Financial Summary for the nine months ended September 30, 2012 Third Quarter Report 3 From the friendly voices of our customer service staff to the personal visits by our territory managers and underwriters to the promptness of our claims adjusters, we are told time and again our people set us apart
Message from the president & chief executive officer Thanks to the efforts of our branch offices working closely with our agency partners, our premium revenue exceeded our plan for the seventh consecutive quarter. This achievement has been made possible by the rigorous execution of our targeted growth strategy in the commercial lines and private passenger automobile segments of our book of business. Also, the commercial lines sector of our industry continues to experience a trend of rate firming while witnessing an increase of exposures. Given the continued volatility in catastrophic weather events that have beset the eastern half of the United States during the last three years, it is not surprising that two lines of business are entering what can only be described as a true hard market. The Homeowners line of business and the Businessowners line of business, due to their particular property coverages and exposures, have absorbed significant adverse loss activity over the last three or four years, and consequently are now becoming subject to significant rate increases on the part of both the industry and our company. Increases in claims severity and, more recently, frequency are responsible for a 7.5% annualized rate of increase in Homeowners claim costs from 1997 to 2011, according to a new study published by the Insurance Research Council (IRC). The IRC says that in 2011 alone, Homeowners claim costs, per insured home, which includes houses, condominiums and apartments, increased by 27.0%. Meanwhile, claim frequency has since jumped from 5.3 paid claims per 100 insured exposures in 2005 to 8.0 claims per 100 insured exposures in 2011. Because of these loss trends in both the Homeowners and Businessowners lines of business, our company must prudently take rate and underwriting actions necessary to protect the long-term profitability of these lines of business, as well as to continue to provide new business markets to our agents in these lines. At Penn National Insurance, we remain focused on maintaining our underwriting integrity by being properly compensated for the risks we are taking on, and improving terms and conditions on the policies we underwrite, in order to generate a satisfactory return on our book of business. The property-casualty insurance industry faces challenges in addition to volatile catastrophic weather events, including historically low yields on investments. Prolonged low interest rates are having an adverse effect on investment income for all property-casualty insurers. Very low investment yields, with looming concerns of inflation, have challenged every insurance company s fixed income portfolio. Insurers can no longer rely on investment income from their fixed income portfolios to offset underwriting losses. Hence, underwriting discipline remains our top priority as a corporation, and attention to underwriting profit will remain our primary focus as an organization. Our company ended the first nine months of the year with statutory net income of $4.2 million. One component of our bottomline profitability was a reduction of the $65.0 million underwriting loss posted during the first nine months of 2011, to an underwriting loss of $26.6 million for the first nine months of 2012. Net premiums earned through September 30 were $425.3 million, which, largely due to pricing improvements, represented an increase of $48.2 million or 12.8 percent over earned premium revenue during the same period last year. This year s results also benefitted from fewer weather-related catastrophe losses than in the previous year, which helped to drive the loss and loss adjustment expense ratio down from 81.7 for the first nine months of 2011 to 69.7 for the current period. Net investment income and realized capital gains of $30.0 million and $2.0 million, respectively, allowed us to achieve our year-to-date net income of $4.2 million. The statutory combined ratio came in right on plan at 104.0, representing an improvement of 12.5 points from that of the prior year. Increasingly in our digital age, insurance consumers are bombarded by TV, radio and online advertisements promoting the idea of purchasing their insurance online or through an 800 number directly with a carrier. Our market research has disclosed that while many people do insurance research online, most insurance consumers still want to deal with a local agent who they can meet with and turn to with questions. Indeed, most policyholders truly value the guidance that they can get only through the services of their local independent agent. Moreover, they place more emphasis on the personalized, quality service they receive from their trusted insurance advisor, than they do on obtaining absolutely the lowest insurance premium for their coverages. At Penn National Insurance, we firmly believe that the independent agency distribution channel is the best means of selling insurance, because local independent agents have as many as 10 to 15 different insurance carriers that they can choose from to best meet the needs of a particular policyholder. I am pleased to be able to introduce a link to a new television commercial that Penn National Insurance is utilizing to promote the many benefits of dealing with a local, independent, trusted insurance agent: www.tinyurl.com/chaemv3. We will be partnering with our agents to promote the superior level of service that prospective policyholders can achieve through working with us and with our independent, professional, hometown insurance agents. Very truly yours, Kenneth R. Shutts President and CEO November 19, 2012
