growth in our agribusiness earned premium mostly offset the decline in our commercial business earned premium. The $129, or 0.8%, increase for the quarter is mostly due to an increase in our assumed premium. For the six months ended June 30, 2011 and 2010, net premiums earned were $33,722 and $33,735, respectively. For the six month period, the $13, or 0.04%, decrease is mostly due to a reduction in net premiums earned in our commercial business segment of $1,563, as we continue to see the effects of our efforts to improve our underwriting results in this segment, offset by an increase in our agribusiness segment of $1,425 for the same period.

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

	Three Months Ended						Six Months Ended
	June 30,						June 30,
	2011			2010			2011			2010
Average cash and invested assets	$	180,234		$	187,872		$	179,183		$	186,758
Net investment income		1,404			1,452			2,845			3,024
Return on average cash and invested assets (1)		3.2	%		3.1	%		3.2	%		3.3	%

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

Net investment income decreased $48 and $179 for the three and six months ended June 30, 2011 as compared to the same periods ended June 30, 2010. The decrease in both periods is attributable to lower average asset balances and the impact of declining interest rates. These factors have been partly offset by higher dividend income on mutual fund investments.

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Underwriting Results 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.

For purposes of segment reporting, the other segment includes the runoff of discontinued lines of insurance business and the results of mandatory assigned risk reinsurance programs that we must participate in as a cost of doing business in the states in which we operate. The discontinued lines of insurance business include personal lines, which we discontinued writing in 2003, and assumed reinsurance contracts, in which we previously participated on a voluntary basis. Participation in these assumed reinsurance contracts ceased in the 1980s and early 1990s.

Underwriting (loss) income measures the pre-tax profitability of our insurance segments. It is derived by subtracting losses and loss adjustment expenses, amortization of deferred policy acquisition costs, and underwriting and administrative expenses from earned premiums. Each of these captions is presented in our consolidated statements of operations but not subtotaled. This section provides more insight into the variances in the primary drivers of our profitability, especially losses and loss adjustment expenses and total underwriting expenses, which include amortization of deferred policy acquisition costs and underwriting and administrative expenses.

The underwriting (loss) income and key profitability ratios for each segment for the three and six months ended June 30, 2011 and 2010 are as follows:

	Three Months Ended June 30, 2011												Three Months Ended June 30, 2010
	Agri-			Commercial									Agri-			Commercial
	business			Business			Other			Consolidated			business			Business			Other			Consolidated
Underwriting (loss) income	$	(5,767	)		(653	)		98		$	(6,322	)	$	(4,110	)		(588	)		(218	)	$	(4,916	)
Loss and LAE ratios:
Losses		56.7	%		89.3	%		25.5	%		65.6	%		63.2	%		75.2	%		37.8	%		67.2	%
Catastrophe losses		52.4	%		7.7	%		0.0	%		39.6	%		41.3	%		5.2	%		0.0	%		29.3	%
Other weather losses		7.7	%		3.2	%		0.0	%		6.4	%		5.8	%		0.9	%		0.0	%		4.2	%
Prior year development		-1.9	%		-30.9	%		-94.4	%		-10.5	%		-5.6	%		-7.9	%		-391.9	%		-5.5	%
Total loss and LAE ratio		114.9	%		69.3	%		-68.9	%		101.1	%		104.7	%		73.4	%		-354.1	%		95.2	%
Underwriting expense ratio		33.2	%		44.5	%		60.0	%		37.6	%		32.2	%		37.1	%		-135.1	%		35.2	%
Combined ratio		148.1	%		113.8	%		-8.9	%		138.7	%		136.9	%		110.5	%		-489.2	%		130.4	%

	Six Months Ended June 30, 2011												Six Months Ended June 30, 2010
	Agri-			Commercial									Agri-			Commercial
	business			Business			Other			Consolidated			business			Business			Other			Consolidated
Underwriting (loss) income	$	(3,669	)		(2,603	)		39		$	(6,233	)	$	(4,592	)		(2,536	)		50		$	(7,078	)
Loss and LAE ratios:
Losses		57.5	%		89.8	%		48.0	%		66.9	%		61.1	%		75.1	%		152.1	%		66.2	%
Catastrophe losses		26.8	%		9.4	%		0.0	%		21.5	%		21.5	%		10.4	%		0.0	%		17.6	%
Other weather losses		5.0	%		5.2	%		0.0	%		5.0	%		6.0	%		5.6	%		0.0	%		5.8	%
Prior year development		-6.9	%		-25.7	%		-32.6	%		-12.6	%		1.6	%		-9.8	%		-226.1	%		-2.9	%
Total loss and LAE ratio		82.4	%		78.7	%		15.4	%		80.8	%		90.2	%		81.3	%		-74.0	%		86.7	%
Underwriting expense ratio		33.2	%		47.6	%		67.0	%		38.5	%		30.5	%		40.8	%		121.9	%		35.2	%
Combined ratio		115.6	%		126.3	%		82.4	%		119.3	%		120.7	%		122.1	%		47.9	%		121.9	%

(1) Corporate expenses are not included in underwriting (loss) income. The consolidated combined ratio includes $174 and $161 of corporate expenses for the three months ended June 30, 2011 and 2010, respectively. The consolidated combined ratio includes $297 and $311 of corporate expenses for the six months ended June 30, 2011 and 2010, respectively.

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Losses and Loss Adjustment Expenses

Our consolidated loss and loss adjustment expense (LAE) ratio was 80.8% for the six months ended June 30, 2011, compared to 86.7% for the six months ended June 30, 2010. The changes in losses and LAE for the six month periods are further described below:

• Catastrophe and other weather related losses were $1,014 higher in the six months ended June 30, 2011 compared to the same period of 2010, and $2,150 higher in the three months ended June 30, 2011 compared to the same period in 2010. The catastrophe losses in the second quarter were driven primarily by record high losses in our agribusiness segment from severe storm activity occurring mostly in the Midwest and Southeast.

• We experienced net favorable prior year reserve development in the six months ended June 30, 2011 of $4,257, compared to net favorable development of $976 in the six months ended June 30, 2010. For the three months ended June 30, 2011, net favorable prior year development was $1,771 compared to $925 for the same period in 2010. The favorable development in 2011 was primarily driven by lower loss emergence, relative to expectations on the commercial multi-peril and workers’ compensation lines of business in our commercial business segment. We also experienced favorable development in the fire and allied lines of business for our agribusiness segment as a result of favorable settlements on previously reported claims and favorable development in the liability lines as a result of lower levels of claims emergence.

• For the three and six month periods ended June 30, 2011, our agribusiness segment experienced improved current accident year loss ratios from non-weather related claims, primarily due to fewer severe fire losses and a reduction in frequency on the workers’ compensation line of business. The commercial business segment experienced an increase in the non-weather related, current accident year loss ratio for the quarter and year to date periods compared to 2010. The non-weather related current accident year loss ratio increased from 75.2% for the three month period ended June 30, 2010 to 89.3% for the same period in 2011 and increased from 75.1% for the six month period ended June 30, 2010 to 89.8% for the same period in 2011. These increases are primarily driven by increases in severity in the fire line of business due to several large fires.

Underwriting Expenses

Our underwriting expense ratio represents the ratio of underwriting expenses (amortization of deferred policy acquisition costs and underwriting and administrative expenses) divided by net premiums earned. As one component of the combined ratio, along with the loss and loss adjustment expense ratio, the underwriting expense ratio is a key measure of profitability. The underwriting expense ratio can exhibit volatility from year to year from such factors as changes in premium volume, one-time or infrequent expenses for strategic initiatives, or profitability based bonuses to employees and producers.

Total underwriting and administrative expenses, including amortization of deferred policy acquisition costs, were $6,314 and $5,871 for the three months ended June 30, 2011 and 2010, respectively, and $12,989 and $11,867 for the six months ended June 30, 2011 and 2010, respectively. Amortization of deferred policy acquisition costs decreased $194, or 3.8%, and $296, or 2.9%, for the three and six months ended June 30, 2011 compared to the same periods in 2010. The decrease is attributable to the decline in earned premiums. Underwriting and administrative expenses increased $637 and $1,418 for the three and six months ended June 30, 2011, compared to the same periods of 2010. The increase in these costs is primarily the result of the one-time benefit of $679 in the second quarter of 2010 from the termination of our SERP plan. Other factors include increased stock based compensation expense compared to the prior year and one-time severance costs related to our February 2011 staff reductions.

The increase in underwriting expenses in 2011, combined with the reduction in earned premium, resulted in the underwriting expense ratio increasing from 35.2% for the six months ended June 30, 2010 to 38.5% for the six months ended June 30, 2011. This increase in the expense ratio was more than offset by the decrease in the loss and LAE ratio, resulting in our combined ratio decreasing from 121.9% for the six months ended June 30, 2010 to 119.3% for the six months ended June 30, 2011.

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Income Tax Expense (Benefit)

For the three months ended June 30, 2011, the income tax benefit for operations was $555, or an effective tax rate of 11.2%, compared to a tax benefit of $1,005, or an effective tax rate of 44.1%, for the same period in 2010. For the six months ended June 30, 2011, the income tax benefit for operations was $241, or an effective tax rate of 8.8%, compared to a tax benefit of $1,072, or an effective tax rate of 41.4%, for the same period in 2010. Our effective income tax rate is impacted by our pre-tax loss, its relationship to the level of tax exempt interest income earned on our municipal bond portfolio, and by the accounting for our deferred tax valuation allowance.

Financial Position

At June 30, 2011 we had total assets of $244,523 compared to total assets of $254,721 at December 31, 2010. The decrease in our total assets is primarily due to lower premiums receivable, due to a lower volume of earned premiums, and lower reinsurance receivables and recoverables due to the timing of loss payments and reinsurance recoveries.

At June 30, 2011 we had total liabilities of $152,801 compared to $161,693 at December 31, 2010. The change in our total liabilities is primarily due to a decrease in losses and LAE reserves of $3,343, due to declining premium and timing of claims settlements. The decline is also due to a decrease in unearned premiums due to the underwriting actions taken in our commercial business segment and decreases in accounts payable and accrued expenses due to the timing of expenditures.

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.

