Pennsylvania National Mutual Casualty Insurance Company Board of Directors Corporate Governance Guidelines

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1 I.MISSION The of Pennsylvania National Mutual Casualty Insurance Company ( Board ) represents the policyholders interest in perpetuating the success of Pennsylvania National Mutual Casualty Insurance Company ( Mutual or Company ), including optimizing financial returns so as to ensure the long-term financial security of the Company for the benefit of its policyholders. The Board is responsible for determining that the Company s management is always capably executing its responsibilities in such a way to ensure this result. This is an active, not a passive, responsibility. The Board has a responsibility to Mutual s policyholders, agents, employees, vendors and to the communities where it operates, all of whom are essential to a successful business. All of these responsibilities, however, are founded upon perpetuation of the Company through financial performance equal to or greater than its peers. The Board has a duty to monitor the business and affairs of the Company by gathering and reviewing information, including financial data, concerning the results, present condition, fulfillment of its corporate obligations and future prospects. The Board shall regularly monitor corporate performance based on objective criteria including management decisions, management of major vendor relationships, and the execution of long-term strategic and annual corporate operational objectives. In furtherance of this responsibility, the Board will have the opportunity to review, discuss and approve both strategic and annual corporate operational plans and shall receive reports from the Company s management on operational matters as appropriate. While the Board is comprised of individual directors, the Board, as a whole, has the responsibility to fulfill these duties. Individual directors shall not and are not authorized to act on their own in an individual capacity, other than in fulfillment of their role as a director. A director must discharge his or her director duties in good faith and in a manner that the director reasonably believes to be in the best interests of the Company. Additionally, a director must exercise his or her best business judgment on behalf of the Company on all matters, issues or questions that are the subject of Board deliberations and/or decisions. The director owes a duty of loyalty to the Company, which requires acting in good faith and avoiding personal and financial conflicts with the Company. A director must also act with the care that a person in a like position would reasonably believe appropriate under similar circumstances. A director of the Company shall stand in a fiduciary relation to the Company. In performing his or her duties, a director shall be entitled, inter alia, to rely in good faith on information, opinions, reports or statements, including financial statements and other financial data, in each case prepared or presented by any of the following: 1) One or more officers or employees of the Company whom the director reasonably believes to be reliable and competent in the matters presented; 2) Counsel, public accountants or other persons as to matters which the director reasonably August 2015 Page 1 of 9

2 believes to be within the professional or expert competence of such person; or 3) A committee of the board upon which he or she does not serve, duly designated in accordance with law, as to matters within its designated authority, which committee the director reasonably believes to merit confidence. Notwithstanding the above, a director shall not be considered acting in good faith if he or she has knowledge concerning the matter in question that would cause his or her reliance to be unwarranted. II.SELECTION AND COMPOSITION OF THE BOARD A. Board Membership Criteria Directors shall be elected from the membership of the organization. Membership is achieved by being a policyholder of the Company. The Governance Committee is responsible for reviewing with the Board, on an annual basis, the appropriate skills and characteristics desired of the Board in the context of the current composition of the Board and strategic plan of the Company. This assessment should include, but not be limited to, diversity, participation, knowledge ( such as understanding general business practices, special areas of expertise, etc.), all in the context of an assessment of the needs of the Board. B. Extending the Invitation to a Candidate for Nomination to the Board The invitation to be considered for nomination to the Board should be extended by the President/CEO of the Company. C. Selection of Directors The Board has created the Nominating Committee to which it has authorized, among other things, the selection of nominees for Board membership. The Board, the Governance Committee, the Nominating Committee and the President/CEO are all instrumental in selecting candidates for Board membership and in the Nominating Committee s recommendations for election by the policyholders. The Board delegates the screening process involved to the Governance Committee and/or the Nominating Committee with the direct input from the Chairperson and/or the President/CEO. The Governance Committee and/or the Nominating Committee shall engage in a deliberate assessment of a candidate s qualifications, including the contributions and participation of an existing director. D. Orientation of New Directors The Board and the Company maintain an orientation process for new directors that includes, among other things, background material and meetings with senior management. August 2015 Page 2 of 9

