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 six months of 2012, the Company experienced positive cash flow from operations totaling $22.4 million which compares to positive cash flow from operations of $26.8 million generated during the first six months of 2011. The $4.4 million decrease in cash flow from the 2011 period is primarily due to higher loss payments associated with the settlement of 2011 catastrophe losses, partially offset by higher net premiums.

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 3.35 years at June 30, 2012, which is substantially shorter than the average life of the Company's liabilities.

Financing activity for the first six months of 2012 included regular dividend payments to shareholders of $7.5 million ($.50 per share).

The Company's assets at June 30, 2012 included $85.1 million in investments classified as cash equivalents that were readily convertible to cash without significant market penalty. An additional $131.8 million of fixed maturity investments will mature within the twelve-month period following June 30, 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 June 30, 2012, $44.0 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 $195.8 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 $12.5 million at June 30, 2012.

The Company's annualized net premium writing to surplus ratio for the first six months of 2012 was approximately 74%. Regulatory guidelines generally allow for writings of between 100% and 300% of surplus, depending on the line of business. 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 Second Quarter, 2012 to Second Quarter, 2011

Direct and assumed premiums written during the second quarter of 2012 decreased $4.2 million (5.0%) and net premiums earned decreased $2.7 million (4.3%) as compared to the same period of 2011. The Company's Property and Casualty Insurance segment reported a decrease in premium written of 3.8% but an increase in earned premiums of 1.7% while the Reinsurance segment reported a decrease in premium written of 10.4% as well as a decrease in premium earned of 23.4%. In the Property and Casualty Insurance segment, a planned reduction in commercial multi-peril business combined with lower personal automobile premium resulting from rate increases implemented during 2012 were offset by increased premium from fleet transportation business resulting from higher activity-sensitive premium on existing accounts and the addition of new business. The Company's property reinsurance program was the main driver of the decrease to the Reinsurance segment, as a strategic reduction in global catastrophe risk was implemented effective January 1, 2012. The following table provides information regarding premiums written and earned for each segment for the quarter ended June 30 (dollars in thousands):

                                                      Direct and
                                                        Assumed
                                                        Premium        Net Premium     Net Premium
                                                        Written          Written         Earned
2012

Property & Casualty Insurance                        $      64,760     $    42,458     $    48,167
Reinsurance                                                 14,094          13,515          11,488

Totals                                               $      78,854     $    55,973     $    59,655

2011

Property & Casualty Insurance                        $      67,309     $    49,247     $    47,352
Reinsurance                                                 15,722          15,244          14,992

Totals                                               $      83,031     $    64,491     $    62,344

Premium ceded to reinsurers on insurance business produced by the Property and Casualty Insurance segment averaged 34.4% of premium written for the current quarter compared to 32.8% in the 2011 second quarter, with the increase reflective of minor changes in treaty structures as well as the impact of the proportion of new products which are ceded at generally higher proportions than legacy products.

Net investment income, before tax, during the second quarter of 2012 was 8.1% lower than the second quarter of 2011 due primarily to lower available interest rates for bonds. Pre-tax bond yields averaged 2.3% during the current quarter compared to 2.7% for the prior year period. Overall after-tax yields decreased from 1.8% to 1.5% while average invested funds, impacted by positive cash flow, were over 7% higher. The short term nature of the Company's fixed income portfolio causes changes in available yields to be quickly reflected in investment income.

The second quarter 2012 net realized investment losses of $5.5 million resulted primarily from $4.9 million in losses reported by limited partnerships and $0.4 million in mark-to-market adjustments. Comparative second quarter 2011 overall investment losses were $2.0 million. Investment losses 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 second quarter of 2012 were $21.4 million lower than that experienced during the second quarter of 2011 due primarily to the impact of 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 64.5% 66.2% Reinsurance 23.1 159.0 Total 56.5 88.5

Other operating expenses, for the second quarter of 2012, increased $1.1 million, or 6.3%, from the second quarter of 2011. The majority of this increase relates to increased salary and salary related expenses which were depressed in 2011as the result of catastrophic losses. The ratio of consolidated other operating expenses to operating revenue was 30.2% during the second quarter of 2012 compared to 27.2% for the 2011 second quarter.