The following table summarizes the distribution of our investment portfolio as a percentage of total estimated fair value based on credit ratings assigned by Standard & Poor’s Corporation (S&P) at June 30, 2011 and at December 31, 2010:

	June 30, 2011					December 31, 2010
	Estimated		Percent of			Estimated		Percent of
Rating(1)	Fair Value		Total(2)			Fair Value		Total(2)
Agencies not backed by the full faith and credit of the U.S. government	$	14,964		8.6	%	$	14,458		8.3	%
U.S. treasury securities		798		0.5	%		736		0.4	%
AAA		37,719		21.7	%		48,482		27.9	%
AA		48,293		27.8	%		41,254		23.8	%
A		46,512		26.8	%		45,354		26.1	%
BBB		13,810		8.0	%		12,487		7.2	%
Sub-total		162,096		93.4	%		162,771		93.7	%
B(3)		11,382		6.6	%		10,874		6.3	%
Total	$	173,478		100.0	%	$	173,645		100.0	%

(1)	The ratings set forth in this table are based on the ratings assigned by S&P. If S&P’s ratings were unavailable, the equivalent ratings supplied by Moody’s Investor Service, Fitch Investors Service, Inc. or the National Association of Insurance Commissioners (NAIC) were used where available.
(2)	Represents percent of fair value for classification as a percent of the total invested assets portfolio.
(3)	Represents the amount invested in a high-yield bond mutual fund invested primarily in corporate fixed maturity securities with an average S&P credit rating of “B”.

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The maturity profile of our fixed maturity securities at June 30, 2011 can be seen in footnote 6 to our Consolidated Financial Statements under Item 1 of this Report on Form 10-Q.

Expected maturities could differ from contractual maturities because borrowers may have the right to call or prepay obligations, with or without call or prepayment penalties. Fixed maturity securities are carried at fair value in our financial statements. Mortgage-backed securities consist of residential and commercial mortgage-backed securities and securities collateralized by home equity loans. These securities are presented separately in the maturity schedule due to the inherent risk associated with prepayment or early amortization. Prepayment rates are influenced by a number of factors that cannot be predicted with certainty, including: the relative sensitivity of the underlying mortgages or other collateral to changes in interest rates; a variety of economic, geographic and other factors; and the repayment priority of the securities in the overall securitization structures.

At June 30, 2011, the average effective duration of our mortgage-backed securities was 4.1 years. The average effective duration of our total fixed maturity investment portfolio was 3.1 years. The fair value of our investments may fluctuate significantly in response to changes in interest rates. In addition, we may experience investment losses to the extent our liquidity needs require the disposition of fixed maturity securities in unfavorable interest rate environments.

Our fixed maturity portfolio held $23,446 and $22,915 of United States Agency-guaranteed residential mortgage-backed securities (RMBS) at June 30, 2011 and December 31, 2010, respectively. The RMBS had an average credit rating of AAA and AAA for each respective period and we held no non-agency guaranteed RMBS during the six months ended June 30, 2011 and during the year ended December 31, 2010.

Approximately 11% of our investments in fixed maturity securities at both June 30, 2011 and December 31, 2010 were guaranteed by third party monoline insurers. As of June 30, 2011 and as of December 31, 2010, the fixed maturity securities guaranteed by these monoline insurers were comprised entirely of municipal bonds with a fair value of $18,208 and $20,062, respectively, and an average credit rating of AA for each of these periods. We base our investment decision on the credit characteristics of the municipal security, without consideration of the guarantee. We hold no securities issued by any third party insurer.

Cash flows for the six months ended June 30, 2011 and 2010 were as follows:

	Six months ended
	June 30,
	2011			2010
Cash flows (used in) provided by operating activities	$	(954	)	$	50
Cash flows used in investing activities		(824	)		(5,184	)
Cash flows used in financing activities		—			(4,155	)
Net decrease in cash and cash equivalents	$	(1,778	)	$	(9,289	)

Cash flows from operating activities decreased by $1,004 for the six month period ended June 30, 2011 compared to the period ended June 30, 2010. The change is primarily due to increased loss payments in 2011 compared to 2010.

Investing activities used $824 and $5,184 of net cash for the six months ended June 30, 2011 and 2010, respectively. In the first six months of 2011, net purchases of available-for-sale securities were $679. For the first six months of 2010, net purchases of available for sale securities were $7,803, and we received $2,682 of cash from the termination of our COLI policies.

Cash flows used in financing activities for the first six months of 2010 were comprised entirely of amounts we paid for our outstanding stock under our share repurchase plans.

As of June 30, 2011, our parent company, Penn Millers Holding Corporation, held total cash and invested assets in fixed maturity securities and equity securities of $13,257. In addition, at June 30, 2011, we had no outstanding debt and, therefore, do not expect to have any need for dividends from Penn Millers Insurance Company in the near future.

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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 without prior approval from the Pennsylvania Insurance Department. 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 January 1, 2011 and June 30, 2011, the amount available for payment of dividends from Penn Millers Insurance Company in 2011 without the prior approval of the Pennsylvania Insurance Department is $6,819 based upon the insurance company’s 2010 annual statement. Prior to its payment of any dividend, Penn Millers Insurance Company is required to provide notice of the dividend to the Pennsylvania Insurance Department. This notice must be provided to the Pennsylvania Insurance Department 30 days prior to the payment of an extraordinary dividend and 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.

Off-Balance Sheet Arrangements

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

Impact of Inflation

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

Critical Accounting Estimates

General

The preparation of financial statements in accordance with GAAP requires both the use of estimates and judgment relative to the application of appropriate accounting policies. We are required to make estimates and assumptions in certain circumstances that affect amounts reported in our financial statements and related footnotes. We evaluate these estimates and assumptions on an on-going basis based on historical developments, market conditions, industry trends and other information that we believe to be reasonable under the circumstances. There can be no assurance that actual results will conform to our estimates and assumptions and that reported results of operations will not be materially adversely affected by the need to make accounting adjustments to reflect changes in these estimates and assumptions from time to time. Our critical accounting estimates are more comprehensively described in our 2010 Form 10-K in the section entitled “Management’s Discussion and Analysis of Financial Condition and Results of Operations-Critical Accounting Estimates.” We believe that our most significant accounting estimates to be those applied to losses and loss adjustment expense reserves and related reinsurance recoverables; investment valuation and impairments; the provision for income taxes; and deferred policy acquisition costs.

Losses and Loss Adjustment Expense Reserves

How reserves are established

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

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

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

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

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

The process of estimating loss reserves involves a significant degree of judgment and is subject to uncertainty from various sources. This includes both internal and external events, such as changes in claims handling procedures, economic inflation, legal trends, and legislative changes, among others. The impact of these items on ultimate losses and loss adjustment expenses is difficult to estimate. Uncertainty in loss reserve estimation difficulties also differs by line of business due to variation in claim complexity, the volume of claims, the potential severity of individual claims, the determination of occurrence date for a claim, and reporting lags (the time between the occurrence of the policyholder event and when it is actually reported to the insurer). Informed judgment is applied throughout the loss reserving process, including the application of individual expertise to multiple sets of data and analyses. We continually refine our loss reserve estimates in a regular, ongoing process as historical loss experience develops and additional claims are reported and settled. In establishing our estimates, we consider all significant facts and circumstances known at the time loss reserves are established.

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

Our actuary determines a range of reasonable reserve estimates which reflects the uncertainty inherent in the loss reserving process. This range does not represent the range of all possible outcomes. We believe that the actuarially-determined ranges represent reasonably likely changes in the losses and LAE estimates, however actual results could differ significantly from these estimates. The range is determined by line of business and accident year after a review of the output generated by the various actuarial methods utilized.

The selection of the ultimate loss is based on information unique to each line of business and accident year and the judgment and expertise of our actuary and management. Although we raised the net retention of our per risk excess of loss reinsurance covering many of these lines of business in 2008, our aggregate stop loss reinsurance contract limits the potential for further development across all lines for the reserves associated with the 2008 and 2009 accident years. The stop loss contract was not renewed for 2010 because the reinsurance protection is no longer necessary as we have raised additional capital through our stock offering in October 2009. As of June 30, 2011 and at December 31, 2010 we had no ceded reinsurance loss recoverable under this stop loss contract.

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Our reserves for unpaid losses and LAE are summarized below:

	As of		As of
	June 30,		December 31,
	2011		2010
Case reserves	$	51,006	$	53,330
IBNR reserves		36,397		34,321
Net unpaid losses and LAE		87,403		87,651
Reinsurance recoverables on unpaid losses and LAE		19,227		22,322
Reserves for unpaid losses and LAE	$	106,630	$	109,973

At June 30, 2011, the amount recorded as compared to the actuarially-determined reserve range, net of reinsurance was as follows:

Reserve Range for Net Unpaid Losses and LAE
Low End		Recorded		High End
$	79,951	$	87,403	$	90,460

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

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

Investments

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

The fair value and unrealized losses for our securities that were temporarily impaired as of June 30, 2011 can be seen in footnote 6 to our Consolidated Financial Statements under Item 1 of this Report on Form 10-Q.

Fair values of interest rate sensitive instruments may be affected by increases and decreases in prevailing interest rates, which generally translate, respectively, into decreases and increases in fair values of fixed maturity investments. The fair values of interest rate sensitive instruments also may be affected by the credit worthiness of the issuer, prepayment options, relative values of other investments, the liquidity of the instrument, and other general market conditions.

At June 30, 2011 and December 31, 2010, we had gross unrealized losses on fixed maturity and equity securities of $204 and $532, respectively. We have evaluated each fixed maturity security and taken into account the severity and duration of any declines in fair value, the current rating on the bond and the outlook for the issuer according to independent analysts. We believe that the foregoing declines in fair value in our existing fixed maturity portfolio are most likely attributable to current market conditions and we will recover the entire amortized cost basis. Our fixed maturity investments and equity securities are classified as available for sale because we will, from time to time, make sales of securities that are not impaired, consistent with our investment goals and policies. Our investment portfolio is managed by an independent investment manager who has discretion to buy and sell securities; however, by agreement, the investment manager cannot sell any security without our consent if such sale will result in a net realized loss.

