The Penn Mutual Life Insurance Company

  The Penn Insurance and Annuity Company

The Penn Insurance and Annuity Company

Variable Life Account I

Audited Financial Statements

as of December 31, 2022

and for the period presented

Report of Independent Registered Public Accounting Firm

To the Board of Directors of The Penn Insurance and Annuity Company and the Contract Owners of Penn Insurance and Annuity Variable Life Account I:

Opinions on the Financial Statements

We have audited the accompanying statements of assets and liabilities of the Vanguard VIF — Equity Index Portfolio, Vanguard VIF — Total Stock Market Portfolio, Vanguard VIF — Global Bond Index Portfolio, Vanguard VIF — Mid-Cap Index Portfolio, Vanguard VIF — Moderate Allocation Index Portfolio, Vanguard VIF — Total Bond Market Portfolio, Vanguard VIF — International Stock Market Index Portfolio, Vanguard VIF — Conservative Allocation Portfolio (constituting Penn Insurance and Annuity Variable Life Account I, hereafter collectively referred to as the “Subaccounts”) of Penn Insurance and Annuity Variable Life Account I as of December 31, 2022, the related statements of operations for the year then ended, and the statements of changes in net assets for each of the two years in the period ended December 31, 2022, including the related notes (collectively referred to as the “financial statements”). In our opinion, the financial statements present fairly, in all material respects, the financial position of each of the Subaccounts of Penn Insurance and Annuity Variable Life Account I as of December 31, 2022, the results of each of their operations for the year then ended, and the changes in each of their net assets for each of the two years in the period ended December 31, 2022 in conformity with accounting principles generally accepted in the United States of America.

Basis for Opinions

These financial statements are the responsibility of the Subaccount’s management. Our responsibility is to express an opinion on the financial statements of each of the subaccounts of Penn Insurance and Annuity Variable Life Account I based on our audits. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) (PCAOB) and are required to be independent with respect to each of the subaccounts of Penn Insurance and Annuity Variable Life Account I in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.

We conducted our audits of these financial statements in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud.

Our audits included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements. Our procedures included confirmation of investments owned as of December 31, 2022 by correspondence with the custodian, the transfer agents of the investee mutual funds and broker. We believe that our audits provide a reasonable basis for our opinions.

Philadelphia, PA

April 13, 2023

We have served as the auditor of one or more of the subaccounts of Penn Insurance and Annuity Variable Life Account I since 2021.

PENN INSURANCE AND ANNUITY VARIABLE LIFE ACCOUNT I

STATEMENTS OF ASSETS AND LIABILITIES — DECEMBER 31, 2022

	Vanguard VIF — Equity Index Portfolio		Vanguard VIF — Total Stock Market Index Portfolio		Vanguard VIF — Global Bond Index Portfolio		Vanguard VIF — Mid-Cap Index Portfolio		Vanguard VIF — Moderate Allocation Index Portfolio
Assets:
Investments at fair value	$	13,163,108	$	11,771,031	$	737,729	$	3,534,741	$	8,519,866
Dividends receivable		—		—		—		—		—
Receivable for securities sold		—		—		—		—		—
Liabilities:
Due to The Penn Insurance and Annuity Company	$	—	$	—	$	—	$	—	$	—
Payable for securities purchased		2,962,799		974,305		35,080		1,200,785		502,814
Total Net Assets	$	10,200,309	$	10,796,726	$	702,649	$	2,333,956	$	8,017,052
TOTAL NET ASSETS REPRESENTED BY:
Net Assets of Contract owners:
Protection VUL	$	10,200,309	$	10,796,726	$	702,649	$	2,333,956	$	8,017,052
Total Net Assets	$	10,200,309	$	10,796,726	$	702,649	$	2,333,956	$	8,017,052
Accumulation of Unit Values:
Protection VUL	$	9.06	$	8.78	$	8.61	$	8.91	$	8.66
Number of Shares		201,031		255,242		39,408		109,165		300,827
Cost of Investments	$	10,314,390	$	11,535,077	$	744,223	$	2,474,778	$	8,568,911
	Vanguard VIF — Total Bond Market Index Portfolio		Vanguard VIF — International Stock Market Index Portfolio		Vanguard VIF — Conservative Allocation Portfolio
Assets:
Investments at fair value	$	3,170,820	$	3,633,665	$	884,739
Dividends receivable		—		—		—
Receivable for securities sold		—		—		—
Liabilities:
Due to The Penn Insurance and Annuity Company	$	—	$	—	$	—
Payable for securities purchased		812,124		549,172		36,873
Total Net Assets	$	2,358,696	$	3,084,493	$	847,866
TOTAL NET ASSETS REPRESENTED BY:
Net Assets of Contract owners:
Protection VUL	$	2,358,696	$	3,084,493	$	847,866
Total Net Assets	$	2,358,696	$	3,084,493	$	847,866
Accumulation of Unit Values:
Protection VUL	$	8.62	$	8.42	$	8.66
Number of Shares		228,556		161,916		37,269
Cost of Investments	$	2,408,470	$	3,235,845	$	882,757

The accompanying notes are an integral part of these financial statements.

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PENN INSURANCE AND ANNUITY VARIABLE LIFE ACCOUNT I

STATEMENTS OF OPERATIONS — FOR THE PERIOD ENDED DECEMBER 31, 2022

	Vanguard VIF — Equity Index Portfolio			Vanguard VIF — Total Stock Market Index Portfolio			Vanguard VIF — Global Bond Index Portfolio			Vanguard VIF — Mid-Cap Index Portfolio			Vanguard VIF — Moderate Allocation Index Portfolio
Net Investment Income (Loss):
Dividends	$	10,557		$	27,940		$	6,985		$	5,808		$	82,624
Expense:
Mortality and expense risk charges		—			—			—			—			—
Net investment income (loss)		10,557			27,940			6,985			5,808			82,624
Net Realized and Unrealized Gains (Losses) on Investments:
Realized gain (loss) from redemption of fund shares		(138,047	)		(101,017	)		(6,452	)		(14,266	)		(285,383	)
Realized gains distributions		35,300			149,661			2,580			55,101			153,949
Net realized gain (loss) from investment transactions		(102,747	)		48,644			(3,872	)		40,835			(131,434	)
Net change in unrealized gain (loss) of investments		(150,052	)		(795,528	)		(40,316	)		(161,813	)		(629,700	)
Net realized and unrealized gain (loss) on investments		(252,799	)		(746,884	)		(44,188	)		(120,978	)		(761,134	)
Net increase (decrease) in net assets resulting from operations	$	(242,242	)	$	(718,944	)	$	(37,203	)	$	(115,170	)	$	(678,510	)
	Vanguard VIF — Total Bond Market Index Portfolio			Vanguard VIF — International Stock Market Index Portfolio			Vanguard VIF — Conservative Allocation Portfolio
Net Investment Income (Loss):
Dividends	$	6,289		$	22,663		$	6,414
Expense:
Mortality and expense risk charges		—			—			—
Net investment income (loss)		6,289			22,663			6,414
Net Realized and Unrealized Gains (Losses) on Investments:
Realized gain (loss) from redemption of fund shares		(6,367	)		(25,557	)		(15,372	)
Realized gains distributions		2,232			23,724			11,265
Net realized gain (loss) from investment transactions		(4,135	)		(1,833	)		(4,107	)
Net change in unrealized gain (loss) of investments		(48,561	)		(162,812	)		(39,354	)
Net realized and unrealized gain (loss) on investments		(52,696	)		(164,645	)		(43,461	)
Net increase (decrease) in net assets resulting from operations	$	(46,407	)	$	(141,982	)	$	(37,047	)

The accompanying notes are an integral part of these financial statements.

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PENN INSURANCE AND ANNUITY VARIABLE LIFE ACCOUNT I

STATEMENTS OF CHANGES IN NET ASSETS — FOR THE PERIOD ENDED DECEMBER 31, 2022

	Vanguard VIF — Equity Index Portfolio						Vanguard VIF — Total Stock Market Index Portfolio						Vanguard VIF — Global Bond Index Portfolio
	2022			2021			2022			2021			2022			2021
Operations:
Net investment income (loss)	$	10,557		$	—		$	27,940		$	—		$	6,985		$	—
Net realized gain (loss) from investment transactions		(102,747	)		488			48,644			(5,696	)		(3,872	)		27
Net change in unrealized gain (loss) of investments		(150,052	)		35,971			(795,528	)		57,178			(40,316	)		(1,259	)
Net increase (decrease) in net assets resulting from operations		(242,242	)		36,459			(718,944	)		51,482			(37,203	)		(1,232	)
Variable Life Activities:
Purchase payments		6,608,341			675,023			9,554,999			2,217,523			423,206			286,542
Death benefits		—			—			—			—			—			—
Cost of insurance		(28,782	)		(1,237	)		(66,039	)		(3,243	)		(4,898	)		(572	)
Net transfers		3,420,979			(15,051	)		453,756			(75,095	)		86,183			1
Transfer of policy loans		—			—			—			—			—			—
Mortality and expense risk charges		(192,996	)		(1,731	)		(504,338	)		(3,991	)		(42,937	)		(604	)
Contract administration charges		(49,021	)		(9,433	)		(83,003	)		(26,381	)		(1,006	)		(4,831	)
Surrender benefits		—			—			—			—			—			—
Net increase (decrease) in net assets resulting from variable life activities		9,758,521			647,571			9,355,375			2,108,813			460,548			280,536
Total increase (decrease) in net assets		9,516,279			684,030			8,636,431			2,160,295			423,345			279,304
Net Assets:
Beginning of year		684,030.00			—			2,160,295.00			—			279,304.00			—
End of year	$	10,200,309			684,030		$	10,796,726			2,160,295		$	702,649			279,304
	Vanguard VIF — Total Bond Market Index Portfolio						Vanguard VIF — International Stock Market Index Portfolio						Vanguard VIF — Conservative Allocation Portfolio
	2022			2021			2022			2021			2022			2021
Operations:
Net investment income (loss)	$	6,289		$	—		$	22,663		$	—		$	6,414		$	—
Net realized gain (loss) from investment transactions		(4,135	)		(63	)		(1,833	)		(115	)		(4,107	)		97
Net change in unrealized gain (loss) of investments		(48,561	)		(1,212	)		(162,812	)		11,460			(39,354	)		4,464
Net increase (decrease) in net assets resulting from operations		(46,407	)		(1,275	)		(141,982	)		11,345			(37,047	)		4,561
Variable Life Activities:
Purchase payments		1,961,167			332,177			2,116,309			690,307			648,528			289,102
Death benefits		—			—			—			—			—			—
Cost of insurance		(5,855	)		(563	)		(16,114	)		(823	)		(5,632	)		(587	)
Net transfers		165,500			17,210			567,323			1,811			1			12
Transfer of policy loans		—			—			—			—			—			—
Mortality and expense risk charges		(54,871	)		(646	)		(121,046	)		(1,316	)		(41,424	)		(617	)
Contract administration charges		(2,897	)		(4,844	)		(13,903	)		(7,418	)		(4,097	)		(4,933	)
Surrender benefits		—			—			—			—			—			—
Net increase (decrease) in net assets resulting from variable life activities		2,063,044			343,334			2,532,569			682,561			597,376			282,977
Total increase (decrease) in net assets		2,016,637			342,059			2,390,587			693,906			560,329			287,538
Net Assets:
Beginning of year		342,059.00			—			693,906.00			—			287,538.00			—
End of year	$	2,358,696		$	342,059		$	3,084,493		$	693,906		$	847,867		$	287,538

The accompanying notes are an integral part of these financial statements.

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PENN INSURANCE AND ANNUITY VARIABLE LIFE ACCOUNT I

STATEMENTS OF CHANGES IN NET ASSETS — FOR THE PERIOD ENDED DECEMBER 31, 2022

(continued)

	Vanguard VIF — Mid-Cap Index Portfolio						Vanguard VIF — Moderate Allocation Index Portfolio
	2022			2021			2022			2021
Operations:
Net investment income (loss)	$	5,808		$	—		$	82,624		$	—
Net realized gain (loss) from investment transactions		40,835			171			(131,434	)		(18,449	)
Net change in unrealized gain (loss) of investments		(161,813	)		20,991			(629,700	)		77,842
Net increase (decrease) in net assets resulting from operations		(115,170	)		21,162			(678,510	)		59,393
Variable Life Activities:
Purchase payments		1,924,494			463,384			6,096,139			3,832,836
Death benefits		—			—			—			—
Cost of insurance		(8,669	)		(854	)		(31,276	)		(3,737	)
Net transfers		97,738			32,839			(842,524	)		(38,021	)
Transfer of policy loans		—			—			—			—
Mortality and expense risk charges		(69,641	)		(1,023	)		(327,205	)		(7,852	)
Contract administration charges		(2,816	)		(7,488	)		(3,931	)		(38,260	)
Surrender benefits		—			—			—			—
Net increase (decrease) in net assets resulting from variable life activities		1,941,106			486,858			4,891,203			3,744,966
Total increase (decrease) in net assets		1,825,936			508,020			4,212,693			3,804,359
Net Assets:
Beginning of year		508,020.00			—			3,804,359.00			—
End of year	$	2,333,956		$	508,020		$	8,017,052		$	3,804,359

The accompanying notes are an integral part of these financial statements.

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PENN INSURANCE AND ANNUITY VARIABLE LIFE ACCOUNT I

Notes to Financial Statements — December 31, 2022

Note 1.    Organization

The Penn Insurance and Annuity Variable Life Account I (“Account I”) was established by The Penn Insurance and Annuity Company (“PIA”) under the provisions of the Delaware Insurance Law. Account I is registered under the Investment Company Act of 1940, as amended, as a unit investment trust. Account I offers units to variable life contract owners to provide for the accumulation of value and for the payment of benefits. Account I contains contracts of the Protection VUL variable life product. Contract owners may borrow up to a specified amount depending on the policy value at any time by submitting a written request for a policy loan. Under applicable insurance law, the assets and liabilities of Account I are legally segregated from PIA’s other assets and liabilities.

Note 2.    Significant Accounting Policies

The preparation of the accompanying financial statements and notes in accordance with accounting principles generally accepted in the United States of America, which requires management to make estimates and assumptions that affect the reported values of assets and liabilities and the reported amounts from operations and variable life activities during the reporting period. Actual results could differ significantly with those estimates.

The significant accounting policies of Account I are as follows:

Investments — Assets of Account I are invested into subaccounts, which invest in the shares of Vanguard^® Variable Insurance Fund (“Vanguard VIF’) portfolios: Equity Index, Total Stock Market Index, Global Bond Index, Mid-Cap Index, Moderate Allocation, Total Bond Market Index, Total International Stock Market Index, and Conservative Allocation.

Vanguard VIF is an open-end diversified management investment company.

The investment in shares of these funds or portfolios is carried at fair market value as determined by the underlying net asset value of the respective funds or portfolios. Investment transactions are accounted for on a trade date basis. The resulting net unrealized gains (losses) are reflected in the Statements of Operations. Realized gains (losses) from securities transactions are determined for federal income tax and for financial reporting purposes on the FIFO cost basis.

The amounts shown as receivable for securities sold and payable for securities purchased on the Statements of Assets and Liabilities reflect transactions that occurred on the last business day of the reporting period. These amounts will be deposited to or withdrawn from the separate account in accordance with the contract owners’ instructions on the first business day subsequent to the close of the period presented.

All dividend distributions received from the underlying Vanguard VIF portfolios are reinvested in additional shares of these Funds and are recorded by Account I on the ex-dividend date.

Federal Income Taxes — The operations of Account I are included in the federal income tax return of PIA, which is taxed as a life insurance company under the provision of the Internal Revenue Code (“IRC”). Under the current provisions of the IRC, PIA does not expect to incur federal income taxes on the earnings of Account I to the extent the earnings are credited under contracts. Based on this, there is no charge to Account I for federal income taxes. PIA will review, as needed, the status of this policy in the event of changes in the tax law. A charge may be made in future years for any federal income taxes that would be attributable to the contracts.

Under the provisions of Section 817(h) of the IRC, a variable life contract will not be treated as a life contract for federal tax purposes for any period for which the investments of the segregated asset account on which the contract is based are not adequately diversified. The IRC provides that the “adequately diversified” requirement may be met if the underlying investments satisfy either a statutory safe harbor test or diversification requirements set forth in regulations issued by the Secretary of Treasury. Account I satisfies the current requirements of the regulations, and PIA intends that Account I will continue to meet such requirements.

FAIR VALUE MEASUREMENT — Fair value is defined as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. Fair value measurement is based on assumptions market participants would make in pricing an asset or liability. The inputs to valuation techniques used to

5

Note 2.    Significant Accounting Policies (continued)

measure fair value are prioritized by establishing a three-level fair value hierarchy. The fair value hierarchy gives the highest priority to quoted prices in active markets and the lowest priority to prices derived from unobservable inputs. An asset or liability’s classification within the fair value hierarchy is based on the lowest level of significant input to its fair value measurement. Account I has categorized its assets and liabilities into the three-level fair value hierarchy based upon the priority of the inputs. The following summarizes the types of assets and liabilities included within the three-level hierarchy:

Level 1 — Fair value is based on unadjusted quoted market prices in active markets for identical assets or liabilities that are accessible at the measurement date. These generally provide the most reliable evidence and are used to measure fair value whenever available. Active markets are defined as having the following for the measured asset/liability: i) many transactions, ii) current prices, iii) price quotes not varying substantially among market makers. iv) narrow bid/ask spreads and v) most information publicly available. Prices are obtained from readily available sources for market transactions involving identical assts or liabilities.

Level 2 — Fair value is based on significant inputs, other than quoted prices included in Level 1, that are observable for the asset or liability, either directly or indirectly, for substantially the full term of the asset or liability through corroboration with observable market data. In circumstances where prices from pricing services are reviewed for reasonability but cannot be validated to observable market data as noted above, these security values are recorded in Level 3 in our fair value hierarchy.

Level 3 — Fair value is based on significant inputs that are unobservable for the asset or liability. These are typically less liquid fixed maturity securities with very limited trading activity. Prices are determined using valuation methodologies such as option pricing models, discounted cash flow models and other similar techniques. Prices may also be based upon non-binding quotes from brokers or other market makers that are reviewed for reasonableness, based on the Penn Mutual’s understanding of the market.

The fair value of all the investments in Account I, are at net asset values and the investments are considered actively traded and fall within Level 1.

Note 3.    Purchases and Sales of Investments

The following table shows aggregate cost of shares purchased and proceeds of shares sold for each fund or portfolio for the period ended December, 31, 2022:

	Purchases		Sales
Vanguard VIF — Equity Index Portfolio	$	10,342,336	$	583,814
Vanguard VIF — Total Stock Market Index Portfolio		9,867,217		511,842
Vanguard VIF — Global Bond Index Portfolio		506,229		45,681
Vanguard VIF — Mid-Cap Index Portfolio		2,002,724		61,619
Vanguard VIF — Moderate Allocation Portfolio		6,244,321		1,353,118
Vanguard VIF — Total Bond Market Index Portfolio		2,112,214		49,169
Vanguard VIF — Total International Stock Market Index Portfolio		2,635,961		103,392
Vanguard VIF — Conservative Allocation Portfolio		682,822		85,446

Note 4.    Related Party Transactions and Contract Charges

PIA received $1,682,398 and $132,983 from Account I for mortality and risk expense, cost of insurance, contract administration and certain other charges for the years ended December 31, 2022 and 2021. These amounts charged include those assessed through redemption of units.

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Note 4.    Related Party Transactions and Contract Charges (continued)

The following products assess mortality and expense charges as a redemption of units held by the contract owner. They are as follows:

Products	Mortality & Risk Expense	Guaranteed Maximum Rate
Protection VUL	0.10% monthly (annual rate of 1.25%) in policy years 1-10 and 0.02% monthly (annual rate of 0.25%) in policy years 11+ of the policy value allocated to the Separate Account; and a monthly expense charge per $1,000 of specified amount during the first 20 years varying by issue age, sex (if applicable), and rate class.	0.10% monthly (annual rate of 1.25%) of policy value allocated to the Separate Account; and a monthly expense charge per $1,000 of specified amount during the first 10 years varying by issue age, sex (if applicable), and rate class.

Certain charges of the products are reflected as a redemption of units held by the policyholder. These are as follows:

A surrender charge may be charged on full surrender of the policy depending on the policy year of the surrender and whether there has been an increase in the Specified Amount. The amount of the surrender charge if any, will in no event exceed the maximum allowed by state or federal law. For Protection VUL, a surrender charge will also be charged if the Specified Amount is decreased in the first five policy years.

A charge equal to the lesser of 2% of the amount withdrawn or $25 will be charged on a partial withdrawal. The charge will be deducted from the available Net Cash Surrender Value and will be considered part of the partial withdrawal.

Premium charges on purchase payments are withdrawn from payments prior to the purchase of units. Currently, state premium taxes on purchase payments range from 0.00% to 4.00%. In addition, premium charges on purchase payments range from 6.00% to 10.00%.

For each Protection VUL policy, on the date of issue and each monthly anniversary, a monthly deduction is made from the policy value. The monthly deduction consists of cost of insurance charges, administrative charges and any charges for additional benefits added by supplemental agreement to a policy.

For each Protection VUL policy, each month on the date specified in the contract (or on the date the contract is withdrawn in full if other than the date specified), a $10 contract administration charge, or a lesser amount under state insurance laws, is deducted from the contract value.

Note 5.    Accumulation Units

	December 31, 2022							December 31, 2021
Subaccount	Units Issued		Units Redeemed			Ending Unit Balance		Units Issued		Units Redeemed			Ending Unit Balance
Vanguard VIF — Equity Index Portfolio		1,129,607		(65,298	)		1,126,057		65,398		(3,650	)		61,748
Vanguard VIF — Total Stock Market Index Portfolio		1,087,505		(55,977	)		1,229,309		220,992		(23,211	)		197,781
Vanguard VIF — Global Bond Index Portfolio		58,659		(5,259	)		81,566		28,691		(525	)		28,166
Vanguard VIF — Mid-Cap Index Portfolio		222,601		(6,853	)		262,052		47,938		(1,634	)		46,304
Vanguard VIF — Moderate Allocation Portfolio		708,750		(152,334	)		925,738		708,746		(339,424	)		369,322
Vanguard VIF — Total Bond Market Index Portfolio		244,812		(5,487	)		273,783		36,768		(2,310	)		34,458
Vanguard VIF — Total International Stock Market Index Portfolio		309,629		(12,619	)		366,200		70,683		(1,493	)		69,190
Vanguard VIF — Conservative Allocation Portfolio		79,147		(9,488	)		97,920		30,557		(2,296	)		28,261

Note 6.    Financial Highlights

Account I is a funding vehicle for a number of variable life products, which have unique combinations of features and fees that are charged against the contract owner’s account balance. Differences in the fee structures result in a variety of unit values, expense ratios and total returns.

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Note 6.    Financial Highlights (continued)

The following table was developed by determining which products offered within Account I have the lowest and highest total return. Only product designs within each subaccount that had units outstanding during the respective periods were considered when determining the lowest and highest total return. The summary may not reflect the minimum and maximum contract charges offered within Account I as contract owners may not have selected all available and applicable contract options.

