Penn Mutual Life Insurance Co. And Penn Insurance & Annuity Co.

Penn Mutual Life Insurance Co. And Penn Insurance & Annuity Co. Primary Credit Analyst: Shellie A Stoddard, Hightstown (1) 212-438-7244; shellie.stoddard@standardandpoors.com Secondary Contact: Peggy H Poon, CFA, New York (1) 212-438-8617; peggy.poon@standardandpoors.com Table Of Contents Rationale Outlook Base-Case Scenario Company Description: An Established Position In Individual Life, With Complementary Distribution Channels Business Risk Profile Financial Risk Profile Other Assessments Accounting Considerations Related Criteria And Research WWW.STANDARDANDPOORS.COM/RATINGSDIRECT DECEMBER 5, 2014 1

Penn Mutual Life Insurance Co. And Penn Insurance & Annuity Co. SACP* Assessments SACP* Support Ratings Anchor a+ + Modifiers 0 = a+ + 0 = Financial Strength Rating Business Risk Strong ERM and Management 0 Liquidity 0 Group Support 0 A+/Stable/-- Financial Risk Very Strong Holistic Analysis 0 Sovereign Risk 0 Gov't Support 0 *Stand-alone credit profile. See Ratings Detail for a complete list of rated entities and ratings covered by this report. Rationale Business Risk Profile: Strong Strong competitive position with a solid market presence in the affluent individual life insurance and annuity markets in the U.S. Highly productive and diversified distribution channels General expense ratio is higher than that of larger peers', but smaller scale may limit ability to profitably increase market share Prolonged low interest rates and volatile equity markets pose challenges consistent with those the entire industry faces Financial Risk Profile: Very Strong Conservative investment approach and redundant AXXX statutory reserves support very strong capital adequacy Capital erosion from statutory new business strain; operating performance modest on a generally accepted accounting principles (GAAP) measure Predominant investments in investment-grade bonds and good asset-liability management practices result in exceptional liquidity Other Factors Capital strength and quality result in a slightly higher weighting of financial risk profile WWW.STANDARDANDPOORS.COM/RATINGSDIRECT DECEMBER 5, 2014 2

Outlook: Stable The stable outlook reflects Standard & Poor's Rating Services' expectation that Penn Mutual Life Insurance Co. and its wholly owned subsidiary Penn Insurance & Annuity Co. (collectively, Penn Mutual) will maintain its strong competitive position and very strong capital and earnings. We expect the insurer to generate more than $200 million in GAAP pretax operating income in 2014 and after-tax operating return on equity (ROE) of roughly 7% for the next two years. We expect Penn Mutual to successfully continue to limit annuity sales while growing life sales in order to reach a new business mix that will lower its statutory reserve strain. Consistent with our base-case scenario, we expect leverage (debt plus hybrids to total capital, GAAP basis) to remain at approximately 15%, and liquidity to remain exceptionally well-supported by Penn Mutual's investment strategy and liability profile. Downside scenario We may lower our rating if there is a significant decline in capital adequacy, or if there is an increase in the allocation to higher risk assets, signaling an increased risk position tolerance. We may also lower the company's rating if its competitive position weakens or if GAAP before-tax operating ROE falls below 4%. Upside scenario It is unlikely that we would upgrade Penn Mutual in the next two years. An upgrade would be predicated on extremely strong capital, coupled with improved competitive position and/or operating performance. Base-Case Scenario Macroeconomic Assumptions The U.S. economy continues to improve slowly with real GDP growth of about 2.5% in 2014 and 3.2% in 2015 Average 10-year U.S. Treasury yield of 2.9% in 2014 and 3.3% in 2015 S&P 500 Index level of 1,885 in 2014 and 1,993 in 2015 Company-Specific Assumptions Capital adequacy remains very strong, continuing to exceed the prospective risk based capital (RBC) requirement at the 'AA' confidence level. We expect Penn Mutual to experience modest growth in operating income through year-end 2014. Statutory net income will be positive in 2014 and beyond because of intentionally lower annuity sales and less new business strain overall. Leverage (debt plus hybrids to total capital, GAAP) remains at roughly 15%; liquidity to remain exceptional. WWW.STANDARDANDPOORS.COM/RATINGSDIRECT DECEMBER 5, 2014 3