The effective federal tax rate on consolidated income for the second quarter of 2012 was 23%. The effective rate differs from the normal statutory rate primarily as a result of tax-exempt investment income.

As a result of the factors mentioned above, net income increased $9.6 million during the second quarter of 2012 as compared to the 2011 period.

Comparison of Six Months Ended June 30, 2012 to Six Months Ended June 30, 2011

Direct and assumed premiums written during the first six months of 2012 increased $.7 million (0.4%) and net premiums earned increased $1.3 million (1.1%) as compared to the same period of 2011. The Company's Property and Casualty Insurance segment reported an increase in written and earned premiums of .4% and 3.5%, respectively while the Reinsurance segment reported a decrease in earned premium of 7.2%. The reasons for the segment fluctuations are similar to those detailed in the quarterly comparison, preceding. The following table provides information regarding premiums written and earned for each segment for the six months ended June 30 (dollars in thousands):

                                                      Direct and
                                                        Assumed
                                                        Premium        Net Premium     Net Premium
                                                        Written          Written         Earned
2012

Property & Casualty Insurance                        $     139,986     $    92,165     $    96,076
Reinsurance                                                 28,920          27,763          25,130

Totals                                               $     168,906     $   119,928     $   121,206

2011

Property & Casualty Insurance                        $     139,413     $    98,929     $    92,870
Reinsurance                                                 28,749          27,793          27,075

Totals                                               $     168,162     $   126,722     $   119,945

Premium ceded to reinsurers on insurance business produced by the Property and Casualty Insurance segment averaged 34.2% of premium written for the current year period compared to 29.0% a year earlier with the increase reflective of changes in treaty structures as well as the impact of new products which are ceded at generally higher proportions than legacy products.

Net investment income, before tax, during the first six months of 2012 was 8.4% lower than the first six months of 2011 for the same reasons noted in the quarterly comparison. Overall pre-tax yields averaged 2.0% during the current period compared to 2.4% for the prior year period. Overall after-tax yields decreased from 1.8% to 1.6%. Average funds invested were nearly 7% higher in the 2012 period as the result of positive cash flow.

Net realized investment losses for the first six months of 2012 were less than $.1 million before tax, resulting primarily from $.2 million in losses reported by direct trading securities and $.3 million mark-to-market adjustment, partially offset by a $.5 million gain reported by limited partnerships. Realized investment losses were $3.4 million for the same period of 2011.

Losses and loss expenses incurred during the first six months of 2012 were $52.2 million lower than that experienced during the first six months of 2011 which included an unprecedented level of catastrophe losses. The lower loss ratio for the Property and Casualty segment was attributable to improvements in most product groupings. The loss ratios for each segment were as follows:

2012 2011 Property and Casualty Insurance 65.0% 70.3% Reinsurance 24.7 205.1 Total 56.6 100.7

Other operating expenses, for the first six months of 2012, increased $1.7 million, or 4.5%, from the 2011 six-month period. The majority of this increase relates to the lower salary and salary related expenses during 2011, as noted in the quarterly comparison. The ratio of consolidated other operating expenses to operating revenue was 29.6% during the 2012 period compared to 28.5% for the 2011 period.

The effective federal tax rate on consolidated income for the first six months of 2012 was 30.1%. The effective rate differs from the normal statutory rate primarily as a result of tax-exempt investment income.

As a result of the factors mentioned above, net income increased $36.3 million 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 June 30, 2012, amounts due from reinsurers on paid and unpaid losses, are estimated to total approximately $122 million. Of this total, approximately $46 million (38%) 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 June 30, 2012, limited partnership investments include approximately $36.5 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.