RATINGS RATIONALE

"While earnings for the last two years have been volatile due to the impact of high frequency, low severity catastrophe losses in its personal and commercial lines business, and a lead paint loss reserve charge in 2010, Penn National has maintained relatively low underwriting and financial leverage," said Enrico Leo, Moody's Assistant Vice President.

For 2011, Penn National reported a GAAP net loss of $10.9 million and a combined ratio of 113.8%, which included 12.4 points in net catastrophe losses. For the first quarter of 2012 profitability improved, with GAAP net income of $6.9 million and a combined ratio of 102.6% reflecting lower catastrophe losses. The company has focused on personal lines growth over the last five years, through policy count growth and rate increases, and while its commercial lines segment has experienced rate increases in more recent quarters, the decline in commercial lines business over the last five years was impacted by the soft pricing environment and economic downturn. The result has been a shift in business mix, with personal lines increasing to 40% as a proportion of total net premiums as of year-end 2011.

Going forward, profitability is expected to recover as the company has been proactively addressing both catastrophe exposure and elevated accident year combined ratios. Actions taken include implementing rate increases, enhancing storm deductibles, tightening underwriting standards, and increasing reinsurance protection. As it relates to lead paint claims, we expect that the retroactive reinsurance agreement entered into the second quarter of 2011 provides protection on these liabilities (as of 3/31/12 approximately $70 million remained under the cover).

Penn National's ratings reflect the group's established position in smaller independent agency markets, conservative balance sheet, high quality investment portfolio, and historically good operating profitability. These strengths are partly offset by intense competition in personal and small commercial lines insurance, significant geographic concentration as 40% of premiums come from Pennsylvania, exposure to catastrophes, greater weighting on long-tail risks which leads to more reserve uncertainty, as well as the company's modest scale, which limits its operating and financial flexibility.

Moody's noted the following factors could lead to an upgrade of the rating: 1) a material increase in geographic and/or line of business diversification or scale; 2) improvement in operating profitability (combined ratios less than 100%); 3) returns on surplus in double digit range; and 3) sustained debt leverage at or below current levels. Conversely, the following could lead to a downgrade of the group's ratings: 1) a decrease in capitalization of 10% or more over a 1-year period resulting from catastrophe losses and/or adverse loss reserve development, 2) a material loss of business to competitors as measured by policy counts, 3) EBIT interest coverage below 5 times, 4) a material decline in profitability (i.e. combined ratios consistently greater than 105%; 5) adjusted debt leverage above 30%.

The following ratings have been affirmed with a stable outlook:

Pennsylvania National Mutual Casualty Insurance Company -- 9.5% surplus notes at Baa3 (hyb), insurance financial strength at A3; and

Penn National Security Insurance Company -- insurance financial strength at A3.

Penn National Insurance, based in Harrisburg, Pennsylvania, is a mutual property/casualty insurance group that underwrites small and middle market commercial and personal lines insurance through independent agents. It operates in nine states located in the Mid-Atlantic and Southeast regions of the United States. For 2011, the group reported statutory net written premiums of $518 million and statutory net loss of $25 million. Statutory surplus was $478 million as of March 31, 2012.

The principal methodology used in rating Penn National Insurance was Moody's Global Rating Methodology for Property and Casualty Insurers, published in May 2010. Please see the Credit Policy page on www.moodys.com for a copy of this methodology.

REGULATORY DISCLOSURES

The Global Scale Credit Ratings on this press release that are issued by one of Moody's affiliates outside the EU are endorsed by Moody's Investors Service Ltd., One Canada Square, Canary Wharf, London E 14 5FA, UK, in accordance with Art.4 paragraph 3 of the Regulation (EC) No 1060/2009 on Credit Rating Agencies. Further information on the EU endorsement status and on the Moody's office that has issued a particular Credit Rating is available on www.moodys.com.

For ratings issued on a program, series or category/class of debt, this announcement provides relevant regulatory disclosures in relation to each rating of a subsequently issued bond or note of the same series or category/class of debt or pursuant to a program for which the ratings are derived exclusively from existing ratings in accordance with Moody's rating practices. For ratings issued on a support provider, this announcement provides relevant regulatory disclosures in relation to the rating action on the support provider and in relation to each particular rating action for securities that derive their credit ratings from the support provider's credit rating. For provisional ratings, this announcement provides relevant regulatory disclosures in relation to the provisional rating assigned, and in relation to a definitive rating that may be assigned subsequent to the final issuance of the debt, in each case where the transaction structure and terms have not changed prior to the assignment of the definitive rating in a manner that would have affected the rating. For further information please see the ratings tab on the issuer/entity page for the respective issuer on www.moodys.com.

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Please see ratings tab on the issuer/entity page on www.moodys.com for the last rating action and the rating history. The date on which some ratings were first released goes back to a time before Moody's ratings were fully digitized and accurate data may not be available. Consequently, Moody's provides a date that it believes is the most reliable and accurate based on the information that is available to it. Please see the ratings disclosure page on our website www.moodys.com for further information.

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Enrico LeoAsst Vice President - Analyst Financial Institutions Group Moody'sInvestors Service, Inc.250 Greenwich StreetNew York, NY 10007 U.S.A. JOURNALISTS: 212-553-0376 SUBSCRIBERS: 212-553-1653Robert Riegel MD - Insurance Financial Institutions Group JOURNALISTS: 212-553-0376 SUBSCRIBERS: 212-553-1653 Releasing Office: Moody's Investors Service, Inc.250 Greenwich StreetNew York, NY 10007 U.S.A. JOURNALISTS: 212-553-0376 SUBSCRIBERS: 212-553-1653(C) 2012 Moody's Investors Service, Inc. and/or its licensors and affiliates (collectively, "MOODY'S"). All rights reserved.

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