Message from the president & chief executive officer | Financials | Facts in Brief | Officers & Directors

Foundations of our strategy:

Profitability. Growth. Customer Experience. Talent Development.

2018 Second Quarter Report

Financial Summary for the six months ended June 30, 2018 Message from the president & chief executive officer | Financials | Facts in Brief | Officers & Directors

Message from the president & chief executive officer

We all expect summer to be a time of growth. With gardens and lawns supplied with plenty of spring Our Human Resources department added a new talent acquisition function to enhance our use rain, you can almost hear the growth during the summer. Our corporate strategic plan emphasizes of sophisticated recruiting and on-boarding processes, combined with an analysis of short-term growth, and particularly in commercial lines. We have watered the garden, and the positive growth and long-term training and development needs. Such a focus is vitally important as we respond trends that we reported in our first quarter continued strongly during the second. We attribute our to opportunities to recruit highly talented new employees. A new automated system will allow our commercial lines growth to several factors, including the following: Human Resources staff and their customers throughout the organization to more effectively manage performance, education and career advancement. • Our senior territory managers are having success in underwriting middle market business directly for selected agencies. Agency feedback indicates that territory managers deliver the most value when We continue to enhance the experiences of our customers when they interact with us. Our Customer they actively participate in underwriting business. We revised roles and responsibilities in response to Experience department has chartered a cross-functional Customer Experience Action Team to this feedback, and we are building growth momentum due to the change. continuously assess the customer-experience expectations of our agent-customers and policyholder- customers. The team is currently engaged in a series of interviews with employees and agents • We are capitalizing on new business market opportunities on good accounts swept up in to measure and define expectations, and to identify perceived strengths, gaps and opportunities competitors’ underwriting/pricing initiatives. in customer experience management. The team is overseeing upcoming enhancements to our automated voice response prompts on our Customer Contact Center’s phone system that will offer • Revisions that we made to our profit-sharing plan are incentivizing agents who formerly were not more self-service by phone without having to speak to a live representative. But when live support eligible for commercial profit sharing. is needed, hold times average about 15 seconds, and recent consolidation of incoming calls routes • We have cross-appointed more agents who were formerly contracted with us only for personal lines. all calls to the most expert staff for fast, thorough response. The Customer Contact Center is extending its hours of operation to 5:30 p.m. ET, also, meeting needs later in the day. Within our overall Commercial Lines growth goals, we are focusing significant resources in and Iowa. Agents in Wisconsin and Iowa can now write Commercial Lines policies that contain Executives held meetings recently with all employees to present information about corporate strategy attractive coverages and endorsement options similar to those available in our other operating and results. These sessions produced valuable dialogue and they will help inform our future plans. territories, following the introduction of our commercial lines products in those states, and backed We are also analyzing the results of a recent all-agency survey, including a post-survey follow-up focus up with a new policy automation system. With Workers’ Compensation, BOP and Auto processing groups, which will produce important insights into agents’ satisfaction and needs. through our new automation system, and with Garage coming later this year, agents have the We thank our agents and employees for their dedication to customer service and for achieving the competitive coverages, rates and services they need to continue the growth trend in Wisconsin and growth that we have measured during 2018. We are well underway with many plans to celebrate Iowa. In our other nine Commercial Lines operating states, a new Contractors E&O endorsement for our 100th anniversary in 2019, including employee events in all our locations, a coffee-table-style BOP policies will add an attractive, competitive coverage option. Also, our Workers’ Compensation corporate history book and messages throughout the year commemorating our company’s innovative PayGo program, since its launch in December of 2017, has helped attract new business and retain and successful adaptations to meeting customers’ needs as the economy and the insurance industry existing accounts totaling approximately $1 million in premium. has evolved for a century. A continued focus on aligning rate to exposure within Personal Lines contributed to total premium and policy count growth in the second quarter. Our commitment to superior customer service and Very truly yours, our delivery of eDocs download, which provides access to policyholder declarations pages and policy forms, are increasing satisfaction and contributing to retention. Our optional Underground Utility Line endorsement, which will be available in October, will offer an attractive coverage enhancement to homeowners. This endorsement will be available first in , and , and available for our other states between late 2018 and early 2019. Christine Sears, President & CEO growthgrowthJune 25, 2018 Message from the president & chief executive officer | Financials | Facts in Brief | Officers & Directors Financial Statements