	January 1, 2022	December 31, 2022					For the Year ended December 31, 2022
Subaccount	Unit Value	Units		Unit Value	Net Assets		Investment Income Ratio*(%)		Expense Ratio**(%)	Total Return***(%)
Vanguard VIF — Equity Index Portfolio	11.08		1,126,057	9.06		10,200,309		.46	—	-18.23
Vanguard VIF — Total Stock Market Index Portfolio	10.92		1,229,309	8.78		10,796,726		.53	—	-19.59
Vanguard VIF — Global Bond Index Portfolio	9.92		81,566	8.61		702,649		2.12	—	-13.13
Vanguard VIF — Mid- Cap Index Portfolio	10.97		262,052	8.91		2,333,956		.96	—	-18.82
Vanguard VIF — Moderate Allocation Portfolio	10.30		925,738	8.66		8,017,052		2.04	—	-19.59
Vanguard VIF — Total Bond Market Index Portfolio	9.93		273,783	8.62		2,358,696		1.54	—	-13.21
Vanguard VIF — Total International Stock Market Index Portfolio	10.03		366,200	8.42		3,084,493		1.81	—	-16.01
Vanguard VIF — Conservative Allocation Portfolio	10.17		97,920	8.66		847,866		1.74	—	-14.90

	July 16, 2021†	December 31, 2021					For the Period July 16, 2021† to December 31, 2021
Subaccount	Unit Value	Units		Unit Value	Net Assets		Investment Income Ratio*(%)		Expense Ratio**(%)	Total Return***(%)
Vanguard VIF — Equity Index Portfolio	10.00		61,748	11.08		684,030		—	—	10.78
Vanguard VIF — Total Stock Market Index Portfolio	10.00		197,781	10.92		2,160,295		—	—	9.23
Vanguard VIF — Global Bond Index Portfolio	10.00		28,166	9.92		279,304		—	—	-0.84
Vanguard VIF — Mid- Cap Index Portfolio	10.00		46,304	10.97		508,020		—	—	9.71
Vanguard VIF — Moderate Allocation Portfolio	10.00		369,322	10.30		3,804,359		—	—	3.01
Vanguard VIF — Total Bond Market Index Portfolio	10.00		34,458	9.93		342,059		—	—	-0.73
Vanguard VIF — Total International Stock Market Index Portfolio	10.00		69,190	10.03		693,906		—	—	0.29
Vanguard VIF — Conservative Allocation Portfolio	10.00		28,261	10.17		287,538		—	—	1.74

† Inception of the subaccounts

* These ratios represent the dividends, excluding distributions of capital gains, received by the subaccounts within Account I from the underlying mutual funds, net of management fees and expenses assessed by the fund manager, divided by the average net assets of the respective subaccounts. These ratios exclude those expenses, such as mortality and expense charges, that result in direct reductions in the unit values. The recognition of investment income by the subaccount is affected by the timing of the declaration of dividends by the underlying funds in which the subaccount invests.

8

Note 6.    Financial Highlights (continued)

** These ratios represent the annualized contract expenses of the subaccount for the period indicated. The ratios include only those expenses that result in a direct reduction to unit values. Charges made directly to contract owner accounts through the redemption of units and expenses of the underlying subaccount are excluded.

*** On July 15, 2021 Protection VUL was launched, which resulted in a partial year of total return ratios for 2021. These ratios represent the total return for the periods indicated, including changes in the value of the underlying subaccount, and reflect deductions for all items included in the expense ratio. The total return also includes any expenses assessed through the redemption of units. The total return is calculated for the period indicated or from the effective date through the end of the reporting period.

Note 7.    Subsequent Events

Management has evaluated events subsequent to December 31, 2022 and through the Account I Financial Statement date of issuance of April 13, 2023.

9

PM8679 05/23

` PricewaterhouseCoopers LLP, Two Commerce Square, 2001 Market Street, Suite 1800, Philadelphia, Pennsylvania 19103-7042 T: (267) 330 3000, www.pwc.com/us

Report of Independent Auditors

To the Board of Directors of the Penn Insurance and Annuity Company

Opinions

We have audited the accompanying statutory financial statements of The Penn Insurance and Annuity Company (“PIA”) a wholly-owned subsidiary of The Penn Mutual Life Insurance Company) which comprise the statutory statements of admitted assets, liabilities and capital and surplus as of December 31, 2022 and 2021, and the related statutory statements of income and changes in surplus, and of cash flows for the years then ended, including the related notes (collectively referred to as the “financial statements”).

Unmodified Opinion on Statutory Basis of Accounting

In our opinion, the accompanying financial statements present fairly, in all material respects, the admitted assets, liabilities and capital and surplus of the Company as of December 31, 2022 and 2021, and the results of its operations and its cash flows for the years then ended, in accordance with the accounting practices prescribed or permitted by the Delaware Insurance Department described in Note 1.

Adverse Opinion on U.S. Generally Accepted Accounting Principles

In our opinion, because of the significance of the matter discussed in the Basis for Adverse Opinion on U.S. Generally Accepted Accounting Principles section of our report, the accompanying financial statements do not present fairly, in accordance with accounting principles generally accepted in the United States of America, the financial position of the Company as of December 31, 2022 and 2021, or the results of its operations or its cash flows for the years then ended.

Basis for Opinions

We conducted our audit in accordance with auditing standards generally accepted in the United States of America (US GAAS). Our responsibilities under those standards are further described in the Auditors’ Responsibilities for the Audit of the Financial Statements section of our report. We are required to be independent of the Company and to meet our other ethical responsibilities, in accordance with the relevant ethical requirements relating to our audit. We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our audit opinion.

Basis for Adverse Opinion on U.S. Generally Accepted Accounting Principles

As described in Note 1 to the financial statements, the financial statements are prepared by the Company on the basis of the accounting practices prescribed or permitted by the Delaware Insurance Department, which is a basis of accounting other than accounting principles generally accepted in the United States of America.

The effects on the financial statements of the variances between the statutory basis of accounting described in Note 1 and accounting principles generally accepted in the United States of America, although not reasonably determinable, are presumed to be material.

Responsibilities of Management for the Financial Statements

Management is responsible for the preparation and fair presentation of the financial statements in accordance with the accounting practices prescribed or permitted by the Delaware Insurance Department. Management is also responsible for the design, implementation, and maintenance of internal control relevant to the preparation and fair presentation of financial statements that are free from material misstatement, whether due to fraud or error.

In preparing the financial statements, management is required to evaluate whether there are conditions or events, considered in the aggregate, that raise substantial doubt about the Company’s ability to continue as a going concern for one year after the date the financial statements are available to be issued.

Auditors’ Responsibilities for the Audit of the Financial Statements

Our objectives are to obtain reasonable assurance about whether the financial statements as a whole are free from material misstatement, whether due to fraud or error, and to issue an auditors’ report that includes our opinion. Reasonable assurance is a high level of assurance but is not absolute assurance and therefore is not a guarantee that an audit conducted in accordance with US GAAS will always detect a material misstatement when it exists. The risk of not detecting a material misstatement resulting from fraud is higher than for one resulting from error, as fraud may involve collusion, forgery, intentional omissions, misrepresentations, or the override of internal control. Misstatements are considered material if there is a substantial likelihood that, individually or in the aggregate, they would influence the judgment made by a reasonable user based on the financial statements.

In performing an audit in accordance with US GAAS, we:

• Exercise professional judgment and maintain professional skepticism throughout the audit.

• Identify and assess the risks of material misstatement of the financial statements, whether due to fraud or error, and design and perform audit procedures responsive to those risks. Such procedures include examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements.

• Obtain an understanding of internal control relevant to the audit in order to design audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control. Accordingly, no such opinion is expressed.

• Evaluate the appropriateness of accounting policies used and the reasonableness of significant accounting estimates made by management, as well as evaluate the overall presentation of the financial statements.

• Conclude whether, in our judgment, there are conditions or events, considered in the aggregate, that raise substantial doubt about the Company’s ability to continue as a going concern for a reasonable period of time.

We are required to communicate with those charged with governance regarding, among other matters, the planned scope and timing of the audit, significant audit findings, and certain internal control-related matters that we identified during the audit.

Philadelphia, Pennsylvania

February 17, 2023

Table of Contents

	Page
Statements of Admitted Assets, Liabilities and Capital and Surplus		1
Statements of Operations		2
Statements of Changes in Capital and Surplus		3
Statements of Cash Flows		4
Notes to Financial Statements
Note 1. Nature of Operations and Basis of Presentation		5
Note 2. Summary of Significant Accounting Policies		6
Note 3. Investments		12
Note 4. Separate Accounts		19
Note 5. Derivatives		20
Note 6. Fair Value of Financial Instruments		22
Note 7. Life Reserves by Withdrawal Characteristics		27
Note 8. Reserves and Funds for the Payment of Annuity Benefits		28
Note 9. Federal Income Taxes		30
Note 10. Reinsurance		35
Note 11. Related Parties		36
Note 12. Commitments and Contingencies		37
Note 13. Subsequent Events		37

($ in Thousands)

Statements of Admitted Assets, Liabilities and Capital and Surplus

As of December 31,	2022		2021
ADMITTED ASSETS
Bonds	$	7,015,519	$	6,200,067
Preferred Stock		54,340		62,437
Common stock — affiliated		130,655		107,305
Common stock — unaffiliated		33,467		34,722
Policy loans		589,233		567,226
Cash and short-term investments		128,400		168,371
Alternative assets		366,264		385,959
Derivatives		990,389		577,670
Other invested assets		125,118		112,591
TOTAL INVESTMENTS		9,433,385		8,216,348
Investment income due and accrued		85,926		78,151
Deferred tax asset		68,112		66,791
Amounts recoverable from reinsurers		49,912		55,176
Funds held by reinsured company		1,049,203		997,405
Federal income taxes recoverable		22,071		2,965
Other assets		134,281		51,833
Separate account assets		76,939		63,914
TOTAL ASSETS	$	10,919,829	$	9,532,583
LIABILITIES
Reserves and funds for payment of future insurance and annuity benefits	$	7,037,940	$	6,217,928
Policy claims in process		24,077		18,290
Asset valuation reserve		107,178		157,725
Interest maintenance reserve		2,993		27,919
Funds held under coinsurance		1,630,788		1,543,064
Other liabilities		402,683		431,496
Derivatives		888,119		403,251
Separate account liabilities		76,939		63,914
TOTAL LIABILITIES		10,170,717		8,863,587
CAPITAL AND SURPLUS
Common stock, $2.50 par value, 1,000 shares authorized, issued and outstanding		2,500		2,500
Capital contributed in excess of par value		529,662		469,662
Accumulated surplus		216,950		196,834
TOTAL CAPITAL AND SURPLUS		749,112		668,996
TOTAL LIABILITIES, CAPITAL AND SURPLUS	$	10,919,829	$	9,532,583

The accompanying notes are an integral part of these financial statements.

2022 Statutory Financial Statements Page 1

($ in Thousands)

Statements of Operations

For the Years Ended December 31,	2022			2021
REVENUES
Premium and annuity considerations	$	942,507		$	845,410
Net investment income		341,231			334,102
Other revenue		48,165			49,026
TOTAL REVENUE		1,331,903			1,228,538
BENEFITS AND EXPENSES
Benefits paid to policyholders and beneficiaries		298,409			94,375
Increase in reserves and funds for payment of future insurance and annuity benefits		594,866			870,199
Commissions		71,649			71,957
Operating expenses		108,015			125,080
Other expenses		76,380			101,278
Net transfer from separate accounts		23,080			3,168
TOTAL BENEFITS AND EXPENSES		1,172,399			1,266,057
GAIN/(LOSS) FROM OPERATIONS BEFORE FEDERAL INCOME TAXES		159,504			(37,519	)
Federal income tax (benefit)/expense		(9,157	)		2,136
GAIN/(LOSS) FROM OPERATIONS		168,661			(39,655	)
Net realized capital (losses)/gains, net of tax		(24,614	)		29,548
NET GAIN/(LOSS)	$	144,047		$	(10,107	)

The accompanying notes are an integral part of these financial statements.

Page 2 The Penn Insurance and Annuity Company

($ in Thousands)

Statements of Changes in Capital and Surplus

For the Years Ended December 31,	2022			2021
COMMON STOCK
Beginning of year	$	2,500		$	2,500
End of year		2,500			2,500
CAPITAL CONTRIBUTED IN EXCESS OF PAR VALUE
Beginning of year		469,662			439,662
Capital Contribution from Parent		60,000			30,000
End of year		529,662			469,662
ACCUMULATED SURPLUS
Opening Surplus Adjustment		(1,357	)		—
Beginning of year		195,477			229,213
Net gain/(loss)		144,047			(10,107	)
Dividend to Parent		(8,202	)		—
Change in:
Nonadmitted assets		6,962			1,958
Asset valuation reserve		50,547			(78,489	)
Net deferred income tax		(36,779	)		7,427
Net unrealized capital (losses)/gains, net of tax		(135,102	)		46,832
End of year		216,950			196,834
TOTAL CAPITAL AND SURPLUS	$	749,112		$	668,996

The accompanying notes are an integral part of these financial statements.

2022 Statutory Financial Statements Page 3

($ in Thousands)

Statements of Cash Flows

For the Years Ended December 31,	2022			2021
OPERATIONS
Premium and annuity considerations	$	985,242		$	835,194
Net investment income		403,358			392,309
Other revenue		48,967			49,255
CASH PROVIDED BY OPERATIONS		1,437,567			1,276,758
Benefits paid		304,369			245,617
Commissions, operating expenses and other		268,974			296,213
Net transfers from separate accounts		26,815			3,322
Taxes paid on operating income and realized investment losses		3,416			9,609
CASH USED IN OPERATIONS		603,574			554,761
NET CASH PROVIDED BY OPERATIONS		833,993			721,997
INVESTMENT ACTIVITIES
Investments sold, matured or repaid:
Bonds		546,613			906,327
Stocks		20,479			35,994
Other invested assets		11,733			16,846
Derivatives		96,984			311,291
NET PROCEEDS FROM INVESTMENTS SOLD, MATURED OR REPAID		675,809			1,270,458
Cost of investments acquired:
Bonds		1,463,246			1,978,511
Stocks		66,410			24,188
Other invested assets		24,364			45,980
Derivatives		201,523			167,494
Miscellaneous applications		39			1,266
TOTAL COST OF INVESTMENTS ACQUIRED		1,755,582			2,217,439
Net (increase) in policy loans		(22,000	)		14,629
NET CASH USED IN INVESTMENT ACTIVITIES		(1,101,773	)		(932,352	)
FINANCING AND MISCELLANEOUS
Net withdrawals/(deposits)/withdrawals on deposit-type funds		225,598			1,985
Capital and paid in surplus		60,000			30,000
Other cash (used in)/provided, net		(57,790	)		120,734
NET CASH PROVIDED BY/(USED IN) FINANCING AND MISCELLANEOUS		227,808			152,719
NET INCREASE IN CASH AND SHORT-TERM INVESTMENTS		(39,971	)		(57,636	)
Cash and short-term investments:
Beginning of year		168,371			226,007
End of year	$	128,400		$	168,371
Supplemental Disclosure of Cash Flow Information for Non-Cash Transactions:
Premium Paid by Benefit	$	881		$	1,180
Premium Paid by Waiver	$	663		$	686
Non-Cash Acquisitions	$	1,570		$	15,197
Other	$	12,376		$	442

The accompanying notes are an integral part of these financial statements.

Page 4 The Penn Insurance and Annuity Company

($ in Thousands)

Notes to Financial Statements

Note 1.  NATURE OF OPERATIONS AND BASIS OF PRESENTATION

NATURE OF OPERATIONS  The Penn Insurance and Annuity Company (the “Company” or “PIA”) is a wholly-owned life insurance subsidiary of The Penn Mutual Life Insurance Company (“Penn Mutual” or “PML”). The Company’s business activities are primarily concentrated in the sale of indexed universal life (“IUL”), variable universal life (“VUL”), fixed universal life and indexed annuity products. The Company markets and sells its products through Penn Mutual’s distribution systems, which consist of a network of career and independent financial professionals, and has its in-force business serviced by PML. Additionally, it has closed blocks of deferred and payout annuities. Domiciled in Delaware, PIA is licensed to write business in forty-nine states and the District of Columbia.

BASIS OF PRESENTATION  The accompanying financial statements of the Company have been prepared in conformity with the National Association of Insurance Commissioner’s (“NAIC”) Practices and Procedures manual and with statutory accounting practices prescribed or permitted by the Delaware Department of Insurance (collectively “SAP” or “statutory accounting principles”). The Company currently has no permitted practices.

Pursuant to a permitted practice received from the Delaware Department of Insurance (Captive Bureau), PIA Reinsurance Company of Delaware I (“PIAre I”), a wholly-owned subsidiary of the Company, admits as an asset and a form of statutory surplus, the value of a credit linked variable funding note (LLC Note) provided by an unaffiliated company in conjunction with a reinsurance agreement with the Company. Based on the “look-through” provisions of the Statement of Statutory Accounting Principles No.97, Investments in Subsidiary, Controlled and Affiliated Entities, the Company includes the value of the LLC Note and related form of surplus in the financial statements of its Insurance SCA, PIAre I, in the carrying value of PIAre I.

In accordance with the permitted practice, the Company recorded $130,655 and $107,305 as of December 31, 2022 and 2021, respectively, in Common stock-affiliated, with a corresponding $130,655 and $107,305 in surplus, which represents the statutory reporting value of PIAre I. If PIAre I had completed their statutory financial statements in accordance with NAIC statutory accounting practices and procedures, the Company’s reporting value of PIAre I would have been $0 as of December 31, 2022 and 2021. There was no impact to net income as a result of the permitted practice.

Had the Company not been permitted to include the asset and statutory surplus noted above in either 2022 or 2021, the resulting RBC of PIA would not have triggered a regulatory event. Had PIAre I not received a permitted or prescribed practice to include the asset and statutory surplus above noted, the resulting RBC of PIAre I would have triggered a regulatory event.

Statutory accounting practices are different in some respects from financial statements prepared in accordance with U.S. Generally Accepted Accounting Principles (“GAAP”). The more significant differences between statutory accounting principles and GAAP are as follows:

(a) certain acquisition costs, such as commissions and other variable costs, that are directly related to the successful acquisition of new business, are charged to current operations as incurred, whereas GAAP generally capitalizes these expenses and amortizes them based on profit emergence over the expected life of the policies or over premium payment period;

(b) statutory policy reserves are based upon the methods prescribed in the Valuation Manual, whereas GAAP reserves would generally be based upon the net level premium method or the estimated gross margin method, with estimates of future mortality, morbidity and interest assumptions;

(c) bonds are generally carried at amortized cost, whereas GAAP generally reports bonds at fair value;

(d) undistributed earnings from alternative assets are included in unrealized gains and losses, whereas GAAP would reflect these changes as net investment income;

(e) deferred income taxes, which provide for book versus tax temporary differences, are subject to limitation and are charged to surplus, whereas GAAP would generally include the change in deferred taxes in net income;

(f) payments received for universal and variable life insurance products and variable annuities are reported as premium income and changes in reserves, whereas GAAP would treat these payments as deposits to policyholders’ account balances;

2022 Statutory Financial Statements Page 5

($ in Thousands)

(g) assets are reported at “admitted asset” value, and “nonadmitted assets” are excluded through a charge against surplus, whereas GAAP would record these assets net of any valuation allowance;

(h) investments in subsidiaries are accounted for using the equity method. The Company’s investments in Independence Square Properties, LLC (“ISP”) and PIAre I, to the extent of the audited surplus/equity, are admitted assets. GAAP would consolidate these entities;

(i) reinsurance reserve credits are reported as a reduction of policyholders’ reserves and liabilities for deposit-type contracts, whereas GAAP would report these balances as an asset;

(j) an asset valuation reserve (“AVR”) is reported as a contingency reserve to stabilize surplus against fluctuations in the carrying value of stocks, real estate investments, partnerships and limited liability companies (“LLCs”), investments in low income housing tax credits (“LIHTC”), as well as non interest-related declines in the value of bonds, whereas GAAP would not record this reserve;

(k) after-tax realized capital gains and losses which result from changes in the overall level of interest rates for all types of fixed-income investments and interest-related hedging activities are deferred into the interest maintenance reserve (“IMR”) and amortized into investment income over the remaining life of the investment sold, whereas GAAP would report these gains and losses as revenue at time of sale;

(l) changes in the fair value of the derivative financial instruments are recorded as changes in surplus, unless deemed an effective hedge when it is carried at amortized cost with no resulting changes in fair value. Changes in fair value for GAAP would be reported as income for ineffective cash flow hedges and effective fair value hedges; changes in fair value for GAAP would be reported as other comprehensive income for effective cash flow hedges;

(m) changes in the fair value of unaffiliated common stock are recorded as changes in surplus, whereas GAAP, records the change in fair value through realized capital gains/losses;

(n) comprehensive income is not presented whereas GAAP would present changes in unrealized capital gains and losses and foreign currency translations as other comprehensive income;

(o) changes in the value of perpetual preferred stock are recorded as changes in surplus, whereas GAAP recognizes the changes through realized capital gains/losses;

(p) embedded derivatives are recorded as part of the underlying contract, whereas GAAP would identify and bifurcate certain embedded derivatives from the underlying contract or security and account for them separately;

(q) identification of other-than-temporary impairment (“OTTI”) uses an “intent and ability to hold” criteria whereas GAAP would use an “ability and intent not to sell” criteria;

(r) investments in Federal Home Loan Bank stock are reported as an investment in common stock, unaffiliated, whereas GAAP would report these within other invested assets.

Note 2.  SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

USE OF ESTIMATES  The preparation of financial statements requires management to make estimates and assumptions that impact the reported amounts of assets and liabilities, the disclosure of contingent assets and liabilities as of the date of the financial statements, and the reported amounts of revenues and expenses during the reporting periods. Those estimates are inherently subject to change and actual results could differ from those estimates. Included among the material reported amounts and disclosures that requires extensive use of estimates are:

◇ Carrying value of certain invested assets

◇ Liabilities for reserves and funds for the payment of insurance and annuity benefits

◇ Accounting for income taxes and valuation of deferred income tax assets and liabilities and unrecognized tax benefits

◇ Litigation and other contingencies

INVESTMENTS  Bonds with an NAIC designation of 1 to 5 are valued at amortized cost. All other bonds are valued at the lower of cost or fair value. Fair value is determined using an external pricing service or management’s pricing models.

For fixed income securities that do not have a fixed schedule of payments, including asset-backed and mortgage-backed securities, the effect on amortization or accretion is revalued periodically based on the current estimated cash flows. Prepayment assumptions are based on borrower constraints and economic incentives such as original

Page 6 The Penn Insurance and Annuity Company

($ in Thousands)

term, age, and coupon of the loan as affected by the interest rate environment. Cash flow assumptions for structured securities are

obtained from broker dealer survey values or internal estimates. These assumptions are consistent with the current interest rate and economic environment.

Preferred Stock  Highest-quality, high-quality or medium quality redeemable preferred stock (NAIC designations 1 to 3) shall be valued at amortized cost. All other redeemable preferred stocks (NAIC designations 4 to 6) shall be reported at the lower of amortized cost or fair value. Perpetual preferred stock shall be valued at fair value, not to exceed any currently effective call price. Fair value is determined using an external pricing service or management’s pricing model.

Common Stock  Common Stock of the Company’s insurance affiliate, PIAre I, is carried at its underlying audited statutory surplus on the Statement of Admitted Assets, Liabilities, and Surplus. Common stock, unaffiliated is valued at fair value. Dividends are recognized in net investment income on the ex-dividend date.    Changes in the carrying value are recognized in unrealized gains or losses in surplus. The investment in capital stock of the Federal Home Loan Bank of Pittsburgh (“FHLB-PGH”) is carried at par, which approximates fair value.

Policy Loans  Policy Loans are carried at the aggregate balance of unpaid principal and interest.

Cash, Cash Equivalents and Short-term investments  Cash Equivalents include investments purchased with maturities of three months or less and money market mutual funds. Short-term investments, which are carried at amortized cost and approximate fair value, consist of investments purchased with maturities greater than three months and less than or equal to 12 months.

Alternative Assets  Alternative Assets consists primarily of limited partnerships. The Company accounts for the value of its investments at their underlying GAAP equity. Dividends and income distributions from limited partnerships are recorded as investment income. Undistributed earnings are included in the unrealized gains and losses balance and are reflected in surplus, net of deferred taxes. Distributions that are recorded as a return of capital reduce the carrying value of the limited partnership investment. Due to the timing of the valuation data received from the partnership, these investments are reported in accordance with the most recent valuations received, which are primarily on a one quarter lag.

