Liquidity and Capital Resources

The Company generally experiences positive cash flow from operations resulting from the fact that premiums are collected on insurance policies in advance of the disbursement of funds in payment of claims. Operating costs of the property/casualty insurance subsidiaries, other than loss and loss expense payments and commissions paid to related agency companies, generally average less than 30% of premiums earned and the remaining amount is available for investment for varying periods of time pending the settlement of claims relating to the insurance coverage provided. The Company's cash flow relating to premiums is significantly affected by reinsurance programs in effect from time-to-time whereby the Company cedes both premium and risk to other insurance and reinsurance companies. These programs vary significantly among products. For the first three months of 2012, the Company experienced positive cash flow from operations totaling $11.7 million which compares to positive cash flow from operations of $6.6 million generated during the first three months of 2011. The $5.1 million increase in cash flow from the 2011 period is primarily due to higher net premiums and collateral deposits partially offset by higher loss payments associated with the settlement of 2011 catastrophe losses.

The Company's investment philosophy has emphasized the purchase of relatively short-term instruments with maximum quality and liquidity. The average life of the Company's fixed income (bond and short-term investment) portfolio, using contractual maturities applied to par value, was 3.4 years at March 31, 2012, which is substantially shorter than the average life of the Company's liabilities.

Financing activity for the first three months of 2012 included regular dividend payments to shareholders of $3.7 million ($.25 per share).

The Company's assets at March 31, 2012 included $71.5 million in investments classified as cash equivalents that were readily convertible to cash without significant market penalty. An additional $145.7 million of fixed maturity investments will mature within the twelve-month period following March 31, 2012. The Company believes that these liquid investments are more than sufficient to provide for projected claim payments and operating cost demands.

Consolidated shareholders' equity is composed largely of GAAP shareholders' equity of the insurance subsidiaries. As such, there are statutory restrictions on the transfer of substantial portions of this equity to the parent company. At March 31, 2012, $47.5 million may be transferred by dividend or loan to the parent company during the remainder of 2012 without approval by, or prior notification to, regulatory authorities. An additional $193.8 million of shareholder's equity of the insurance subsidiaries could, theoretically, be advanced or loaned to the parent company with prior notification to, and approval from, regulatory authorities, although it is unlikely that transfers of this size would be practical. The Company believes that these restrictions pose no material liquidity concerns to the Company. The Company also believes that the financial strength and stability of the subsidiaries would permit ready access by the parent company to short-term and long-term sources of credit. The parent company had cash and marketable securities valued at $9.6 million at March 31, 2012.

The Company's annualized net premium writing to surplus ratio for the first three months of 2012 was approximately 78%. Regulatory guidelines generally allow for writings of at least 100% of surplus. Accordingly, the Company could increase net premium writings significantly with no need to raise additional capital. Further, the insurance subsidiaries' individual capital levels are several times higher than the minimum amounts designated by the National Association of Insurance Commissioners.

Results of Operations

Comparison of First Quarter, 2012 to First Quarter, 2011

Net premiums written during the first quarter of 2012 increased $1.7 million (2.8%) and net premiums earned increased $4.0 million (6.9%) as compared to the same period of 2011. The Company's Property and Casualty Insurance segment reported an increase in earned premiums of 5.3% while the Reinsurance segment reported an increase of 12.9%. In the Property and Casualty Insurance segment, fleet transportation and professional liability were the main sources of the overall increase. The Company's two year old casualty reinsurance program was the main driver of the increase to the Reinsurance segment. The following table provides information regarding premiums written and earned for each segment for the quarter ended March 31 (dollars in thousands):

                                                      Direct and
                                                        Assumed
                                                        Premium        Net Premium     Net Premium
                                                        Written          Written         Earned

2012
Property & Casualty Insurance                        $      75,226     $    49,707     $    47,909
Reinsurance                                                 14,827          14,248          13,642

Totals                                               $      90,053     $    63,955     $    61,551

2011
Property & Casualty Insurance                        $      72,104     $    49,682     $    45,518
Reinsurance                                                 13,027          12,549          12,083

Totals                                               $      85,131     $    62,231     $    57,601

Premium ceded to reinsurers on insurance business produced by the Property and Casualty Insurance segment averaged 33.9% of premium written for the current quarter compared to 31.1% a year earlier with the increase reflective of changes in treaty structures as well as the impact of new products which are ceded at significantly higher proportions than legacy products.