3 III.BOARD LEADERSHIP A. Selection of Chairperson, President/CEO and other Elected Officers The Board is responsible to elect annually a Chairperson, a President/CEO, a Secretary and a Treasurer. The Board may also elect or appoint a Vice Chairperson and/or one or more Vice Presidents and such other assistant officers as it deems necessary or advisable. B. Chairperson of the Board The duties and responsibilities of the Chairperson of the Board include, but are not limited to, the following: 1. preside at all meetings of the, including executive sessions; 2. call meetings, special meetings, and executive sessions of the directors and, following any such meetings, communicate with the President/CEO to provide feedback and to effectuate the decisions and recommendations; 3. in concert with the CEO, develop and set the agendas for meetings of the Board; 4. ensure that the Directors are properly informed and that they have sufficient information to enable them to form appropriate judgements; 5. act as liaison between management the Board; 6. provide independent advice and counsel to the CEO; and 7. interview Board candidates, as appropriate. Independence. The Board believes firmly that in endeavoring to ensure corporate governance and oversight best practices, there is a compelling case for the Chairperson of the Board to be an independent, outside director. Having the Chairperson s position filled by an independent, outside director appropriately separates the diverse roles and responsibilities of Chairperson of the Board and President/CEO, which have different purviews and attendant duties. The role of the Board is to oversee and govern the Company in the fulfillment of its mission to protect the financial security of the policyholders of the Company, while the role of management is to execute the strategic direction of the organization, as established by the Board, and to manage the day-to-day operations of the Company to achieve the strategic, operational and tactical goals and objectives of the corporation. Having the Chairperson be an independent director also facilitates oversight of corporate management by the, helps insure that the Board agenda items and discussion August 2015 Page 3 of 9

4 topics are aligned with the Board s roles and priorities, and reflects the Board s primary function of protecting the interest of the policyholders. C. Vice Chairperson of the Board At its discretion, the Board may appoint an independent Vice Chairperson of the Board. The duties and responsibilities of the Vice Chairperson shall include, but not be limited to, assisting the Chairperson as requested and serving as the chair in the absence of the Chairperson, or when a motion involving the Chairperson is being discussed. D. Lead Independent Director If the Chairperson is not independent, the Board shall appoint a Lead Independent Director. The duties and responsibilities of the Lead Independent Director shall include, but are not limited to, the following: 1. call meetings and executive sessions of the outside and/or independent directors and, following any such meetings, communicate with the President/CEO on such sessions; 2. preside at all meetings of the at which the Chairperson or Vice-Chairperson is not present, including executive sessions of the outside and/or independent directors; 3. act as liaison between the outside and/or independent directors and the Chairperson and President/CEO and management on a regular basis and when special circumstances exist or communication out of the ordinary course is necessary; 4. in concert with the Chairperson and CEO, develop and set the agendas for meetings of the Board; 5. interview Board candidates, as appropriate. IV.BOARD COMPOSITION AND PERFORMANCE A. Size of the Board The By-laws of the Company specify that the Board will consist of not less than nine (9) or more than fifteen (15) members. These members are to be divided into three (3) classes of not less than three (3) or more than five (5) directors. The number of Board members may vary from time-to-time (between 9 and 15) as deemed appropriate and necessary. August 2015 Page 4 of 9