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We monitor our investment portfolio and review securities that have experienced a decline in fair value below cost to evaluate whether the decline is other-than-temporary. When assessing whether the amortized cost basis of a fixed maturity security will be recovered, we compare the present value of the cash flows likely to be collected, based on an evaluation of all available information relevant to the collectability of the security, to the amortized cost basis of the security. The shortfall of the present value of the cash flows expected to be collected in relation to the amortized cost basis is referred to as the “credit loss.” If we determine that we intend to sell the securities that have experienced a decline in fair value below cost, or that it is more likely than not that we will be required to sell the securities prior to recovering their amortized cost basis less any current-period credit losses, the full amount of the other-than-temporary impairment will be recognized in earnings. If we conclude based on our analysis that there is a credit loss, and we determine that we do not intend to sell, and it is not more likely than not that we will be required to sell the securities, the amount of the credit loss will be recorded in earnings, and the remaining portion of the other-than-temporary impairment loss will be recognized in other comprehensive income (loss), net of applicable tax.

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

We developed our investment policy in conjunction with our external investment manager, and our board of directors reviews the policy at least annually. Our investment portfolio is professionally managed by a registered independent investment advisor specializing in the management of insurance company assets. We use quoted values and other data provided by a nationally recognized independent pricing service in our process for determining the fair values of our investments. Its evaluations represent an exit price and a good faith estimate as to what a buyer in the marketplace would pay for a security in a current sale. This pricing service provides us with one quote per instrument. For fixed maturity securities that have quoted prices in active markets, market quotations are provided. For fixed maturity securities that do not trade on a daily basis, the independent pricing service prepares estimates of fair value using a wide array of observable inputs.

In accordance with the guidance set forth by Accounting Standards Codification (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. Details on level categorizations, related inputs and pricing can be seen in footnote 5 to our Consolidated Financial Statements under Item 1 of this Report on Form 10-Q.

Income Taxes

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

We exercise significant judgment in evaluating the amount and timing of recognition of the resulting tax liabilities and assets. These judgments require us to make projections of future taxable income. The judgments and estimates we make in determining our deferred tax assets, which are inherently subjective, are reviewed on a continual basis as regulatory and business factors change. We evaluate the recoverability of deferred tax assets by taking into account the future taxable income of the legal entity that generated the deferred tax asset. Any changes in estimated future taxable income may require us to change our estimated valuation allowance against our deferred tax assets. In determining whether a valuation allowance is required, we consider all available evidence, both positive and negative, including our cumulative losses in recent years, projected taxable income and available tax strategies.

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

The significant level of second quarter 2010 catastrophic losses resulted in a pre-tax loss from operations for that year and our 2011 results to date have been similarly impacted by second quarter catastrophe losses. Although our current financial forecasts indicate that taxable income will be generated in the future, those forecasts were not considered sufficient positive evidence to overcome the observable negative evidence associated with our three year cumulative loss position. Therefore, we carry a full valuation allowance against our net deferred tax assets. In future periods, we may be able to reduce some or all of the valuation allowance upon our determination that we will be able to realize such deferred tax assets. In that event, we would be able to reduce our future tax liability and recognize an income tax benefit within the statement of operations to the extent of those assets.

As of June 30, 2011 and December 31, 2010, we had no material unrecognized tax benefits or accrued interest and penalties. Federal tax years 2007 through 2010 were open for examination as of June 30, 2011.

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Deferred Policy Acquisition Costs

In accordance with ASC Topic 944 Financial Services — Insurance, certain direct policy acquisition costs consisting of commissions, premium taxes and certain other direct underwriting expenses that vary with, and are primarily related to, the production of business are deferred and amortized over the effective period of the related insurance policies as the underlying policy premiums are earned. The method followed in computing deferred acquisition costs (DAC) limits the amount of deferred costs to their estimated realizable value, which gives effect to the premium to be earned, related investment income, losses and loss adjustment expenses, and certain other costs expected to be incurred as the premium is earned. If the sum of the expected loss and loss adjustment expenses, the expected dividends to policyholders, unamortized acquisition costs, and maintenance costs exceeds the related unearned premiums and anticipated investment income, then the excess must be written off. Future changes in estimates, the most significant of which is expected losses and loss adjustment expenses, may require adjustments to deferred policy acquisition costs. If the estimation of net realizable value indicates that the deferred acquisition costs are not recoverable, they would be written off, and further analysis would be performed to determine if an additional liability would need to be accrued.

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

With the increase in the loss ratio in our commercial business segment, the excess of unearned premiums and anticipated investment income over the expected expenses in our DAC recoverability projection has narrowed. If the actual loss ratio in our commercial business segment were to continue to increase in future periods significantly enough to cause the expected loss ratio to increase by more than roughly two percentage points, we would consider a portion of our DAC to be unrecoverable. Furthermore, if we did not consider investment income in the expected recoverability calculation, approximately $228 of the $2,707 of deferred acquisition costs in our commercial business segment at June 30, 2011 would be unrecoverable.

Recent Accounting Standards

In June 2011, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update (ASU) 2011-05, Presentation of Comprehensive Income. This ASU improves the comparability, consistency, and transparency of financial reporting and increases the prominence of items reported in other comprehensive income. The updated guidance requires that all nonowner changes in stockholders’ equity be presented either in a single continuous statement of comprehensive income or in two separate but consecutive statements. In the two-statement approach, the first statement should present total net income and its components followed consecutively by a second statement that should present total other comprehensive income, the components of other comprehensive income, and the total of comprehensive income. The amendments in the ASU are effective for fiscal years, and interim periods within those years, beginning after December 15, 2011 and should be applied retrospectively. Early adoption is permitted, because compliance with the amendments is already permitted. The updated guidance will result in a change in the presentation of the Company’s financial statements but will not have any impact on the Company’s results of operations, financial position or liquidity.

In May 2011, the FASB issued ASU 2011-04, Amendments to Achieve Common Fair Value Measurements and Disclosure Requirements in U.S. GAAP and IFRSs. The amendments in this ASU result in common fair value measurement and disclosure requirements in GAAP and IFRSs. Consequently, the amendments change the wording used to describe many of the requirements in GAAP for measuring fair value and for disclosing information about fair value measurements. For many of the requirements, the FASB does not intend for the amendments in this ASU to result in a change in the application of the requirements of Topic 820. The amendments in the ASU are effective for fiscal years, and interim periods within those years, beginning after December 15, 2011 and should be applied prospectively. Early adoption is not permitted. The Company is currently evaluating the impact that the adoption of this ASU will have on its financial statements and related disclosures.

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

All other standards and updates of those standards issued during the six months ended June 30, 2011 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.

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Item 3. 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 effective duration of the fixed maturity securities in our investment portfolio at June 30, 2011, was 3.1 years. Our fixed maturity securities investments include U.S. government bonds, securities issued by government agencies, obligations of state and local governments and governmental authorities, corporate bonds and mortgage-backed securities, most of which are exposed to changes in prevailing interest rates and which may experience moderate fluctuations in fair value resulting from changes in interest rates. We carry these investments as available for sale. This allows us to manage our exposure to risks associated with interest rate fluctuations through active review of our investment portfolio by our management and board of directors and consultation with our external investment manager.

Approximately 7% of our investment portfolio at June 30, 2011 is in a high-yield bond mutual fund that invests primarily in corporate fixed maturity securities. This is a publicly traded mutual fund in which we have an ownership stake in the overall assets of the fund (that is stated as a number of shares), and we are not a creditor in the underlying debt securities. Because this is an investment in shares of a mutual fund, we have classified this investment as an equity security on our consolidated balance sheets. This fund is also subject to interest rate risk and has an option-adjusted duration of 5.06 years at June 30, 2011.

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

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

The table below shows the interest rate sensitivity of our fixed maturity investments measured in terms of fair value (which is equal to the carrying value for all of our investment securities that are subject to interest rate changes) at June 30, 2011:

	Change in
Hypothetical Change in Interest Rates	Fair Value			Fair Value
200 basis point increase	$	(12,230	)		161,248
100 basis point increase		(6,203	)		167,275
No change		—			173,478
100 basis point decrease		6,201			179,679
200 basis point decrease		12,296			185,774

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.

44

The insolvency or inability of any reinsurer to meet its obligations to us could have a material adverse effect on our results of operations or financial condition. We monitor the solvency of reinsurers through regular review of their financial statements and, if available, their A.M. Best ratings. All of our significant reinsurance partners that A.M. Best follows have at least an “A-” A.M. Best rating. According to A.M. Best, companies with a rating of “A-” or better “have an excellent ability to meet their ongoing obligations to policyholders.” In certain instances, we may partner with a reinsurer who is not rated by A.M. Best. However, in such instances the reinsurer must be well capitalized and have a strong credit rating from Standard and Poor’s or Moody’s rating agencies. We will generally only make exceptions for property related reinsurance in which there is typically little or no delay in the reporting of losses by insureds and the settlement of the claims. We have experienced no significant difficulties collecting amounts due from reinsurers. For more information regarding the credit ratings of our reinsurers, see Item 1 “Business — Reinsurance” included in the Company’s 2010 Annual Report on Form 10-K.

Equity Risk

Equity price risk is the risk that we will incur economic losses due to adverse changes in equity prices. In the fourth quarter of 2010, we sold all of our equity securities (which represented approximately 6% of our investment portfolio) that had been invested in a passively-managed equity index fund, and invested the proceeds in a high-yield bond mutual fund. Even though this bond fund is classified as an equity security, it does not have the same exposure to equity price risk because the underlying assets are invested mostly in corporate bonds.

Item 4. Controls and Procedures

Under the supervision and with the participation of our management, including the President and Chief Executive Officer and the Chief Financial Officer, we have evaluated the effectiveness of our disclosure controls and procedures as required by Exchange Act Rule 13a-15(b) as of the end of the period covered by this report. Based on that evaluation, the President and Chief Executive Officer and the Chief Financial Officer have concluded that these disclosure controls and procedures are effective. There were no changes in our internal control over financial reporting during the quarter ended June 30, 2011 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

45

Part II — Other Information

Item 1. Legal Proceedings

From time to time, we are subject to legal proceedings and claims that arise in the ordinary course of our business. While the outcome of these proceedings cannot be predicted with certainty, we do not currently expect them to have a material adverse effect on our financial statements. There have been no material developments during the quarter ended June 30, 2011 regarding our currently pending legal proceedings.

Item 1A. Risk Factors

There are no material changes from the risk factors previously disclosed under the heading “Risk Factors” in the Company’s Form 10-K as filed on March 28, 2011, SEC File No. 001-34496.