Net investment income, before tax, during the first quarter of 2012 was 8.7% lower than the first quarter of 2011 due primarily to lower available interest rates for bonds. Pre-tax yields averaged 2.2% during the current quarter compared to 2.5% for the prior year period. Overall after-tax yields decreased from 1.8% to 1.6%. The short term nature of the Company's fixed income portfolio causes changes in available yields to be quickly reflected in investment income.

The first quarter 2012 net realized investment gains of $5.4 million resulted primarily from $5.4 million in gains reported by limited partnerships. Comparative first quarter 2011 overall investment losses were $1.5 million. Investment gains result from decisions regarding the sale of individual securities and the change in total value of limited partnerships and, as such, are not expected to be consistent from period to period.

Losses and loss expenses incurred during the first quarter of 2012 were $30.8 million lower than that experienced during the first quarter of 2011 due primarily to the unprecedented level of catastrophe losses during the prior year period. The loss ratios for each segment were as follows:

                                   2012       2011
Property and Casualty Insurance     65.4 %      74.7 %
Reinsurance                         26.0       262.3
Total                               56.7       114.0

Other operating expenses, for the first quarter of 2012, increased $0.5 million, or 2.8%, from the first quarter of 2011. The majority of this increase relates to higher gross commissions expense on increased premium volume. The ratio of consolidated other operating expenses to operating revenue decreased to 29.0% during the first quarter of 2012 compared to 29.8% for the 2011 first quarter.

The effective federal tax on consolidated income for the first quarter of 2012 was $5.5 million. The effective rate differs from the normal statutory rate primarily as a result of tax-exempt investment income.

As a result of continued premium growth coupled with far fewer catastrophe related losses as well as improved performance related to limited partnership investments, net income increased $26.7 million during the first quarter of 2012 as compared to the 2011 period.

Forward-Looking Information

Any forward-looking statements in this report, including without limitation, statements relating to the Company's plans, strategies, objectives, expectations, intentions and adequacy of resources, are made pursuant to the safe harbor provisions of the Private Securities Litigation Reform Act of 1995. Investors are cautioned that such forward-looking statements involve risks and uncertainties including without limitation the following: (i) the Company's plans, strategies, objectives, expectations and intentions are subject to change at any time at the discretion of the Company; (ii) the Company's business is highly competitive and the entrance of new competitors into or the expansion of the operations by existing competitors in the Company's markets and other changes in the market for insurance products could adversely affect the Company's plans and results of operations; (iii) other risks and uncertainties indicated from time to time in the Company's filings with the Securities and Exchange Commission; and (iv) other risks and factors which may be beyond the control or foresight of the Company. Readers are encouraged to review the Company's annual report for its full statement regarding forward-looking information.

Critical Accounting Policies

There have been no changes in the Company's critical accounting policies as disclosed in the Form 10-K filed for the year ended December 31, 2011.

Concentrations of Credit Risk

The insurance subsidiaries cede portions of their gross premiums to numerous reinsurers under quota share and excess of loss treaties as well as facultative placements. These reinsurers assume commensurate portions of the risk of loss covered by the contracts. As losses are reported and reserved, portions of the gross losses attributable to reinsurers are established as receivable assets and losses incurred are reduced. At March 31, 2012, amounts due from reinsurers on paid and unpaid losses, are estimated to total approximately $128 million. Of this total, approximately $37 million (29%) represents the Company's provision for incurred but not reported losses and loss adjustment expenses attributable to reinsurers. Because of the large policy limits reinsured by the Company, the ultimate amount of incurred but not reported losses and loss adjustment expenses attributable to reinsurers could vary significantly from the estimate provided; however, such variance would not result in changes in net claim losses incurred by the Company.

At March 31, 2012, limited partnership investments include approximately $40.6 million consisting of three partnerships which are managed by organizations in which certain of the Company's directors are officers, directors, general partners or owners. Each of these investments contains profit sharing agreements to the affiliated organizations.