5 B. Inside, Outside and Independent Directors The Board may be comprised of inside directors, outside directors and independent directors, as long as the composition meets the minimum requirements of Pennsylvania law. For purposes of these Guidelines, the following definitions shall apply: 1. Inside Directors. Inside directors are any directors who are employed by the Company or who have been employed by the company within the past five years. 2. Outside Directors. Outside directors are any directors who are not inside directors. 3. Independent Directors. To be independent, a director may not (i) accept any consulting, advisory or other compensatory fee from the insurer or an affiliate of the insurer other than in the member s capacity as a member of the Board or Board committee; (ii) have a direct or indirect financial relationship, or have an immediate family member with a direct or indirect financial interest, with an insurance agency appointed by the Company; or (iii) in the case of a former executive officer of the Company, or of an affiliated company, have been employed by the Company or the affiliated company for a period of at least five (5) years. The Board believes that as a matter of policy there should be a majority of independent directors on the Board. The Board is willing to have executive officers, in addition to the most recent past President/CEO, as directors. However, the Board believes that management should encourage senior managers to understand that Board membership is not necessary or a prerequisite to any higher management position in the Company. There should be no conflict of interest between any director and Pennsylvania National Mutual Casualty Insurance Company or affiliated company that could be construed in any way to compromise the director s exercise of independence of judgment. C. Former Officer-Director s Board Membership When an Officer-Director retires from his or her officer position, he or she will be deemed to have resigned from the Board at the same time. Whether the individual continues to serve on the Board is a matter for recommendation by the Nominating Committee, with the final determination being made by the Board. D. Directors Who Change Their Present Job Responsibility It is the sense of the Board that those individual directors who either embark upon a totally new and different career, or who experience a change in their job position which entails significantly August 2015 Page 5 of 9

6 different responsibilities than was the case when they were elected to the Board, should be reconsidered for membership to the Board at the expiration of their then current term. It is not the sense of the Board that in every instance directors who retire or change from the position they held when they came on the Board should necessarily leave the Board. However, there should be an opportunity for the Board, via the Governance and/or Nominating Committee, to review the continued appropriateness of Board membership under these circumstances. E. Board Compensation Board compensation should be recommended by the Benefits and Compensation Committee and be based on market data, but with full discussion and concurrence by the Board. F. Executive Sessions of Outside and/or Independent Directors The outside and/or independent directors of the Board may meet informally in executive session without the presence of any Company employees, except that the substance of such meetings will be reported to the President/CEO by the Lead Independent Director, if there is one, or the Chairperson. The Chairperson and/or Lead Independent Director have the authority to determine, in his or her sole discretion, whether the attendees shall be limited to independent directors. G. Board Assessment The Governance Committee is responsible to report periodically, but not less than every three years, to the Board as to an assessment of the Board s performance. This assessment should be conducted following the end of each calendar year. This assessment should be of the Board s contribution and composition as a whole and specifically review areas in which the Board and/or the management believes a better contribution could be made. The purpose of the assessment is to increase the effectiveness of the Board, not to target individual directors. V. BOARD INTERACTION WITH INVESTORS, PRESS, CUSTOMERS, ETC. The Board believes that the management speaks for the Company. Individual Board members may, from time-to-time at the request of the management, meet or otherwise communicate with various constituencies that are involved with the Company. If comments from the Board are appropriate, they should be made by, in most circumstances, the President/CEO, the Chairperson, the Vice-Chairperson and/or the Lead Independent Director. VI.BOARD INTERACTION WITH SENIOR MANAGEMENT A. Attendance of Non-Directors at Board Meetings The Board welcomes the attendance at Board meetings of non-board members. Their attendance is subject to the invitation of the President/CEO. August 2015 Page 6 of 9