Derivatives  The Company may utilize derivative financial instruments in the normal course of business to manage risk, in conjunction with its management of assets and liabilities and interest rate risk. The accounting treatment of specific derivatives depends on whether the financial instrument is designated and qualifies as a highly effective hedge. Derivatives used in hedging transactions that meet the criteria of a highly effective hedge are reported and valued in a manner that is consistent with the instrument hedged. The change in fair value of these derivatives is recognized as an unrealized capital gain/(loss) until they are closed, at which time they are recorded in realized capital gains/(losses). Derivatives used in risk management transactions that do not meet the criteria of an effective hedge are accounted for at fair value, with changes in fair value recorded in unrealized capital gains/ (losses). Derivatives with a positive fair value or carrying value are reported as admitted assets and Derivatives with a negative fair value or carrying value are reported as liabilities. Realized gains and losses that are recognized upon termination or maturity of the derivatives used in economic hedges of interest rate and currency risk of the fixed income portfolio, regardless of accounting treatment, are transferred, net of taxes, to the IMR. All other realized gains and losses are recognized in net income upon maturity or termination of the derivative contracts.

The Company has entered into equity options in the form of call spreads that qualify for hedge accounting. The equity options in the form of call spreads have been designated to qualify as cash flow hedges of cash flows associated with indexed credits related to the annual return of the S&P 500 IUL policies.

The Company entered into interest rate swaps, that are carried at fair value. The Company may use payer swaps, a type of interest rate swap, to manage risk associated with rising interest rates. Receiver swaps, a type of interest rate swap, protect the Company from credit risk in the fixed income portfolio. The Company has not designated these as hedging instruments.

2022 Statutory Financial Statements Page 7

($ in Thousands)

The Company does not engage in derivative financial instrument transactions for speculative purposes.

Other Invested Assets  The Company invests in LIHTC investments, that generate tax credits for investing in affordable housing projects. Investments in LIHTC are included in other invested assets and are accounted for under the proportional amortized cost method. The delayed equity contributions for these investments are unconditional and legally binding and therefore, have been recognized as a liability. LIHTC investments are reviewed for OTTI, which is accounted for as a realized loss.

Other invested assets also include notes receivable carried at book value from Janney Montgomery Scott LLC (“JMS”), an affiliate, the Company’s investments in ISP, and Penn Mutual AM Strategic Income Fund (“PMAM’s PMUBX”) and receivables for unsettled investment transactions.

OTTI EVALUATION

Bonds, mortgage-backed and asset-backed securities  The Company considers an impairment to be OTTI if: (a) the Company’s intent is to sell, (b) the Company will more likely than not be required to sell, (c) the Company does not have the intent and ability to hold the security for a period of time sufficient to recover the amortized cost basis, or (d) the Company does not expect to recover the entire amortized cost basis. The Company conducts a periodic management review of all bonds including those in default, not-in-good standing, or otherwise designated by management. The Company also considers other qualitative and quantitative factors in determining the existence of OTTI including, but not limited to, unrealized loss trend analysis and significant short-term changes in value, default rates, delinquency rates, percentage of nonperforming loans, prepayments, and severities. If the impairment is other-than-temporary, the non-interest loss portion of the impairment is recorded through realized losses, and the interest related portion of the loss is disclosed in the notes to the financial statements.

The non-interest portion is determined based on the Company’s “best estimate” of future cash flows discounted to a present value using the appropriate yield. The difference between the present value of the best estimate of cash flows and the amortized cost is the non-interest loss. The remaining difference between the amortized cost and the fair value is the interest loss.

Equity Securities  OTTI The Company will impair any lot of equity securities in an unrealized loss position for more than 12 consecutive months by more than 10%. Any such impairments are accounted for as a realized loss.

Alternative Assets OTTI  The Company’s evaluation for OTTI takes into consideration the remaining life of a partnership and the performance of the underlying assets when evaluating the facts and circumstances surrounding the recovery of the cost for a partnership. Any such impairments are accounted for as a realized loss.

LIHTC OTTI  The Company’s evaluation for OTTI is determined by comparing the book value of the investment with the present value of future tax benefits. The investment is written down if the book value is higher than the present value and the impairment is accounted for as a realized loss.

INVESTMENT INCOME DUE AND ACCRUED  Investment income due and accrued consists primarily of interest and dividends. Interest is recognized on an accrual basis and dividends are recorded as earned on the ex-dividend date. Due and accrued income is not recorded on: (a) bonds in default; (b) bonds delinquent more than 90 days or where collection of interest is improbable; and (c) policy loan interest due and accrued in excess of the cash surrender value of the underlying contract.

OTHER ASSETS  Other assets primarily consists of amounts receivable from the Company’s affiliates relating to reinsurance and other intercompany service agreements.

FEDERAL INCOME TAX  The Company files a consolidated federal income tax return with its parent, Penn Mutual, and Penn Mutual’s subsidiaries. Each subsidiary’s tax liability or refund is accrued on a benefits for loss basis. Penn Mutual reimburses subsidiaries for losses utilized in the consolidated return based on inter-company tax allocation agreements. The provision for federal income taxes is computed in accordance with the section of the Internal Revenue Code applicable to life insurance companies and is based on income that is currently taxable.

Page 8 The Penn Insurance and Annuity Company

($ in Thousands)

Uncertain tax positions (“UTP”) are established when the merits of a tax position are evaluated against certain measurement and recognition tests. UTP changes are reflected as a component of income taxes. The Company currently has no UTPs.

Deferred income tax assets and liabilities are established to reflect the impact of temporary differences between the amount of assets and liabilities recognized for financial reporting purposes and such amounts recognized for tax purposes. These deferred tax assets or liabilities are measured by using the enacted tax rates expected to apply to taxable income in the period in which the deferred tax liabilities or assets are expected to be settled or realized. Changes in the deferred tax balances are reported as adjustments to surplus. Deferred tax assets, after the consideration of any necessary valuation allowance, in excess of statutory limits are treated as nonadmitted assets and charged to surplus.

REINSURANCE  In the normal course of business, the Company seeks to limit its exposure to loss on any single insured and to recover a portion of benefits paid by ceding reinsurance to other insurance enterprises or reinsurers under excess coverage and coinsurance contracts. The Company has set its retention limit for acceptance of risk on life insurance policies at various levels up to $7,500 for single life and $10,000 for joint lives.

In addition to excess coverage and coinsurance contracts, the Company also utilizes other forms of reinsurance such as coinsurance funds withheld.

Reinsurance does not relieve the Company of its primary liability and, as such, failure of reinsurers to honor their obligations could result in losses to the Company. The Company evaluates the risk transfer of its reinsurance contracts as well as the financial strength of potential reinsurers. The Company regularly monitors the financial condition and ratings of its existing reinsurers to ensure that amounts due from reinsurers are collectible.

Insurance liabilities are reported net of the effects of reinsurance. Estimated reinsurance recoverables are recognized in a manner consistent with the liabilities related to the underlying reinsured contracts.

SEPARATE ACCOUNT ASSETS AND LIABILITIES  The Company has separate account assets and liabilities representing segregated funds administered and invested by the Company primarily for the benefit of variable life insurance policyholders and variable annuity contractholders. The assets of each account are legally segregated and are generally not subject to claims that arise out of any other business of the Company. The separate accounts have varying investment objectives.

Separate account assets are stated at the fair value of the underlying assets, which are shares of mutual funds. The value of the assets in the Separate Accounts reflects the actual investment performance of the respective accounts and is not guaranteed by the Company. The liability is reported at contract value and represents the policyholders’ interest in the account and includes accumulated net investment income and realized and unrealized capital gains/(losses) on the assets. The investment income and realized capital gains/(losses) from separate account assets accrue to the policyholders and are not included in the Statements of Operations. Mortality, policy administration, surrender charges assessed and asset management fees charged against the accounts are included in other revenue in the accompanying Statements of Operations.

The Company has traditional variable annuity contracts in the separate accounts in which the Company provides various forms of guarantees to benefit the related contract holders called Guaranteed Minimum Death Benefits (“GMDB”). In accordance with guarantees provided, if the investment proceeds in the separate accounts are insufficient to cover the guarantees for the product, the policyholder proceeds will be remitted by the general account.

NONADMITTED ASSETS  Assets designated as nonadmitted by the NAIC include the amount of the deferred tax asset that will not be realized within the next three year period or in excess of statutory limitations, the IMR in a net asset position, certain other receivables, advances and prepayments, and related party amounts outstanding greater than 90 days from the due date and the investment in certain subsidiaries. Such amounts are excluded from the Statements of Admitted Assets, Liabilities and Capital and Surplus.

2022 Statutory Financial Statements Page 9

($ in Thousands)

RESERVES AND FUNDS FOR THE PAYMENT OF FUTURE INSURANCE AND ANNUITY BENEFITS  Policyholders’ reserves provide amounts adequate to discharge estimated future obligations in excess of estimated future premium on policies in-force. Any adjustments that are made to the reserve balances are reflected in the Statements of Operations in the year in which such adjustments are made, with the exception of changes in valuation bases that are accounted for as charges or credits to surplus.

Reserves and funds for the payment of future life and annuity benefits are developed using actuarial methods based on statutory mortality and interest requirements. Reserves for life insurance contracts are developed using accepted actuarial methods computed principally on the Commissioners’ Reserve Valuation Method (“CRVM”) method using the 1958, 1980, 2001, and 2017 Commissioners’ Standard Ordinary Mortality Tables and assumed interest rates ranging from 3.50% to 9.00%. Reserves for substandard policies are computed using multiples of the respective underlying mortality tables. The Company has universal life contracts with secondary guarantee features. The Company establishes reserves according to Actuarial Guideline XXXVIII.

Reserves for Term and Single Life UL with secondary guarantee features are based on the methodology specified by the Life Principle-Based Reserve approach (“VM-20”), starting with 2017 policy issue years. Reserves for Single and Joint Life IUL are based on the same VM-20 methodology starting with 2018 policy issue years. Reserves for all other life insurance products are based on the same VM-20 methodology starting with 2020 policy issue years. VM-20 specifies the final reserve as the greater of the Net Premium Reserve (“NPR”), Deterministic Reserve (“DR”) and Stochastic Reserve (“SR”). The NPR is a formulaic reserve with prescribed assumptions, including the 2017 CSO Mortality Tables. The DR is based on a single path, deterministic projection with prudent estimate assumptions, including margins for uncertainty. The SR is based on the Conditional Tail Expectation 70 (“CTE70”) of 1,000 stochastically generated interest rate return scenarios with prudent estimate assumptions, including margins for uncertainty.

Reserves for fixed indexed annuities are developed using accepted actuarial methods computed principally on the Commissioners’ Annuity Reserve Valuation Method (“CARVM”) method using the 2012 Individual Annuity Mortality Basis and assumed interest rates ranging from 3.00% to 3.75%. Reserves for substandard policies are computed using multiples of the respective underlying reserving tables. The Company establishes reserves according to Actuarial Guideline XXXV.

The Company waives deduction of deferred fractional premium at death and returns any portion of the final premium beyond the date of death. Reserves are computed using continuous functions to reflect these practices. Surrender values are not promised in excess of the legally computed reserves.

Reserves for deferred fixed individual annuity contracts are developed using accepted actuarial methods computed principally under the Commissioners’ Annuity Reserve Valuation Method using applicable interest rates and mortality tables, primarily on the 1971, 1983, 2000, and 2012 Individual Annuity Mortality Table and rates ranging from 1.00% to 7.75%.

The Company also has deferred variable annuity contracts and establishes reserves according to the methodology specified by Principle-Based Reserves for Variable Annuities (“VM-21”).

Reserves for group annuity contracts are developed using accepted actuarial methods computed principally on the 1971 Group Annuity Mortality Tables with an assumed interest rate of 11.25%.

The Company had $205 and $405 as of December 31, 2022 and December 31, 2021, respectively, of insurance in force for which the gross premiums are less than the net premiums according to the standards of valuation set by the Delaware Department of Insurance.

The tabular interest has been determined from the basic data for the calculation of policy reserves. The tabular less actual reserve released has been determined by formula.

LIABILITIES FOR DEPOSIT-TYPE CONTRACTS  Reserves for funding agreements, investment-type contracts such as supplementary contracts not involving life contingencies, and certain structured settlement annuities are based on account value or accepted actuarial methods using applicable interest rates. Fair value is estimated by discounting future cash flows using current market rates.

Page 10 The Penn Insurance and Annuity Company

($ in Thousands)

The tabular interest for funds not involving life contingencies is determined as the change in reserves less funds added during the year less other increases, plus funds withdrawn during the year.

POLICY CLAIMS IN PROCESS  Policy claims in process include provisions for payments to be made on reported claims and claims incurred but not reported.

INTEREST MAINTENANCE RESERVE  The IMR captures the realized capital gains/(losses) that result from changes in the overall level of interest rates and amortizes them into income over the calendar years to expected maturity.

ASSET VALUATION RESERVE  The AVR is a contingency reserve to stabilize surplus against fluctuations in the statement value of common stocks, partnerships, LIHTC investments, and LLCs, as well as non interest-related declines in the value of bonds. The AVR is reported in the Statement of Admitted Assets, Liabilities and Capital and Surplus, and the change in AVR is reported in the Statements of Changes in Capital and Surplus.

DRAFTS OUTSTANDING  Drafts outstanding that have not been presented for payment are recorded as a liability.

OTHER LIABILITIES  Other liabilities consists primarily of premiums received in advance, drafts outstanding, amounts payable on unaffiliated reinsurance agreements and amounts payable to the Company’s affiliates under reinsurance agreements and other service agreements.

CONTINGENCIES  Amounts related to contingencies are accrued if it is probable that a liability has been incurred and an amount is reasonably estimable. Regarding litigation, management evaluates whether there are incremental legal or other costs directly associated with the ultimate resolution of the matter that are reasonably estimable and, if so, includes these costs in the accrual.

RISK-BASED CAPITAL  Life insurance companies are subject to certain risk-based capital (“RBC”) requirements as specified by the NAIC. Under those requirements, minimum amounts of statutory surplus are required to be maintained based on various risk factors related to it. At December 31, 2022, the Company’s surplus exceeds these minimum levels.

PREMIUM AND RELATED EXPENSE RECOGNITION  Life insurance premium revenue is generally recognized as revenue on the gross basis when due from policyholders under the terms of the insurance contract. Annuity premium on policies with life contingencies is recognized as revenue when received. Both premium and annuity considerations are recorded net of reinsurance premiums. Commissions and other costs related to issuance of new policies, and policy maintenance and settlement costs are charged to current operations when incurred. Surrender fee charges on certain life and annuity products are recorded as a reduction of benefits and expenses. Benefits payments are reported net of the amounts received from reinsurers.

The Company accounts for deposit-type contracts (those that do not subject the Company to mortality or morbidity risk) under the deposit method. Amounts received from and payments to policyholders related to these contracts are recorded directly against the related policy reserves. Interest credited to policyholder accounts is reflected in Benefits paid to policyholders and beneficiaries. Fees charged to policyholder accounts are reflected in Other revenue.

OTHER REVENUE AND OTHER EXPENSES  Other revenue includes interest income earned on the funds withheld assets in PML pursuant to the terms of the 70% coinsurance with funds withheld agreement with PML. The Company subsequently remits this interest income earned to PIAre I, the ultimate assuming company, which is recognized in Other expenses.

Other revenue also includes benefits received by the Company under reinsurance agreements with PML relating to index credits on certain universal life policies issued by the Company.

REALIZED AND UNREALIZED CAPITAL GAINS AND LOSSES  Realized capital gains and losses, net of taxes, exclude gains and losses transferred to the IMR. Realized capital gains and losses are recognized in net income and are determined using the specific identification method.

2022 Statutory Financial Statements Page 11

($ in Thousands)

All after-tax realized capital gains and losses that result from changes in the overall level of interest rates for all types of fixed-income investments and interest-related derivative activities for derivatives backing assets are transferred to the IMR and amortized into net investment income using the grouped method over the remaining life of the investment sold or, in the case of derivative financial instruments, over the remaining life of the underlying asset.

Unrealized capital gains and losses, net of deferred federal income taxes, are recorded as a change in surplus.

FEDERAL HOME LOAN BANK BORROWINGS  The Company is a member of the FHLB-PGH, which provides access to collateralized advances, collateralized funding agreements, and other FHLB-PGH products. Collateralized advances from the FHLB-PGH are classified in Borrowed money. Collateralized funding agreements issued to the FHLB-PGH are classified as liabilities for deposit-type funds and are recorded within Reserves and funds for payment of insurance and annuity benefits. FHLB-PGH is a first-priority secured creditor.

The Company’s membership in FHLB-PGH requires the ownership of member stock, and borrowings from FHLB-PGH require the purchase of FHLB-PGH activity based stock in an amount equal to 4% of the outstanding borrowings. All FHLB-PGH stock purchased by the Company is classified as restricted general account investments within Common stock — unaffiliated. The Company’s borrowing capacity is determined by the lesser of the assets available to be pledged as collateral to FHLB-PGH or 10% of the Company’s prior period admitted general account assets. The fair value of the qualifying assets pledged as collateral by the Company must be maintained at certain specified levels of the borrowed amount, which can vary, depending on the nature of the assets pledged. The Company’s agreement allows for the substitution of assets and the advances are pre-payable. Current borrowings are subject to prepayment penalties.

Borrowings from the FHLB-PGH are classified as funding agreements. As of December 31, 2022, there were $225,000 in outstanding borrowings and the maximum borrowed during the year was $325,000. As of December 31, 2021, there were $0 in outstanding borrowings and the maximum borrowed during the year was $50,000.

NEW ACCOUNTING STANDARDS

Effective January 1, 2021, the Company adopted revisions to SSAP 32R for perpetual preferred stock. Perpetual preferred stock now shall be valued at fair value, not to exceed any currently effective call price. Prior to this effective date, perpetual preferred stock was valued at amortized cost. NAIC 1 to 3 designated redeemable preferred stock will remain valued at amortized cost while NAIC 4 to 6 designated redeemable preferred stock will also remain at the lower of amortized cost or fair value. Adoption of this is guidance did not materially impact the Company.

Note 3.  INVESTMENTS

The Company maintains a diversified investment portfolio. Investment policies limit concentration in any asset class (except for U.S. Treasury and U.S. Government guaranteed securities), geographic region, industry group, economic characteristic, investment quality, or individual investment.

Page 12 The Penn Insurance and Annuity Company

($ in Thousands)

BONDS AND PREFERRED STOCK  The following summarizes the admitted value and estimated fair value of the Company’s investment in bonds and redeemable preferred stock.

			Gross Unrealized Capital
	Admitted Value		Gains		Losses		Estimated Fair Value
December 31, 2022
US Governments	$	34,228	$	1	$	5,192	$	29,037
Other Governments		6,994		—		440		6,554
States, Territories and Possessions		49,967		996		2,774		48,189
Political Subdivisions		202,832		1,167		35,027		168,972
Special Revenue		661,518		5,988		113,933		553,573
Industrial and Miscellaneous		3,315,611		13,376		509,704		2,819,283
Residential Mortgage-backed
Securities		462,000		744		59,587		403,157
Commercial Mortgage-backed
Securities		1,080,983		1,621		99,552		983,052
Asset-backed Securities		1,052,337		995		88,593		964,739
Hybrid Securities		148,687		647		13,539		135,795
SVO Identified Funds		362		—		—		362
Total Bonds		7,015,519		25,535		928,341		6,112,713
Preferred Stock		54,340		6,601		9,663		51,278
Total Bonds and Preferred Stock	$	7,069,859	$	32,136	$	938,004	$	6,163,991

			Gross Unrealized Capital
	Admitted Value		Gains		Losses		Estimated Fair Value
December 31, 2021
US Governments	$	72,699	$	340	$	1,755	$	71,284
Other Governments		6,993		828		—		7,821
States, Territories and Possessions		36,039		9,157		—		45,196
Political Subdivisions		164,651		15,411	$	360.00		179,702
Special Revenue		598,831		69,275		1,893		666,213
Industrial and Miscellaneous		2,944,832		362,230		10,657		3,296,405
Residential Mortgage-backed
Securities		369,459		3,660		1,512		371,607
Commercial Mortgage-backed
Securities		917,758		37,055		6,603		948,210
Asset-backed Securities		945,327		21,850		7,259		959,918
Hybrid Securities		137,801		11,094		551		148,344
SVO Identified Funds		5,677		—		—		10,732
Total Bonds		6,200,067		530,900		30,590		6,700,377
Preferred Stock		62,437		829		13		63,253
Total Bonds and Preferred Stock	$	6,262,504	$	531,729	$	30,603	$	6,763,630

2022 Statutory Financial Statements Page 13

($ in Thousands)

RESTRICTED ASSETS AND SPECIAL DEPOSITS  The Company maintains assets on deposit with governmental authorities or trustees as required by certain state insurance laws. The Company also receives and pledges collateral for derivative contracts and FHLB in the form of cash and securities. Capital stock was purchased as a requirement to participate in the FHLB lending program.

Balance Sheet Classification	Type	2022		2021
Debt securities — Available for sale	Collateral — FHLB		502,019		—
Debt securities — Available for sale	Reinsurance agreements		581,315		529,382
Debt securities — Available for sale	State deposit		1,512		1,607
Equity securities — Common stock unaffiliated	FHLB Stock		10,103		1,081
Equity securities — Common stock unaffiliated	Reinsurance agreements		723		678
Cash	Collateral — Derivatives		—		235,938
Cash	State deposit		2,936		2,936
Total Restricted Assets		$	1,098,608	$	771,622

The following table summarizes the admitted value and estimated fair value of debt securities as of December 31, 2022 by contractual maturity. Expected maturities may differ from contractual maturities because borrowers may have the right to call or prepay obligations with or without penalties. Securities that are not due on a single maturity are included as of the final maturity.

Years to maturity:	Admitted Value		Fair Value
Due in one year or less	$	37,401	$	37,270
Due after one year through five years		283,553		271,439
Due after five years through ten years		533,362		498,857
Due after ten years		3,549,270		2,954,226
Residential Mortgage-backed Securities(1)		470,709		402,779
Commercial Mortgage-backed Securities(1)		1,088,887		983,430
Asset-backed Securities(1)		1,052,337		964,739
Total Bonds		7,015,519		6,112,740
Preferred Stock		54,340		51,251
TOTAL BONDS AND PREFERRED STOCK	$	7,069,859	$	6,163,991
(1) Includes U.S. Agency structured securities

Mortgage and other asset-backed securities consist of commercial and residential mortgage pass-through holdings and securities backed by various forms of collateral, with the largest being collateralized loan obligations. These securities follow a structured principal repayment schedule and are rated investment grade, other than $65,925 primarily in asset-backed securities. The mortgage and other asset-backed securities portfolio are presented separately in the maturity schedule due to the potential for prepayment. The weighted average life of this portfolio is 6.7 years.

At December 31, 2022, the largest industry concentration of the Company’s portfolio was investments in the Electric-Integrated sector of $417,469, representing 6% of the total debt securities portfolio.

Page 14 The Penn Insurance and Annuity Company

($ in Thousands)

CREDIT LOSS ROLLFORWARD  The following represents a rollforward of the cumulative credit loss component of OTTI loss recognized in earnings on fixed maturity securities still held for which a portion of the OTTI loss was not recognized in earnings.