Financial Statements Combined Statutory Balance Sheets (Unaudited) September 30, December 31, (dollars in thousands) 2012 2011* Admitted Assets Investments: Bonds $ 993,076 $ 955,889 Stocks 161,023 141,002 Mortgage loans 20,473 20,989 Real estate & other 2,030 2,300 Cash and cash equivalents 34,456 17,568 Total cash and investments 1,211,058 1,137,748 Agents balances and uncollected premiums 157,841 130,181 Investment income due and accrued 10,841 11,097 Amounts due from reinsurers 6,506 10,350 Deferred tax asset, net 50,076 47,648 Other assets 14,923 11,659 Total admitted assets $1,451,245 $1,348,683 Liabilities and Policyholders Surplus Liabilities: Reserves for losses and loss adjustment expenses $ 603,718 $ 581,864 Unearned premiums 267,208 225,769 Premium taxes and other expenses 47,439 44,965 Drafts outstanding 11,263 14,290 Other liabilities 38,335 30,644 Total liabilities 967,963 897,532 Policyholders surplus: Surplus notes 50,000 50,000 Unassigned surplus 433,282 401,151 Total policyholders surplus 483,282 451,151 Total liabilities and policyholders surplus $1,451,245 $1,348,683 Combined Statutory Statements of Operations (Unaudited) Nine months ended September 30 (dollars in thousands) 2012 2011* Underwriting loss: Net premiums written $457,120 $393,522 Increase in unearned premiums (31,774) (16,360) Premiums earned 425,346 377,162 Losses and loss adjustment expenses 296,732 308,214 Underwriting expenses 155,204 133,930 Total losses and expenses 451,936 442,144 Total underwriting loss (26,590) (64,982) Investment income: Net investment income 29,952 32,374 Net realized gains on investments 2,036 1,243 Total investment income 31,988 33,617 Other income, net 1,405 2,107 Income (loss) before dividends and federal income tax expense 6,803 (29,258) Dividends to policyholders 1,657 3,078 Income (loss) before federal income tax expense 5,146 (32,336) Federal income tax expense 956 1,163 Net income (loss) $ 4,190 ($ 33,499) Combined Statutory Operating Statistics (Unaudited) Nine months ended September 30 2012 2011* Loss ratio 59.1 70.2 Loss adjustment expense ratio 10.6 11.5 Loss and loss adjustment expense ratio 69.7 81.7 Underwriting expense ratio 33.9 34.0 Dividend ratio 0.4 0.8 Combined ratio after dividends 104.0 116.5 Net premiums written to surplus ratio 1.2 1.1 Net liabilities to surplus ratio 2.0 2.0 Net leverage ratio 3.2 3.1 *2011 does not include the results of Partners Mutual Insurance. *2011 does not include the results of Partners Mutual Insurance.
Our Marketing Strengths Our customers look to us for our local market knowledge and flexibility. Our regional structure allows us to respond quickly to our customers needs. Our strengths include the following: n Commitment to the independent agency system with strong agency relationships n Competitive products and pricing n Enhanced ease of doing business through intuitive, powerful automation tools n Superb agency force n Underwriting consistency in the marketplace n Financial strength n Outstanding claims service with high customer satisfaction n Knowledgeable and experienced employees Our company offers the following types of insurance: Business n Businessowners Program (BOP) n Property n General Liability n Inland Marine n Business Automobile n Workers Compensation n Umbrella n Agents Umbrella n Surety & Fidelity n Group Safety Programs with Dividend Potential Personal n Personal Automobile n Homeowners n Boat n Dwelling Fire n Renters n Umbrella Liability Facts in Brief l We ranked 102 nd in net premiums written out of approximately 1,000 U.S. property and casualty insurance groups. l Our insurance operations employ over 750 people. l We sell through more than 900 independent agencies, in eleven states. l We were founded in 1919. l Our principal lines of business are personal automobile, other liability, commercial automobile, and workers compensation. l We have a financial strength rating of A- (Excellent) from the A.M. Best Company. We respond to agents needs by developing products that offer profitable growth and services that make it easy for our customers to do business with us. Our Surety Department underwrites three general types of bonds: contract bonds, fidelity bonds, and miscellaneous bonds (including ERISA, Public Official, Tax Collectors, License and Permit, Lost Instrument, Administrator, and others). Our PIA- and Big I-endorsed Agents Umbrella Program offers competitively priced insurance protection for independent insurance agents. For self-insured clients, we can provide self-insured services, including medical professional liability, through our subsidiary, Inservco Insurance Services, Inc. We take pride in the outstanding quality of our claims service. Our customer service standards call for prompt, same-day contact with our claimants, and fast, fair, courteous claims adjusting. Winner of: Best Places to Work in Insurance Best Places to Work in IT Best Places to Work in PA Best Places to Work in Pittsburgh, PA Best Places to Work in Greensboro, NC A top-10 carrier in Deep Customer Connections Ease of Doing Business national survey
Officers & Directors Elected Officers Kenneth R. Shutts* president and chief executive officer Christine Sears, CPCU* executive vice president and chief operating officer Gregory R. Stine, CTP, FLMI senior vice president, treasurer, and chief financial officer Robert B. Brandon, CPCU senior vice president of underwriting operations Karen C. Yarrish senior vice president, secretary, and general counsel *Also serves on the Board of Directors Board of Directors Dennis C. Rowe, CPCU chairman retired CEO Penn National Insurance John H. Rhodes lead outside director president Rhodes Development Group, Inc. (real estate development) William H. Alexander faculty Wharton School, University of Pennsylvania Frank D. Campbell retired executive vice president and director Conning Asset Management (investment management firm) Alexander M. Clark senior managing director Griffin Financial Group, LLC (investment banking) James H. Davies chairman Davies & Associates, Inc. (insurance agency) Todd R. Fisher, M.D. physician private practice James E. McGill retired senior vice president Robins & Weill, Inc. (insurance agency) Sherill T. Moyer, Esq. partner Rhoads & Sinon LLP (law firm) Douglas C. Stago president K.R. MacDonald, Inc. (insurance agency) Stephen L. Swanson president The Alternative Board (business consulting firm) An Equal Employment Opportunity/Affirmative Action Employer (11/2012)