7 B. Board Access to Management Board members should have reasonable access to management for information purposes. It is expected that Board members will use reasonable judgment to be sure that this contact is not distracting to the business operation of the Company. Further, inquiries on matters of substance shall be communicated to the President/CEO. Furthermore, the Board encourages the President/CEO, from time-to-time, to bring managers into Board meetings who: (a) can provide additional insight into the items being discussed because of personal involvement in these areas; and/or (b) represent managers with future potential that the senior management believes should be given exposure to the Board. VII.BOARD MEETINGS A. Selection of Agenda Items for Board Meetings The Lead Independent Director, Chairperson, and President/CEO will establish the agenda for each Board meeting. Each Board member is free to suggest to the Lead Independent Director, Chairperson or President/CEO the inclusion of item(s) on the agenda. The Lead Independent Director, Chairperson and/or President/CEO will solicit the Board at least annually for items to add to the Board meeting agendas. B. Board Materials Distributed in Advance It is the sense of the Board that information and data that is important to the Board s understanding of the business be distributed, whenever practicable, in writing or electronically at least one week before the Board meeting. Management will make every attempt to see that this material is as brief as possible while still providing the desired information. As a general rule, presentations on specific subjects should be sent to the directors in advance so that Board meeting time may be conserved and discussion time focused on questions that the Board has about the material. On those occasions in which the subject matter is too sensitive to put on paper, the presentation will be discussed at the meeting and depending on the nature of the topic, at the request of the President/CEO, any written material should be returned to the President/CEO. VIII.COMMITTEE MATTERS A. Number, Structure and Independence of Committees From time to time, the Board may form a new standing or ad hoc committee or disband a current committee, depending upon the circumstances, and as subject to requirements of law. The August 2015 Page 7 of 9

8 current standing committees are Audit, Benefits and Compensation, Governance, Nominating, Executive and Finance. As a matter of corporate governance, believes similarly that the Audit Committee, the Nominating Committee and the Benefits and Compensation Committee should be comprised entirely of independent directors. Committee charters should be reviewed annually by the respective committees, recommended to the Governance Committee, and then submitted to the Board for approval. Such charters should include function/purpose, membership/organization, meeting schedule/activities and responsibilities. B. Assignment and Rotation of Committee Members The Chairperson is responsible, after consultation with the President/CEO and potential director appointees, for the appointment of directors to various Board committees and for the appointment of the committee chairs. Such appointments are subject to approval by the Board. C. Committee Orientation The committee chair shall provide new committee members with an orientation to the committee and its responsibilities and activities, as appropriate. D. Committee Chairperson It is the sense of the Board that consideration should be given to rotating committee chairs and members periodically, but the Board does not feel that such a rotation should be mandated as a policy since there may be reasons at a given point in time to maintain an individual director s committee chairperson role or membership for a longer period. The duties and responsibilities of the committee chairperson shall include, but not be limited to, the following: 1. preside over all meetings of his or her respective committee and report back to the as appropriate; 2. bring forward to the recommendations of the committee for approval by the ; and 3. after each executive session of the respective committee, communicate with the Chairperson and with the President/CEO to provide feedback and also to effect the decisions and recommendations of the committee. August 2015 Page 8 of 9

9 IX.LEADERSHIP DEVELOPMENT A. Evaluation of the Elected Officers The Benefits and Compensation Committee shall be responsible to establish the annual performance objectives for the President/CEO, to conduct the annual performance evaluation of the President/CEO and to review the President/CEO s performance evaluations of the other elected officers. These evaluations will be used by the Benefits and Compensation Committee as a basis to recommend for approval by the Board the compensation of the President/CEO and of the elected officers. B. Succession Planning The President/CEO will report annually to the Board relative to succession planning. There should also be available, on a continuing basis, the President/CEO s recommendation as to a successor should he or she unexpectedly be disabled or otherwise unavailable to serve. C. Management Development The President/CEO will report annually to the Board on the Company s program for management development. This report should be given to the Board at the same time as the succession planning report noted previously. X. GENERAL PROVISIONS These comprise a statement of intent by the Board of Directors as to the broad contextual backdrop of the parameters of corporate governance, and as such are not intended to be either all encompassing or self-limiting. The reserves the right to amend, modify, change, or not enforce these Guidelines at any time in the future where such is deemed desirable and/or necessary; moreover, reasonable exceptions to these Guidelines can be made at the recommendation of the President/CEO with the approval of the. August 2015 Page 9 of 9