As of December 31,	2022			2021
Balance, beginning of period	$	684		$	744
Credit loss impairments previously recognized on securities which matured, paid down, prepaid or were sold during the period		(46	)		(60	)
Credit loss impairments previously recognized on securities impaired to fair value during the period		—			—
Credit loss impairment recognized in the current period on securities not previously impaired		1,576			—
Additional credit loss impairments recognized in the current period on securities previously impaired		—			—
Balance, end of period	$	2,214		$	684

UNREALIZED LOSSES ON INVESTMENTS  Management has determined that the unrealized losses on the Company’s investments in equity and fixed maturity securities at December 31, 2022 are temporary in nature.

The following tables are an analysis of the fair values and gross unrealized losses aggregated by bond category and length of time that the securities were in a continuous unrealized loss position.

	Less than 12 months				12 months or greater				Total
	Fair Value		Gross Unrealized Capital Loss		Fair Value		Gross Unrealized Capital Loss		Fair Value		Gross Unrealized Capital Loss		Number of Securities
December 31, 2022
US Governments	$	17,572	$	430	$	50,336	$	4,762	$	67,908	$	5,192		15
Political Subdivisions		95,216		21,927		30,540		13,100		125,756		35,027		57
Special Revenue		271,045		45,416		157,233		68,517		428,278		113,933		207
Industrial and Miscellaneous		1,911,997		271,073		583,573		238,631		2,495,570		509,704		1,273
Residential Mortgage-backed Securities		263,919		27,965		126,074		31,622		389,993		59,587		113
Commercial Mortgage-backed Securities		683,201		54,145		258,985		45,407		942,186		99,552		346
Asset-backed Securities		485,508		31,897		436,888		56,696		922,396		88,593		242
Hybrid Securities		113,780		10,959		13,147		2,580		126,927		13,539		63
Total Bonds		3,873,858		467,026		1,656,776		461,315		5,530,634		928,341		2,316
Preferred Stock		41,255		6,955		10,023		2,708		51,278		9,663		25
Total Bonds and Preferred Stock	$	3,915,113	$	473,981	$	1,666,799	$	464,023	$	5,581,912	$	938,004		2,341

2022 Statutory Financial Statements Page 15

($ in Thousands)

	Less than 12 months				12 months or greater				Total
	Fair Value		Gross Unrealized Capital Loss		Fair Value		Gross Unrealized Capital Loss		Fair Value		Gross Unrealized Capital Loss		Number of Securities
December 31, 2021
US Governments	$	44,741	$	826	$	86,797	$	929	$	131,538	$	1,755		17
Special Revenue		119,172		1,893		—		—		119,172		1,893		191
Industrial and Miscellaneous		320,436		6,024		98,849		4,633		419,285		10,657		1,144
Residential Mortgage-backed Securities		194,648		1,512		—		—		194,648		1,512		91
Commercial Mortgage-backed Securities		199,184		2,748		48,913		3,855		248,097		6,603		298
Asset-backed Securities		527,667		4,035		67,550		3,224		595,217		7,259		222
Hybrid Securities		9,190		551		—		—		9,190		551		59
Total Bonds		1,430,579		17,858		307,636		12,732		1,738,215		30,590		2,272
Preferred Stock		6,367		13		—		—		6,367		13		22
Total Bonds and Preferred Stock	$	1,436,946	$	17,871	$	307,636	$	12,732	$	1,744,582	$	30,603		2,294

Included in the December 31, 2022 and 2021 amounts above is the interest portion of other-than-temporary impairments on securities of $412 and $407, respectively.

COMMON STOCK — UNAFFILIATED  The following summarizes the cost and estimated fair value of the Company’s investment in unaffiliated common stock:

			Gross Unrealized Capital
	Cost		Gains		Losses		Estimated Fair Value
December 31, 2022	$	37,132	$	859	$	4,524	$	33,467
December 31, 2021		37,626		787		3,691		34,722

The following presents the gross unrealized capital losses and fair values for unaffiliated common stock with unrealized capital losses.

	Less than 12 months				Greater than 12 Months				Total
	Fair Value		Gross Unrealized Capital Losses		Fair Value		Gross Unrealized Capital Losses		Fair Value		Gross Unrealized Capital Losses
December 31, 2022	$	4,797	$	561	$	10,516	$	3,963	$	15,313	$	4,524
December 31, 2021		19,642		3,658		4,923		33		24,565		3,691

The amount of unrealized capital losses on the Company’s investment in unaffiliated common stock is spread over 17 individual securities. As of December 31, 2022, there were 9 unaffiliated common stock securities that were priced below 80% of the security’s cost. These securities totaling $2,932 have been impaired.

Federal Home Loan Bank  The Company’s investment in FHLB-PGH Class B Membership Capital Stock as of December 31, 2022 and December 31, 2021 was $1,103 and $1,081, respectively. The Company also invested $9,000 and $0 in FHLB-PGH Activity Stock as of December 31, 2022 and December 31, 2021, respectively. The Class B

Page 16 The Penn Insurance and Annuity Company

($ in Thousands)

Membership Capital Stock held by the Company is subject to written notices of requests for redemption followed by a five year waiting period.

The Company’s borrowing capacity with the FHLB-PGH was $630,406 and $830,503 as of December 31, 2022 and December 31, 2021, respectively.

The following represents the amount of collateral required to be pledged to the FHLB-PGH and the maximum amount of collateral pledged as of:

	December 31 2022		Maximum during 2022		December 31 2021		Maximum during 2021
Carrying value	$	502,019	$	522,911	$	—	$	64,675
Fair value		448,129		495,858		—		73,456

The amount of interest on borrowings classified as funding agreements for the years ended December 31, 2022 and December 31, 2021 was $4,330 and $24, respectively.

OTHER THAN TEMPORARY IMPAIRMENTS ON LOAN-BACKED SECURITIES  There were no other-than-temporary impairments recognized on loan-backed securities for the years ended December 31, 2022 and December 31, 2021.

ALTERNATIVE ASSETS  The investment values of alternative assets are provided per the partnerships’ capital account statements. The Company’s interest cannot be redeemed, without exception. Instead, distributions from each fund result from the liquidation of the underlying assets. The period over which unredeemable investments are expected to be liquidated ranges from 5 to 10 years.

As of December 31, 2022, none of these investments exceed 10% of the Company’s admitted assets. The Company recognized realized losses of $169 and $65 for the years ended December 31, 2022 and December 31, 2021, respectively, associated with other-than-temporary impairments of certain alternative assets.

Unfunded commitments for alternative assets were $106,885 and $109,099 for the years ended December 31, 2022 and December 31, 2021.

The Company did not recognize any realized gains (losses) for the years ended December 31, 2022 and December 31, 2021 associated with liquidations of the company’s interest in alternative assets.

OTHER INVESTED ASSETS  The components of other invested assets as of December 31, 2022 and 2021 were as follows:

December 31,	2022		2021
LIHTC	$	25,179	$	8,001
Receivable for securities		5,428		77
Notes receivable — JMS		40,000		40,000
PMUBX		54,511		56,660
ISP		—		7,853
Total other invested assets	$	125,118	$	112,591

Low Income Housing Tax Credits  The Company has no LIHTC properties under regulatory review at December 31, 2022 and 2021. There were no write-downs due to forfeiture of eligibility and there were no impairments for 2022 or 2021.

Commitments of $22,907 and $5,413 for the years ended December 31, 2022 and December 31, 2021, respectively, have been recorded in Other liabilities related to unconditional and legally binding delayed equity contributions

2022 Statutory Financial Statements Page 17

($ in Thousands)

associated with investments in LIHTC. The Company has unexpired tax credits with remaining lives ranging between 2 and 13 years and required holding periods for its LIHTC investments between 5 and 18 years.

NET INVESTMENT INCOME AND REALIZED CAPITAL GAINS AND LOSSES  The following table summarizes the major categories of net investment income for the years ended:

December 31,	2022			2021
Bonds and preferred stock	$	285,043		$	238,296
Common Stock — unaffiliated		2,286			2,264
Policy loans		28,604			29,358
Cash and short term investments		955			47
Alternative assets		34,799			58,930
Derivatives		(10,090	)		5,963
Other invested assets		8,903			5,828
IMR amortization		(4,255	)		(72	)
Gross investment income		346,245			340,614
Less: Investment expenses		5,014			6,512
Net investment income	$	341,231		$	334,102

There was no nonadmitted accrued investment income at December 31, 2022 and December 31, 2021.

Included in the table above (Bonds and preferred stocks) is $1,001 of investment income attributable to securities disposed of as a result of a callable feature, spread over 8 securities in 2022.

The following table represents proceeds from sales of bonds, preferred stock, and unaffiliated common stocks, and related gross realized gains and losses on those sales for the years ended December 31:

	2022						2021
	Proceeds From Sales		Gross Realized Gains		Gross Realized Losses		Proceeds From Sales		Gross Realized Gains		Gross Realized Losses
Bonds	$	290,295	$	498	$	30,880	$	297,270	$	2,574	$	7,577
Preferred stock		—		—		—		4,993		—		7
Common stock-unaffiliated		16,025		103		8,404		24,220		337		4,224

As of December 31, 2022, there were no preferred stock impairments.

Realized capital gains/(losses) are reported net of federal income taxes and amounts transferred to the IMR are as follows for the years ended:

December 31,	2022			2021
Realized capital gains	$	(61,686	)	$	27,188
Less amount transferred to IMR		(36,938	)		(2,945	)
Less Taxes:
Transferred to IMR		7,757			617
Capital gains		(7,891	)		(32	)
Net Realized Capital (Losses)/Gains	$	(24,614	)	$	29,548

Portions of realized capital gains and losses that were determined to be interest related were transferred to the IMR.

Page 18 The Penn Insurance and Annuity Company

($ in Thousands)

There were no NAIC designation 3 or below, or unrated securities sold during the year ended December 31, 2022 and reacquired within 30 days of the sale date.

Note 4.  SEPARATE ACCOUNTS

SEPARATE ACCOUNTS REGISTERED WITH THE SEC  The Company maintains separate accounts that are registered with the Securities Exchange Commission (“SEC”) for its individual variable life and annuity products with assets of $76,939 and $63,914 at December 31, 2022 and December 31, 2021, respectively. The assets for these separate accounts, which are carried at fair value, represent investments in shares of the Company’s Penn Series Funds and other non-proprietary funds.

Information regarding the Separate Accounts of the Company, all of which are nonguaranteed, is as follows:

	2022		2021
Premiums, considerations and deposits for the year ended December 31	$	29,362	$	8,873
Reserves at December 31, at market value		73,019		63,730
Subject to discretionary withdrawal at market value	$	73,019	$	63,730

The following table reconciles the amounts transferred to and from the separate accounts as reported in the financial statements of the separate accounts to the amount reported in the Statements of Operations:

Years Ended December 31,	2022			2021
Transfers as reported in the financial statements of the separate accounts:
Transfers to separate accounts	$	29,362		$	8,873
Transfers from separate accounts		(6,282	)		(5,705	)
Transfers as reported in the Statements of Operations	$	23,080		$	3,168

The Company utilizes separate accounts to record and account for assets and liabilities for particular lines of business and transactions. For the current reporting year, the Company reported assets and liabilities from variable life and annuities product lines into a separate account.

The assets of the separate accounts, which are legally insulated from the general account, are comprised of the following as of December 31:

Product Description	2022		2021
Individual Annuity	$	38,597	$	55,154
Single Life Variable Universal Life		38,342		8,760
Total	$	76,939	$	63,914

In accordance with the products recorded within the separate account, some separate account liabilities are guaranteed by the general account.

There were no risk charges paid to compensate the general account for the risk taken as of December 31, 2022 and December 31, 2021.

For the years ended December 31, 2022 and December 31, 2021, the general account of the Company has paid $5 and $4, respectively, and $222 cumulatively over the last five years towards separate account guarantees.

2022 Statutory Financial Statements Page 19

($ in Thousands)

Note 5.  DERIVATIVES

The Company utilizes derivatives to achieve its risk management goals. Exposure to risk is monitored and analyzed as part of the Company’s asset/liability management process, which focuses on risks that impact liquidity, capital, and income. The Company may enter into derivative transactions to hedge exposure to interest rate, credit, liability, currency, and cash flow risks.

The Company offers IUL products which have embedded options with guaranteed returns. The Company uses equity options in the form of call spread options for protection from rising equity levels and rising volatility.

The Company uses interest rate swaps to reduce market risks from changes in interest rates.

When entering into a derivative transaction, there are several risks, including but not limited to basis risk, credit risk, and market risk. Basis risk is the exposure to loss from imperfectly matched positions, and is monitored and minimized by modifying or terminating the transaction. Credit risk is the exposure to loss as a result of default or a decline in credit rating of a counterparty. Credit risk is addressed by establishing and monitoring guidelines on the amount of exposure to any particular counterparty. Market risk is the adverse effect that a change in interest rates, currency rates, implied volatility rates, or a change in certain equity indexes or instruments has on the value of a financial instrument. The Company manages the market risk by establishing and monitoring limits as to the types and degree of risk that may be undertaken. Also, the Company requires that an International Swaps and Derivatives Association Master agreement govern all Over-the-Counter (“OTC”) derivative contracts.

Derivative Instruments Designated and Qualifying as Hedging Instruments

The Company has purchased equity options in the form of call spreads that qualify for hedge accounting. These have been designated as cash flow hedges of cash flows related to the annual return of the S&P 500 Index. These call spreads are used to hedge the increase in liability associated with indexed credits on IUL policies. As these are derivatives in a highly effective hedge, they are carried at cost in a manner consistent with the firm commitment being hedged. At termination, a realized gain amount, net of the cost basis, is recognized within benefits paid to policyholders and beneficiaries on the Statements of Income and Changes in Surplus, consistent with the change in liability associated with the account value. In the event that the hedge fails to qualify as being highly effective at any of the accounting measurement points, the hedge will be considered ineffective and the derivative will be marked to market and the associated change will be recognized as unrealized gain/(loss). At the time of exercise or expiration of the derivative, the associated realized gain or loss will flow through net investment gain/(loss) on the income statement.

The following table presents the notional values, fair values and carrying values of derivative instruments designated and qualifying as hedging instruments. Derivative instruments with carrying values showing a gain are reported as admitted assets and Derivative instruments with carrying values showing a loss are reported in Other liabilities.

Derivative Instruments Designated and Qualifying as Hedging Instruments are as follows:

December 31,	2022
	Notional Value		Fair Value					Carrying Value
			Gain		(Loss)			Gain		(Loss)
Cash flow hedges:
Equity options	$	5,427,572	$	261,526	$	(145,960	)	$	498,370	$	(308,406	)
Total designated and qualifying as hedges	$	5,427,572	$	261,526	$	(145,960	)	$	498,370	$	(308,406	)

Page 20 The Penn Insurance and Annuity Company

($ in Thousands)

December 31,	2021
	Notional Value		Fair Value					Carrying Value
			Gain		(Loss)			Gain		(Loss)
Cash flow hedges:
Equity options	$	4,490,812	$	578,939	$	(347,470	)	$	284,951	$	(133,162	)
Total designated and qualifying as hedges	$	4,490,812	$	578,939	$	(347,470	)	$	284,951	$	(133,162	)

The following table presents the notional and fair values of derivative financial instruments not designated and not qualifying as hedging instruments. Derivative instruments with carrying values showing a gain are reported as admitted assets and Derivative instruments with carrying values showing a loss are reported in Other liabilities. For the derivative instruments shown below, fair values equal carrying values.

Derivative Instruments Not Designated and Not Qualifying as Hedging Instruments are as follows:

December 31,	2022							2021
	Notional Value		Fair Value					Notional Value		Fair Value
			Gain		(Loss)					Gain		(Loss)
Equity options	$	341,704	$	523	$	(4	)	$	679,394	$	138,311	$	(95,636	)
Interest rate swaps		4,860,900		491,496		(579,709	)		5,760,900		154,408		(174,453	)
Total not designated and not qualifying as hedges	$	5,202,604	$	492,019	$	(579,713	)	$	6,440,294	$	292,719	$	(270,089	)

The impact of derivatives instruments reported on the Statements of Operations for the years ended December 31, 2022 and 2021, segregated by derivatives designated and qualifying as hedging instruments and derivatives not designated and not qualifying as hedging instruments, is reported in the tables below:

Derivative Instruments Designated and Qualifying as Hedging Instruments are as follows:

Year Ended December 31,	2022			2021
	Benefits paid to policyholders and beneficiaries			Benefits paid to policyholders and beneficiaries
Cash flow hedges:
Equity options	$	(56,417	)	$	125,796
Total qualifying hedges	$	(56,417	)	$	125,796

Derivative Instruments Not Designated and Not Qualifying as Hedging Instruments are as follows:

Year Ended December 31,	2022			2021
	Net Investment Gains/(Losses)			Net Investment Gains/(Losses)
Equity options	$	(13,197	)	$	34,763
Interest rate swaps		(8,262	)		554
Total nonqualifying hedges	$	(21,459	)	$	35,317

2022 Statutory Financial Statements Page 21

($ in Thousands)

The change in unrealized capital gains/(losses) for derivative instruments not designated and not qualifying as hedging instruments are as follows for the years ended December 31:

	2022			2021
Equity options	$	(30,646	)	$	(6,188	)
Interest rate swaps		(68,168	)		(41,952	)
Total	$	(98,814	)	$	(48,140	)

CREDIT RISK  The Company is exposed to credit related losses in the event of non-performance by counterparties to derivative financial instruments. In order to minimize credit risk, the Company and its derivative counterparties require collateral to be posted in the amount owed under each transaction, subject to minimum transfer amounts that are functions of the counterparties credit rating. As of December 31, 2022 and 2021, the Company was fully collateralized thereby eliminating the potential for an accounting loss. Additionally, certain agreements with counterparties allow for contracts in a positive position to be offset by contracts in a negative position. This right of offset also reduces the Company’s exposure. As of December 31, 2022 and 2021, the Company has received net (posted)/collateral of $(13,434) and $235,938, respectively, in the form of cash. The cash received from held collateral that is not invested in an interest bearing money market fund is invested mainly in fixed income securities.

Note 6.  FAIR VALUE OF FINANCIAL INSTRUMENTS

FAIR VALUE MEASUREMENT  Fair value is defined as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. Fair value measurement is based on assumptions market participants would make in pricing an asset or liability. Inputs to valuation techniques to measure fair value are prioritized by establishing a three-level fair value hierarchy. The fair value hierarchy gives the highest priority to quoted prices in active markets and the lowest priority to prices derived from unobservable inputs. An asset or liability’s classification within the fair value hierarchy is based on the lowest level of significant input to its fair value measurement.

The Company has categorized its assets and liabilities into the three-level fair value hierarchy based upon the priority of the inputs. The following summarizes the types of assets and liabilities included within the three-level hierarchy:

Level 1	Fair value is based on unadjusted quoted market prices in active markets for identical assets or liabilities that are accessible at the measurement date. These generally provide the most reliable evidence and are used to measure fair value whenever available. Active markets are defined as having the following for the measured asset/liability: i) many transactions, ii) current prices, iii) price quotes not varying substantially among market makers, iv) narrow bid/ask spreads and v) most information publicly available. Prices are obtained from readily available sources for market transactions involving identical assets and liabilities.
Level 2	Fair value is based on significant inputs, other than quoted prices included in Level 1, that are observable for the asset or liability, either directly or indirectly, for substantially the full term of the asset or liability through corroboration with observable market data. Prices for assets classified as Level 2 are primarily provided by an independent pricing service or are internally priced using observable inputs. In circumstances where prices from pricing services are reviewed for reasonability but cannot be corroborated to observable market data as noted above, these security values are recorded in Level 3 in the fair value hierarchy.
Level 3	Fair value is based on significant inputs that are unobservable for the asset or liability. These inputs reflect the Company’s assumptions about the assumptions market participants would use in pricing the asset or liability. These are typically less liquid fixed maturity securities with very limited trading activity. Prices are determined using valuation methodologies such as option pricing models, discounted cash flow models, market approach and other similar techniques. Prices may be based upon non-binding quotes from brokers or other market makers that are reviewed for reasonableness, based on the Company’s understanding of the market but are not further corroborated with other additional observable market information.

Page 22 The Penn Insurance and Annuity Company

($ in Thousands)

The determination of fair value, which for certain assets and liabilities is dependent on the application of estimates and assumptions, can have a significant impact on the Company’s results of operations. The following sections describe the valuation methodologies used to determine fair values as well as key estimates and assumptions surrounding certain assets and liabilities, measured at fair value on a recurring basis, that could have a significant impact on the Company’s results of operations or involve the use of significant unobservable inputs.

The fair value process is monitored on a monthly basis by financial and investment professionals who utilize additional subject matter experts as applicable. The purpose is to monitor the Company’s asset valuation policies and procedures by ensuring objective and reliable valuation practices and pricing of financial instruments, as well as addressing fair valuation issues, changes to valuation methodologies and pricing sources. To assess the continuing appropriateness of third party pricing service security valuations, the Company regularly monitors the prices and reviews price variance reports. In addition, the Company performs an initial and ongoing review of the third party pricing services methodologies, reviews inputs and assumptions used for a sample of securities on a periodic basis. Pricing challenges are raised on valuations considered not reflective of market and are monitored by the Company.

BONDS  The fair values of the Company’s debt securities are generally based on quoted market prices or prices obtained from independent pricing services. In order to validate reasonability, prices are reviewed by investment professionals through comparison with directly observed recent market trades or color or by comparison of significant inputs used by the pricing service to the Company’s observations of those inputs in the market. Consistent with the fair value hierarchy described above, securities with quoted market prices or corroborated valuations from pricing services are generally reflected within Level 2. Inputs considered to be standard for valuations by the independent pricing service include: benchmark yields, reported trades, broker/dealer quotes, issuer spreads, two-sided markets, benchmark securities, bids, offers, reference data and industry and economic events. In circumstances where prices from pricing services are reviewed for reasonability but cannot be corroborated to observable market data as noted above, these security values are recorded in Level 3 in the Company’s fair value hierarchy. Under certain conditions, the Company may conclude pricing information received from third party pricing services is not reflective of market activity and may over-ride that information with a valuation that utilizes market information and activity. As of December 31, 2022, there were 2 debt securities carried at a fair value of $2,392 that was valued in this manner. As of December 31, 2021, there were 1 debt security carried at a fair value of $1,732 that was valued in this manner.

In circumstances where market data such as quoted market prices or vendor pricing is not available, internal estimates based on significant observable inputs are used to determine fair value. This category also includes fixed income securities priced internally. Inputs considered include: public debt, industrial comparables, underlying assets, credit ratings, yield curves, type of deal structure, collateral performance, loan characteristics and various indices, as applicable. Also included in Level 2 are private placement securities. Inputs considered are: public corporate bond spreads, industry sectors, average life, internal ratings, security structure, liquidity spreads, credit spreads and yield curves, as applicable. If the discounted cash flow model incorporates significant unobservable inputs, these securities would be reflected within Level 3 in the Company’s fair value hierarchy.

In circumstances where significant observable inputs are not available, estimated fair value is calculated by using unobservable inputs. These inputs reflect the Company’s assumptions about the inputs market participants would use in pricing the asset, and are therefore included in Level 3 in the Company’s fair value hierarchy. Circumstances where observable market data is not available may include events such as market illiquidity and credit events related to the security.

EQUITY SECURITIES  Equity securities consist principally of investments in common and preferred stock of publicly traded companies. The fair values of most publicly traded equity securities are based on quoted market prices in active markets for identical assets and are classified within Level 1 in the Company’s fair value hierarchy.

CASH, CASH EQUIVALENTS AND SHORT-TERM INVESTMENTS  Short-term investments and cash equivalents carried at Level 1 consist of money market funds and investments purchased with maturities less than or equal to 12 months. These are carried at amortized cost and approximate fair value.

DERIVATIVE INSTRUMENTS  The fair values of derivative contracts are determined based on quoted prices in active exchanges or prices provided by counterparties, exchanges or clearing members as applicable, utilizing valuation

2022 Statutory Financial Statements Page 23

($ in Thousands)

models. The fair values of derivative contracts can be affected by changes in interest rates, foreign exchange rates, commodity prices, credit spreads, market volatility, expected returns and liquidity as well as other factors.