Key Metrics --Year ended Dec. 31-- (Mil. $) 2015* 2014* 2013 2012 2011 S&P capital adequacy/redundancy AA AA AA AA AAA Financial leverage (%) 25.0 25.0 24.8 25.7 22.2 Fixed-charge coverage (x) >5 >5 7.1 6.0 5.6 Return on equity (%) 6.7 6.4 5.8 4.6 3.6 EBITDA adjusted >275 >275 265.0 204.8 133.6 *Forecast data reflect Standard & Poor's base-case assumptions. Company Description: An Established Position In Individual Life, With Complementary Distribution Channels Penn Mutual has established a strong position in the affluent individual life and annuity market. Penn Mutual has achieved this through its focus on relationship-oriented producers and a well-balanced emphasis on two complementary distribution channels: career agents, and independent agents and independent broker-dealers. Penn Mutual has been consistently ranked in the top-30 companies based on total life insurance sales, ranking 22nd for 2013 per the LIMRA U.S. Individual Life Insurance Sales Survey. Revenues totaled $2.2 billion in 2013 on a statutory basis. The rating reflects our view of Penn Mutual's strong business risk profile and very strong financial risk profile. Under our criteria, these factors lead to an anchor of either 'a' or 'a+'. We believe the company's highly productive career agency force, consistent strategy and execution, and commitment to very strong capital adequacy combined are more consistent with the assigned 'a+' anchor. Business Risk Profile: Strong Penn Mutual operates predominantly in the U.S. life insurance industry, which has low risk in our assessment. The company's mutual ownership structure (versus a stock ownership structure) facilitates the execution of management's long-term strategy to provide face-to-face value-added distribution to affluent markets. This is a key support to our strong business risk profile assessment. Further, the mutual ownership structure provides management sufficient flexibility to undertake other long-term initiatives such as making significant investments in information technology and strengthening and expanding its well-diversified distribution network. Insurance industry and country risk: Low Our assessment of Penn Mutual's industry and country risk as low stems from our view of the very low country risk and intermediate industry risks in its U.S.-only life insurance operations. Stable economic growth prospects, relatively effective and stable political institutions, sophisticated financial systems, and strong payment culture in the U.S strengthens our view of low country risk for the company. In our view, Penn Mutual's life insurance operations are exposed to low industry risks because of moderate product risk, as demonstrated by its strong track record of WWW.STANDARDANDPOORS.COM/RATINGSDIRECT DECEMBER 5, 2014 4

maintaining asset-liability management mismatch to within one year. The availability of fixed-income instruments of sufficient duration to match insurance liabilities in the capital markets greatly supports this capability. But we see sensitivity to interest rates and equity-market volatility as offsetting this strength somewhat and burdening long-term operating returns. We believe persistent low interest rates and intense competition will limit the sector's growth prospects and potential for higher operating margins. Table 1 Industry And Country Risk Insurance sector IICRA Business mix (%) U.S. life Low risk 100.00 Competitive position: Strong Penn Mutual has a strong competitive position, in our view, as a result of its solid market presence in the affluent individual life and annuity markets in the U.S. supported by its complementary diversified distribution channels. In addition, its retail broker-dealer subsidiary, Janney Montgomery Scott LLC ("Janney"), provides a diversified (noninsurance/fee-based) revenue stream, with revenue sources approximating 80% retail and 20% institutional. Penn Mutual's competitive position is enhanced by its national retail distribution network with production well-diversified across channels. The breakdown among these channels has remained fairly consistent year-over-year at approximately 40% career and 60% independent. Penn Mutual does not benefit from a highly controlled distribution (which we define as approximately half of its premiums, per our criteria), but we view Penn Mutual's independent channels somewhat favorably as a result of productivity and performance being similarly strong across both channels. Penn Mutual also avoids differentiation between the channels and allows producers to change channels relatively easily. Table 2 Penn Mutual Competitive Position --Year ended Dec. 31-- (Mil. $) 2013 2012 2011 2010 Gross premiums written 322 375 329 283 Change in gross premiums written (%) (14) 14 16 N.M. Net premiums earned 205.7 347.2 301.4 253.3 Total assets under management 17,616 16,765 14,770 13,199 Growth in assets under management (%) 5.1 13.5 11.9 N.M. Life: reinsurance utilization - reserves (%) 3.9 3.7 8.0 4.5 N.M.-Not meaningful. Penn Mutual's growing, productive, and diversified retail distribution network with an established presence in affluent markets is key to its competitive strength. The company recorded new life insurance sales of $139 million in 2013, down 15% from the previous year, and life sales for first-half 2014 totaling $51.4 million compared to $81 million for the same period last year. Sales during first-half 2014 had a more balanced mix with 35% coming from whole-life. Annuity sales were strategically limited in 2013 to $687 million, down 16% from previous year and we expect this to continue during 2014. WWW.STANDARDANDPOORS.COM/RATINGSDIRECT DECEMBER 5, 2014 5