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds

None

Item 4. (Removed and Reserved)

Item 5. Other Information

None

Item 6. Exhibits

Exhibits marked with an asterisk are filed herewith.

Exhibit No.		Description
	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).
	10.1	Form of Penn Millers Stock Incentive Plan Stock Option Agreement for Nonqualified Stock Option for Non-Management Directors.*
	31.1	Certification of Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.*
	31.2	Certification of Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.*
	32.1	Certification of Chief Executive Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.*
	32.2	Certification of Chief Financial Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.*
	101	The following financial information from the Quarterly Report on Form 10-Q for the fiscal quarter ended June 30, 2011, formatted in XBRL (Extensible Business Reporting Language) and furnished electronically herewith: (i) the Consolidated Balance Sheets; (ii) the Consolidated Statements of Operations; (iii) the Consolidated Statements of Comprehensive Income; (iv) the Consolidated Statements of Cash Flows; and (v) the Notes to the Consolidated Financial Statements, tagged as blocks of text.

46

SIGNATURES

Pursuant to the requirements 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
Date: August 12, 2011	By:	/s/ Douglas A. Gaudet
		Douglas A. Gaudet
		President and Chief Executive Officer
Date: August 12, 2011	By:	/s/ Michael O. Banks
		Michael O. Banks
		Executive Vice President and Chief Financial Officer

47

EX-10.1

Exhibit 10.1

PENN MILLERS STOCK INCENTIVE PLAN

STOCK OPTION AGREEMENT FOR

NONQUALIFIED STOCK OPTION

FOR NON-MANAGEMENT DIRECTORS

BETWEEN

PENN MILLERS HOLDING CORPORATION

AND

(the Optionholder)

Date of Award:

Number of Shares:

Exercise Price:

Option Expiration Date:

NONQUALIFIED STOCK OPTION AGREEMENT

Number of shares subject to option:  _____  (the “Option”).

This Agreement dated  _____  , 2011, between Penn Millers Holding Corporation (the “Corporation”) and  _____  (the “Optionholder”).

WITNESSETH:

1. Award of Option

Pursuant to the provisions of the Penn Millers Stock Incentive Plan (the “Plan”) the Corporation hereby awards to the Optionholder, subject to the terms and conditions of the Plan and subject further to the terms and conditions herein set forth, the right and option to purchase from the Corporation, all or any part of an aggregate of  _____  shares of common stock (par value $0.01 per share) of the Corporation (the “Common Stock”) at the exercise price of $ _____  per share; such option to be exercised as hereinafter provided.

2. Terms and Conditions

It is understood and agreed that the Option evidenced hereby is subject to the following terms and conditions:

(a)	Expiration Date. Subject to the provisions of Paragraph 2(d), the Option awarded hereby shall expire on  _____  ..
(b)	Exercise of Option. Except as may be provided below, no part of this Option may be exercised until the Optionholder has remained in the continuous service as a non-employee director of the Corporation or of a Subsidiary for the following periods after date hereof:

Vesting Date	% of Shares Vesting	Number of Shares Vesting
	33.3%
	33.3%
	33.3%

This Option may be exercised in whole at any time, or from time to time in part, to the extent vested, prior to the expiration date specified in Paragraph 2(a) hereof. Any exercise shall be accompanied by a written notice to the Corporation specifying the number of shares as to which the Option is being exercised. Notwithstanding the foregoing:

(1) upon the occurrence of a Change in Control, all unvested Options then held by the Optionholder shall vest and become immediately excisable; and

(2) if the Optionholder’s service with the Corporation or a Subsidiary terminates on or after the date in which the Optionholder (A) reaches age 55 and (B) has completed three or more full terms as a director of the Corporation or a Subsidiary (including a predecessor of the Corporation or a Subsidiary), unvested Options then held by the Optionholder shall vest and become immediately exercisable.

2

(c) Payment of Exercise Price upon Exercise. At the time of any exercise, the exercise price of the shares as to which this Option may be exercised shall be paid in cash or, subject to the conditions and limitations described in the Plan, by one of the methods of payment set forth in the Plan for the exercise of a Nonqualified Stock Option.

(d) Exercise upon Death, Being Disabled or other Termination of Service.

(1) In the event of the termination of the Optionholder’s service by reason of death or Disability, this Option may be exercised, to the extent that the Optionholder was entitled to do so at the date of termination of service due to such cause, in whole at any time, or from time to time in part, within 12 months after the Optionholder’s death or Disability, but in no event later than the expiration date specified in Paragraph 2(a) hereof.

(2) In the event the Corporation or a Subsidiary terminates the service of the Optionholder (other than if the termination is a Termination or Dismissal for Cause), this Option may be exercised, to the extent that the Optionholder was entitled to do so at the date of termination of service due to such cause, in whole at any time, or from time to time in part, within 12 months after the date of such termination, but in no event later than the expiration date specified in Paragraph 2(a) hereof.

(3) In the event the Optionholder’s service is voluntarily terminated by the Optionholder, this Option may be exercised, to the extent that the Optionholder was entitled to do so at the date of termination of service, in whole at any time, or from time to time in part, within 12 months after the date of such termination, but in no event later than the expiration date specified in Paragraph 2(a) hereof.

(4) Notwithstanding anything herein to the contrary, in the event the Optionholder’s termination of service is a Termination or Dismissal for Cause, all rights to exercise this Option shall lapse upon the date of such termination of service.

(e) Nontransferability. This Option shall not be transferable other than by will or by the laws of descent and distribution. During the lifetime of the Optionholder, this Option shall be exercisable only by the Optionholder.

3

(f)	Adjustments. In the event that the shares of Common Stock, as presently constituted, shall be changed into or exchanged for a different number or kind of shares of stock or other securities of the Corporation, or if the number of such shares of Common Stock shall be changed through the payment of a stock dividend, stock split, or reverse stock split, then the shares of Common Stock then subject to this Option and the exercise price thereof shall be increased, decreased, or otherwise changed to such extent and in such manner as may be necessary or appropriate to reflect any of the foregoing events. If there shall be any other change in the number or kind of the outstanding shares of the Common Stock, or of any stock or other securities into which such Common Stock shall have been changed, or for which it shall have been exchanged, and if a majority of the disinterested members of the Board shall, in its sole discretion, determine that such change equitably requires an adjustment to the terms of this Option, then such adjustment shall be made in accordance with such determination. Any adjustment so made shall be final and binding upon the Optionholder.
(g)	No Rights as Shareholder. The Optionholder shall have no rights as a shareholder with respect to any shares of Common Stock subject to this Option prior to the date of issuance of a certificate or certificates for such shares.
(h)	No Right to Continued Service. This Option shall not confer upon the Optionholder any right to continue in the service, nor shall it interfere in any way with the right of the Corporation or any Subsidiary to terminate the Optionholder’s service at any time and for any reason.
(i)	Compliance with Law and Regulations. This Option and the obligation of the Corporation to sell and deliver shares hereunder shall be subject to all applicable federal and state laws, rules, and regulations and to such approvals by any government or regulatory agency as may be required. The Corporation shall not be required to issue or deliver any certificates for shares of Common Stock prior to (1) the listing of such shares on any stock exchange on which the Common Stock may then be listed and (2) the completion of any registration or qualification of such shares under any federal or state law, or any rule or regulation of any government body which the Corporation shall, in its sole discretion, determine to be necessary or advisable.

3. Investment Representation

The Corporation may require the Optionholder to furnish to the Corporation, prior to the issuance of any shares upon the exercise of all or any part of this Option, an agreement (in such form as the Corporation may specify) in which the Optionholder represents that the shares acquired upon exercise are being acquired for investment and not with a view to the sale or distribution thereof.

4. Optionholder Bound by Plan

The Optionholder acknowledges receipt of a copy of the Plan and agrees that this award shall be subject to all of the terms and conditions set forth in the Plan, including future amendments thereto, if any, pursuant to the terms thereof, which Plan is incorporated herein by reference as a part of this Agreement. Capitalized terms used in this Agreement without definition shall have the meanings assigned to them in the Plan.

4

5. Notices

Any notice hereunder to the Corporation shall be addressed to it at its office, 72 North Franklin Street, P.O. Box P, Wilkes Barre, PA 18773 0016; Attention: Chief Financial Officer (or to such different address as the Corporation may designate in writing) and any notice hereunder to Optionholder shall be addressed to him or her at the most recent address as shown in the stock records of the Corporation.

IN WITNESS WHEREOF, Penn Millers Holding Corporation has caused this Agreement to be executed by a duly authorized officer and the Optionholder has executed this Agreement, both as of the day and year first above written.

PENN MILLERS
HOLDING CORPORATION		OPTIONHOLDER
By
	Douglas A. Gaudet	(Signature)
	President and Chief Executive Officer
		(Print Address)

5

EX-31.1

Exhibit 31.1

Certification pursuant to Rule 13a — 14(a), as adopted pursuant to
Section 302 of the Sarbanes-Oxley Act of 2002

I, Douglas A. Gaudet, President and Chief Executive Officer, certify that:

1. I have reviewed this Quarterly Report on Form 10-Q of Penn Millers Holding Corporation (the registrant);

2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;

4. The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a—15(e) and 15d—15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a — 15(f) and 15d — 15(f)) for the registrant and have:

(a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;

(b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;

(c) Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and

(d) Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and

5. The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):

(a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and

(b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.

August 12, 2011

/s/ Douglas A. Gaudet Douglas A. Gaudet

President and Chief Executive Officer

EX-31.2

Exhibit 31.2

Certification pursuant to Rule 13a — 14(a), as adopted pursuant to
Section 302 of the Sarbanes-Oxley Act of 2002

I, Michael O. Banks, Executive Vice President and Chief Financial Officer, certify that:

1. I have reviewed this Quarterly Report on Form 10-Q of Penn Millers Holding Corporation (the registrant);

2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;

4. The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a—15(e) and 15d—15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a — 15(f) and 15d — 15(f)) for the registrant and have:

(a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;

(b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;

(c) Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and

(d) Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and

5. The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):

(a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and

(b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.

August 12, 2011

/s/ Michael O. Banks Michael O. Banks

Executive Vice President and

Chief Financial Officer

EX-32.1

Exhibit 32.1

Certification pursuant to 18 U.S.C. Section 1350, as adopted pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002

I, Douglas A. Gaudet, the President and Chief Executive Officer of Penn Millers Holding Corporation, (the Company) hereby certify, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that:

1.	the Quarterly Report on Form 10-Q of the Company for the quarterly period ended June 30, 2011 (the Report), which this certification accompanies, fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and
2.	the information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.