The Company’s exchange traded futures are valued using quoted prices in active markets and are classified within Level 1 in our fair value hierarchy.

Derivative positions traded in the OTC and cleared OTC derivative markets where fair value is determined by third party independent sources are classified within Level 2. These investments included: interest rate swaps, interest rate caps, total return swaps, swaptions, equity options, inflation swaps, forward contracts, and credit default swaps. OTC derivatives classified within Level 2 are valued using models generally accepted in the financial services industry that use actively quoted or observable market input values from external market data providers, broker dealer quotations, third-party pricing vendors and/or recent trading activity. Prices are reviewed by investment professionals through comparison with directly observed recent market trades, comparison with valuations estimated through use of valuation models maintained on an industry standard analytical and valuation platform, or comparison of all significant inputs used by the pricing service to observations of those inputs in the market.

SEPARATE ACCOUNT ASSETS  Separate account assets primarily consist of mutual funds. The fair value of mutual funds is based upon quoted prices in an active market, resulting in classification in Level 1.

The following table presents the financial instruments carried at fair value by caption on the Statements of Admitted Assets, Liabilities and Capital and Surplus and by valuation hierarchy (as described above):

December 31, 2022	FV Level 1		FV Level 2			FV Level 3		Total
Bonds	$	362	$	504		$	—	$	866
Preferred stock		26,113		—			—		26,113
Common stock — unaffiliated		23,364		—			10,103		33,467
Derivatives		—		492,018			—		492,018
Separate account assets(1)		76,939		—			—		76,939
Total assets	$	126,778	$	492,522		$	10,103	$	629,403
Derivatives		—		(579,713	)		—		(579,713	)
Total liabilities	$	—	$	(579,713	)	$	—	$	(579,713	)

(1) Separate account assets represent segregated funds that are invested for certain customers. Investment risks associated with market value changes are borne by the customers, except to the extent of minimum guarantees made by the Company with respect to certain accounts. Separate account liabilities are not included in the above table as they are reported at contract value and not fair value in the Company’s Statements of Admitted Assets, Liabilities and Capital and Surplus.

Page 24 The Penn Insurance and Annuity Company

($ in Thousands)

The following table presents the financial instruments carried at fair value by caption on the Statements of Admitted Assets, Liabilities and Capital and Surplus and by valuation hierarchy (as described above):

December 31, 2021	FV Level 1		FV Level 2			FV Level 3		Total
Bonds		5,676		538			—		6,214
Preferred stock		36,019		—			—		36,019
Common stock — unaffiliated		33,641		—			1,081		34,722
Derivatives		—		292,718			—		292,718
Separate account assets(1)		63,914		—			—		63,914
Total assets		139,250		293,256			1,081		433,587
Derivatives		—		(270,089	)		—		(270,089	)
Total liabilities		—		(270,089	)		—		(270,089	)

(1) Separate account assets represent segregated funds that are invested for certain customers. Investment risks associated with market value changes are borne by the customers, except to the extent of minimum guarantees made by the Company with respect to certain accounts. Separate account liabilities are not included in the above table as they are reported at contract value and not fair value in the Company’s Statements of Admitted Assets, Liabilities and Capital and Surplus.

CHANGES IN LEVEL 3 RECURRING FAIR VALUE MEASUREMENTS  When a determination is made to classify a financial instrument within level 3, the determination is based upon the significance of the unobservable parameters to the overall fair value measurement. However, level 3 financial instruments typically include, in addition to the unobservable or level 3 components, observable components (that is, components that are actively quoted and can be validated to external sources); accordingly, the gains and losses in the table below include changes in fair value due in part to observable factors that are part of the valuation methodology.

The Company recognizes transfers into Level 3 as of the end of the period in which the circumstances leading to the transfer occurred. The Company recognizes transfers out of Level 3 at the beginning of a period in which the circumstances leading to the transfer occurred.

There were no assets transferred into Level 3 and there were no assets transferred out of Level 3 for the year ended December 31, 2022. There were no assets transferred into Level 3 and 2 assets transferred out of Level 3 due to increase in fair value for the year ended December 31, 2021.

The tables below include a rollforward of the Statements of Admitted Assets, Liabilities and Surplus amounts for the years ended December 31, 2022 and December 31, 2021 (including the change in fair value) for financial instruments classified by the Company within Level 3 of the valuation hierarchy.

	2022		2021
	Unaffiliated Common Stock		Unaffiliated Common Stock
Balance January 1	$	1,081	$	846
Transfers in		—		—
Transfers out		—		—
Total gains or losses (realized/unrealized) included in:
Income/(loss)		—		—
Surplus		—		—
Amortization/Accretion		—		—
Purchases/(Sales):
Purchases		9,022		235
(Sales)		—		—
Balance December 31	$	10,103	$	1,081

2022 Statutory Financial Statements Page 25

($ in Thousands)

The following summarizes the fair value, valuation techniques and significant unobservable inputs of the Level 3 fair value measurements that were developed as of December 31, 2022:

	Fair Value		Valuation Technique	Significant Unobservable Inputs		Rate/Range or /weighted avg.
Assets:
Investments
Common stock, unaffiliated	$	10,103	Set by issuer — FHLB-PGH(1)		Not available		N/A
Total investments	$	10,103

(1) Fair Value approximates carrying value. The par value of the FHLB capital stock is $100 and set by the FHLB. The capital stock is issued, redeemed and repurchased at par.

The following table summarizes the aggregate fair value for all financial instruments and the level within the fair value hierarchy in which the fair value measurements in their entirety fall, for which it is practicable to estimate fair value, at December 31:

2022	Aggregate Fair Value		Admitted Value		Level 1		Level 2		Level 3
Financial Assets:
Bonds	$	6,112,713	$	7,015,519	$	1,691	$	5,981,565	$	129,458
Preferred stock		51,278		54,340		43,218		8,060		—
Common stock — unaffiliated		33,467		33,467		23,364		—		10,103
Cash, Cash Equivalents and short-term investments		128,400		128,400		128,400		—		—
Derivatives		961,784		990,389		—		961,784		—
Separate account assets		76,939		76,939		76,939		—		—
Financial Liabilities:
Investment-type contracts:
Individual annuities	$	240,894	$	240,908	$	—	$	—	$	240,894
Derivatives		862,744		888,119		—		862,744		—
Separate account liabilities		76,939		76,939		76,939		—		—
2021	Aggregate Fair Value		Admitted Value		Level 1		Level 2		Level 3
Financial Assets:
Bonds	$	6,700,377	$	6,200,067	$	24,141	$	6,616,843	$	59,393
Preferred stock		63,253		62,437		63,253		—		—
Common stock — unaffiliated		34,722		34,722		33,641		—		1,081
Cash and short-term investments		168,371		168,371		168,371		—		—
Derivatives		871,659		577,670		—		871,659		—
Separate account assets		63,914		63,914		63,914		—		—
Financial Liabilities:
Investment-type contracts:
Individual annuities	$	221,641	$	222,778	$	—	$	—	$	221,641
Derivatives		617,559		403,251		—		617,559		—
Separate account liabilities		63,914		63,914		63,914		—		—

Page 26 The Penn Insurance and Annuity Company

($ in Thousands)

During 2022, there were no securities with transfers from Level 3 to Level 2.

Note 7.  LIFE RESERVES BY WITHDRAWAL CHARACTERISTICS

The withdrawal characteristics of the Company’s life reserves are illustrated below as of December 31:

	General Account						Separate Account
December 31, 2022	Account Value		Cash Value		Reserve		Account Value		Cash Value		Reserve
Subject to Discretionary Withdrawal, Surrender Values, or Policy Loans:
Universal Life	$	457,072	$	456,988	$	462,709	$	—	$	—		—
Universal Life with Secondary Guarantees		1,057,910		811,709		2,072,673		—		—		—
Indexed Universal Life		—		—		—		—		—		—
Indexed Universal Life with Secondary Guarantees		5,922,820		5,609,947		6,441,117		—		—		—
Variable Universal Life		9,584		7,026		21,070		38,349		34,437		34,435
Miscellaneous Reserves		—		—		10		—		—		—
Not Subject to Discretionary Withdrawal or No Cash Values:
Accidental Death Benefits		—		—		14		—		—		—
Disability — Active Lives		—		—		308		—		—		—
Disability — Disabled Lives		—		—		2,971		—		—		—
Miscellaneous Reserves		—		—		—		—		—		—
Total		7,447,386		6,885,670		9,000,872		38,349		34,437		34,435
Less: Reinsurance ceded		1,066,363		904,007		2,429,583		—		—		—
Net	$	6,381,023	$	5,981,663	$	6,571,289	$	38,349	$	34,437	$	34,435

2022 Statutory Financial Statements Page 27

($ in Thousands)

Life reserves of $46,112 with a surrender charge of 5% or more as of December 31, 2022 will have less than a 5% surrender charge in 2023.

	General Account						Separate Account
December 31, 2021	Account Value		Cash Value		Reserve		Account Value		Cash Value		Reserve
Withdrawal, Surrender Values, or Policy Loans:
Universal Life	$	477,413	$	477,337	$	483,174	$	—	$	—	$	—
Universal Life with Secondary Guarantees		998,564		774,679		1,916,025		—		—		—
Indexed Universal Life		—		—		—		—		—		—
Indexed Universal Life with Secondary Guarantees		5,365,733		5,064,441		5,800,544		—		—		—
Variable Universal Life								8,897		8,603		8,603
Miscellaneous Reserves		—		—		89,094		—		—		—
Not Subject to Discretionary Withdrawal or No Cash Values:
Accidental Death Benefits		—		—		14		—		—		—
Disability — Active Lives		—		—		301		—		—		—
Disability — Disabled Lives		—		—		3,090		—		—		—
Miscellaneous Reserves		—		—		—		—		—		—
Total		6,842,019		6,316,476		8,292,489		8,897		8,603		8,603
Less: Reinsurance ceded		1,053,456		895,184		2,297,619		—		—		—
Net	$	5,788,563	$	5,421,292	$	5,994,870	$	8,897	$	8,603	$	8,603

Note 8.  RESERVES AND FUNDS FOR THE PAYMENT OF ANNUITY BENEFITS

The withdrawal characteristics of the Company’s annuity actuarial reserves and deposit-type contracts are illustrated below:

December 31, 2022	General Account		Separate Account		Total		% of Total
Subject to discretionary withdrawal-with adjustments:
With market value adjustment	$	—	$	—	$	—		—	%
At book value less surrender charges		172,766		—		172,766		34	%
At market value		—		38,583		38,583		8	%
Subtotal		172,766		38,583		211,349		42	%
At book value — without adjustment		275,440		—		275,440		55	%
Not subject to discretionary withdrawal		18,445		—		18,445		4	%
Total annuity reserves and deposit liabilities, gross		466,651		38,583		505,234		100	%
Less: Reinsurance ceded		—		—		—		—	%
Total annuity reserves and deposit liabilities, net	$	466,651	$	38,583	$	505,234		100	%

Page 28 The Penn Insurance and Annuity Company

($ in Thousands)

Annuity and deposit-type contract reserves of $33,204 with surrender charges of 5% or more as of December 31, 2022 will have less than a 5% surrender charge in 2023.

December 31, 2021	General Account		Separate Account		Total		% of Total
Subject to discretionary withdrawal-with adjustments:
With market value adjustment	$	—	$	—	$	—		—	%
At book value less surrender charges		159,425		—		159,425		57	%
At market value		—		55,127		55,127		20	%
Subtotal		159,425		55,127		214,552		77	%
At book value — without adjustment		43,107		—		43,107		15	%
Not subject to discretionary withdrawal		20,525		—		20,525		7	%
Total annuity reserves and deposit liabilities, gross		223,057		55,127		278,184		100	%
Less: Reinsurance ceded		—		—		—		—	%
Total annuity reserves and deposit liabilities, net	$	223,057	$	55,127	$	278,184		100	%

The following summarizes the total annuity actuarial reserves and liabilities for deposit-type contracts as of December 31:

	2022		2021
Statutory Statements of Admitted Assets, Liabilities and Capital and Surplus:
Policyholders’ reserves — group annuities	$	270	$	279
Policyholders’ reserves — individual annuities		229,914		211,909
Liabilities for deposit-type contracts		236,467		10,869
VM-21 reserves		—		—
Subtotal	$	466,651	$	223,057
Separate Account Annual Statement:
Annuities	$	38,583	$	55,127
Subtotal		38,583		55,127
TOTAL RESERVES	$	505,234	$	278,184

The Company has variable annuity contracts containing GMDB provisions that provide a specified minimum return upon death as follows:

RETURN OF PREMIUM  provides the greater of the account value or total deposits made to the contract less any partial withdrawals and assessments, which is referred to as “net purchase payments”. This guarantee is a standard death benefit on all individual variable annuity products.

RISING FLOOR  provides a variable death benefit equal to the greater of the current account value and the variable purchase payments accumulated at a set rate and adjusted for withdrawals and transfers.

The following table summarizes the account values and net amount at risk (death benefit in excess of account value), net of reinsurance, for variable annuity contracts with guarantees invested in the separate accounts as of December 31:

	2022		2021
Account value	$	38,597	$	55,154
Net amount at risk		2,970		1,990

2022 Statutory Financial Statements Page 29

($ in Thousands)

The Company has fixed indexed annuity contracts that have GMWB Rider options. The GMWB rider allows for guaranteed withdrawals from a benefit base after a selected waiting period. The GMWB riders are also available with inflation protection. The benefit base is calculated as the maximum of principal increase at a roll up rate less any partial withdrawals during the accumulation phase, the current account value, and the highest anniversary value over the first ten years. The withdrawal amount is stated as a percentage of the benefit base and varies based on whether the annuitant selects lifetime withdrawals or a specified period. One version of this rider has an inflation adjustment applied to the Guaranteed Withdrawal Amount.

The following table summarizes the account values for the different benefit types as of December 31, 2022:

Rider Type	Contracts		Fund Value		Cash Value
GMWB		505	$	102,195	$	97,068
GMWB w/ inflation		49		8,130		7,779
Total		554	$	110,325	$	104,847

The following table summarizes the account values for the different benefit types as of December 31, 2021:

Rider Type	Contracts		Fund Value		Cash Value
GMWB		462	$	96,455	$	90,981
GMWB w/ inflation		48		8,171		7,763
Total		510	$	104,626	$	98,744

Variable annuity reserves for living and death benefits are based on the methodology specified in Valuation Manual — 21: Requirements for Principle-Based Reserves for Variable Annuities (“VM-21”), which specifies the reserve as the Company Stochastic Reserve plus the Additional Standard Projection Amount. The individual policy reserve is floored at cash surrender value. The Company Stochastic Reserve is based on the Conditional Tail Expectation (“CTE”) 70% of 1,000 stochastically generated interest rate and equity return scenarios. Prudent estimate assumptions including margins for uncertainty are used to calculate the Company Stochastic Reserve. Key assumptions needed in valuing the liability include full withdrawals, partial withdrawals, mortality, the Consumer Price Index, investment management fees and revenue sharing, expenses, fund allocations and other policyholder behavior. The Additional Standard Projection Amount requires prescribed assumptions to be used in place of company assumptions for most key assumptions. The reserve also requires the projection of in-force general account assets and assets from reinvested cash flows. The key assumptions needed in valuing the assets, including the maximum reinvestment earned rate spreads and default rates, are prescribed. In addition, the method for projecting interest rates and equity returns is prescribed for both the Company Stochastic Reserve calculation and the Additional Standard Projection Amount calculation. The final reserve balance for policies that fall within the scope of VM-21, which covers both Living and Death Benefit guarantees, is $38,585 and $55,126 as of December 31, 2022 and December 31, 2021, respectively.

Fixed indexed annuity reserves for living benefits are based on the methodology specified in Actuarial Guideline XXXV, which specifies the reserve as the sum of the nonelective benefit reserve and the elective benefit reserve. The elective benefit reserve is calculated using the elective benefit path that results in the highest present value of future benefits. The final reserve balance for policies that fall within the scope of Actuarial Guideline XXXV is $193,426 and $176,651, as of December 31, 2022 and December 31, 2021, respectively.

Note 9.  FEDERAL INCOME TAXES

The Company follows Statement of Statutory Accounting Principles No. 101 — Income Taxes, A Replacement of SSAP No. 10R and SSAP No. 10 (“SSAP 101”). SSAP 101 includes a calculation for the limitation of gross deferred tax assets for insurers that maintain a minimum of 300% of their authorized control level RBC computed without net deferred tax assets. The Company exceeded the 300% minimum RBC requirement at December 31, 2022 and 2021.

Page 30 The Penn Insurance and Annuity Company

($ in Thousands)

The Company is required to evaluate the recoverability of deferred tax assets and to establish a valuation allowance if necessary to reduce the deferred tax asset to an amount which is more likely than not to be realized. Considerable judgment is required in determining whether a valuation allowance is necessary, and if so, the amount of such valuation allowance. In evaluating the need for a valuation allowance, the Company considers many factors, including: (1) the nature of the deferred tax assets and liabilities; (2) whether they are ordinary or capital; (3) the timing of their reversal; (4) taxable income in prior carryback years as well as projected taxable income exclusive of reversing temporary differences and carryforwards; (5) the length of time that carryovers can be utilized; (6) unique tax rules that would impact the utilization of the deferred tax assets; and (7) any tax planning strategies that the Company would employ to avoid a tax benefit from expiring unused; although the realization is not assured, management believes it is more likely than not that the deferred tax assets, will be realized. The Company has not recorded a valuation allowance as of December 31, 2022 and 2021.

The components of deferred tax asset (“DTAs”) and deferred tax liabilities (“DTLs”) recognized by the Company are as follows as of December 31:

Description	2022									2021
	Ordinary			Capital			Total			Ordinary			Capital			Total
Gross DTAs	$	130,590		$	2,027		$	132,617		$	143,094		$	3,192		$	146,286
Adjusted gross DTAs		130,590			2,027			132,617			143,094			3,192			146,286
Adjusted gross DTAs nonadmitted		(27,034	)		(196	)		(27,230	)		(32,867	)		—			(32,867	)
Subtotal admitted adjusted DTA		103,556			1,831			105,387			110,227			3,192			113,419
Gross DTL		(25,794	)		(11,481	)		(37,275	)		(5,500	)		(41,128	)		(46,628	)
Net admitted DTA/(DTL)	$	77,762		$	(9,650	)	$	68,112		$	104,727		$	(37,936	)	$	66,791

The changes in components of deferred tax asset (“DTAs”) and deferred tax liabilities (“DTLs”) recognized by the Company are as follows:

Description	Changes During 2022
	Ordinary			Capital			Total
Gross DTAs	$	(12,504	)	$	(1,165	)	$	(13,669	)
Adjusted gross DTAs		(12,504	)		(1,165	)		(13,669	)
Adjusted gross DTAs nonadmitted		5,833			(196	)		5,637
Subtotal admitted adjusted DTA		(6,671	)		(1,361	)		(8,032	)
Gross DTA/(DTL)		(20,294	)		29,647			9,353
Net admitted DTA/(DTL)	$	(26,965	)	$	28,286		$	1,321

2022 Statutory Financial Statements Page 31

($ in Thousands)

Admitted DTA’s are comprised of the following admission components based on paragraph 11 SSAP No. 101 as of December 31:

Description	2022						2021
	Ordinary		Capital		Total		Ordinary		Capital		Total
Admitted DTA 3 years:
Federal income taxes paid that can be recovered:
Remaining adjusted gross DTAs expected to be realized in 3 years (lesser of 1 or 2):	$	66,281	$	1,831	$	68,112	$	63,599	$	3,192	$	66,791
1. Adjusted gross DTA expected to be realized		66,281		1,831		68,112		63,599		3,192		66,791
2. Adjusted gross DTA allowed per limitation threshold		—		—		102,150		—		—		90,331
Adjusted gross DTA offset by existing DTLs		37,275		—		37,275		46,628		—		46,628
Total admitted DTA realized within 3 years	$	103,556	$	1,831	$	105,387	$	110,227	$	3,192	$	113,419

Description	Changes During 2022
	Ordinary			Capital			Total
Admitted DTA 3 years:
Federal income taxes paid that can be recovered:
Remaining adjusted gross DTAs expected to be realized within 3 years (lesser of 1 or 2):	$	2,682		$	(1,361	)	$	1,321
1. Adjusted gross DTA expected to be realized		2,682			(1,361	)		1,321
2. Adjusted gross DTA allowed per limitation threshold		—			—			11,819
Adjusted gross DTA offset by existing DTLs		(9,353	)		—			(9,353	)
Total admitted DTA realized within 3 years	$	(6,671	)	$	(1,361	)	$	(8,032	)

The authorized control level RBC and total adjusted capital computed without net deferred tax assets utilized when determining the amount of net deferred tax was as follows:

December 31:	2022			2021
Ratio percentage used to determine recovery period and threshold limitation amount		416	%		404	%
Amount of adjusted capital and surplus used to determine recovery period and threshold limitation	$	790,327		$	762,122

The impact of Tax planning strategies on the determination of adjusted gross DTA’s and net admitted DTA’s is as follows:

	December 31, 2022									December 31, 2021												Change
	Ordinary			Capital			Total			Ordinary			Capital			Total			Ordinary			Capital			Total
Adjusted gross DTAs		—	%		100	%		2	%		87	%		100	%		87	%		(87	)%		—	%		(85	)%
Net admitted DTAs		—	%		100	%		3	%		88	%		100	%		88	%		(88	)%		—	%		(85	)%

The Company’s tax planning strategies do not include the use of internal and external reinsurance during 2022 to support DTA realization.

Page 32 The Penn Insurance and Annuity Company

($ in Thousands)

There are no temporary differences for which a DTL has not been established.

Current income taxes incurred consist of the following major components for the years ended December 31:

Description	2022			2021
Current federal income tax (benefit)/expense	$	(9,157	)	$	2,136
Income tax effect on realized capital losses		(7,891	)		(32	)
Federal and foreign income taxes incurred	$	(17,048	)	$	2,104

As reported on the capital gains and losses, net of tax as disclosed within the income statement, the Company’s accounting policy is to record tax expense or benefit as calculated pursuant to the Internal Revenue Code, adjusted for taxes transferred to the IMR reserve.

