A.M. Best Affirms Ratings of The Penn Mutual Life Insurance Company and Its Subsidiary

A.M. Best Co. has affirmed the financial strength rating of A+ (Superior) and issuer credit ratings of “aa-” of The Penn Mutual Life Insurance Company (Penn Mutual) (Horsham, PA) and its subsidiary, The Penn Insurance and Annuity Company (Wilmington, DE), jointly referred to as Penn Mutual. Concurrently, A.M. Best has affirmed the debt rating of “a” of $200 million 6.65% 30-year surplus notes due June 15, 2034 of Penn Mutual. The outlook for all ratings is stable.

The rating actions reflect Penn Mutual’s large excess surplus position and solid risk-adjusted capitalization that has benefitted from generally positive operating trends, and a conservative fixed-income investment portfolio that has performed reasonably well through the ongoing difficult economic and investment environments. A.M. Best has observed that most mutual life insurance companies have weathered these difficult times more effectively than their publicly traded counterparts. Penn Mutual’s focus on longer-term financial performance and policyholder benefits is viewed positively.

The rating actions also acknowledge Penn Mutual’s diversified business profile, marketing a full array of life insurance products that include whole life, term life, fixed universal life and variable universal life policies. Both fixed and variable annuity products complement its core ordinary life businesses. Penn Mutual has a well-established affluent market presence developed through its focus on relationship-oriented producers. Life and annuity products are distributed through three distinct and complimentary distribution channels: career agents, independent agents and independent broker-dealers. Penn Mutual’s subsidiary, Janney Montgomery Scott LLC, is a full service regional securities broker-dealer that provides a source of earnings diversification.

The affirmation of the ratings also recognizes Penn Mutual’s well-defined investment hedging programs, asset/liability management (ALM) and cash flow analysis techniques that support its significant and expanding interest sensitive businesses. Penn Mutual maintains modest financial leverage, while interest coverage remains strong.

Partially offsetting these positive factors are the challenges Penn Mutual faces to sustain and improve its operating performance, which has been impacted by several factors in recent years. These factors include Penn Mutual’s decision to self-fund AXXX reserving requirements; increased sales-related operating expenses reflecting the competitive nature of the affluent market; the effects of the current low interest rate environment; the recent performance of the credit and equity markets; and reserve charges related primarily to Penn Mutual’s variable life and annuity businesses. Furthermore, the highly competitive ordinary life insurance segment makes maintaining consistent and sustainable revenue growth and earnings performance a challenge. New ordinary life sales growth has fluctuated in recent years, impacted further by management’s decision to move away from markets supported by premium financing arrangements. Penn Mutual maintains elevated exposure to the commercial mortgage market relative to its total-adjusted surplus through its investments in commercial mortgage-backed securities (CMBS). While these securities are almost entirely concentrated in the highest rated

tranches, are earlier vintages and have a high degree of subordination, A.M. Best believes Penn Mutual is susceptible to moderate investment losses should the commercial mortgage market continue to soften. However, Penn Mutual’s ability to hold these securities to maturity and its strong surplus position partially mitigates A.M. Best’s concerns.

For Best’s Credit Ratings, an overview of the rating process and rating methodologies, please visit http://www.ambest.com/ratings.

The principal methodologies used in determining these ratings, including any additional methodologies and factors that may have been considered, can be found at http://www.ambest.com/ratings/methodology.