August 12, 2011

/s/ Douglas A. Gaudet Douglas A. Gaudet

President and Chief Executive Officer

EX-32.2

Exhibit 32.2

Certification pursuant to 18 U.S.C. Section 1350, as adopted pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002

I, Michael O. Banks, the Executive Vice President and Chief Financial Officer of Penn Millers Holding Corporation, (the Company) hereby certify, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that:

1.	the Quarterly Report on Form 10-Q of the Company for the quarterly period ended June 30, 2011 (the Report), which this certification accompanies, fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and
2.	the information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.

August 12, 2011

/s/ Michael O. Banks Michael O. Banks

Executive Vice President and

Chief Financial Officer

XML



Consolidated Balance Sheets (Parenthetical) (USD $) In Thousands, except Share data	Jun. 30, 2011	Dec. 31, 2010
Consolidated Balance Sheets
Available-for-sale Securities, Debt Maturities, Amortized Cost Basis	$ 156,970	$ 158,193
Available-for-sale Equity Securities, Amortized Cost Basis	$ 11,274	$ 10,885
Preferred Stock, No par value
Preferred Stock, Shares Authorized	1,000,000	1,000,000
Preferred Stock, Shares Issued	0	0
Preferred Stock, Shares Outstanding	0	0
Common Stock, Par or Stated Value Per Share	$ 0.01	$ 0.01
Common Stock, Shares Authorized	10,000,000	10,000,000
Common Stock, Shares, Issued	5,444,022	5,444,022
Common Stock, Shares, Outstanding	4,524,415	4,462,131
Employee Stock Ownership Plan (ESOP), Number of Suspense Shares	449,999	476,999
Treasury Stock, Shares	469,608	504,892

XML



Consolidated Statements of Operations (USD $) In Thousands, except Per Share data	3 Months Ended		6 Months Ended
	Jun. 30, 2011	Jun. 30, 2010	Jun. 30, 2011	Jun. 30, 2010
Revenues:
Premiums earned	$ 16,808	$ 16,679	$ 33,722	$ 33,735
Investment income, net of investment expense	1,404	1,452	2,845	3,024
Realized investment gains, net:
Total other-than-temporary impairment losses	0	0	0	0
Portion of loss recognized in other comprehensive income	0	0	0	0
Other realized investment gains, net	64	1,294	852	1,666
Total realized investment gains, net	64	1,294	852	1,666
Other income	70	88	156	180
Total revenues	18,346	19,513	37,575	38,605
Losses and expenses:
Losses and loss adjustment expenses	16,990	15,885	27,263	29,257
Amortization of deferred policy acquisition costs	4,965	5,159	9,740	10,036
Underwriting and administrative expenses	1,349	712	3,249	1,831
Interest expense	1	0	16	0
Other expense, net	8	37	54	70
Total losses and expenses	23,313	21,793	40,322	41,194
Loss before income taxes	(4,967)	(2,280)	(2,747)	(2,589)
Income tax benefit	(555)	(1,005)	(241)	(1,072)
Net loss	$ (4,412)	$ (1,275)	$ (2,506)	$ (1,517)
Earnings per share (see note 14):
Basic net loss per common share	$ (0.98)	$ (0.27)	$ (0.56)	$ (0.32)
Diluted net loss per common share	$ (0.98)	$ (0.27)	$ (0.56)	$ (0.32)

XML



Document and Entity Information	6 Months Ended
	Jun. 30, 2011	Aug. 01, 2011
Document and Entity Information
Document Type	10-Q
Amendment Flag	false
Document Period End Date	Jun. 30, 2011
Document Fiscal Period Focus	Q2
Document Fiscal Year Focus	2011
Entity Registrant Name	PENN MILLERS HOLDING CORP
Entity Central Index Key	0001453820
Current Fiscal Year End Date	--12-31
Entity Filer Category	Smaller Reporting Company
Entity Common Stock, Shares Outstanding		5,080,252

XML



Fair Value Measurements

6 Months Ended

Jun. 30, 2011

Fair Value Measurements

Fair Value Measurements

(5) Fair Value Measurements

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

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

Level 1 — Unadjusted quoted market prices for identical assets or liabilities in active markets that the Company has the ability to access.

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

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

Transfers between level categorizations may occur due to changes in the availability of market observable inputs. Transfers in and out of level categorizations are reported as having occurred at the beginning of the quarter in which the transfer occurred. There were no transfers between level categorizations during the six months ended June 30, 2011 and 2010.

The table below presents the balances of assets and liabilities measured at fair value on a recurring basis as of June 30, 2011 and December 31, 2010:

	Level 1		Level 2		Level 3		Total
June 30, 2011:
Fixed maturities, available for sale
U.S. treasuries	$	798		—		—	$	798
Agencies not backed by the full faith and credit of the U.S. government		—		14,964		—		14,964
State and political subdivisions		—		43,572		—		43,572
Commercial mortgage-backed securities		—		287		—		287
Residential mortgage-backed securities		—		23,446		—		23,446
Corporate securities		—		79,029		—		79,029
Total available for sale	$	798		161,298		—	$	162,096
Equity securities
High-yield bond mutual fund	$	11,382		—		—	$	11,382
Total equities	$	11,382		—		—	$	11,382
Total assets	$	12,180		161,298		—	$	173,478

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

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

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

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

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

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

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

All unadjusted fair value estimates for fixed maturity securities are priced by the pricing services as described above and are included in the amounts disclosed in Level 2. There have been no changes to these valuation techniques.

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

The fair value estimates of the Company's investments provided by the independent pricing service at June 30, 2011 and December 31, 2010, were utilized, among other resources, in reaching a conclusion as to the fair value of investments. As of June 30, 2011 and December 31, 2010, all of the Company's fixed maturity investments were priced using this one primary service. Management reviews the reasonableness of the pricing provided by the independent pricing service by employing various analytical procedures. The Company reviews all securities to identify recent downgrades, significant changes in pricing, and pricing anomalies on individual securities relative to other similar securities. This will include looking for relative consistency across securities in various common blocks or sectors, durations, and credit ratings. This review will also include all fixed maturity securities rated lower than "A" by Moody's or Standard & Poor's (S&P). If, after this review, management does not believe the pricing for any security is a reasonable estimate of fair value, then it will seek to resolve the discrepancy through discussions with the pricing service or its asset manager. The classification within the fair value hierarchy as presented in ASC 820 is then confirmed based on the final conclusions from the pricing review. The Company did not have any such discrepancies at June 30, 2011 and December 31, 2010.

The fair value of other financial instruments, principally receivables, accounts payable and accrued expenses, approximates their June 30, 2011 and December 31, 2010 carrying values.

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Federal Income Tax

6 Months Ended

Jun. 30, 2011

Federal Income Tax

Federal Income Tax

(10) Federal Income Tax

Deferred income taxes arise from the recognition of temporary differences between financial statement carrying amounts and the tax bases of the Company's assets and liabilities. A valuation allowance is provided when it is more likely than not that some portion of the deferred tax asset will not be realized. The Company must assess the likelihood that any recorded deferred tax assets will be recovered against future taxable income. The Company considers many factors when assessing the likelihood of future realization of deferred tax assets, including recent cumulative earnings experience by taxing jurisdiction, expectations of future taxable income or loss, the carry-forward periods available for tax reporting purposes, and other relevant factors. To the extent the Company believes that recovery is not more likely than not, a valuation allowance must be established.

Although the Company's current financial forecasts indicate that taxable income will be generated in the future, those forecasts were not considered sufficient positive evidence to overcome the observable negative evidence associated with its three year cumulative loss position. As a result, the Company carried a full valuation allowance on its total deferred tax assets of $4,937 and $4,116 at June 30, 2011 and December 31, 2010, respectively. Of the total valuation allowance, $4,321 and $3,468 was related to federal net deferred tax assets at June 30, 2011 and December 31, 2010, respectively. The remainder for each period was related to state income tax net operating loss carryforwards.

In any interim period, the Company may generate income or loss. To the extent that any income is generated, the related tax expense may be offset by a reduction in the valuation allowance. Conversely, any tax benefits arising from losses may be offset by an additional valuation allowance to reduce the net deferred tax asset to an amount that is more likely than not to be realized. Any reduction of the valuation allowance will be allocated to operations and other comprehensive income based on the intraperiod tax allocation rules. The intraperiod tax allocation rules in FASB ASC 740, related to items charged directly to accumulated other comprehensive income, can result in disproportionate tax effects that remain in accumulated other comprehensive income until certain events occur. The following schedule shows the amounts and corresponding tax effects in accumulated other comprehensive income as of June 30, 2011 and December 31, 2010 and the related change for the period:

	June 30,			December 31,			Change for
	2011			2010			the Period
Net unrealized investment gains
Before tax gain	$	5,234		$	4,567		$	667
Tax expense		(2,072	)		(1,845	)		(227	)
After tax gain	$	3,162		$	2,722		$	440
Defined benefit pension plans - net actuarial loss
Before tax loss	$	(1,174	)	$	(1,216	)	$	42
Tax benefit		534			548			(14	)
After tax loss	$	(640	)	$	(668	)	$	28
Total Accumulated Other Comprehensive Income
Before tax income	$	4,060		$	3,351		$	709
Tax expense		(1,538	)		(1,297	)		(241	)
After tax income	$	2,522		$	2,054		$	468

As of June 30, 2011, the Company had no material unrecognized tax benefits or accrued interest and penalties. The Company's policy is to account for interest as a component of interest expense and penalties as a component of other expense. Federal tax years 2007 through 2010 were open for examination as of June 30, 2011.

Income tax payments, net of refunds, were $823 in the first two quarters of 2010. No tax payments were made in 2011, however, a refund was received in the amount of $480.

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Basis of Presentation

6 Months Ended

Jun. 30, 2011

Basis of Presentation

Basis of Presentation

(1) Basis of Presentation

The accompanying unaudited consolidated financial statements have been prepared in accordance with U.S. generally accepted accounting principles (GAAP) for interim financial information and pursuant to the instructions to Form 10-Q and Article 10 of Regulation S-X of the Securities Exchange Act of 1934, as amended. Accordingly, they do not include all of the information and notes required by GAAP for complete financial statements. Such information reflects all adjustments which are, in the opinion of management, necessary for a fair presentation of the financial position, results of operations, and cash flows for the interim periods. The results of operations for interim periods are not necessarily indicative of results to be expected for the full year. All material intercompany balances and accounts have been eliminated in consolidation. These financial statements should be read in conjunction with the financial statements and notes for the year ended December 31, 2010 included in the Company's 2010 Annual Report on Form 10-K.