The combined financial performance of Penn Combined Statutory Balance Sheets (Unaudited) Combined Statutory Statements of Operations (Unaudited) National Insurance for the first half of the year Six months ended produced net income of $10.3 million, which June 30, December 31, June 30 was equivalent to that of the first six months (dollars in thousands) 2018 2017 (dollars in thousands) 2018 2017 of 2017. Underwriting income (loss): Premium levels in 2018 have been bolstered Admitted Assets Net premiums written $381,779 $363,790 by renewal rate increases in our personal Investments: Increase in unearned premiums (26,209) (21,047) lines of business and new business growth Bonds $1,224,675 $1,215,663 Premiums earned 355,570 342,743 in commercial lines. Direct premiums written Stocks 171,684 166,151 were up by $16.9 million or 4.4 percent from Mortgage loans 16,619 16,931 Losses and loss adjustment expenses 241,860 230,554 mid-year 2017, reaching $402.2 million for the Real estate & other 350 883 Underwriting expenses 122,375 118,828 six months ended June 30, 2018. Combined Cash and cash equivalents 39,179 57,165 Total losses and expenses 364,235 349,382 net premiums written and earned were higher Total cash and investments 1,452,507 1,456,793 Total underwriting loss (8,665) (6,639) than the prior year by 4.9 percent and 3.7 percent, respectively. Agents’ balances and uncollected premiums 217,724 193,031 Investment income: Investment income due and accrued 10,005 10,076 Loss results were impacted by significant Net investment income 20,565 20,780 Amounts due from reinsurers 19,998 23,968 storms in both the winter and spring months. Net realized gains on investments 1,929 5,007 Deferred tax asset, net 18,397 18,863 So far this year, we’ve experienced no less Total investment income 22,494 25,787 Other assets 48,410 44,273 than five weather-related events that exceeded $1.7 million each. This has caused net Total admitted assets $1,767,041 $1,747,004 Other income, net 886 271 catastrophe losses and LAE for the first six Income before dividends and months of 2018 to be significantly higher than federal income tax expense (benefit) 14,715 19,419 expected at $19.0 million or 5.4 points. This Dividends to policyholders 5,081 5,104 Liabilities and Policyholders’ Surplus compares to the $14.9 million or 4.3 points Income before federal of catastrophe losses and LAE that affected Liabilities: income tax expense (benefit) 9,634 14,315 our financial results during the first half of Reserves for losses and loss adjustment expenses $ 721,002 $ 722,892 Federal income tax expense (benefit) (667) 3,848 Unearned premiums 346,016 319,808 2017. Also by comparison, our net loss and Net income $ 10,301 $ 10,467 loss adjustment expense ratio this year has Premium taxes and other expenses 39,994 43,913 increased to 68.0, from 67.3 a year ago. Drafts outstanding 15,271 18,316 Combined Statutory Operating Statistics (Unaudited) Other liabilities 49,696 55,158 Our reported net combined ratio through the Six months ended Total liabilities 1,171,979 1,160,087 end of June 2018 came in at 101.4, which June 30 was unchanged from that of June 2017. Policyholders’ surplus: (dollars in thousands) 2018 2017 The unfavorable impact of losses and LAE Surplus notes 34,000 34,000 Loss ratio 57.5 56.9 on our combined ratio was offset by an Unassigned surplus 561,062 552,917 Loss adjustment expense ratio 10.5 10.4 underwriting expense ratio and dividend ratio Total policyholders’ surplus 595,062 586,917 Loss and loss adjustment expense ratio 68.0 67.3 that improved by 0.6 point and 0.1 point, Total liabilities and policyholders’ surplus $1,767,041 $1,747,004 Underwriting expense ratio 32.0 32.6 respectively, from the previous year. Total Dividend ratio 1.4 1.5 admitted assets remained in excess of $1.7 Combined ratio after dividends 101.4 101.4 billion; and with another $8.1 million being added so far this year, policyholders’ surplus Net premiums written to surplus ratio 1.2 1.1 reached $595.1 million as of June 30, 2018. Net liabilities to surplus ratio 2.0 1.8 Net leverage ratio 3.2 2.9 Message from the president & chief executive officer | Financials | Facts in Brief | Officers & Directors

Facts in Brief

• We ranked 97th in net premiums written out of approximately 1,000 U.S. property and casualty insurance groups. Our Mission • We employ approximately 830 people. We help people feel secure • We were founded in 1919. • Our principal lines of business are personal automobile, other liability, and make life better commercial automobile, homeowners and workers’ compensation. when bad things happen.

Employee Tenure We sell through n 25 years or greater Vision more than 900 n 20 – 24 years Our vision is to be the regional carrier of choice. independent n 15 – 19 years n agencies, 10 – 14 years n 5 – 9 years Core Values in 11 states. n 4 years or fewer Integrity – We are honest and ethical in all of our actions. Excellence – We are accountable for high standards of performance in order to deliver the security we promise. A group of Pennsylvania farmers founded our Respect – We treat everyone fairly and value diversity company in 1919 to provide affordable workers’ among ourselves. compensation insurance, and we quickly grew into a full-service, regional company. Openness – We provide frequent, appropriate and truthful communication. Today, Penn National Insurance sells property- casualty insurance and surety bonds through Citizenship – We give back to our communities through independent agents in eleven states. volunteer time and financial support.

An Equal Employment Opportunity/Affirmative Action Employer 8/2018 Message from the president & chief executive officer | Financials | Facts in Brief | Officers & Directors

Officers & Directors

Elected Officers Board of Directors Christine Sears, CPCU* John H. Rhodes president & CEO board chair – Penn National Insurance chairman & CEO – Rhodes Development Group, Inc. Robert B. Brandon, CPCU executive vice president & COO Stephen L. Swanson board vice-chair – Penn National Insurance Jacquelyn M. Anderson, CPA, CPCU director – Strategy & Corporate Development, Bon Tool Company senior vice president, CFO & treasurer William H. Alexander Karen C. Yarrish faculty – Wharton School, University of Pennsylvania senior vice president, secretary & general counsel G. Lawrence Buhl *Also serves on the Board of Directors 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.