We will enhance existing technology and processes to provide better service and increase ease of doing business for our agents and policyholders. Engaging Agents We want our agents to feel & Policyholders that we are partners in the business of protecting their policyholders. We want our policyholders to know that we are looking out for their best interests and will receive consistent, high-quality service.

2016 Second Quarter Report

Financial Summary for Our Mission the six months ended June 30, 2016 Why we exist We deliver superior property and casualty insurance products and services through independent agents. In doing so, we provide financial security to businesses and individuals that assists them in managing their risk.

Message from the president & chief executive officer

When you are a child, days last forever. A week or a month seems like an eternity. Summer never ends.

In adult life, time flies so quickly. In business, we no sooner get started executing Our Claims Division recently introduced enhancements that streamline the our annual plan in January than we find ourselves back in meetings already in July, process of reporting claims by phone, immediately directing callers to the planning for the next year. Half of 2016 has whizzed past us like a freight train. local office and adjuster who will handle the claim, reducing holding time and We have accomplished so much on this first half of the ride, with so much more immediately making the connection with the empowered, local adjuster. Future ahead of us on our journey. enhancements in the planning stage will offer real-time claim status reports, showing where the claim stands in the timeline from first-report to conclusion. We began the year with a significant project already underway to implement a new policy administration system. We are introducing this system first for Partners Our Human Resources Department is focusing on talent development and Mutual Insurance, our affiliated company, and later for Penn National Insurance, employee engagement, with plans underway that will make our workplace even first in commercial lines and then personal lines. The new system will make it easier more vibrant and attractive to new employees, and a nurturing environment that and more attractive for Partners’ agents to grow their commercial lines books of encourages employees to stretch, grow and advance in their careers. We will be business. When it launches for Penn National Insurance, agents will enjoy new performing an assessment of employee engagement to guide us in our plans. efficiencies, and it will permit us to make changes more quickly to existing products We wished our former CFO, Greg Stine, a happy retirement in June and in July or launch new product offerings. welcomed our new CFO, Jackie Anderson, who brings valuable operational In our Underwriting Operations division, we entered the year with an initiative knowledge of our company, gained during her leadership of our Internal Audit to address commercial insurance profitability issues in three states, and at six department, and extensive financial experience from her work in accounting, months we are seeing positive results of those plans. We improved workflows and with a focus on property-casualty insurance. Before joining our company, she data accessibility for our agents by electronically delivering various underwriting had worked as a CPA for Brown, Schultz, Sheridan and Fritz, in Camp Hill, PA. activity notifications directly to agents’ automated systems, so they have real- She joins our senior executive team with the benefit of having worked very time information available about transactions and activities we have completed closely and effectively with executive team members over the years. on their customers’ behalf. We have related enhancements underway, and have In this letter, we put the brakes on the speeding train of 2016 to offer you an benefited greatly from agents’ input and consultation as we have developed overview of what we have accomplished so far on our fast-paced journey. these improvements. Enrollment by policyholders in our Online Insurance Center And now we are off on the second half of the ride. Watch for more good news continues to increase. With a registered account, they can view and print next quarter and at year-end. policies, make and manage premium payments, report claims and view claim status, print personal auto ID cards and make simple policy change requests. Enrollment in our automated recurring premium payment plan also continues to Very truly yours, grow, and we promote it in our correspondence with policyholders and on our website. Our personal lines telematics program is expanding and is now available to policyholders in . We will introduce telematics in later this year, and in 2017. By participating in the telematics program, policyholders can earn premium reductions by using an electronic device to give them feedback that promotes safe driving habits. Christine Sears, President & CEO July 18, 2016