The tax effects of temporary differences that give rise to significant portions of the DTA’s and DTL’s are as follows as of December 31:

	2022			2021			Change
DTA resulting in book/tax difference in:
Ordinary:
Future policy benefits	$	24,853		$	36,723		$	(11,870	)
DAC		69,420			59,678			9,742
Investments — ordinary		146			17,083			(16,937	)
Deferred gain on reinsurance		18,272			18,272			—
Nonadmitted assets		12			129			(117	)
LIHTC		17,843			11,195			6,648
Other — ordinary		44			14			30
Subtotal — gross ordinary DTAs		130,590			143,094			(12,504	)
Nonadmitted ordinary DTAs		(27,034	)		(32,867	)		5,833
Admitted ordinary DTAs		103,556			110,227			(6,671	)
Capital:
OTTI on investments		2,027			3,192			(1,165	)
Capital gross DTAs		2,027			3,192			(1,165	)
Nonadmitted capital DTAs		(196	)		—			(196	)
Admitted capital DTAs		1,831			3,192			(1,361	)
Admitted DTAs		105,387			113,419			(8,032	)
DTLs resulting in book/tax differences in:
Ordinary:
Investments — ordinary		(21,669	)		—			(21,669	)
Future policy benefits — 8 year spread		(4,125	)		(5,500	)		1,375
Ordinary DTLs		(25,794	)		(5,500	)		(20,294	)
Capital:
Alternative asset investments		(11,241	)		(8,424	)		(2,817	)
Net unrealized investment gains		(240	)		(32,704	)		32,464
Capital DTLs		(11,481	)		(41,128	)		29,647
DTLs		(37,275	)		(46,628	)		9,353
Net deferred tax asset	$	68,112		$	66,791		$	1,321

2022 Statutory Financial Statements Page 33

($ in Thousands)

The change in deferred income taxes is comprised of the following (this analysis is exclusive of nonadmitted assets as the Change in nonadmitted assets is reported separately from the Change in net deferred income taxes in the surplus section of the Annual Statement):

	2022			2021			Change
Total deferred tax assets	$	132,617		$	146,286		$	(13,669	)
Total deferred tax liabilities		(37,275	)		(46,628	)		9,353
Net deferred tax asset/liabilities		95,342			99,658			(4,316	)
Net deferred tax asset/liability after SVA	$	95,342		$	99,658
Tax effect on unrealized (gains)/losses								(32,464	)
Change in net deferred income taxes							$	(36,779	)

The provision for federal income taxes incurred is different from that which would be obtained by applying the statutory federal income tax rate to income before income taxes including realized capital gains/(losses). The significant items causing the differences as of December 31, 2022 are as follows:

Description	Amount			Tax Effect			Effective Tax Rate
Income before taxes	$	97,820		$	20,542			21.00	%
Dividends received deduction		(1,805	)		(379	)		-0.39	%
Separate Account DRD		(153	)		(32	)		-0.03	%
Income from affiliates		(2,845	)		(597	)		-0.61	%
2021 tax return true-up		122			26			0.03	%
IMR amortization		4,255			894			0.91	%
LIHTC		—			(839	)		-0.86	%
Other		559			117			0.12	%
Total	$	97,953		$	19,732			20.17	%
Federal income tax expense incurred					(9,157	)		-9.36	%
FIT expense/(benefit) on Realized Capital Gains/Losses					(133	)		-0.14	%
FIT in IMR Gains/Losses					(7,757	)		-7.93	%
Change in net deferred income taxes					36,779			37.60	%
Total statutory taxes				$	19,732			20.17	%

The Company has $17,843 LIHTC available of as of December 31, 2022 that will begin to expire in 2035.

The Company has not made any deposits regarding the suspension of running interest (protective deposits) pursuant to Internal Revenue Code Section 6603.

The Company’s federal income tax return is consolidated with its parent, Penn Mutual, and Penn Mutual’s subsidiaries. The method of tax allocation among the companies is subject to a written agreement, whereby the tax allocation is made on a benefits for loss basis. In addition, the Company is party to a tax agreement with PIA Re whereby PIA Re will pay its federal income tax liability or receive a refund for its net operating losses from the Company determined on a separate return basis. There was no income tax expense for 2022, 2021 and 2020 that is available for recoupment in the event of future net losses.

A listing of the companies included in the consolidated return is as follows:

Penn Mutual Life Insurance Company (Parent)

Penn Insurance & Annuity Company

PIA Reinsurance Company of Delaware I

Vantis Life Insurance Company

Penn Insurance and Annuity Company of New York

Page 34 The Penn Insurance and Annuity Company

($ in Thousands)

For the year ended December 31, 2022, PIA Re had a taxable net loss of $46,639 generating an amount payable from PIA to PIA Re of $9,794.

For the year ended December 31, 2021, PIA Re had a taxable net loss of $18,147 generating an amount payable from PIA to PIA Re of $3,811, which was paid in 2022.

Tax years 2019 and subsequent are still subject to audit by the Internal Revenue Service.

The Company recognizes interest and penalties, if any, related to unrecognized tax benefits, as a component of tax expense. During the years ended December 31, 2022 and December 31, 2021, the Company did not recognize or accrue penalties or interest.

The Company has no tax loss contingencies for which it is reasonably possible that the total liability will significantly increase within the next twelve months of the reporting date.

On August 16, 2022, the Inflation Reduction Act of 2022 (Act) was passed by the US Congress and signed into law by President Biden. The Act includes a new corporate alternative minimum tax (CAMT) for tax years beginning after December 31, 2022. The Company has determined that it does not expect to be liable for CAMT in 2023.

Note 10.  REINSURANCE

The Company has assumed and ceded reinsurance on certain life and annuity contracts under various agreements. Reinsurance ceded permits recovery of a portion of losses from reinsurers.

The table below highlights the reinsurance amounts shown in the accompanying financial statements.

	Direct		Assumed		Ceded		Net Amount
December 31, 2022
Premium and annuity considerations	$	843,274	$	181,732	$	82,499	$	942,507
Reserves and funds for payment of future insurance and annuity benefits		6,082,244		3,385,279		2,429,583		7,037,940
December 31, 2021
Premium and annuity considerations	$	734,859	$	194,533	$	83,982	$	845,410
Reserves and funds for payment of future insurance and annuity benefits		5,300,135		3,215,412		2,297,619		6,217,928

2022 Statutory Financial Statements Page 35

($ in Thousands)

INTERCOMPANY REINSURANCE  The Company maintains various reinsurance agreements with affiliates. The following table summarizes premium and reserves balances associated with such agreements as of and for the years ended December 31:

		Assumed/(Ceded)
		2022						2021
	Affiliate	Premium			Reserves			Premium			Reserves
Coinsurance funds withheld	PML	$	33,895		$	1,518,169		$	36,080		$	1,447,171
Coinsurance funds withheld	PIAre I		(42,937	)		(2,422,872	)		(46,535	)		(2,292,158	)
Coinsurance — Inforce	PML		37,929			565,410			42,332			545,308
Coinsurance	PML		92,718			1,293,105			100,613			1,215,179
YRT — Index credits	PIAre I		17,190			8,595			15,508			7,754
YRT — Over retention	PML		(4,239	)		(584	)		(3,726	)		(452	)
Total		$	134,556		$	961,823		$	144,272		$	922,802

Coinsurance funds withheld  Effective December 31, 2013, the Company ceded a closed block of business to PIAre I on a 100% coinsurance funds withheld basis. Effective December 31, 2014, the Company entered into a contract with PML to assume reserves pursuant to transactions subject to the requirements of Section 7 of the NAIC XXX and AXXX Reinsurance Model Regulation. The Company then contemporaneously reinsured the policies to PIAre I. At inception, the agreement generated an after-tax gain of $87,008, which was a direct increase to surplus and is amortized into income over the life of the agreement.

Coinsurance — Inforce  Effective January 1, 2015, the Company assumed from PML an inforce block of single life index universal life policies issued by PML between 2012 and 2014. The Company assumed 100% of the risk, net of inuring reinsurance.

Coinsurance  The Company assumes certain risks under reinsurance agreements with Penn Mutual relating to various fixed and indexed universal life business.

YRT — Index credits  Effective January 1, 2017, the Company assumes the equity risk associated with PIAre I’s indexed UL products on a YRT basis.

YRT — Over retention  The Company ceded to PML policies issued after October 1, 2006 and before October 1, 2014 that resulted in retention greater than $1,000 per life.

Note 11.  RELATED PARTIES

The Company entered into a revolving loan agreement with JMS on August 19, 2011, to provide funding to JMS in an amount not to exceed $40,000. Terms of the loan specify that semi-annual interest be paid on the outstanding balances based on market rates determined at the dates of the loans. The principal balances are not due until maturity in August 2030. The Company recorded $3,650 and $3,650 in interest income on this note for the years ended December 31, 2022 and December 31, 2021, respectively. At December 31, 2022 and December 31, 2021, the Company had an outstanding principal receivable from JMS of $40,000 and outstanding interest receivables of $920 and $920, relating to this agreement.

The Company has received a rating equivalent to an NAIC 1 for the note receivable from JMS.

The Company declared a $40,000 capital contribution to PIAre in 2022. In 2022, the Company received $60,000 in capital contributions from its parent, Penn Mutual.

In 2022, the Company declared their ownership of Independence Square Properties LLC (“ISP LLC”) as a dividend to their parent company, Penn Mutual, in the amount of $8,202.

The Company’s unconsolidated subsidiaries had combined assets of $2,564,862 and 2,421,296 and combined liabilities of $2,434,206 and $2,313,991 as of December 31, 2022 and 2021, respectively. The admitted value of the

Page 36 The Penn Insurance and Annuity Company

($ in Thousands)

Company’s investments in subsidiaries includes goodwill of $— and $4,831 and other intangible assets of $— and $266 at December 31, 2022 and 2021, respectively.

Under the terms of an expense allocation agreement, the Company reimbursed Penn Mutual for services and facilities provided on behalf of the Company, including direct and allocated expenses. For December 31, 2022 and December 31, 2021, the total expenses incurred under this agreement were $47,733 and $59,985, respectively. The amount due was $13,581 and $13,760 at December 31, 2022 and December 31, 2021, respectively.

Under the terms of investment management and administrative services agreements, the Company paid PMAM for investment management and accounting services provided on behalf of the Company. For December 31, 2022 and December 31, 2021, the total expenses incurred under these agreements were $6,088 and $6,370, respectively. The amount due was $481 and $553 at December 31, 2022 and December 31, 2021, respectively.

The Company agreed to provide certain accounting and administrative services, at cost, to PIAre I. The administrative costs for the years ended December 31, 2022 and December 31, 2021 were $435 and $425, respectively.

Note 12.  COMMITMENTS AND CONTINGENCIES

LITIGATION  The Company and its subsidiaries are involved in litigation arising in and out of the normal course of business that seek both compensatory and punitive damages. In addition, the regulators within the insurance and brokerage industries continue to focus on market conduct and compliance issues. While the Company is not aware of any actions or allegations that should reasonably give rise to a material adverse impact to the Company’s financial position or liquidity, the outcome of litigation cannot be foreseen with certainty.

GUARANTY FUNDS  The Company is subject to insurance guaranty fund laws in the states in which it does business. These laws assess insurance companies amounts to be used to pay benefits to policyholders and policy claimants of insolvent insurance companies. Many states allow these assessments to be credited against future premium taxes. The liability for estimated guaranty fund assessments net of applicable premium tax credits as of December 31, 2022 and December 31, 2021 was $60 and $60. The Company monitors sales materials and compliance procedures and makes extensive efforts to minimize any potential liabilities in this area. The Company believes such assessments in excess of amounts accrued will not materially impact its financial statement position, results of operation, or liquidity.

COMMITMENTS  In the normal course of business, the Company extends commitments relating to its investment activities. As of December 31, 2022 the Company had outstanding commitments totaling $106,842 relating to these investment activities. The fair value of these commitments approximates their face amount.

PIAre I has an adjustable 20 year, non-interest bearing financial instrument with a current face amount of $783,489 to support a modified coinsurance arrangement with an unaffiliated reinsurer. The Company is obligated to pay a financing fee on the reserve amount being financed. The Company may be subject to an early termination fee upon the occurrence of certain events through December 31, 2030. The modified coinsurance arrangement was effective December 31, 2013. Fees incurred during the years ended December 31, 2022 and December 31, 2021 were $2,539 and $2,407, respectively, which are included in Other expenses in the Statements of Operations.

DIVIDEND RESTRICTIONS The payment of dividends by the Company to Penn Mutual is subject to restrictions set forth in the State of Delaware insurance laws. These laws require that the maximum amount of ordinary dividends that can be paid by the Company to Penn Mutual without restriction cannot exceed the greater of the net gain from operations of the previous year or 10% of surplus as of the previous year end. Generally, these restrictions pose no short-term liquidity concerns for the Company. Based on these restrictions and 2022 statutory results, the Company could pay $74,911 in dividends in 2023 to Penn Mutual without prior approval from the Delaware Department of Insurance, subject to the notification requirement. In 2022, the Company recorded a dividend to Penn Mutual in the form of the Company’s ownership of ISP, valued at $8,202. In 2021, the Company paid no dividends to Penn Mutual.

Note 13. SUBSEQUENT EVENTS

The Company has evaluated events subsequent to December 31, 2022 and through the financial statement issuance date of February 17, 2023 and has determined that there were no other significant events requiring disclosure in the financial statements.

2022 Statutory Financial Statements Page 37

About The Penn Insurance and Annuity Company

The Penn Insurance and Annuity Company (PIA) is a wholly owned life insurance subsidiary of The Penn Mutual Life Insurance Company (Penn Mutual). Domiciled in Delaware, PIA maintains its operations in Horsham, Pa., and is licensed to do business in 49 states and the District of Columbia. It markets its products with a focus on universal life insurance through Penn Mutual’s distribution systems and has its in-force business serviced by the parent company.

Visit Penn Mutual at www.pennmutual.com.

           

^© 2023 The Penn Insurance and Annuity Company, Philadelphia, PA 19172, www.pennmutual.com

T4471-PIA 01/23

Report of Independent Auditors

To the Board of Directors of

The Penn Insurance and Annuity Company

We have audited the accompanying statutory financial statements of The Penn Insurance and Annuity Company (a wholly-owned subsidiary of The Penn Mutual Life Insurance Company) (the “Company”) which comprise the statutory statements of admitted assets, liabilities and capital and surplus as of December 31, 2020 and 2019, and the related statutory statements of operations, of changes in capital and surplus, and of cash flows for the years then ended.

Management’s Responsibility for the Financial Statements

Management is responsible for the preparation and fair presentation of the financial statements in accordance with the accounting practices prescribed or permitted by the Delaware Department of Insurance. Management is also responsible for the design, implementation, and maintenance of internal control relevant to the preparation and fair presentation of financial statements that are free from material misstatement, whether due to fraud or error.

Auditors’ Responsibility

Our responsibility is to express an opinion on the financial statements based on our audits. We conducted our audits in accordance with auditing standards generally accepted in the United States of America. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free from material misstatement.

An audit involves performing procedures to obtain audit evidence about the amounts and disclosures in the financial statements. The procedures selected depend on our judgment, including the assessment of the risks of material misstatement of the financial statements, whether due to fraud or error. In making those risk assessments, we consider internal control relevant to the Company’s preparation and fair presentation of the financial statements in order to design audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control. Accordingly, we express no such opinion. An audit also includes evaluating the appropriateness of accounting policies used and the reasonableness of significant accounting estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our audit opinion.

Basis for Adverse Opinion on U.S. Generally Accepted Accounting Principles

As described in Note 1 to the financial statements, the financial statements are prepared by the Company on the basis of the accounting practices prescribed or permitted by the Delaware Department of Insurance, which is a basis of accounting other than accounting principles generally accepted in the United States of America.

The effects on the financial statements of the variances between the statutory basis of accounting described in Note 1 and accounting principles generally accepted in the United States of America, although not reasonably determinable, are presumed to be material.

Adverse Opinion on U.S. Generally Accepted Accounting Principles

In our opinion, because of the significance of the matter discussed in the “Basis for Adverse Opinion on U.S. Generally Accepted Accounting Principles” paragraph, the financial statements referred to above do not present fairly, in accordance with accounting principles generally accepted in the United States of America, the financial position of the Company as of December 31, 2020 and 2019, or the results of its operations or its cash flows for the years then ended.

Opinion on Statutory Basis of Accounting

In our opinion, the financial statements referred to above present fairly, in all material respects, the admitted assets, liabilities and surplus of the Company as of December 31, 2020 and 2019, and the results of its operations and its cash flows for the years then ended, in accordance with the accounting practices prescribed or permitted by the Delaware Department of Insurance described in Note 1.

February 18, 2021

Table of Contents

	Page
Statements of Admitted Assets, Liabilities and Capital and Surplus		1
Statements of Operations		2
Statements of Changes in Capital and Surplus		3
Statements of Cash Flows		4
Notes to Financial Statements
Note 1. Nature of Operations and Basis of Presentation		6
Note 2. Summary of Significant Accounting Policies		7
Note 3. Investments		13
Note 4. Separate Accounts		20
Note 5. Derivatives		20
Note 6. Fair Value of Financial Instruments		23
Note 7. Life Reserves by Withdrawal Characteristics		27
Note 8. Reserves and Funds for the Payment of Annuity Benefits		28
Note 9. Federal Income Taxes		30
Note 10. Reinsurance		35
Note 11. Related Parties		36
Note 12. Commitments and Contingencies		36
Note 13. Subsequent Events		37

($ in Thousands)

Statements of Admitted Assets, Liabilities and Capital and Surplus

As of December 31,	2020		2019
ADMITTED ASSETS
Bonds	$	5,207,479	$	4,464,451
Preferred Stock		54,928		46,890
Common stock — affiliated		107,152		104,050
Common stock — unaffiliated		35,481		27,459
Policy loans		581,849		568,740
Cash and short-term investments		226,007		214,304
Alternative assets		266,520		214,332
Derivatives		529,812		241,942
Other invested assets		109,804		128,545
TOTAL INVESTMENTS		7,119,032		6,010,713
Investment income due and accrued		72,279		70,229
Deferred tax asset		69,191		62,184
Amounts recoverable from reinsurers		68,241		70,441
Funds held by reinsured company		940,755		882,649
Federal income taxes recoverable		—		4,534
Other assets		35,533		22,080
Separate account assets		53,424		50,651
TOTAL ASSETS	$	8,358,455	$	7,173,481
LIABILITIES
Reserves and funds for payment of future insurance and annuity benefits	$	5,345,743	$	4,587,645
Policy claims in process		10,506		14,514
Asset valuation reserve		79,236		60,952
Interest maintenance reserve		30,174		23,748
Funds held under coinsurance		1,443,849		1,341,864
Federal income taxes payable		4,541		—
Other liabilities		395,038		374,630
Derivatives		324,569		94,191
Separate account liabilities		53,424		50,651
TOTAL LIABILITIES		7,687,080		6,548,195
CAPITAL AND SURPLUS
Common stock, $2.50 par value, 1,000 shares authorized, issued and outstanding		2,500		2,500
Capital contributed in excess of par value		439,662		409,662
Accumulated surplus		229,213		213,124
TOTAL CAPITAL AND SURPLUS		671,375		625,286
TOTAL LIABILITIES, CAPITAL AND SURPLUS	$	8,358,455	$	7,173,481

The accompanying notes are an integral part of these financial statements.

2020 Statutory Financial Statements Page 1

($ in Thousands)

Statements of Operations

For the Years Ended December 31,	2020			2019
REVENUES
Premium and annuity considerations	$	785,477		$	768,995
Net investment income		278,943			269,432
Other revenue		45,955			50,827
TOTAL REVENUE		1,110,375			1,089,254
BENEFITS AND EXPENSES
Benefits paid to policyholders and beneficiaries		98,804			155,773
Increase in reserves and funds for payment of future insurance and annuity benefits		757,717			642,823
Commissions		66,436			74,198
Operating expenses		114,516			94,695
Other expenses		88,531			84,344
Net transfer from separate accounts		(5,286	)		(8,433	)
TOTAL BENEFITS AND EXPENSES		1,120,718			1,043,400
(LOSS)/GAIN FROM OPERATIONS BEFORE FEDERAL INCOME TAXES		(10,343	)		45,854
Federal income tax expense		10,281			41,481
(LOSS)/GAIN FROM OPERATIONS		(20,624	)		4,373
Net realized capital losses, net of tax		(1,620	)		(26,278	)
NET LOSS	$	(22,244	)	$	(21,905	)

The accompanying notes are an integral part of these financial statements.

Page 2 The Penn Insurance and Annuity Company

($ in Thousands)

Statements of Changes in Capital and Surplus

For the Years Ended December 31,	2020			2019
COMMON STOCK
Beginning of year	$	2,500		$	2,500
End of year		2,500			2,500
CAPITAL CONTRIBUTED IN EXCESS OF PAR VALUE
Beginning of year		409,662			379,662
Capital Contribution from Parent		30,000			30,000
End of year		439,662			409,662
ACCUMULATED SURPLUS
Beginning of year		213,124			90,424
Net loss		(22,244	)		(21,905	)
Change in:
Nonadmitted assets		(1,320	)		85,693
Asset valuation reserve		(18,284	)		(13,040	)
Net deferred income tax		18,068			40,936
Net unrealized capital gains, net of tax		39,869			31,016
End of year		229,213			213,124
TOTAL CAPITAL AND SURPLUS	$	671,375		$	625,286

The accompanying notes are an integral part of these financial statements.

2020 Statutory Financial Statements Page 3

($ in Thousands)

Statements of Cash Flows

For the Years Ended December 31,	2020			2019
OPERATIONS
Premium and annuity considerations	$	788,899		$	782,198
Net investment income		344,758			315,959
Other revenue		48,128			37,725
CASH PROVIDED BY OPERATIONS		1,181,785			1,135,882
Benefits paid		221,055			227,248
Commissions, operating expenses and other		268,755			45,984
Net transfers from separate accounts		(5,257	)		(8,433	)
Taxes paid on operating income and realized investment losses		4,953			21,410
CASH USED IN OPERATIONS		489,506			286,209
NET CASH PROVIDED BY OPERATIONS		692,279			849,673
INVESTMENT ACTIVITIES
Investments sold, matured or repaid:
Bonds		949,521			665,082
Stocks		35,554			69,757
Other invested assets		24,930			45,859
Derivatives		187,061			—
Miscellaneous proceeds		8,450			—
NET PROCEEDS FROM INVESTMENTS SOLD, MATURED OR REPAID		1,205,516			780,698
Cost of investments acquired:
Bonds		1,739,486			1,249,482
Stocks		54,148			69,900
Other invested assets		46,908			53,879
Derivatives		155,070			14,502
Miscellaneous applications		15,000			—
TOTAL COST OF INVESTMENTS ACQUIRED		2,010,612			1,387,763
Net (increase) in policy loans		(13,103	)		(32,124	)
NET CASH USED IN INVESTMENT ACTIVITIES		(818,199	)		(639,189	)
FINANCING AND MISCELLANEOUS
Net withdrawals/(deposits)/withdrawals on deposit-type funds		380			(174,083	)
Capital and paid in surplus		30,000			30,000
Other cash provided, net		107,243			71,560
NET CASH PROVIDED BY/(USED IN) FINANCING AND MISCELLANEOUS		137,623			(72,523	)
NET INCREASE IN CASH AND SHORT-TERM INVESTMENTS		11,703			137,960
Cash and short-term investments:
Beginning of year		214,304			76,344
End of year	$	226,007		$	214,304

…continued -

Page 4 The Penn Insurance and Annuity Company

($ in Thousands)

Statements of Cash Flows (cont’)

For the Years Ended December 31,	2020		2019
Supplemental Disclosure of Cash Flow Information for Non-Cash Transactions:
Capitalized Interest	$	306	$	1,206
Premium Paid by Benefit	$	407	$	632
Premium Paid by Waiver	$	628	$	575
Non-Cash Acquisitions	$	66,255	$	69,735
Other	$	442	$	25

The accompanying notes are an integral part of these financial statements.

2020 Statutory Financial Statements Page 5

($ in Thousands)

Notes to Financial Statements

Note 1.  NATURE OF OPERATIONS AND BASIS OF PRESENTATION

NATURE OF OPERATIONS  The Penn Insurance and Annuity Company (the “Company” or “PIA”) is a wholly-owned life insurance subsidiary of The Penn Mutual Life Insurance Company (“Penn Mutual” or “PML”). The Company’s business activities are primarily concentrated in the sale of indexed universal life (“IUL”), fixed universal life and indexed annuity products. The Company markets and sells its products through Penn Mutual’s distribution systems, that consist of a network of career and independent financial professionals, and has its in-force business serviced by PML. Additionally, it has closed blocks of current assumption universal life insurance and deferred and payout annuities. Domiciled in Delaware, PIA is licensed to write business in forty-nine states and the District of Columbia.

BASIS OF PRESENTATION  The accompanying financial statements of the Company have been prepared in conformity with the National Association of Insurance Commissioner’s (“NAIC”) Practices and Procedures manual and with statutory accounting practices prescribed or permitted by the Delaware Department of Insurance (collectively “SAP” or “statutory accounting principles”). The Company currently has no permitted practices.