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Comprehensive Income

6 Months Ended

Jun. 30, 2011

Comprehensive Income

Comprehensive Income

(7) Comprehensive Income

Comprehensive loss for the three months and six months ended June 30, 2011 and 2010 consisted of the following (all amounts net of taxes):

	For the three months ended						For the six months ended
	June 30,						June 30,
	2011			2010			2011			2010
Net loss	$	(4,412	)	$	(1,275	)	$	(2,506	)	$	(1,517	)
Other comprehensive income:
Unrealized gains on securities:
Unrealized investment holding gains arising during period		1,458			337			1,292			1,046
Less:
Reclassification adjustment for realized gains included in net loss		(64	)		(854	)		(852	)		(1,100	)
Net unrealized investment gains (losses)		1,394			(517	)		440			(54	)
Defined benefit plans		7			16			28			37
Recognition of prior service costs related to curtailment and settlement (see note 9)		—			306			—			306
Other comprehensive income (loss)		1,401			(195	)		468			289
Comprehensive loss	$	(3,011	)	$	(1,470	)	$	(2,038	)	$	(1,228	)

Accumulated other comprehensive income at June 30, 2011 and December 31, 2010 consisted of the following amounts (all amounts net of taxes):

	June 30,			December 31,
	2011			2010
Unrealized investment gains	$	3,162		$	2,722
Defined benefit pension plans — net actuarial loss		(640	)		(668	)
Accumulated other comprehensive income	$	2,522		$	2,054

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

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Segment Information

6 Months Ended

Jun. 30, 2011

Segment Information

Segment Information

(12) 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.

Segment information for the three months and six months ended June 30, 2011 and 2010 is as follows:

	For the three months ended						For the six months ended
	June 30,						June 30,
	2011			2010			2011			2010
Revenues:
Premiums earned:
Agribusiness	$	11,999		$	11,125		$	23,592		$	22,167
Commercial business		4,719			5,591			9,909			11,472
Other		90			(37	)		221			96
Total premiums earned		16,808			16,679			33,722			33,735
Investment income, net of investment expense		1,404			1,452			2,845			3,024
Realized investment gains, net		64			1,294			852			1,666
Other income		70			88			156			180
Total revenues	$	18,346		$	19,513		$	37,575		$	38,605
Components of net loss:
Underwriting loss:
Agribusiness	$	(5,767	)	$	(4,110	)	$	(3,669	)	$	(4,592	)
Commercial business		(653	)		(588	)		(2,603	)		(2,536	)
Other		98			(218	)		39			50
Total underwriting loss		(6,322	)		(4,916	)		(6,233	)		(7,078	)
Investment income, net of investment expense		1,404			1,452			2,845			3,024
Realized investment gains, net		64			1,294			852			1,666
Other income		70			88			156			180
Corporate expense		(174	)		(161	)		(297	)		(311	)
Interest expense		(1	)		—			(16	)		—
Other expense, net		(8	)		(37	)		(54	)		(70	)
Loss before income taxes		(4,967	)		(2,280	)		(2,747	)		(2,589	)
Income tax benefit		(555	)		(1,005	)		(241	)		(1,072	)
Net loss	$	(4,412	)	$	(1,275	)	$	(2,506	)	$	(1,517	)

The following table sets forth the net premiums earned by major lines of business for the Company's core insurance products in the three months and six months ended June 30, 2011 and 2010:

	For the three months ended					For the six months ended
	June 30,					June 30,
	2011		2010			2011		2010
Net premiums earned:
Agribusiness
Property	$	4,353	$	4,014		$	8,579	$	7,897
Commercial auto		3,014		2,853			5,934		5,667
Liability		2,330		2,356			4,587		4,647
Workers' compensation		2,117		1,722			4,128		3,602
Other		185		180			364		354
Agribusiness subtotal		11,999		11,125			23,592		22,167
Commercial lines
Property & liability		2,917		3,416			5,994		6,938
Workers' compensation		808		1,066			1,875		2,309
Commercial auto		944		1,053			1,937		2,114
Other		50		56			103		111
Commercial lines subtotal		4,719		5,591			9,909		11,472
Other		90		(37	)		221		96
Total net premiums earned	$	16,808	$	16,679		$	33,722	$	33,735

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Employee Benefit Plans

6 Months Ended

Jun. 30, 2011

Employee Benefit Plans

Employee Benefit Plans

(8) Employee Benefit Plans

Retirement Plans

The Company has a noncontributory defined benefit pension plan covering substantially all employees. Retirement benefits are a function of both the years of service and level of compensation. In October 2009, the plan was amended and all participants' accrued benefits under the plan were frozen. It is the Company's policy to fund the plan in amounts not greater than the amount deductible for federal income tax purposes and not less than the minimum required contribution under the Pension Protection Act of 2006. The Company also sponsored a Supplemental Executive Retirement Plan (SERP). The SERP, which was unfunded, provided 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.

In May 2010, upon approval by the Board of Directors, the Company terminated the SERP for four of the five participants. The one remaining participant is a retired employee in pay status. The accumulated benefit obligation for the one remaining participant in pay status at June 30, 2011 is $618.

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

	For the three months ended						For the six months ended
	June 30,						June 30,
	2011			2010			2011			2010
Components of net periodic pension cost:
Service cost	$	17		$	28		$	34		$	76
Interest cost		123			129			246			252
Expected return on plan assets		(126	)		(97	)		(253	)		(195	)
Amortization of prior service costs		—			4			—			14
Amortization of net loss		21			21			42			42
Net periodic pension cost		35			85			69			189
Curtailment loss		—			68			—			68
Settlement gain		—			(747	)		—			(747	)
Net periodic pension cost and additional amounts recognized	$	35		$	(594	)	$	69		$	(490	)

The Company's minimum required contribution to the pension plan in 2011 is expected to be $37.

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Investments

6 Months Ended

Jun. 30, 2011

Investments

Investments

(6) Investments

The amortized cost and fair value of investments in fixed maturity and equity securities, which are all available for sale, at June 30, 2011 and December 31, 2010, are as follows:

			Gross		Gross
	Amortized		unrealized		unrealized		Estimated
	cost		gains		losses		fair value
June 30, 2011:
U.S. Treasuries	$	770		39		11	$	798
Agencies not backed by the full faith and credit of the U.S. government		14,621		343		—		14,964
State and political subdivisions		41,731		1,854		13		43,572
Commercial mortgage-backed securities		284		3		—		287
Residential mortgage-backed securities		22,775		717		46		23,446
Corporate securities		76,789		2,374		134		79,029
Total fixed maturities	$	156,970		5,330		204	$	162,096
Total equity securities	$	11,274		108		—	$	11,382
December 31, 2010:
U.S. Treasuries	$	721		32		17	$	736
Agencies not backed by the full faith and credit of the U.S. government		14,111		347		—		14,458
State and political subdivisions		43,224		1,564		229		44,559
Commercial mortgage-backed securities		1,589		73		—		1,662
Residential mortgage-backed securities		22,223		758		66		22,915
Corporate securities		76,325		2,325		209		78,441
Total fixed maturities	$	158,193		5,099		521	$	162,771
Total equity securities	$	10,885		—		11	$	10,874

The amortized cost and estimated fair value of fixed maturity securities at June 30, 2011, by contractual maturity, are shown below:

	Amortized		Estimated
	cost		fair value
Due in one year or less	$	14,239	$	14,414
Due after one year through five years		91,127		94,462
Due after five years through ten years		19,404		20,082
Due after ten years		9,141		9,405
		133,911		138,363
Commercial mortgage-backed securities		284		287
Residential mortgage-backed securities		22,775		23,446
Total fixed maturities	$	156,970	$	162,096

The expected maturities may differ from contractual maturities in the foregoing table because borrowers may have the right to call or prepay obligations with or without call or prepayment penalties.

At June 30, 2011 and December 31, 2010, investments with a fair value of $4,408 and $4,348, respectively, were on deposit with regulatory authorities, as required by law.

Major categories of net investment income are as follows:

	For the three months ended						For the six months ended
	June 30,						June 30,
	2011			2010			2011			2010
Interest on fixed maturities	$	1,367		$	1,574		$	2,756		$	3,233
Dividends on equity securities		194			51			389			84
Interest on cash and cash equivalents		2			1			3			4
Total investment income		1,563			1,626			3,148			3,321
Investment expense		(159	)		(174	)		(303	)		(297	)
Investment income, net of investment expense	$	1,404		$	1,452		$	2,845		$	3,024

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

	For the three months ended						For the six months ended
	June 30,						June 30,
	2011			2010			2011		2010
Fixed maturity securities:
Available for sale:
Gross gains	$	64		$	1,465		$	852	$	1,847
Gross losses		—			(171	)		—		(181	)
Realized investment gains, net	$	64		$	1,294		$	852	$	1,666
Change in difference between fair value and cost of investments:
Fixed maturity securities	$	1,703		$	581		$	548	$	1,040
Equity securities		(82	)		(1,363	)		119		(1,120	)
Total increase (decrease)	$	1,621		$	(782	)	$	667	$	(80	)

Income tax expense on net realized investment gains was $22 and $440 for the three months ended June 30, 2011 and 2010, respectively, and $290 and $566 for the six months ended June 30, 2011 and 2010, respectively. Deferred income tax expense applicable to net unrealized investment gains included in accumulated other comprehensive income was $2,072 and $1,845 at June 30, 2011 and December 31, 2010, respectively. See note 10 for additional information related to the allocation of tax between operations and accumulated other comprehensive income. 