Financial Statements

At June 30, 2016, our company’s total Combined Statutory Balance Sheets (Unaudited) Combined Statutory Statements of Operations (Unaudited) admitted assets remained in excess of Six months ended $1.7 billion. Our best-ever first quarter June 30, December 31, June 30 performance earlier this year was followed (dollars in thousands) 2016 2015 (dollars in thousands) 2016 2015 by an almost equally profitable second Underwriting income (loss): quarter. This resulted in reported net Admitted Assets Net premiums written $355,758 $348,757 income of $23.9 million for the first six Investments: Increase in unearned premiums (14,743) (17,392) months of 2016. Total net premiums Bonds $1,181,576 $1,194,980 Premiums earned 341,015 331,365 earned continued to exceed planned Stocks 146,457 133,817 goals, coming in at $341.0 million for the Mortgage loans 17,813 18,090 Losses and loss adjustment expenses 214,383 220,923 first half of the year and surpassing the Real estate & other 1,119 1,270 Underwriting expenses 118,134 115,339 Cash and cash equivalents 34,359 21,227 2015 mid-year mark by 2.9 percent or Total losses and expenses 332,517 336,262 $9.7 million. The company’s combined Total cash and investments 1,381,324 1,369,384 Total underwriting income (loss) 8,498 (4,897) ratio was 96.3 for the six months ended Agents’ balances and uncollected premiums 198,151 178,054 June 30, 2016. This represented a Investment income: Investment income due and accrued 10,473 10,469 4.3 point improvement from the 100.6 Net investment income 19,234 20,237 Amounts due from reinsurers 102,162 94,604 combined ratio for the same period in Net realized gains on investments 1,043 1,654 Deferred tax asset, net 38,895 42,617 2015, primarily driven by a loss and loss Total investment income 20,277 21,891 Other assets 12,319 5,465 adjustment expense ratio that was 3.8 Total admitted assets $1,743,324 $1,700,593 Other income (expenses), net 1,615 (17,261) points better. Losses and loss adjustment Income (loss) before dividends and expenses continued to trend favorably federal income tax expense (benefit) 30,390 (267) during the second quarter, yielding a year- Dividends to policyholders 1,098 2,936 to-date incurred amount that was $6.5 Liabilities and Policyholders’ Surplus Income (loss) before federal million lower than last year. As part of this Liabilities: income tax expense (benefit) 29,292 (3,203) favorable trend, catastrophe and weather- Reserves for losses and loss adjustment expenses $ 690,462 $ 673,424 Federal income tax expense (benefit) 5,348 (1,854) related losses and loss adjustment Unearned premiums 320,153 305,410 Net income (loss) $ 23,944 $ (1,349) expenses, at $5.2 million so far this year, Premium taxes and other expenses 57,371 55,520 were $5.0 million or 1.6 points less than Drafts outstanding 10,792 12,357 the first half of last year. The current year’s Other liabilities 60,839 73,079 Combined Statutory Operating Statistics (Unaudited) Six months ended strong performance during the first two Total liabilities 1,139,617 1,119,790 June 30 quarters has enabled total policyholders’ Policyholders’ surplus: (dollars in thousands) 2016 2015 surplus to increase $22.9 million Surplus notes 50,000 50,000 Loss ratio 51.7 56.8 since the previous year-end, topping Unassigned surplus 553,707 530,803 Loss adjustment expense ratio 11.1 9.8 $603.7 million as of June 30, 2016. Total policyholders’ surplus 603,707 580,803 Loss and loss adjustment expense ratio 62.8 66.6 Total liabilities and policyholders’ surplus $1,743,324 $1,700,593 Underwriting expense ratio 33.2 33.1 Dividend ratio 0.3 0.9 Combined ratio after dividends 96.3 100.6

Net premiums written to surplus ratio 1.1 1.2 Net liabilities to surplus ratio 1.9 2.0 Net leverage ratio 3.0 3.2

Officers & Directors Facts in Brief Elected Officers Christine Sears, CPCU* • We ranked 95th in net premiums written out of approximately president & CEO 1,000 U.S. property and casualty insurance groups. Robert B. Brandon, CPCU executive vice president & COO • We employ more than 825 people. Jacquelyn M. Anderson, CPA, CIA • We were founded in 1919. senior vice president, CFO & treasurer Karen C. Yarrish • Our principal lines of business are personal automobile, senior vice president, secretary & general counsel other liability, commercial automobile, homeowners and *Also serves on the Board of Directors 2016 workers’ compensation. Board of Directors John H. Rhodes chairman chairman & CEO – Rhodes Development Group, Inc. Employee Tenure (real estate development) We sell through n 25 years or greater William H. Alexander faculty – Wharton School, University of Pennsylvania more than 900 n 20 – 24 years n 15 – 19 years G. Lawrence Buhl independent Retired audit partner – Philadelphia office of Ernst & Young n 10 – 14 years agencies, Alexander M. Clark n 5 – 9 years senior managing director – Griffin Financial Group, LLC (investment banking) in 11 states. n 4 years or fewer Todd R. Fisher, M.D. physician – private practice Constance B. Foster A group of Pennsylvania farmers Winner of: partner – Saul Ewing, LLP (law firm) founded our company in 1919 • Best Places to Work in Insurance Mark B. Glessner to provide affordable workers’ • Best Places to Work in IT retired managing partner – Harrisburg Office of PricewaterhouseCoopers compensation insurance, and we • Best Places to Work in PA Michael N. Herro NICKAL, LLC quickly grew into a full-service, • Best Places to Work in Pittsburgh, PA Senior management consulting regional company. • Best Employers in James E. McGill retired senior vice president – Robins & Weill, Inc. (insurance agency) Today, Penn National Insurance sells Sherill T. Moyer, Esq. property-casualty insurance and of counsel – Rhoads & Sinon LLP (law firm) surety bonds through independent Kenneth R. Shutts agents in eleven states. retired president & CEO – Penn National Insurance Douglas C. Stago president – K.R. MacDonald, Inc. (insurance agency) Stephen L. Swanson director – Strategy & Corporate Development Bon Tool Company An Equal Employment Opportunity/Affirmative Action Employer 7/2016