PIA Reinsurance Company of Delaware I (“PIAre I”), a wholly-owned subsidiary of the Company, admits as an asset and a form of statutory surplus, the value of a credit linked variable funding note (LLC Note) provided by an unaffiliated company in conjunction with a reinsurance agreement with the Company. Pursuant to the licensing order from the Delaware Department of Insurance (Captive Bureau), PIAre I recorded as a prescribed practice from inception through September 30, 2019, the LLC Note as an admitted asset and a form of surplus. This accounting practice differs from the NAIC statutory accounting practices and procedures.

Effective October 1, 2019, PIAre I received a permitted practice from the Delaware Department of Insurance (Captive Bureau). The “look-through” provisions of Statement of Statutory Accounting Principles No. 97, Investments in Subsidiary, Controlled and Affiliated Entities, allow the Company to include the value of the LLC Note and related form of surplus reflected in the financial statements of its Insurance SCA, PIAre I, in the carrying value of PIAre I.

As a result of the permitted practice, the Company recorded $107,152 and $104,050 as of December 31, 2020 and 2019, respectively, in Common stock-affiliated, with a corresponding $107,152 and $104,050 in surplus, which represents the statutory reporting value of PIAre I. If PIAre I had completed their statutory financial statements in accordance with NAIC statutory accounting practices and procedures, the Company’s reporting value of PIAre I would have been $0 as of December 31, 2020 and 2019. There was no impact to net income as a result of the permitted practice.

Had the Company not been permitted to include the asset and statutory surplus noted above in either 2020 or 2019, the resulting RBC of PIA would not have triggered a regulatory event. Had PIAre I not received a permitted or prescribed practice to include the asset and statutory surplus above noted, the resulting RBC of PIAre I would have triggered a regulatory event.

Statutory accounting practices are different in some respects from financial statements prepared in accordance with U.S. Generally Accepted Accounting Principles (“GAAP”). The more significant differences between statutory accounting principles and GAAP are as follows:

(a) certain acquisition costs, such as commissions and other variable costs, that are directly related to the successful acquisition of new business, are charged to current operations as incurred, whereas GAAP generally capitalizes these expenses and amortizes them based on profit emergence over the expected life of the policies or over premium payment period;

(b) statutory policy reserves are based upon the methods prescribed in the Valuation Manual, whereas GAAP reserves would generally be based upon the net level premium method or the estimated gross margin method, with estimates of future mortality, morbidity and interest assumptions;

(c) bonds are generally carried at amortized cost, whereas GAAP generally reports bonds at fair value;

(d) undistributed earnings from alternative assets are included in unrealized gains and losses, whereas GAAP would reflect these changes as net investment income;

Page 6 The Penn Insurance and Annuity Company

($ in Thousands)

(e) deferred income taxes, which provide for book versus tax temporary differences, are subject to limitation and are charged to surplus, whereas GAAP would generally include the change in deferred taxes in net income;

(f) payments received for universal life insurance products and variable annuities are reported as premium income and changes in reserves, whereas GAAP would treat these payments as deposits to policyholders’ account balances;

(g) assets are reported at “admitted asset” value, and “nonadmitted assets” are excluded through a charge against surplus, whereas GAAP would record these assets net of any valuation allowance;

(h) investments in subsidiaries are accounted for using the equity method. The Company’s investments in Independence Square Properties, LLC (“ISP”) and PIAre I, to the extent of the audited surplus/equity, are admitted assets. GAAP would consolidate these entities;

(i) reinsurance reserve credits are reported as a reduction of policyholders’ reserves and liabilities for deposit-type contracts, whereas GAAP would report these balances as an asset;

(j) an asset valuation reserve (“AVR”) is reported as a contingency reserve to stabilize surplus against fluctuations in the carrying value of stocks, real estate investments, partnerships and limited liability companies (“LLCs”), investments in low income housing tax credits (“LIHTC”), as well as non interest-related declines in the value of bonds, whereas GAAP would not record this reserve;

(k) after-tax realized capital gains and losses which result from changes in the overall level of interest rates for all types of fixed-income investments are deferred into the interest maintenance reserve (“IMR”) and amortized into investment income over the remaining life of the investment sold, whereas GAAP would report these gains and losses as revenue at time of sale;

(l) changes in the fair value of the derivative financial instruments are recorded as changes in surplus, unless deemed an effective hedge when it is carried at amortized cost with no resulting changes in fair value. Changes in fair value for GAAP would be reported as income for ineffective cash flow hedges and effective fair value hedges; changes in fair value for GAAP would be reported as other comprehensive income for effective cash flow hedges;

(m) changes in the fair value of unaffiliated common stock are recorded as changes in surplus, whereas GAAP, records the change in fair value through realized capital gains/losses;

(n) comprehensive income is not presented whereas GAAP would present changes in unrealized capital gains and losses and foreign currency translations as other comprehensive income;

(o) embedded derivatives are recorded as part of the underlying contract, whereas GAAP would identify and bifurcate certain embedded derivatives from the underlying contract or security and account for them separately;

(p) identification of other-than-temporary impairment (“OTTI”) uses an “intent and ability to hold” criteria whereas GAAP would use an “ability and intent not to sell” criteria;

(q) investments in Federal Home Loan Bank stock are reported as an investment in common stock, unaffiliated, whereas GAAP would report these within other invested assets.

Note 2.  SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

USE OF ESTIMATES  The preparation of financial statements requires management to make estimates and assumptions that impact the reported amounts of assets and liabilities, the disclosure of contingent assets and liabilities as of the date of the financial statements, and the reported amounts of revenues and expenses during the reporting periods. Those estimates are inherently subject to change and actual results could differ from those estimates. Included among the material reported amounts and disclosures that requires extensive use of estimates are:

◇ Carrying value of certain invested assets

◇ Liabilities for reserves and funds for the payment of insurance and annuity benefits

◇ Accounting for income taxes and valuation of deferred income tax assets and liabilities and unrecognized tax benefits

◇ Litigation and other contingencies

INVESTMENTS  Bonds with an NAIC designation of 1 to 5 are valued at amortized cost. All other bonds are valued at the lower of cost or fair value. Fair value is determined using an external pricing service or management’s pricing models.

2020 Statutory Financial Statements Page 7

($ in Thousands)

For fixed income securities that do not have a fixed schedule of payments, including asset-backed and mortgage-backed securities, the effect on amortization or accretion is revalued periodically based on the current estimated cash flows. Prepayment assumptions are based on borrower constraints and economic incentives such as original term, age, and coupon of the loan as affected by the interest rate environment. Cash flow assumptions for structured securities are obtained from broker dealer survey values or internal estimates. These assumptions are consistent with the current interest rate and economic environment.

Preferred Stock  Preferred Stock with an NAIC designation of 1 to 3 is valued at amortized cost. All other preferred stock is valued at the lower of cost or market. Fair value is determined using an external pricing service or management’s pricing model.

Common Stock  Common Stock of the Company’s insurance affiliate, PIAre I is carried at its underlying audited statutory surplus on the Statement of Admitted Assets, Liabilities, and Surplus. Common stock, unaffiliated is valued at fair value. Dividends are recognized in net investment income on the ex-dividend date. Changes in the carrying value are recognized in unrealized gains or losses in surplus. The investment in capital stock of the Federal Home Loan Bank of Pittsburgh (“FHLB-PGH”) is carried at par, which approximates fair value.

Policy Loans  Policy Loans are carried at the aggregate balance of unpaid principal and interest.

Cash, Cash Equivalents and Short-term investments  Cash Equivalents include investments purchased with maturities of three months or less and money market mutual funds. Short-term investments, which are carried at amortized cost and approximate fair value, consist of investments purchased with maturities greater than three months and less than or equal to 12 months.

Alternative Assets  Alternative Assets consists primarily of limited partnerships. The Company accounts for the value of its investments at their underlying GAAP equity. Dividends and income distributions from limited partnerships are recorded as investment income. Undistributed earnings are included in the unrealized gains and losses balance and are reflected in surplus, net of deferred taxes. Distributions that are recorded as a return of capital reduce the carrying value of the limited partnership investment. Due to the timing of the valuation data received from the partnership, these investments are reported in accordance with the most recent valuations received, which are primarily on a one quarter lag.

Derivatives  The Company may utilize derivative financial instruments in the normal course of business to manage risk, in conjunction with its management of assets and liabilities and interest rate risk. The accounting treatment of specific derivatives depends on whether the financial instrument is designated and qualifies as a highly effective hedge. Derivatives used in hedging transactions that meet the criteria of a highly effective hedge are reported and valued in a manner that is consistent with the instrument hedged. The change in fair value of these derivatives is recognized as an unrealized capital gain/(loss) until they are closed, at which time they are recorded in realized capital gains/(losses). Derivatives used in risk management transactions that do not meet the criteria of an effective hedge are accounted for at fair value, with changes in fair value recorded in unrealized capital gains/ (losses). Derivatives with a positive fair value or carrying value are reported as admitted assets and Derivatives with a negative fair value or carrying value are reported as liabilities. Realized gains and losses that are recognized upon termination or maturity of the derivatives used in economic hedges of interest rate and currency risk of the fixed income portfolio, regardless of accounting treatment, are transferred, net of taxes, to the IMR. All other realized gains and losses are recognized in net income upon maturity or termination of the derivative contracts.

The Company has entered into equity options in the form of call spreads that qualify for hedge accounting. The equity options in the form of call spreads have been designated to qualify as cash flow hedges of cash flows associated with indexed credits related to the annual return of the S&P 500 IUL policies.

In 2020, the Company entered into interest rate swaps, that are carried at fair value. The Company may use payer swaps, a type of interest rate swap, to manage risk associated with rising interest rates. Receiver swaps, a type of interest rate swap, protect the Company from credit risk in the fixed income portfolio. The Company has not designated these as hedging instruments.

The Company does not engage in derivative financial instrument transactions for speculative purposes.

Page 8 The Penn Insurance and Annuity Company

($ in Thousands)

Other Invested Assets  The Company invests in LIHTC investments, which generate tax credits for investing in affordable housing projects. Investments in LIHTC are included in other invested assets and are accounted for under the proportional amortized cost method. The delayed equity contributions for these investments are unconditional and legally binding and therefore, have been recognized as a liability. LIHTC investments are reviewed for OTTI, which is accounted for as a realized loss.

Other invested assets also include notes receivable carried at book value from Janney Montgomery Scott LLC (“JMS”), an affiliate, and the Company’s investments in ISP, Penn Mutual Asset Management Multi -Series Funds Series A and Penn Mutual AM Strategic Income Fund (collectively “PMAM’s Private Funds/PMUBX”) and receivables for unsettled investment transactions.

OTTI EVALUATION

Bonds, mortgage-backed and asset-backed securities  The Company considers an impairment to be OTTI if: (a) the Company’s intent is to sell, (b) the Company will more likely than not be required to sell, (c) the Company does not have the intent and ability to hold the security for a period of time sufficient to recover the amortized cost basis, or (d) the Company does not expect to recover the entire amortized cost basis. The Company conducts a periodic management review of all bonds including those in default, not-in-good standing, or otherwise designated by management. The Company also considers other qualitative and quantitative factors in determining the existence of OTTI including, but not limited to, unrealized loss trend analysis and significant short-term changes in value, default rates, delinquency rates, percentage of nonperforming loans, prepayments, and severities. If the impairment is other-than-temporary, the non-interest loss portion of the impairment is recorded through realized losses, and the interest related portion of the loss is disclosed in the notes to the financial statements.

The non-interest portion is determined based on the Company’s “best estimate” of future cash flows discounted to a present value using the appropriate yield. The difference between the present value of the best estimate of cash flows and the amortized cost is the non-interest loss. The remaining difference between the amortized cost and the fair value is the interest loss.

Alternative Assets OTTI  The Company’s evaluation for OTTI takes into consideration the remaining life of a partnership and the performance of the underlying assets when evaluating the facts and circumstances surrounding the recovery of the cost for a partnership. Any such impairments are accounted for as a realized loss.

LIHTC OTTI  For LIHTC investments, OTTI is determined by comparing the book value of the investment with the present value of future tax benefits. The investment is written down if the book value is higher than the present value, and the impairment is accounted for as a realized loss.

INVESTMENT INCOME DUE AND ACCRUED  Investment income due and accrued consists primarily of interest and dividends. Interest is recognized on an accrual basis and dividends are recorded as earned on the ex-dividend date. Due and accrued income is not recorded on: (a) bonds in default; (b) bonds delinquent more than 90 days or where collection of interest is improbable; and (c) policy loan interest due and accrued in excess of the cash surrender value of the underlying contract.

OTHER ASSETS  Other assets primarily consists of amounts receivable from the Company’s affiliates relating to reinsurance and other intercompany service agreements.

FEDERAL INCOME TAX  The Company files a consolidated federal income tax return with its parent, Penn Mutual, and Penn Mutual’s non-insurance subsidiaries. Each subsidiary’s tax liability or refund is accrued on a benefits for loss basis. Penn Mutual reimburses subsidiaries for losses utilized in the consolidated return based on inter-company tax allocation agreements. The provision for federal income taxes is computed in accordance with the section of the Internal Revenue Code applicable to life insurance companies and is based on income that is currently taxable.

Uncertain tax positions (“UTP”) are established when the merits of a tax position are evaluated against certain measurement and recognition tests. UTP changes are reflected as a component of income taxes. The Company currently has no UTPs.

2020 Statutory Financial Statements Page 9

($ in Thousands)

Deferred income tax assets and liabilities are established to reflect the impact of temporary differences between the amount of assets and liabilities recognized for financial reporting purposes and such amounts recognized for tax purposes. These deferred tax assets or liabilities are measured by using the enacted tax rates expected to apply to taxable income in the period in which the deferred tax liabilities or assets are expected to be settled or realized. Changes in the deferred tax balances are reported as adjustments to surplus. Deferred tax assets, after the consideration of any necessary valuation allowance, in excess of statutory limits are treated as nonadmitted assets and charged to surplus.

REINSURANCE  In the normal course of business, the Company seeks to limit its exposure to loss on any single insured and to recover a portion of benefits paid by ceding reinsurance to other insurance enterprises or reinsurers under excess coverage and coinsurance contracts. The Company has set its retention limit for acceptance of risk on life insurance policies at various levels up to $5,000 for single life and $7,500 for joint lives.

In addition to excess coverage and coinsurance contracts, the Company also utilizes other forms of reinsurance such as coinsurance funds withheld.

Reinsurance does not relieve the Company of its primary liability and, as such, failure of reinsurers to honor their obligations could result in losses to the Company. The Company evaluates the risk transfer of its reinsurance contracts as well as the financial strength of potential reinsurers. The Company regularly monitors the financial condition and ratings of its existing reinsurers to ensure that amounts due from reinsurers are collectible.

Insurance liabilities are reported net of the effects of reinsurance. Estimated reinsurance recoverables are recognized in a manner consistent with the liabilities related to the underlying reinsured contracts.

SEPARATE ACCOUNT ASSETS AND LIABILITIES  The Company has separate account assets and liabilities representing segregated funds administered and invested by the Company primarily for the benefit of variable annuity contractholders. The assets of each account are legally segregated and are generally not subject to claims that arise out of any other business of the Company. The separate accounts have varying investment objectives.

Separate account assets are stated at the fair value of the underlying assets, which are shares of mutual funds. The value of the assets in the Separate Accounts reflects the actual investment performance of the respective accounts and is not guaranteed by the Company. The liability is reported at contract value and represents the policyholders’ interest in the account and includes accumulated net investment income and realized and unrealized capital gains and losses on the assets, The investment income and realized capital gains or losses from separate account assets accrue to the policyholders and are not included in the Statements of Operations. Mortality, policy administration, surrender charges assessed and asset management fees charged against the accounts are included in other revenue in the accompanying Statements of Operations.

The Company has traditional variable annuity contracts in the separate accounts in which the Company provides various forms of guarantees to benefit the related contract holders called Guaranteed Minimum Death Benefits (“GMDB”). In accordance with guarantees provided, if the investment proceeds in the separate accounts are insufficient to cover the guarantees for the product, the policyholder proceeds will be remitted by the general account.

NONADMITTED ASSETS  Assets designated as nonadmitted by the NAIC include the amount of the deferred tax asset that will not be realized within the next three year period or in excess of statutory limitations, the IMR in a net asset position, certain other receivables, advances and prepayments, and related party amounts outstanding greater than 90 days from the due date and the investment in certain subsidiaries. Such amounts are excluded from the Statements of Admitted Assets, Liabilities and Capital and Surplus.

RESERVES AND FUNDS FOR THE PAYMENT OF FUTURE INSURANCE AND ANNUITY BENEFITS  Policyholders’ reserves provide amounts adequate to discharge estimated future obligations in excess of estimated future premium on policies in-force. Any adjustments that are made to the reserve balances are reflected in the Statements of Operations in the year in which such adjustments are made, with the exception of changes in valuation bases that are accounted for as charges or credits to surplus.

Page 10 The Penn Insurance and Annuity Company

($ in Thousands)

Reserves and funds for the payment of future life and annuity benefits are developed using actuarial methods based on statutory mortality and interest requirements. Reserves for life insurance contracts are developed using accepted actuarial methods computed principally on the Commissioners’ Reserve Valuation Method (“CRVM”) method using the 1958, 1980, 2001, and 2017 Commissioners’ Standard Ordinary Mortality Tables and assumed interest rates ranging from 3.50% to 9.00%. Reserves for substandard policies are computed using multiples of the respective underlying mortality tables. The Company has universal life contracts with secondary guarantee features. The Company establishes reserves according to Actuarial Guideline XXXVIII.

Reserves for Term and Single Life UL with secondary guarantee features are based on the methodology specified by the Life Principle-Based Reserve approach (“VM-20”), starting with 2017 policy issue years. Reserves for Single and Joint Life IUL are based on the same VM-20 methodology starting with 2018 policy issue years. VM-20 specifies the final reserve as the greater of the Net Premium Reserve (“NPR”), Deterministic Reserve (“DR”) and Stochastic Reserve (“SR”). The NPR is a formulaic reserve with prescribed assumptions, including the 2017 CSO Mortality Tables. The DR is based on a single path, deterministic projection with prudent estimate assumptions, including margins for uncertainty. The SR is based on the Conditional Tail Expectation 70 (“CTE70”) of 1000 stochastically generated interest rate return scenarios with prudent estimate assumptions, including margins for uncertainty.

Reserves for fixed indexed annuities are developed using accepted actuarial methods computed principally on the Commissioners’ Annuity Reserve Valuation Method (“CARVM”) method using the 2012 Individual Annuity Mortality Basis and assumed interest rates ranging from 3.25% to 3.75%. Reserves for substandard policies are computed using multiples of the respective underlying reserving tables. The Company establishes reserves according to Actuarial Guideline XXXV.

The Company waives deduction of deferred fractional premium at death and returns any portion of the final premium beyond the date of death. Reserves are computed using continuous functions to reflect these practices. Surrender values are not promised in excess of the legally computed reserves.

Reserves for deferred fixed individual annuity contracts are developed using accepted actuarial methods computed principally under the Commissioners’ Annuity Reserve Valuation Method using applicable interest rates and mortality tables, primarily on the 1971, 1983, 2000, and 2012 Individual Annuity Mortality Table and rates ranging from 2.00% to 7.75%.    

The Company also has deferred variable annuity contracts and establishes reserves according to the methodology specified by Principle-Based Reserves for Variable Annuities (“VM-21”).

Reserves for group annuity contracts are developed using accepted actuarial methods computed principally on the 1971 Group Annuity Mortality Tables with an assumed interest rate of 11.25%.

The Company had $654 and $550 as of December 31, 2020 and December 31, 2019, respectively, of insurance in force for which the gross premiums are less than the net premiums according to the standards of valuation set by the Delaware Department of Insurance.

The tabular interest has been determined from the basic data for the calculation of policy reserves. The tabular less actual reserve released has been determined by formula.

LIABILITIES FOR DEPOSIT-TYPE CONTRACTS  Reserves for funding agreements, investment-type contracts such as supplementary contracts not involving life contingencies, and certain structured settlement annuities are based on account value or accepted actuarial methods using applicable interest rates. Fair value is estimated by discounting future cash flows using current market rates.

The tabular interest for funds not involving life contingencies is determined as the change in reserves less funds added during the year less other increases, plus funds withdrawn during the year.

POLICY CLAIMS IN PROCESS  Policy Claims in Process include provisions for payments to be made on reported claims and claims incurred but not reported.

INTEREST MAINTENANCE RESERVE The IMR captures the realized capital gains/(losses) that result from changes in the overall level of interest rates and amortizes them into income over the calendar years to expected maturity.

2020 Statutory Financial Statements Page 11

($ in Thousands)

ASSET VALUATION RESERVE  The AVR is a contingency reserve to stabilize surplus against fluctuations in the statement value of common stocks, partnerships, LIHTC investments, and LLCs, as well as non interest-related declines in the value of bonds. The AVR is reported in the Statement of Admitted Assets, Liabilities and Capital and Surplus, and the change in AVR is reported in the Statements of Changes in Capital and Surplus.

DRAFTS OUTSTANDING  Drafts Outstanding that have not been presented for payment are recorded as a liability.

OTHER LIABILITIES  Other liabilities consists primarily of premiums received in advance, drafts outstanding, amounts payable on unaffiliated reinsurance agreements and amounts payable to the Company’s affiliates under reinsurance agreements and other service agreements.

CONTINGENCIES  Amounts related to contingencies are accrued if it is probable that a liability has been incurred and an amount is reasonably estimable. Regarding litigation, management evaluates whether there are incremental legal or other costs directly associated with the ultimate resolution of the matter that are reasonably estimable and, if so, includes these costs in the accrual.

RISK-BASED CAPITAL  Life insurance companies are subject to certain risk-based capital (“RBC”) requirements as specified by the NAIC. Under those requirements, minimum amounts of statutory surplus are required to be maintained based on various risk factors related to it. At December 31, 2020, the Company’s surplus exceeds these minimum levels.

PREMIUM AND RELATED EXPENSE RECOGNITION  Life insurance premium revenue is generally recognized as revenue on the gross basis when due from policyholders under the terms of the insurance contract. Annuity premium on policies with life contingencies is recognized as revenue when received. Both premium and annuity considerations are recorded net of reinsurance premiums. Commissions and other costs related to issuance of new policies, and policy maintenance and settlement costs are charged to current operations when incurred. Surrender fee charges on certain life and annuity products are recorded as a reduction of benefits and expenses. Benefits payments are reported net of the amounts received from reinsurers.

The Company accounts for deposit-type contracts (those that do not subject the Company to mortality or morbidity risk) under the deposit method. Amounts received from and payments to policyholders related to these contracts are recorded directly against the related policy reserves. Interest credited to policyholder accounts is reflected in Benefits paid to policyholders and beneficiaries. Fees charged to policyholder accounts are reflected in Other revenue.

OTHER REVENUE AND OTHER EXPENSES  Other revenue includes interest income earned on the funds withheld assets in PML pursuant to the terms of the 70% coinsurance with funds withheld agreement with PML. The Company subsequently remits this interest income earned to PIAre I, the ultimate assuming company, which is recognized in Other expenses.

Other revenue also includes benefits received by the Company under reinsurance agreements with PML relating to index credits on certain universal life policies issued by the Company.

REALIZED AND UNREALIZED CAPITAL GAINS AND LOSSES  Realized capital gains and losses, net of taxes, exclude gains and losses transferred to the IMR. Realized capital gains and losses are recognized in net income and are determined using the specific identification method.

All after-tax realized capital gains and losses that result from changes in the overall level of interest rates for all types of fixed-income investments are transferred to the IMR and amortized into revenue. These interest-related gains and losses are amortized into net investment income using the grouped method over the remaining life of the investment sold.

Unrealized capital gains and losses, net of deferred federal income taxes, are recorded as a change in surplus.

