2018 Third Quarter Report

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1 S i n c e Just like those farmers in 1919 who envisioned an insurance company that could meet their needs better than any existing insurance carrier, we look to the future of our company and make strategic and operational plans to ensure that we continue to thrive and grow, and meet and exceed customers expectations as we serve them Third Quarter Report Financial Summary for the nine months ended September 30, 2018

2 Message from the president & chief executive officer After nearly 100 years in business, our company has responded to countless storms and hurricanes. This year, hurricanes Florence and Michael behaved differently than most storms of the past. Florence brought severe flooding to areas generally not identified as flood-prone, and extensive wind damage in the Carolinas. Michael s winds brought damage to the Florida panhandle stronger than anything ever recorded in the region, and also damaging winds in nearby states where we do business. Our entire industry faces a labor shortage of talented potential recruits for positions at all levels. Although our employee retention and advancement metrics outshine those of most of our competitors, many employees have already made the decision that it is time to enjoy retirement, and more will follow. To help us on-board and develop new hires, our Human Resources Department is focusing on the following five initiatives: Developing a new recruiting strategy Developing and implementing new-employee onboarding processes Exploring initiatives to raise employee engagement Identifying specific needs for a future learning and development curriculum and supporting processes Implementing a new Human Capital Management automation system Along with our focus on recruiting and developing our future employee leaders, we are developing the future of our success with our independent agencies by investing in our Aspire Agent Group. This group brings agency staff members who are newer to the agency business together with executives from our company for training and networking. We have received approximately 2,300 claim reports from the hurricanes. Our property claims team is going about the business of making life better when bad things happen. We are proud of their efforts and pleased with our performance on key metrics, such as time to first contact with policyholder, physical property inspection conducted, and scope of damages completed. Unfortunately, it takes events like Florence and Michael for many people to fully appreciate the value of the insurance mechanism, and the services of an independent insurance agent. Our Customer Experience Division, formed in April, has completed extensive interviews with employees at all levels, and also with agency staff, to measure perceptions about our current customer experience delivery, to identify areas for improvement, and to define and codify what we mean when we commit to delivering a superior customer experience. The division is setting goals and prioritizing opportunities to enhance the experience that our customers have when they interact with us, for incorporation into 2018 initiatives and beyond. We will issue our next financial report early in our centennial year, A wonderful story can be found within the company s extensive archives of board minutes, financial reports, and communications to employees and agents. Since 1919, we have been meeting the ever-changing needs of our policyholders and agents. As our society moved from agricultural to industrial and post-industrial, and now, the information age, we changed with the times. We rose to every challenge. We viewed change as opportunity. We grew and thrived. And one thing remains the same: We help people feel secure, and make life better when bad things happen. Very truly yours, Christine Sears, President & CEO October 29, 2018

