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February 25, 2011

To Our Shareholders, Friends and Associates:

The final quarter of 2010 was by far the best, remarkable not for any unusual events or trends, but rather for predictable seasonal weather, steady business practices and persistent execution of our plans.

Our property casualty insurance underwriting profitability rose on the emergence of mild fourth-quarter weather and favorable development of reserves established in prior periods. These factors moved our full-year results for catastrophe losses, reserve development and year-end reserve levels within historical ranges. Premiums also rose during the fourth quarter, reflecting cumulative benefits from expanding into and developing new marketing territories and independent agencies, as well as ongoing efforts to sharpen our pricing precision and to market increased value and service.

The ability to achieve underwriting gains assumes new urgency as investment income, historically our main source of profit growth, continues under pressure. While our pretax investment income rose slightly for full-year 2010 primarily because of higher growth in our average invested assets, it declined slightly for the fourth quarter on lower bond yields. To assure that our business creates value, we will continue as 2011 unfolds to emphasize our initiatives to grow and prosper on the insurance side of our operations. Consider that:

• By increasing our investment income 5 percent - quite a challenge in this environment - we could grow revenues by approximately $26 million.
• By improving our property casualty combined ratio just 1 percentage point - a feat we believe is more than doable - we could add approximately $29 million to underwriting profits.

Our 2010 results and our optimism run counter to some industry trends and predictions. A.M. Best recently reported that the estimated industry combined ratio deteriorated to 103.0 percent from 101.2 percent in 2009; they expect it to again rise, reaching a projected 103.5 percent in 2011 as the soft commercial insurance market persists and industry reserve releases decline. They think better personal lines results will be more than offset by weaker results in commercial lines, for which they project the estimated combined ratio will worsen to 110 percent in 2011 from 108.5 percent in 2010 and 103.0 percent in 2009.

In contrast, your company reported improving trends overall and for both commercial and personal lines in 2010, as you'll read in this report. We are looking forward to the opportunity 2011 brings to drive further improvement:

By nurturing and increasing our traditional areas of strength: We continue the same careful claims and reserving practices today that served us well in the past, regularly updating loss reserve estimate assumptions to account for emerging trends. Our track record of 22 consecutive years of favorable development on reserves for prior accident years demonstrates our consistent pattern of reserve adequacy. In 2010, we increased our actuarial staff, broadening expertise in several areas including reserving. Other staffing changes served to foster our strong independent agency relationships. Fully 30 percent of our total staff now lives and works in agents' communities, ready 24/7 to assist with claims, quotes and marketing, loss control services, inspections and audits. While our overall staffing grew leaner in 2010, field staffing increased.

By pushing hard on initiatives so early progress can further compound over time: We are leveraging predictive analytics and modeling as part of specific plans to turn around our weak results in the challenging workers' compensation and homeowner lines of business, and agents are responding positively as we ramp up loss control services and claim reporting speed for workers' compensation. Our agent relationships are developing well in newer states and agencies entered over the past few years. Typically, we earn the number one or two spot and 10 percent of an independent agency's business within the first 10 years of our relationship. In 2010, we entered two new states and appointed 93 new agencies in all states where we operate, with plans to appoint 120 in 2011. Agents in most states now are using our new policy administration systems that increase agency ease and efficiency in placing and processing business with us.

Going forward, we will work to remain predictable, steady and persistent in achieving progress and creating long-term value for our shareholders, agents, policyholders and associates. Thank you for your support.

Respectfully,

/S/ John J. Schiff, Jr. John J. Schiff, Jr., CPCU Chairman of the Board

/S/ Kenneth W. Stecher Kenneth W. Stecher President and Chief Executive Officer

/S/ Steven J. Johnston Steven J. Johnston, FCAS, MAAA, CFA Senior Vice President and Chief Financial Officer

This report contains forward-looking statements that involve potential risks and uncertainties. For factors that could cause results to differ materially from those discussed, please see the most recent edition of our safe harbor statement under the Private Securities Litigation Reform Act of 1995. To view or print the edition in effect as of this report's initial publication date, please view this document as a printable PDF.

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