[December 14, 2012]

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

A.M. Best Co. has affirmed the financial strength rating of A+ (Superior) and the issuer credit ratings of "aa-" of Penn Mutual Life Insurance Company (Penn Mutual Life) (Horsham, PA) and its wholly owned subsidiary, Penn Insurance and Annuity Company (Wilmington, DE) (together referred to as Penn Mutual). A.M. Best also has affirmed the debt ratings of "a" on Penn Mutual Life's $200 million 6.65% surplus notes due June 15, 2034 and its $200 million 7.625% surplus notes due June 15, 2040. The outlook for all ratings is stable.

These rating actions reflect Penn Mutual's large excess surplus position and strong risk-adjusted capitalization that has been enhanced by the issuance of surplus notes as well as a conservative fixed income investment portfolio that is liquid, has performed reasonably well and is currently in a large net unrealized gain position. A.M. Best notes that Penn Mutual's financial leverage and interest coverage ratios remain within the guidelines for its current ratings.

The rating actions also consider the strength of Penn Mutual's business profile, which emphasizes a broad portfolio of individual life insurance products led by its universal life with secondary guarantees and indexed universal life products as well as a growing block of participating whole life business. Fixed and variable annuities complement its core individual life products. Penn Mutual maintains a well-established and competitive affluent market presence developed through its focus on relationship oriented producers. Penn Mutual's life and annuity products are distributed through three distinct, harmonized and expanding distribution channels: career agents, independent agents and independent broker-dealers. These distribution channels all hae contributed to Penn Mutual's recent strong sales growth. Janney Montgomery Scott LLC, Penn Mutual's full service securities broker-dealer, provides diversification of both revenue and earnings.

Other positive rating factors include Penn Mutual's well-defined hedging programs and its strong asset/liability management and cash flow techniques that support its significant and growing interest-sensitive businesses. Penn Mutual's commitment to maintaining its mutuality with a focus on longer-term financial performance and policyholder benefits also is viewed positively.

Partially offsetting these positive factors are the challenges to sustain and improve its operating performance and grow its surplus, which has been impacted by several factors in recent years. These factors include the decision by Penn Mutual to self-fund AXXX reserving requirements, increased sales-related operating expenses, the continuing challenges of the low interest rate environment and volatile equity markets. Furthermore, the highly competitive individual life insurance segment makes maintaining consistent and sustainable revenue growth and earnings performance a challenge. Penn Mutual maintains an elevated exposure to the real estate market relative to total surplus through its investments in commercial mortgage-backed securities (CMBS) that could expose it to some investment losses should the fragile U.S. economic recovery stall or deteriorate. A.M. Best acknowledges that the exposure to these risks is mitigated somewhat as the CMBS-which are currently in a net unrealized gain position-are almost entirely in the highest-rated tranches, well-diversified both by asset type and geographic region and have a high degree of subordination. A.M. Best also believes Penn Mutual has the ability to hold these securities to maturity, while the company's strong excess surplus position further mitigates A.M. Best's concerns.

A.M. Best believes Penn Mutual is well-positioned at its current rating level. Negative rating actions could result from a significant and sustained decline in risk-adjusted capitalization as measured by Best's Capital Adequacy Ratio (BCAR) model, operating performance that does not meet A.M. Best's expectations over a sustained period, or financial leverage and/or interest coverage that falls materially short of the guidelines for the company's current ratings.

The methodology used in determining these ratings is Best's Credit Rating Methodology, which provides a comprehensive explanation of A.M. Best's rating process and contains the different rating criteria employed in the rating process. Best's Credit Rating Methodology can be found at www.ambest.com/ratings/methodology.

Founded in 1899, A.M. Best Company is the world's oldest and most authoritative insurance rating and information source. For more information, visit www.ambest.com.

Copyright © 2012 by A.M. Best Company, Inc. ALL RIGHTS RESERVED.

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