The fair value and unrealized losses for securities temporarily impaired as of June 30, 2011 and December 31, 2010 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
2011:
U.S. Treasuries	$	290		11		—		—	$	290		11
Agencies not backed by the full faith and credit of the State and political subdivisions		1,126		13		—		—		1,126		13
Residential mortgage-backed securities		3,956		46		—		—		3,956		46
Corporate securities		6,739		113		824		21		7,563		134
Total temporarily impaired securities	$	12,111		183		824		21	$	12,935		204
2010:
U.S. Treasuries	$	284		17		—		—	$	284		17
State and political subdivisions		9,477		182		2,803		47		12,280		229
Residential mortgage-backed securities		3,094		64		361		2		3,455		66
Corporate securities		9,658		200		928		9		10,586		209
Total fixed maturity securities		22,513		463		4,092		58		26,605		521
Equity securities		10,874		11		—		—		10,874		11
Total temporarily impaired securities	$	33,387		474		4,092		58	$	37,479		532

These fixed maturity securities are classified as available for sale because the Company will, from time to time, sell securities that are not impaired, consistent with its investment goals and policies. Fair values of interest rate sensitive instruments may be affected by increases and decreases in prevailing interest rates which generally translate, respectively, into decreases and increases in fair values of fixed maturity investments. The fair values of interest rate sensitive instruments also may be affected by the credit worthiness of the issuer, prepayment options, relative values of other investments, the liquidity of the instrument, and other general market conditions. There are $824 in fixed maturity securities, at fair value, that at June 30, 2011, had been below cost for 12 months or longer. The $21 of unrealized losses on such securities relates to securities which carry an investment grade debt rating and have declined in fair value roughly in line with overall market conditions. The Company has evaluated each fixed maturity security and taken into account the severity and duration of the impairment, the current rating on the bond, and the outlook for the issuer according to independent analysts. The Company has found that the declines in fair value of these assets are most likely attributable to the current interest rate environment.

Per the Company's current policy, a fixed maturity investment is other-than-temporarily impaired if the present value of the cash flows expected to be collected is less than the amortized cost of the security or where the Company intends to sell, or more likely than not will be required to sell, the security before recovery of its value.

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

The Company believes, based on its analysis, that the fixed maturity and equity securities are not other-than-temporarily impaired. However, depending on developments involving both the issuers and overall economic conditions, these investments may be written down in the consolidated statements of operations in the future.

For the six months ended June 30, 2011 and 2010, no impairment charges had been incurred by the Company.

The Company does not engage in subprime residential mortgage lending. The only securitized financial assets that the Company owns are residential and commercial mortgage-backed securities of high credit quality. The Company's exposure to subprime lending is limited to investments in corporate bonds of banks, which may contain some subprime loans on their balance sheets. These bonds are reported at fair value. As of June 30, 2011, fixed maturity securities issued by banks accounted for 12.9% of the bond portfolio's book value.

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Consolidated Statement of Shareholders' Equity (Parenthetical) (USD $) In Thousands, except Share data	6 Months Ended
	Jun. 30, 2011	Jun. 30, 2010
Consolidated Statements of Shareholders' Equity
Related income tax expense - Unrealized investment holding gain arising during period	$ 516	$ 539
Related income tax expense - Reclassification adjustment for realized gains included in net income	290	566
Related income tax expense - Defined benefit pension plans	14	19
Tax expense - Recognition of prior service costs related to curtailment and settlement	$ 0	$ 157
Treasury stock purchased	0	287,131
Treasury stock reissued	35,284	0

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Use of Estimates

6 Months Ended

Jun. 30, 2011

Use of Estimates

Use of Estimates

(2) Use of Estimates

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

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Concentration of Risk

6 Months Ended

Jun. 30, 2011

Concentration of Risk

Concentration of Risk

(3) 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 41 states, in-force premiums for two states, New Jersey and Pennsylvania, accounted for approximately 18% of the Company's in-force premiums written as of June 30, 2011. Consequently, changes in the New Jersey or Pennsylvania legal, regulatory, or economic environment could adversely affect the Company.

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Reinsurance

6 Months Ended

Jun. 30, 2011

Reinsurance

Reinsurance

(11) Reinsurance

Reinsurance is ceded by the Company on a pro rata and excess of loss basis. The Company's retention on any one risk in 2010 was $800 per occurrence. Effective January 1, 2011, the Company increased its retention on the per-risk reinsurance treaty to $1,000.

For 2010 and 2011, the Company purchased catastrophe excess-of-loss reinsurance with a retention of $3,000 per event and a limit of $42,000 of coverage. The Company has a 5% co-participation in any losses incurred above the $3,000 retention.

For umbrella coverages, the Company retains a 25% pro rata share of any losses on the first $1,000 of coverage. Losses in excess of $1,000 up to $10,000 are ceded 100% to reinsurers.

The Company continues to maintain a whole account, accident year aggregate excess of loss (aggregate stop loss) contract. This contract covers the 2008 and 2009 accident years and provides reinsurance coverage for loss and allocated loss adjustment expense (ALAE) from all lines of business, in excess of a 72% loss and ALAE ratio. The reinsurance coverage has a limit of 20% of subject net earned premiums. As of June 30, 2011, the Company has not ceded any losses under the aggregate stop loss contract.

The Company has assumed reinsurance related 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 three months and six months ended June 30, 2011 and 2010 is as follows:

(a) Premiums

	For the three months ended June 30,
	2011						2010
	Written			Earned			Written			Earned
Direct	$	17,875		$	21,271		$	19,118		$	21,389
Assumed		86			55			(40	)		(84	)
Ceded		(4,100	)		(4,518	)		(4,406	)		(4,626	)
Net	$	13,861		$	16,808		$	14,672		$	16,679

	For the six months ended June 30,
	2011						2010
	Written			Earned			Written			Earned
Direct	$	37,932		$	42,428		$	39,967		$	42,915
Assumed		178			148			48			4
Ceded		(8,271	)		(8,854	)		(8,969	)		(9,184	)
Net	$	29,839		$	33,722		$	31,046		$	33,735

(b) Losses and Loss Adjustment Expenses

	For the three months ended						For the six months ended
	June 30,						June 30,
	2011			2010			2011			2010
Direct	$	20,550		$	23,786		$	30,219		$	39,739
Assumed		(85	)		89			4			(127	)
Ceded		(3,475	)		(7,990	)		(2,960	)		(10,355	)
Net	$	16,990		$	15,885		$	27,263		$	29,257

(c) Unearned Premiums

	June 30,			December 31,
	2011			2010
Direct	$	38,217		$	42,800
Assumed		37			7
Prepaid reinsurance (ceded)		(3,737	)		(4,320	)
Net	$	34,517		$	38,487

(d) Loss and Loss Adjustment Expense Reserves

	June 30,		December 31,
	2011		2010
Direct	$	99,287	$	101,876
Assumed		7,343		8,097
Gross	$	106,630	$	109,973

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Recent Accounting Standards

6 Months Ended

Jun. 30, 2011

Recent Accounting Standards

Recent Accounting Standards

(4) Recent Accounting Standards

In June 2011, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update (ASU) 2011-05, Presentation of Comprehensive Income. This ASU improves the comparability, consistency, and transparency of financial reporting and increases the prominence of items reported in other comprehensive income. The updated guidance requires that all nonowner changes in stockholders' equity be presented either in a single continuous statement of comprehensive income or in two separate but consecutive statements. In the two-statement approach, the first statement should present total net income and its components followed consecutively by a second statement that should present total other comprehensive income, the components of other comprehensive income, and the total of comprehensive income. The amendments in the ASU are effective for fiscal years, and interim periods within those years, beginning after December 15, 2011 and should be applied retrospectively. Early adoption is permitted, because compliance with the amendments is already permitted. The updated guidance will result in a change in the presentation of the Company's financial statements but will not have any impact on the Company's results of operations, financial position or liquidity.

In May 2011, the FASB issued ASU 2011-04, Amendments to Achieve Common Fair Value Measurements and Disclosure Requirements in U.S. GAAP and IFRSs. The amendments in this ASU result in common fair value measurement and disclosure requirements in GAAP and IFRSs. Consequently, the amendments change the wording used to describe many of the requirements in GAAP for measuring fair value and for disclosing information about fair value measurements. For many of the requirements, the FASB does not intend for the amendments in this ASU to result in a change in the application of the requirements of Topic 820. The amendments in the ASU are effective for fiscal years, and interim periods within those years, beginning after December 15, 2011 and should be applied prospectively. Early adoption is not permitted. The Company is currently evaluating the impact that the adoption of this ASU will have on its financial statements and related disclosures.

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

All other standards and updates of those standards issued during the three months ended June 30, 2011 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.

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Earnings Per Share

6 Months Ended

Jun. 30, 2011

Earnings Per Share

Earnings Per Share

(14) Earnings Per Share

Basic earnings per common share is computed by dividing net loss by the weighted-average number of shares of common stock outstanding during the period. Diluted earnings per common share is computed by dividing net income by the weighted-average number of shares of common stock outstanding during the period increased to include the number of additional shares of common stock that would have been outstanding if the potentially dilutive securities had been issued. Potentially dilutive securities include outstanding stock options and unvested restricted stock. The dilutive effect of potentially dilutive securities is reflected in diluted earnings per common share by application of the treasury stock method. Under the treasury stock method, an increase in the fair market value of the Company's common stock can result in a greater dilutive effect from potentially dilutive securities. Dilutive securities are not included in the computation of diluted earnings per share when a company is in a loss position.

The following table sets forth the computation of basic and diluted earnings per common share for the three month and six month periods ended June 30, 2011 and 2010:

	For the three months ended						For the six months ended
	June 30,						June 30,
	2011			2010			2011			2010
Numerator:
Net loss	$	(4,412	)	$	(1,275	)	$	(2,506	)	$	(1,517	)
Denominator:
Weighted average shares outstanding		4,501,574			4,666,806			4,485,318			4,684,312
Effect of dilutive securities		—			—			—			—
Weighted average shares diluted		4,501,574			4,666,806			4,485,318			4,684,312
Basic loss per share	$	(0.98	)	$	(0.27	)	$	(0.56	)	$	(0.32	)
Diluted loss per share	$	(0.98	)	$	(0.27	)	$	(0.56	)	$	(0.32	)

Potentially dilutive securities representing approximately 47,343 and 54,024 shares of common stock for the three months and six months ended June 30, 2011, respectively, and 23,931 and 12,032 shares of common stock for the three months and six months ended June 30, 2010, respectively, were excluded from the computation of diluted loss per common share for these periods because their effect would have been antidilutive.

