2014 PAMIC Financial Management Seminar Enterprise Risk Management Presentation Jeff Pratt – Director FP&A September 30, 2014

What is Enterprise Risk Management? Different Stakeholders / Different Opinions Pre-Cursors – RBC, Capital Adequacy, DFA Different Definitions Initially – Select Rating Agencies Currently – All Rating Agencies and Regulators

Penn National Insurance ERM start-up timeline July 2006 – Initial ERM Committee Meeting Held March 2007 – Initial Risk Tolerances Developed July 2007 – Incident Log Started August 2007 – Scorecard Development Started November 2007 – First Presentation to Board

Primary Purpose of ERM To assure that the Company properly allocates its capital to seize appropriate business opportunities and identifies and mitigates underwriting, investment, financial or operational risks that approach or exceed acceptable risk tolerance levels.

Why do we think ERM is important? ERM Supports Good Corporate Governance Good Business Practice To Understand Risks And Opportunities That Exist Throughout The Organization Rating Agencies Are Requiring It

Role of the Board of Directors Knowledge and understanding of corporate risks Communicate Board support of ERM to the organization Assure that corporate risk taking is in line with Board expectations Authorize ERM Committee to implement as outlined in Policy Statement Review and approve changes to the ERM Policy Statement annually

Annual Board Report Updates on risks previously identified Identification of emerging risks Significant items that relate to the management of risk and capital Recommended changes to the ERM Policy Statement

Current Risks Separated into four Risk Categories Strategic Underwriting Investment Operational Total of twenty nine defined risks Keeping an eye out for emerging risks

Typical ERM Program Components ERM Policy Risk Framework Risk Appetite Risk Tolerance Risk Monitoring

Standard & Poor’s Risk Framework CreditInterestInsuranceOperational Asset DefaultInterest RatesUnderwritingIT Systems Counterparty:Interest SpreadsPricingContinuity ReinsurersOptionalityCycle ManagementEnvironmental DerivativeCatastropheRegulation Banks Market ReservingCompliance BrokersEquitiesClaims ManagementFraud DealersForeign ExchangeTerrorism TPAsReal EstatePersonnel Change Management Distribution Outsourcing Reputation

AM Best Risk Framework CreditMarketUnderwritingOperationalStrategic DefaultEquitiesUW ProcessMonetaryCompetition DowngradeOther AssetsPricingReportingDemographics DisputesCurrencyReservesLegalPublicity SettlementConcentrationProduct DesignDistributionRating SovereignBasis IT SystemsDemands ConcentrationReinvestmentFrequencyRegulatoryRegulatory Capital LiquiditySeverityTrainingAvailability ALMLapseTurnoverTechnological Interest RatesLongevityData Capture Mortality/Morbidity Optionality Concentration Economy

Other Important Considerations for ERM Risk Management Culture Prospective Risk Management Financial Models Used

Financial Models Supporting ERM Deterministic Models Project financial results based upon assumptions, e.g. Inflation rates Interest rates Stock market results Rate changes Loss reserve performance Useful for testing sensitivity to economic and other changes Stochastic Models Model the full range of possible financial results Produces a statistical distribution of financial results

What do we do with ERM data? Address Identified Risk Tolerance Breaches Rank Risks Use Modeled Results In Planning Supports Reinsurance Purchases Disclosures to Regulators and Rating Agencies Allocate Capital

2014 PAMIC Financial Management Seminar Enterprise Risk Management Presentation Jeff Pratt – Director FP&A September 30, 2014