3 Financial Statements Message from the president & chief executive officer Financials Facts in Brief Officers & Directors For the first nine months of 2018, Penn National Insurance reported a combined net income of $19.7 million, compared to $23.8 million for the first nine months of Total admitted assets topped $1.8 billion at the end of the third quarter, and policyholders surplus increased $10.3 million from the previous year-end, to $597.2 million at September 30, At $33.2 million or 6.2 points, net catastrophe losses and LAE for 2018 remain much higher than expected. As reported previously, loss results were impacted by significant storms in both the winter and spring months, with several weather-related events that exceeded $1.7 million each. More recently, the impact of Hurricane Florence adversely affected our financial results by $10.0 million. By comparison, we experienced catastrophe losses and LAE of $17.3 million or 3.3 points during the first nine months of This increased catastrophe activity has contributed to our current year net loss and loss adjustment expense ratio of 70.5 being 4.5 points higher than the 66.0 ratio of one year ago. Combined net premiums written and earned so far this year are higher than the prior year by 3.8 percent and 3.6 percent, respectively, as premium levels have been heightened through renewal rate increases in our personal lines of business and new business growth in commercial lines. Direct premiums written were up by $21.0 million from the same period last year, reaching $600.9 million for the nine months ended September 30, Our reported net combined ratio through the end of September 2018 was 103.2, which was 3.4 points higher than the 99.8 of the first nine months of The unfavorable impact of losses and LAE on our combined ratio was partially offset by an underwriting expense ratio and dividend ratio that improved by 0.9 point and 0.2 point, respectively, from the previous year. Combined Statutory Balance Sheets (Unaudited) September 30, December 31, Admitted Assets Investments: Bonds $1,274,529 $1,215,663 Stocks 158, ,151 Mortgage loans 16,460 16,931 Real estate & other 10, Cash and cash equivalents 45,702 57,165 Total cash and investments 1,505,144 1,456,793 Agents balances and uncollected premiums 220, ,031 Investment income due and accrued 10,119 10,076 Amounts due from reinsurers 16,921 23,968 Deferred tax asset, net 17,498 18,863 Other assets 32,185 44,273 Total admitted assets $1,801,923 $1,747,004 Liabilities and Policyholders Surplus Liabilities: Reserves for losses and loss adjustment expenses $ 738,149 $ 722,892 Unearned premiums 354, ,808 Premium taxes and other expenses 41,093 43,913 Drafts outstanding 16,018 18,316 Other liabilities 55,052 55,158 Total liabilities 1,204,718 1,160,087 Policyholders surplus: Surplus notes 34,000 34,000 Unassigned surplus 563, ,917 Total policyholders surplus 597, ,917 Total liabilities and policyholders surplus $1,801,923 $1,747,004 Combined Statutory Statements of Operations (Unaudited) Nine months ended September 30 Underwriting income (loss): Net premiums written $568,970 $547,955 Increase in unearned premiums (34,597) (31,976) Premiums earned 534, ,979 Losses and loss adjustment expenses 376, ,448 Underwriting expenses 180, ,406 Total losses and expenses 556, ,854 Total underwriting loss (22,299) (2,875) Investment income: Net investment income 31,441 30,847 Net realized gains on investments 14,043 6,111 Total investment income 45,484 36,958 Other income, net 1, Income before dividends and federal income tax expense (benefit) 24,940 34,543 Dividends to policyholders 6,050 6,920 Income before federal income tax expense (benefit) 18,890 27,623 Federal income tax expense (benefit) (800) 3,796 Net income $ 19,690 $ 23,827 Combined Statutory Operating Statistics (Unaudited) Nine months ended September 30 Loss ratio Loss adjustment expense ratio Loss and loss adjustment expense ratio Underwriting expense ratio Dividend ratio Combined ratio after dividends Net premiums written to surplus ratio Net liabilities to surplus ratio Net leverage ratio

4 Facts in Brief We ranked 97th in net premiums written out of approximately 1,000 U.S. property and casualty insurance groups. We employ approximately 830 people. We were founded in Our principal lines of business are personal automobile, other liability, commercial automobile, homeowners and workers compensation. Our Mission We help people feel secure and make life better when bad things happen. We sell through more than 900 independent agencies, in 11 states. A group of Pennsylvania farmers founded our company in 1919 to provide affordable workers compensation insurance, and we quickly grew into a full-service, regional company. Today, Penn National Insurance sells propertycasualty insurance and surety bonds through independent agents in eleven states. Employee Tenure n 25 years or greater n years n years n years n 5 9 years n 4 years or fewer Vision Our vision is to be the regional carrier of choice. Core Values Integrity We are honest and ethical in all of our actions. Citizenship We give back to our communities through volunteer time and financial support. Openness We provide frequent, appropriate and truthful communication. Respect We treat everyone fairly and value diversity among ourselves. Excellence We are accountable for high standards of performance in order to deliver the security we promise.

5 Officers & Directors Elected Officers Christine Sears, CPCU* president & CEO Robert B. Brandon, CPCU executive vice president & COO Jacquelyn M. Anderson, CPA, CPCU senior vice president, CFO & treasurer Karen C. Yarrish senior vice president, secretary & general counsel *Also serves on the Board of Directors Board of Directors John H. Rhodes board chair Penn National Insurance chairman & CEO Rhodes Development Group, Inc. Stephen L. Swanson board vice-chair Penn National Insurance director Strategy & Corporate Development, Bon Tool Company William H. Alexander faculty Wharton School, University of Pennsylvania G. Lawrence Buhl retired partner Ernst & Young Alexander M. Clark senior managing director Griffin Financial Group, LLC Todd R. Fisher, M.D. physician private practice Constance B. Foster partner Saul Ewing Arnstein & Lehr, LLP Mark B. Glessner retired partner PriceWaterhouseCoopers Michael N. Herro CEO NICKAL, LLC James E. McGill retired senior vice president Robins & Weill, Inc. Sherill T. Moyer, Esq. retired partner Rhoads & Sinon LLP Kenneth R. Shutts retired president & CEO Penn National Insurance principal Shutts & Baird, LLC Douglas C. Stago president K.R. MacDonald, Inc. An Equal Employment Opportunity/Affirmative Action Employer 10/2018