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Consolidated Statements of Shareholders' Equity (USD $) In Thousands, except Share data	Common Stock [Member]	Additional Paid-in Capital [Member]	Accumulated Other Comprehensive Income (Loss) [Member]	Retained Earnings [Member]	Unearned ESOP [Member]	Treasury Stock [Member]	Total
Beginning Balance (Amount) at Dec. 31, 2009	$ 54	$ 50,520	$ 2,519	$ 54,481	$ (5,310)	$ (2,216)	$ 100,048
Beginning Balance (Shares) at Dec. 31, 2009	5,444,022
Net loss				(1,517)			(1,517)
Other comprehensive income, net of taxes:
Unrealized investment holding gain arising during period, net of related income tax expense			1,046				1,046
Reclassification adjustment for realized gains included in net loss, net of related income tax expense			(1,100)				(1,100)
Net unrealized investment gain (loss)							(54)
Defined benefit pension plans, net of related income tax expense			37				37
Recognition of prior service costs related to curtailment and settlement, net of tax expense			306				306
Comprehensive loss							(1,228)
Stock-based compensation		81					81
ESOP shares released		70			270		340
Treasury stock purchased						(4,155)	(4,155)
Ending Balance (Amount) at Jun. 30, 2010	54	50,671	2,808	52,964	(5,040)	(6,371)	95,086
Ending Balance (Shares) at Jun. 30, 2010	5,444,022
Beginning Balance (Amount) at Dec. 31, 2010	54	51,068	2,054	50,993	(4,770)	(6,371)	93,028
Beginning Balance (Shares) at Dec. 31, 2010	5,444,022
Net loss				(2,506)			(2,506)
Other comprehensive income, net of taxes:
Unrealized investment holding gain arising during period, net of related income tax expense			1,002				1,002
Reclassification adjustment for realized gains included in net loss, net of related income tax expense			(562)				(562)
Net unrealized investment gain (loss)							440
Defined benefit pension plans, net of related income tax expense			28				28
Comprehensive loss							(2,038)
Stock-based compensation		321					321
ESOP shares released		141			270		411
Treasury stock reissued		(361)				361
Ending Balance (Amount) at Jun. 30, 2011	$ 54	$ 51,169	$ 2,522	$ 48,487	$ (4,500)	$ (6,010)	$ 91,722
Ending Balance (Shares) at Jun. 30, 2011	5,444,022

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Consolidated Statements of Cash Flows (USD $) In Thousands	6 Months Ended
	Jun. 30, 2011	Jun. 30, 2010
Cash flows from operating activities:
Net loss	$ (2,506)	$ (1,517)
Adjustments to reconcile net loss to net cash (used in) provided by operating activities:
Change in receivables, unearned premiums, and prepaid reinsurance	4,091	(4,046)
Change in losses and loss adjustment expense reserves	(3,343)	9,530
Change in accounts payable and accrued expenses	(954)	(1,980)
Change in current income taxes	470	(1,877)
Deferred income taxes	(241)	(186)
Change in deferred acquisition costs	914	549
Change in accrual and amortization of investment income	561	589
Amortization and depreciation	320	313
ESOP share allocation	411	340
Amortization of stock-based compensation	321	81
Realized investment gains, net	(852)	(1,666)
Other, net	(146)	(80)
Net cash (used in) provided by operating activities	(954)	50
Cash flows from investing activities:
Available-for-sale investments: Purchases of fixed maturity securities	(23,197)	(39,221)
Available-for-sale investments: Purchases of equity securities	(389)	(11,084)
Available-for-sale investments: Sales of fixed maturity securities	21,407	29,602
Available-for-sale investments: Maturities of fixed maturity securities	1,500	12,900
Proceeds from disposition of corporate owned life insurance policies	0	2,682
Purchases of property and equipment, net	(145)	(63)
Net cash used in investing activities	(824)	(5,184)
Cash flows from financing activities:
Purchase of treasury stock	0	(4,155)
Net cash used in financing activities	0	(4,155)
Net decrease in cash	(1,778)	(9,289)
Cash and cash equivalents at beginning of period	6,510	20,220
Cash and cash equivalents at end of period	$ 4,732	$ 10,931

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Stock-Based Compensation

6 Months Ended

Jun. 30, 2011

Stock-Based Compensation

Stock-Based Compensation

(9) Stock-Based Compensation

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

On May 12, 2010, 141,122 shares of restricted stock were granted to executives of the Company. The restricted stock will be issued from treasury shares upon vesting. The restricted stock had a grant date fair value of $14.83 per share, which was the Company's closing stock price on that date. The restricted stock vests 25% in the first year and 15% in each of the five years thereafter, based on the satisfaction of service conditions. As of June 30, 2011, 35,284 shares of restricted stock had vested. No additional grants have been awarded.

On May 12, 2010, 114,960 stock options were awarded to executives, non-management directors and select employees of the Company. The stock options, which vest over five years at 20% per year, have a contractual term of seven years, and vesting is based on the satisfaction of service conditions. The stock options were awarded at a grant date fair value of $5.22 per option as calculated using a Black-Scholes Merton valuation model. As of June 30, 2011, 23,599 stock options had vested.

On May 11, 2011, 25,000 incentive stock options were awarded to executives and select employees of the Company. The incentive stock options, which vest over five years at 20% per year, have a contractual term of seven years, and vesting is based on the satisfaction of service conditions. An additional 14,000 in non-qualified stock options were awarded to non-management directors of the Company. The non-qualified stock options, which vest over three years at 33% per year, have a contractual term of seven years, and vesting is based on the satisfaction of service conditions. The incentive and non-qualified stock options were awarded at a grant date fair value of $5.21 and $4.86, respectively, per option as calculated using a Black-Scholes Merton valuation model with the following assumptions:

	Stock Options -			Stock Options -
	Incentive			Non-Qualified
Expected volatility -		30.00	%		30.00	%
Expected term (in years) -		5			4.5
Risk-free interest rate -		1.87	%		1.64	%
Expected dividend yield -		0.00	%		0.00	%

The expected volatility assumption was derived from share price data over the expected term of the options of ten companies the Company considers to be its peers based upon asset size, market capitalization, profitability level and other relevant factors. The expected term assumption was derived using the "simplified" approach for plain vanilla options as set forth in SEC Staff Accounting Bulletin (SAB) Topic 14 for companies with insufficient historical data. The risk-free interest rate assumption was based upon the implied yield on the measurement date of a zero-coupon U.S. Treasury bond with a maturity period equal to the options' expected term. The Company does not expect to pay dividends; therefore, the expected dividend yield is assumed to be zero. No post-vesting restrictions exist for these options.

The total compensation cost recognized in the statements of operations and classified as underwriting and administrative expenses for all stock-based compensation awards, excluding the Company's ESOP, was $175 and $321 for the three months and six months ended June 30, 2011, respectively. The related tax benefit recognized was $48 and $90 for the same periods. The total compensation cost recognized in the statements of operations and classified as underwriting and administrative expenses for all stock-based compensation awards, excluding the Company's ESOP, was $81 for the three months and six months ended June 30, 2010. The related tax benefit recognized was $23 for the same periods.

The total compensation cost recognized in the statements of operations and classified as underwriting and administrative expenses for the Company's ESOP was $219 and $411 for the three months and six months ended June 30, 2011, respectively. The related tax benefit recognized was $46 and $92 for the same periods. The total compensation cost recognized in the statements of operations and classified as underwriting and administrative expenses for the Company's ESOP was $192 and $340 for the three months and six months ended June 30, 2010, respectively. The related tax benefit recognized was $46 and $92 for the same periods.

The total unrecognized compensation cost related to all nonvested Plan awards at June 30, 2011 and 2010 was $1,802 and $2,523, respectively, which is expected to be recognized in future periods over a weighted average period of 4.4 years.

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

	Stock Options					Restricted Stock Awards
				Weighted-
	Number of			Average		Number of			Weighted-
	Shares			Exercise Price		Shares			Average Price
Outstanding at December 31, 2010		114,960		$	14.83		141,122		$	14.83
Granted		39,000			17.50		—			—
Exercised		—			—		—			—
Vested		—			—		(35,284	)		14.83
Canceled		(2,976	)		14.83		—			—
Outstanding at June 30, 2011		150,984		$	15.52		105,838		$	14.83
Exercisable at June 30, 2011		23,599		$	14.83

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Shareholders' Equity

6 Months Ended

Jun. 30, 2011

Shareholders' Equity

Shareholders' Equity

(13) Shareholders' Equity

As of June 30, 2011, 271,562 shares remain to be purchased under the share repurchase plans approved by the Board of Directors. The authorization has no expiration date.

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Consolidated Balance Sheets (USD $) In Thousands	Jun. 30, 2011	Dec. 31, 2010
Assets
Fixed maturities: Available for sale, at fair value (amortized cost $156,970 in 2011 and $158,193 in 2010)	$ 162,096	$ 162,771
Equity Securities: Available for sale, at fair value (cost $11,274 in 2011 and $10,885 in 2010)	11,382	10,874
Cash and cash equivalents	4,732	6,510
Premiums and fees receivable	24,339	28,394
Reinsurance receivables and recoverables	20,906	24,912
Deferred policy acquisition costs	8,821	9,735
Prepaid reinsurance premiums	3,737	4,320
Accrued investment income	1,581	1,621
Property and equipment, net of accumulated depreciation	3,145	3,323
Income taxes receivable	783	1,253
Other	3,001	1,008
Total assets	244,523	254,721
Liabilities:
Losses and loss adjustment expense reserves	106,630	109,973
Unearned premiums	38,254	42,807
Accounts payable and accrued expenses	7,917	8,913
Total liabilities	152,801	161,693
Shareholders' equity:
Preferred stock, no par value, authorized 1,000,000; no shares issued or outstanding	0	0
Common stock, $0.01 par value, authorized 10,000,000; issued 2011, 5,444,022 and 2010, 5,444,022; outstanding 2011, 4,524,415 shares and 2010, 4,462,131 shares	54	54
Additional paid-in capital	51,169	51,068
Accumulated other comprehensive income	2,522	2,054
Retained earnings	48,487	50,993
Unearned ESOP, 449,999 and 476,999 shares	(4,500)	(4,770)
Treasury stock, at cost, 469,608 and 504,892 shares	(6,010)	(6,371)
Total shareholders' equity	91,722	93,028
Total liabilities and shareholders' equity	$ 244,523	$ 254,721