S&P Announces: Penn National Security Insurance Co. and Affiliates Assigned 'BBB' Ratings; Outlook Stable

Business Wire, March 17, 2004

Business Editors

NEW YORK--(BUSINESS WIRE)--March 17, 2004

On March 17, 2004, Standard & Poor's Ratings Services assigned its 'BBB' counterparty credit and financial strength ratings to Pennsylvania National Mutual Casualty Insurance Co. and its wholly owned property/casualty subsidiaries: Penn National Security Insurance Co. and Founders Insurance Co. (collectively referred to as Penn National Insurance). The outlook is stable.

The ratings are based on the group's improved operating results and strong capitalization. Partially offsetting these positive factors is the group's limited market breadth. In addition, one of the company's four largest lines of business--workers' compensation--is one of the industry's more challenging lines.

Outlook

Penn National Insurance's operating performance at year-end 2004 is expected to be similar to or slightly better than that of 2003, with a combined ratio of about 99% and an ROE of about 7%. Capital adequacy is expected to remain at about 140% at year-end 2004. Standard & Poor's believes management will continue to make improvements in operating efficiencies and continue to improve its expense ratios. At the same time, the corrective measures management has taken to tighten risk controls in its workers' compensation business should produce results that are better than in the prior three years.

Major Rating Factors

-- Improved earnings performance. Penn National Insurance, a

diversified personal and commercial lines carrier focusing on

small to medium-sized accounts, has improved earnings

performance because of management's renewed focus on

profitability rather than growth. Operating performance has

improved gradually and consistently since 1998, with the

combined ratio declining significantly from a high of 113.8%

in 1998 to 101.4% at year-end 2003. In this period, profit

margins--as measured by ROR--improved to 5.4% at year-end 2003

from a low of negative 1.8% at year-end 1998.

-- Improved operational efficiencies. The management team

continues to streamline the organization for profitable growth

and to thrive in its core states. The group has made progress

in lowering its higher-than-average expenses with three key

initiatives: closing several claims offices, improving its

agency force and pay structure, and investing in technology.

-- Strong capitalization and investment portfolio. Penn National

Insurance has a strong Standard & Poor's capital adequacy

ratio of about 140% at year-end 2002. It maintains a prudent

investment portfolio in terms of both credit risk and interest

rate risk.

-- Limited market breadth. Standard & Poor's views Penn National

Insurance as a market follower with a relatively small market

share in its nine key states of business. For that reason,

Standard & Poor's believes the group remains at a market

disadvantage compared with larger, more-established

competitors.

-- Poor results in workers' compensation. Operating performance

in the group's workers' compensation business, a product

deemed to be one of the more challenging products to

underwrite, continues to deteriorate. This is demonstrated by

the continued rise in the loss ratio for this line to 73.6% at

year-end 2003 from 56.3% at year-end 1998. The group has taken

steps to implement better controls in risk selection and

improved pricing. The improvements have yet to fully yield the

desired results, but Standard & Poor's believes they will

eventually do so.

Ratings List
Penn National Security Insurance Co.
Founders Insurance Co.
Pennsylvania National Mutual Casualty Insurance Co.
Counterparty credit rating                            BBB/Stable/--
Financial strength rating                             BBB/Stable