Variable annuity products have been offered by Penn Mutual opportunistically in an effort to penetrate both customers and distribution while building brand loyalty. However, Penn Mutual maintains annuity products in line with its risk tolerances. It has altered its annuity offerings over time to limit its exposure to guaranteed death and income benefits. However, Penn Mutual employs a comprehensive hedging strategy in order to mitigate the risks associated with specific product features. Operating performance is neutral to the rating. Penn Mutual's strong competitive position may help the company increase its earnings as the pressure on investment income loosens with increasing interest rates in 2014 and ahead, as per our base-case scenario. Also, the company's efforts to derisk its products and better align field compensation with product profitability support our expectation for longer-term improvement in its earnings profile. In the short-term, however, Penn Mutual may witness a subdued growth in earnings as a result of strategic actions by the company to change its business mix by tilting away from annuity sales. We estimate the company's return on adjusted equity will be modest and flat through 2014 at roughly 5%. Our base-case assumption for insurance revenue growth through 2014 is supported by our view of moderate economic recovery and favorable demographic changes in the U.S. Financial Risk Profile: Very Strong We view Penn Mutual's financial risk profile to be very strong, supported by very strong capital adequacy. AXXX financing has slightly offset the 2013 statutory earnings strain from new business. The level of excess capital maintained as well as the high-quality and liquid investment portfolio largely demonstrate a conservative financial profile. Moreover, management's commitment toward maintaining a mutual company structure allows them to focus on long-term strategies to benefit the company and relieve the emphasis on shorter-term investor objectives. We expect management to continue running the company prudently, as it demonstrated when it chose to issue $200 million in surplus notes in 2010 to fund future growth. Penn Mutual has a history of self-funding of AXXX reserves for universal life with secondary guarantees, including a $130 million financing within the past year, and we expect the company to continue to pursue this type of financing going forward. Successful hedging strategy associated with derisking of the product portfolio enhances the financial strength of the company. Capital and earnings: Very strong In our opinion, Penn Mutual has very strong capital consistent with the current rating under our base-case assumptions, and we expect the company to maintain an RBC ratio of more than 550% on a consolidated basis in 2014 and 2015. According to our risk-based capital model, Penn Mutual was redundant at the 'AA' confidence level as of year-end 2013, and we expect capital adequacy to remain very strong over the next two years. We expect the company to witness stable or improved profitability, earnings, and capital adequacy in the longer term as a result of a strategic shift in new business mix and expense management. Penn Mutual's captive reinsurance of AXXX reserves bolstered total adjusted capital (TAC) at year-end 2013 by $130 million. WWW.STANDARDANDPOORS.COM/RATINGSDIRECT DECEMBER 5, 2014 6

Table 3 Penn Mutual Capitalization --Year ended Dec. 31-- (Mil. $) 2013 2012 2011 2010 Common shareholders' equity 2,694 2,906 2,722 2,322 Change in common shareholders' equity (%) (7) 7 17 N.M. Total reported capital 3,204 3,501 3,161 2,842 Change in total capital (reported) (%) (8) 11 11 N.M. N.M.-Not meaningful. Table 4 Penn Mutual Earnings --Year ended Dec. 31-- (Mil. $) 2013 2012 2011 2010 Total revenue 1,845 1,828 1,651 1,528 EBIT adjusted 252 195 124 N/A EBITDA adjusted 265.0 204.8 132.6 N/A Net income (attributable to all shareholders) 163 130 91 85 Return on revenue (%) 14 11 8 N/A Return on assets 1 1 1 N/A Return on shareholders' equity (reported) (%) 5.8 4.6 3.6 N/A Life: Net expense ratio (%) N.M. N.M. N.M. N.M. N/A-Not applicable. N.M.-Not meaningful. Penn Mutual's GAAP net income grew to $98.6 million through June 30, 2014, which amounts to a 42% rise as compared to first-half 2013. This significant growth came as a result of higher income from growth in Penn Mutual's in-force business coupled with positive trends in the equity market. We believe the company will shift its earnings mix over the next several quarters in order to lower sales of its reserve strain products. This was evident in first-half 2014, when 35% of sales was from whole life. New annuity sales declined in first-half 2014 to $297.1 million as compared to $373 million reported in first-half 2013. Risk position: Intermediate A diverse and high-quality investment portfolio shapes our view of Penn Mutual's intermediate risk position. Approximately 97% of Penn Mutual's fixed-income investments are considered investment grade (based on NAIC ratings), and the portfolio has a weighted-average rating of 'A'. The company's exposure to high-risk assets has increased to 88% of TAC compared to 69% in the prior year. The company is successfully hedging its product risk along with prudent management of its assets and liabilities. Table 5 Penn Mutual Risk Position --Year ended Dec. 31-- (Mil. $) 2013 2012 2011 2010 Total invested assets 17,616 16,765 14,770 13,198.7 Net investment income 553 511 451 419.8 WWW.STANDARDANDPOORS.COM/RATINGSDIRECT DECEMBER 5, 2014 7

Table 5 Penn Mutual Risk Position (cont.) Net investment yield (%) 5.0 4.8 4.8 N/A Net investment yield including realized capital gains/(losses) (%) 5 5 5 N/A Portfolio composition (% of general account invested assets) Cash and short-term investments 1.5 1.7 1.6 1.2 Bonds 87.3 87.7 86.4 85.5 Equity investments 0.4 0.4 0.7 0.5 Real estate 0.2 0.1 0.1 0.2 Mortgages N/A N/A N/A N/A Loans 7 6 7 8.1 Other investments 4.0 3.8 4.1 4.5 N/A-Not applicable. Penn Mutual invests in structured securities such as commercial mortgage-backed securities (CMBS, 18% of fixed-income assets as of December 31, 2013), residential mortgage-backed securities (6%), and other loan-backed structured securities (8%). The company typically invests primarily in the relatively stable tranches of securities that have more predictable cash-flow characteristics in order to limit risks. Since 2010, there has been a decline in 'AAA'-rated CMBS investments, leading to an increase in the stressed required capital in our model. However, CMBS-required capital decreased in 2013 from 2012 overall. We acknowledge that Penn Mutual's CMBS portfolio has experienced no credit impairments since 1996. We also view this portfolio as potentially problematic if the macroeconomic environment is to deteriorate. However, this is not considered within our current base-case assumption given the moderate economic recovery. Financial flexibility: Adequate Penn Mutual has adequate financial flexibility. As a mutual insurance company, issuance of surplus notes is the only direct means of access to external capital. The company has two surplus notes outstanding that total $400 million, with over 5x GAAP EBIT interest coverage. We expect the company's debt leverage ratio to remain at the current level, and minimum GAAP interest coverage to be sustained at current levels. Table 6 Penn Mutual Financial Flexibility --Year ended Dec. 31-- (x) 2013 2012 2011 2010 EBITDA fixed-charge coverage including realized and unrealized gains/(losses) 6 6 5 N/A EBITDA fixed-charge coverage 7 6 6 N/A Financial leverage including pension deficit as debt (%) 24.8 25.7 22.2 23.5 N/A-Not applicable. Adequate financial flexibility reflects Penn Mutual's reasonable access to external capital. The company has demonstrated its ability to access the capital markets with its first surplus note issuance of $200 million in 2004, which it repeated with another note issuance of $200 million in 2010. Moreover, we view the company's capitalization adequate to support its plan for modest growth in upcoming years. The resulting financial leverage in the mid-20% WWW.STANDARDANDPOORS.COM/RATINGSDIRECT DECEMBER 5, 2014 8

area is above average for a mutual company. However, we expect the company's capital base (including recent proceeds from the financing of AXXX non-economic reserves) and earnings to be more than sufficient to support its business growth over the rating horizon. Other Assessments We consider Penn Mutual's adequate enterprise risk management (ERM) program and its satisfactory management and governance practices consistent with our ratings. Liquidity is viewed as exceptional. Enterprise risk management: Adequate controls Penn Mutual's ERM, while relatively undeveloped, has adequate controls in place for asset-liability management (ALM), credit limits, and investment limits. An ALM committee provides structure and oversight of risk management. Key risk indicators (such as value at risk) are developed and managed across market, credit, and insurance risks. Penn Mutual's product design balances competitive features with risk control. For example, living benefits were not introduced on its products until the appropriate dynamic risk profile was established. The company uses programs from outside consultants to hedge its more complicated risks. However, the company has not undergone an independent risk assessment by a third party. Our ERM assessment does not carry much weight in the overall rating because we consider Penn Mutual's risks as less complex (given its large block of stable whole life) and supported by excess capital. However, as Penn Mutual expands variable and universal life products (with increased equity risk and need for hedging), we view ERM as being of growing importance to the rating. The company has a designated Chief Risk Officer and acknowledges the growing importance of ERM. Management and governance: Satisfactory Our view of Penn Mutual's management and governance as satisfactory indicates the effective strategic planning process, operational performance and effectiveness, financial management, and governance of the company. We consider management to be of sufficient depth, with expertise in operating its major business lines. However, there is some key-man risk present as the Chief Investment Officer (CIO) retired this year and the Chief Operating Officer (David O'Malley, who has 20 years of experience in investments) will oversee investments until the next CIO is in place. The company effectively adapts to changes in market conditions, observing the market's response to innovations before launching competing products. In addition, management generally designs its products with fewer features, but prices them slightly lower than market leaders, which has resulted in robust sales of uncomplicated products. Liquidity: Exceptional We consider Penn Mutual's liquidity to be exceptional supported by the company's year-end 2013 liquidity ratio of 312%, as well as the large proportion of high-grade, liquid investments. These resources are ample to meet any immediate liquidity needs. Penn Mutual also faces limited exposure to confidence-sensitive liabilities. WWW.STANDARDANDPOORS.COM/RATINGSDIRECT DECEMBER 5, 2014 9

Accounting Considerations We note that Penn Mutual, as a mutual company, is not required to produce audited GAAP financial statements. However, management provides summary GAAP statements, which PricewaterhouseCoopers audits. The auditor provided an unqualified opinion for the 2013 financial statements. We primarily analyze Penn Mutual's operating performance based on GAAP after-tax operating income (excluding the corporate segment and realized gains). Penn Mutual's statutory capital base includes $400 million of surplus notes (one $200 million 30-year note issued in 2004, and a second $200 million 30-year note issued in 2010), both of which contribute to long-term capital. However, we do not give full equity credit to the 2010 issuance because combined proceeds for the two surplus notes exceed the 15% maximum for capital credit under our criteria. We consider the company's $130 million AXXX financing as operating leverage in our calculations. Rating Score Snapshot Financial Strength Rating A+/Stable/-- Anchor a+ Business Risk Profile Strong IICRA* Low Risk WWW.STANDARDANDPOORS.COM/RATINGSDIRECT DECEMBER 5, 2014 10

Rating Score Snapshot (cont.) Competitive Position Strong Financial Risk Profile Very Strong Capital & Earnings Very Strong Risk Position Intermediate Risk Financial Flexibility Adequate Modifiers 0 ERM and Management 0 Enterprise Risk Management Adequate Management & Governance Satisfactory Holistic Analysis 0 Liquidity Exceptional Support 0 Group Support 0 Government Support 0 *Insurance Industry And Country Risk Assessment. Related Criteria And Research Insurance Rating Methodology, May 7, 2013 Enterprise Risk Management, May 7, 2013 Group Rating Methodology, Nov. 19, 2013 Methodology: Management And Governance Credit Factors For Corporate Entities And Insurers, Nov. 13, 2012 Refined Methodology And Assumptions For Analyzing Insurer Capital Adequacy Using The Risk-Based Insurance Capital Model, June 7, 2010 Use Of CreditWatch and Outlooks, Sept. 14, 2009 Ratings Detail (As Of December 5, 2014) Operating Companies Covered By This Report Penn Mutual Life Insurance Co. Financial Strength Rating Local Currency Counterparty Credit Rating Local Currency Subordinated A- Penn Insurance & Annuity Co. Financial Strength Rating Local Currency Issuer Credit Rating Local Currency Domicile A+/Stable/-- A+/Stable/NR A+/Stable/-- A+/Stable/-- Pennsylvania *Unless otherwise noted, all ratings in this report are global scale ratings. Standard & Poor's credit ratings on the global scale are comparable across countries. Standard & Poor's credit ratings on a national scale are relative to obligors or obligations within that specific country. WWW.STANDARDANDPOORS.COM/RATINGSDIRECT DECEMBER 5, 2014 11

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