FEDERAL HOME LOAN BANK BORROWINGS  The Company is a member of the FHLB-PGH, which provides access to collateralized advances, collateralized funding agreements, and other FHLB-PGH products. Collateralized advances

Page 12 The Penn Insurance and Annuity Company

($ in Thousands)

from the FHLB-PGH are classified in “Borrowed money.” Collateralized funding agreements issued to the FHLB-PGH are classified as liabilities for deposit-type funds and are recorded within Reserves and funds for payment of insurance and annuity benefits. FHLB-PGH is a first-priority secured creditor.

The Company’s membership in FHLB-PGH requires the ownership of member stock, and borrowings from FHLB-PGH require the purchase of FHLB-PGH activity based stock in an amount equal to 4% of the outstanding borrowings. All FHLB-PGH stock purchased by the Company is classified as restricted general account investments within Common stock — unaffiliated. The Company’s borrowing capacity is determined by the lesser of the assets available to be pledged as collateral to FHLB-PGH or 10% of the Company’s prior period admitted general account assets. The fair value of the qualifying assets pledged as collateral by the Company must be maintained at certain specified levels of the borrowed amount, which can vary, depending on the nature of the assets pledged. The Company’s agreement allows for the substitution of assets and the advances are pre-payable. Current borrowings are subject to prepayment penalties.

Borrowings from the FHLB-PGH are classified as funding agreements. As of December 31, 2020, there were $0 in outstanding borrowings and the maximum borrowed during the year was $400,000. As of December 31, 2019, there were $0 in outstanding borrowings and the maximum borrowed during the year was $215,000.

NEW ACCOUNTING STANDARDS

Effective January 1, 2020, the Company adopted VM-21, which replaces Actuarial Guideline 43 (AG43) and impacts all inforce variable annuity policies which had previously been reserved for under AG43, as well as new issues going forward. The new regulation had no impact on the Company’s financial results.

Effective January 1, 2020, SSAP No. 22R rejects US GAAP guidance on operating leases. SSAP No. 22R incorporates additional disclosures regarding sale-leaseback transactions, lessor accounting and leveraged leases. Adoption of this guidance did not impact the Company.

Effective January 1, 2020, SSAP No. 108 provides accounting and reporting guidance for derivatives that hedge interest rate risk of variable annuity guarantees reserved under VM-21. The Company has currently not elected to adopt this guidance.

Effective December 31, 2019, the Company adopted revisions to NAIC SSAP no. 51R requiring additional disclosures for life reserves by withdrawal characteristics.

During 2019, the Company adopted NAIC SSAP 100R, “Fair Value”. The revisions eliminated disclosures on transfers between Levels 1 and 2.

The NAIC adopted revisions to SSAP No. 69, “Statement of Cash Flow”. The revisions require restricted cash to be included in cash when reconciling the beginning -of-period and end-of-period cash amounts on the statement of cash flow. The new guidance is effective for the year ending December 31, 2019. Adoption of this guidance was not material to the Company.

Note 3.  INVESTMENTS

The Company maintains a diversified investment portfolio. Investment policies limit concentration in any asset class (except for U.S. Treasury and U.S. Government guaranteed securities), geographic region, industry group, economic characteristic, investment quality, or individual investment.

2020 Statutory Financial Statements Page 13

($ in Thousands)

BONDS AND PREFERRED STOCK  The following summarizes the admitted value and estimated fair value of the Company’s investment in bonds and redeemable preferred stock.

			Gross Unrealized Capital
December 31, 2020	Admitted Value		Gains		Losses		Estimated Fair Value
US Governments	$	61,753	$	932	$	1,081	$	61,604
Other Governments		6,991		1,153		—		8,144
States, Territories and Possessions		36,158		11,355		—		47,513
Political Subdivisions		125,371		17,125		—		142,496
Special Revenue		475,809		78,982		159		554,632
Industrial and Miscellaneous		2,406,887		449,048		2,857		2,853,078
Residential Mortgage-backed Securities		428,702		10,207		314		438,595
Commercial Mortgage-backed Securities		832,804		36,885		10,955		858,734
Asset-backed Securities		674,970		25,814		11,670		689,114
Hybrid Securities		147,302		11,727		1,763		157,266
SVO Identified Funds		10,732		—		—		10,732
Total Bonds		5,207,479		643,228		28,799		5,821,908
Preferred Stock		54,928		4,133		71		58,990
Total Bonds and Preferred Stock	$	5,262,407	$	647,361	$	28,870	$	5,880,898

Included in admitted value and estimated fair value for Residential mortgage-backed securities above are $76,752 and $82,750, respectively, of subprime mortgages.

			Gross Unrealized Capital
December 31, 2019	Admitted Value		Gains		Losses		Estimated Fair Value
US Governments	$	16,282	$	513	$	12	$	16,783
Other Governments		4,989		351,000		—		5,340
States, Territories and Possessions		42,135		9,059		—		51,194
Political Subdivisions		101,714		10,755		80		112,389
Special Revenue		424,259		59,817		108		483,968
Industrial and Miscellaneous		2,043,067		236,287		3,825		2,275,529
Residential Mortgage-backed Securities		228,298		5,212		429		233,081
Commercial Mortgage-backed Securities		814,512		28,888		4,044		839,356
Asset-backed Securities		617,654		18,284		4,414		631,524
Hybrid Securities		156,935		7,860		517		164,278
SVO Identified Funds		14,606		—		479		10,732
Total Bonds		4,464,451		377,026		13,908		4,827,569
Preferred Stock		46,890		2,058		88		48,860
Total Bonds and Preferred Stock	$	4,511,341	$	379,084	$	13,996	$	4,876,429

RESTRICTED ASSETS AND SPECIAL DEPOSITS  The Company maintains assets on deposit with governmental authorities or trustees as required by certain state insurance laws. The Company also receives and pledges collateral for derivative contracts and FHLB in the form of cash and securities. Capital stock was purchased as a requirement to participate in the FHLB lending program.

Page 14 The Penn Insurance and Annuity Company

($ in Thousands)

Balance Sheet Classification	Type		2020		2019
Debt securities — Available for sale		Collateral — FHLB	$	—	$	126,932
Debt securities — Available for sale		Reinsurance agreements		476,533		491,361
Debt securities — Available for sale		State deposit		1,300		1,301
Equity securities — Common stock unaffiliated		FHLB Stock		846		823
Equity securities — Common stock unaffiliated		Reinsurance agreements		2,611		2,905
Cash		Collateral — Derivatives		216,859		334,816
Cash		State deposit		2,936		2,936
Total Restricted Assets			$	701,086	$	961,075

The following table summarizes the admitted value and estimated fair value of debt securities as of December 31, 2020 by contractual maturity. Expected maturities may differ from contractual maturities because borrowers may have the right to call or prepay obligations with or without penalties. Securities that are not due on a single maturity are included as of the final maturity.

Years to maturity:	Admitted Value		Fair Value
Due in one year or less	$	12,887	$	13,234
Due after one year through five years		234,458		249,348
Due after five years through ten years		509,092		581,986
Due after ten years		2,472,235		2,990,895
Residential Mortgage-backed Securities(1)		438,847		438,596
Commercial Mortgage-backed Securities(1)		864,990		858,735
Asset-backed Securities(1)		674,970		689,114
Total Bonds		5,207,479		5,821,908
Preferred Stock		54,928		58,990
TOTAL BONDS AND PREFERRED STOCK	$	5,262,407	$	5,880,898
(1)  Includes U.S. Agency structured securities

Mortgage and other asset-backed securities consist of commercial and residential mortgage pass-through holdings and securities backed by various forms of collateral, with the largest being collateralized loan obligations. These securities follow a structured principal repayment schedule and are rated investment grade, other than $97,596 primarily in asset-backed securities. The mortgage and other asset-backed securities portfolio are presented separately in the maturity schedule due to the potential for prepayment. The weighted average life of this portfolio is 6.1 years.

At December 31, 2020, the largest industry concentration of the Company’s portfolio was investments in the Electric-Integrated sector of $297,659, representing 6% of the total debt securities portfolio.

CREDIT LOSS ROLLFORWARD  The following represents a rollforward of the cumulative credit loss component of OTTI loss recognized in earnings on fixed maturity securities still held for which a portion of the OTTI loss was not recognized in earnings.

As of December 31,	2020			2019
Balance, beginning of period	$	1,746		$	3,649
Credit loss impairments previously recognized on securities which matured, paid down, prepaid or were sold during the period		(1,002	)		(3,649	)
Credit loss impairment recognized in the current period on securities not previously impaired		—			1,746
Balance, end of period	$	744		$	1,746

2020 Statutory Financial Statements Page 15

($ in Thousands)

UNREALIZED LOSSES ON INVESTMENTS  Management has determined that the unrealized losses on the Company’s investments in equity and fixed maturity securities at December 31, 2020 are temporary in nature.

The following tables are an analysis of the fair values and gross unrealized losses aggregated by bond category and length of time that the securities were in a continuous unrealized loss position.                

	Less than 12 months				12 months or greater				Total
December 31, 2020	Fair Value		Gross Unrealized Capital Loss		Fair Value		Gross Unrealized Capital Loss		Fair Value		Gross Unrealized Capital Loss		Number of Securities
US Governments	$	21,000	$	480	$	62,702	$	601	$	83,702	$	1,081		18
Special Revenue		22,362		159		—		—		22,362		159		155
Industrial and Miscellaneous		75,447		2,328		5,531		529		80,978		2,857		977
Residential Mortgage-backed
Securities		24,050		226		988		88		25,038		314		95
Commercial Mortgage-backed Securities		219,530		8,661		31,088		2,294		250,618		10,955		258
Asset-backed Securities		196,824		9,539		98,739		2,131		295,563		11,670		177
Hybrid Securities		20,459		723		12,006		1,040		32,465		1,763		59
Total Bonds		579,672		22,116		211,054		6,683		790,726		28,799		1,739
Preferred Stock		2,498		2		1,931		69		4,429		71		20
Total Bonds and Preferred Stock	$	582,170	$	22,118	$	212,985	$	6,752	$	795,155	$	28,870		1,759

	Less than 12 months				12 months or greater				Total
December 31, 2019	Fair Value		Gross Unrealized Capital Loss		Fair Value		Gross Unrealized Capital Loss		Fair Value		Gross Unrealized Capital Loss		Number of Securities
US Governments	$	—	$	—	$	16,783	$	12	$	16,783	$	12		10
Political Subdivisions		7,107		80		—		—		7,107		80		27
Special Revenue		4,107		41		17,159		67		21,266		108		140
Industrial and Miscellaneous		89,623		2,127		46,232		1,698		135,855		3,825		857
Residential Mortgage-backed
Securities		30,280		161		18,296		268		48,576		429		92
Commercial Mortgage-backed Securities		143,208		2,827		24,221		1,217		167,429		4,044		250
Asset-backed Securities		139,868		1,310		121,268		3,104		261,136		4,414		154
Hybrid Securities		6,623		49		10,301		468		16,924		517		62
Total Bonds		420,816		6,595		268,387		7,313		689,203		13,908		1,600
Preferred Stock		3,995		6		1,918		82		5,913		88		19
Total Bonds and Preferred Stock	$	424,811	$	6,601	$	270,305	$	7,395	$	695,116	$	13,996		1,619

Page 16 The Penn Insurance and Annuity Company

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Included in the December 31, 2020 and 2019 amounts above is the interest portion of other-than-temporary impairments on securities of $0 and $273, respectively.

COMMON STOCK — UNAFFILIATED  The following summarizes the cost and estimated fair value of the Company’s investment in unaffiliated common stock:

			Gross Unrealized Capital
	Cost		Gains		Losses		Estimated Fair Value
December 31, 2020	$	45,950	$	17	$	10,486	$	35,481
December 31, 2019		31,440		—		3,981		27,459

The following presents the gross unrealized capital losses and fair values for unaffiliated common stock with unrealized capital losses that are deemed to be only temporarily impaired and length of time that individual securities have been in an unrealized capital loss position.

	Less than 12 months				Greater than 12 Months				Total
	Fair Value		Gross Unrealized Capital Losses		Fair Value		Gross Unrealized Capital Losses		Fair Value		Gross Unrealized Capital Losses
December 31, 2020	$	16,509	$	3,731	$	16,762	$	6,755	$	33,271	$	10,486
December 31, 2019		10,798		756		15,839		3,225		26,637		3,981

The amount of unrealized capital losses on the Company’s investment in unaffiliated common stock is spread over 22 individual securities. There was 12 unaffiliated common stock securities that were priced below 80% of the security’s cost. Management has determined that the unrealized losses on the Company’s investments in unaffiliated common stock at December 31, 2020 are temporary in nature.

Federal Home Loan Bank  The Company’s investment in the FHLB-PGH Class B Membership Capital Stock as of December 31, 2020 and December 31, 2019 was $846 and $823, respectively. The Company also invested $0 and $0 in FHLB-PGH Activity Stock as of December 31, 2020 and December 31, 2019, respectively. The Class B Membership Capital Stock held by the Company is subject to written notices of requests for redemption followed by a five year waiting period.

The Company’s borrowing capacity with the FHLB-PGH was $712,283 and $606,155 as of December 31, 2020 and December 31, 2019, respectively.

The following represents the amount of collateral required to be pledged to the FHLB-PGH, and the maximum amount of collateral pledged as of:

	December 31, 2020		Maximum during 2020		December 31, 2019		Maximum during 2019
Carrying value	$	—	$	478,772	$	—	$	226,169
Fair value		—		526,582		—		266,261

The amount of interest on borrowings classified as funding agreements for the years ended December 31, 2020 and December 31, 2019 was $1,412 and $3,093, respectively.

2020 Statutory Financial Statements Page 17

($ in Thousands)

OTHER THAN TEMPORARY IMPAIRMENTS ON LOAN-BACKED SECURITIES  There were no other-than-temporary impairments recognized on loan-backed securities for the years ended December 31, 2020 and December 31, 2019.

ALTERNATIVE ASSETS  The investment values of alternative assets are provided per the partnerships’ capital account statements. The Company’s interest cannot be redeemed, without exception. Instead, distributions from each fund result from the liquidation of the underlying assets. The period over which unredeemable investments are expected to be liquidated ranges from 5 to 10 years.

As of December 31, 2020, none of these investments exceed 10% of the Company’s admitted assets. The Company recognized realized losses of $1,541 and $872 for the years ended December 31, 2020 and December 31, 2019, respectively, associated with other-than-temporary impairments of certain alternative assets.

Unfunded commitments for alternative assets were $114,268 and $133,394 for the years ended December 31, 2020 and December 31, 2019.

The Company did not recognize any realized gains (losses) for the years ended December 31, 2020 and December 31, 2019 associated with liquidations of the company’s interest in alternative assets.

OTHER INVESTED ASSETS  The components of other invested assets as of December 31, 2020 and 2019 were as follows:

December 31,	2020		2019
LIHTC	$	3,587	$	5,480
Receivable for securities		3,086		11,537
Notes receivable — JMS		40,000		40,000
Other invested assets, affiliated		63,131		71,528
Total other invested assets	$	109,804	$	128,545

Other invested assets, affiliated represents the Company’s investment in subsidiaries ISP, Dresher Run and PMAM’s Private Funds/PMUBX.

Low Income Housing Tax Credits  The Company has no LIHTC properties under regulatory review at December 31, 2020 and 2019. There were no write-downs due to forfeiture of eligibility and there were no impairments for 2020 or 2019.

Commitments of $9 and $230 for the years ended December 31, 2020 and December 31, 2019, respectively, have been recorded in Other liabilities related to unconditional and legally binding delayed equity contributions associated with investments in LIHTC. The Company has unexpired tax credits with remaining lives ranging between 4 and 8 years and required holding periods for its LIHTC investments between 6 and 9 years.

Page 18 The Penn Insurance and Annuity Company

($ in Thousands)

NET INVESTMENT INCOME AND REALIZED CAPITAL GAINS AND LOSSES  The following table summarizes the major categories of net investment income for the years ended:

December 31,	2020		2019
Bonds and preferred stock	$	220,714	$	204,281
Common Stock — unaffiliated		3,796		5,470
Policy loans		29,710		29,450
Cash and short term investments		1,166		1,717
Alternative assets		23,728		25,601
Derivatives		1,379		—
Other invested assets		4,225		9,446
IMR amortization		503		623
Gross investment income		285,221		276,588
Less: Investment expenses		6,278		7,156
Net investment income	$	278,943	$	269,432

There was no nonadmitted accrued investment income at December 31, 2020 and December 31, 2019.

Included in the table above (Bonds and preferred stocks) is $1,285 of investment income attributable to securities disposed of as a result of a callable feature, spread over 10 securities in 2020.

The following table represents proceeds from sales of bonds, preferred stock, and unaffiliated common stocks, and related gross realized gains and losses on those sales for the years ended December 31:

			2020						2019
	Proceeds From Sales		Gross Realized Gains		Gross Realized Losses		Proceeds From Sales		Gross Realized Gains		Gross Realized Losses
Bonds	$	503,958	$	43,765	$	21,277	$	490,854	$	20,672	$	3,034
Preferred stock		4,000		—		34		12,160		275		—
Common stock-unaffiliated		13,303		86		3,346		55,298		1,679		685

The company recognized a common stock impairment of $0 as of December 31, 2020.

Realized capital gains/(losses) are reported net of federal income taxes and amounts transferred to the IMR are as follows for the years ended:

December 31,	2020			2019
Realized capital gains/(losses)	$	9,055		$	(9,988	)
Less amount transferred to IMR		8,771			17,039
Less Taxes:
Transferred to IMR		(1,842	)		(3,578	)
Capital gains		3,746			2,829
Net Realized Capital Losses	$	(1,620	)	$	(26,278	)

Portions of realized capital gains and losses that were determined to be interest related were transferred to the IMR.

There were no NAIC designation 3 or below, or unrated securities sold during the year ended December 31, 2020 and reacquired within 30 days of the sale date.

2020 Statutory Financial Statements Page 19

($ in Thousands)

Note 4.  SEPARATE ACCOUNTS

SEPARATE ACCOUNTS REGISTERED WITH THE SEC The Company maintains separate accounts that are registered with the Securities Exchange Commission (“SEC”) for its individual variable annuity products with assets of $53,424 and $50,651 at December 31, 2020 and December 31, 2019, respectively. The assets for these separate accounts, which are carried at fair value, represent investments in shares of the Company’s Penn Series Funds and other non-proprietary funds.

Information regarding the Separate Accounts of the Company, all of which are nonguaranteed, is as follows:

	2020		2019
Premiums, considerations and deposits for the year ended December 31	$	350	$	47
Reserves at December 31, at market value		53,395		50,651
Subject to discretionary withdrawal at market value	$	53,395	$	50,651

The following table reconciles the amounts transferred to and from the separate accounts as reported in the financial statements of the separate accounts to the amount reported in the Statements of Operations:

Years Ended December 31,	2020			2019
Transfers as reported in the financial statements of the separate accounts:
Transfers to separate accounts	$	350		$	47
Transfers from separate accounts		(5,636	)		(8,480	)
Transfers as reported in the Statements of Operations	$	(5,286	)	$	(8,433	)

The Company utilizes separate accounts to record and account for assets and liabilities for particular lines of business and transactions. For the current reporting year, the Company reported assets and liabilities from variable annuities product lines into a separate account.

The assets of the separate accounts, which are legally insulated from the general account, are comprised of the following as of December 31:

Product Description	2020		2019
Individual Annuity	$	53,424	$	50,651

In accordance with the products recorded within the separate account, some separate account liabilities are guaranteed by the general account.

There were no risk charges paid to compensate the general account for the risk taken as of December 31, 2020 and December 31, 2019.

For the years ended December 31, 2020 and December 31, 2019, the general account of the Company has paid $1 and $21, respectively, and $400 cumulatively over the last five years towards separate account guarantees.

Note 5.  DERIVATIVES

The Company utilizes derivatives to achieve its risk management goals. Exposure to risk is monitored and analyzed as part of the Company’s asset/liability management process, which focuses on risks that impact liquidity, capital, and income. The Company may enter into derivative transactions to hedge exposure to interest rate, credit, liability, currency, and cash flow risks.

The Company offers IUL products which have embedded options with guaranteed returns. The Company uses equity options in the form of call spread options for protection from rising equity levels and rising volatility.

Page 20 The Penn Insurance and Annuity Company

($ in Thousands)

The Company uses interest rate swaps to reduce market risks from changes in interest rates.

When entering into a derivative transaction, there are several risks, including but not limited to basis risk, credit risk, and market risk. Basis risk is the exposure to loss from imperfectly matched positions, and is monitored and minimized by modifying or terminating the transaction. Credit risk is the exposure to loss as a result of default or a decline in credit rating of a counterparty. Credit risk is addressed by establishing and monitoring guidelines on the amount of exposure to any particular counterparty. Market risk is the adverse effect that a change in interest rates, currency rates, implied volatility rates, or a change in certain equity indexes or instruments has on the value of a financial instrument. The Company manages the market risk by establishing and monitoring limits as to the types and degree of risk that may be undertaken. Also, the Company requires that an International Swaps and Derivatives Association Master agreement govern all Over-the-Counter (“OTC”) derivative contracts.

Derivative Instruments Designated and Qualifying as Hedging Instruments

The Company has purchased equity options in the form of call spreads that qualify for hedge accounting. These have been designated as cash flow hedges of cash flows related to the annual return of the S&P 500 Index. These call spreads are used to hedge the increase in liability associated with indexed credits on IUL policies. As these are derivatives in a highly effective hedge, they are carried at cost in a manner consistent with the firm commitment being hedged. At termination, a realized gain amount, net of the cost basis, is recognized within benefits paid to policyholders and beneficiaries on the Statements of Income and Changes in Surplus, consistent with the change in liability associated with the account value. In the event that the hedge fails to qualify as being highly effective at any of the accounting measurement points, the hedge will be considered ineffective and the derivative will be marked to market and the associated change will be recognized as unrealized gain/(loss). At the time of exercise or expiration of the derivative, the associated realized gain or loss will flow through net investment gain/(loss) on the income statement.

The following table presents the notional values, fair values and carrying values of derivative instruments designated and qualifying as hedging instruments. Derivative instruments with carrying values showing a gain are reported as admitted assets and Derivative instruments with carrying values showing a loss are reported in Other liabilities.

Derivative Instruments Designated and Qualifying as Hedging Instruments are as follows:

December 31,	2020
	Notional Value		Fair Value					Carrying Value
			Gain		(Loss)			Gain		(Loss)
Cash flow hedges:
Equity options	$	3,291,114	$	554,832	$	(370,320	)	$	240,270	$	(123,621	)
Total designated and qualifying as hedges	$	3,291,114	$	554,832	$	(370,320	)	$	240,270	$	(123,621	)
December 31,	2019
	Notional Value		Fair Value					Carrying Value
			Gain		(Loss)			Gain		(Loss)
Cash flow hedges:
Equity options	$	2,905,837	$	329,401	$	(160,704	)	$	154,254	$	(51,149	)
Total designated and qualifying as hedges	$	2,905,837	$	329,401	$	(160,704	)	$	154,254	$	(51,149	)

The following table presents the notional and fair values of derivative financial instruments not designated and not qualifying as hedging instruments. Derivative instruments with carrying values showing a gain are reported as admitted assets and Derivative instruments with carrying values showing a loss are reported in Other liabilities. For the derivative instruments shown below, fair values equal carrying values.

2020 Statutory Financial Statements Page 21

($ in Thousands)

Derivative Instruments Not Designated and Not Qualifying as Hedging Instruments are as follows:

December 31,			2020							2019
	Notional Value		Fair Value					Notional Value		Fair Value
			Gain		(Loss)					Gain		(Loss)
Equity options	$	1,163,957	$	223,959	$	(157,272	)	$	722,597	$	87,688	$	(43,042	)
Interest rate swaps		4,672,100		65,583		(43,676	)		—		—		—
Total not designated and not qualifying as hedges	$	5,836,057	$	289,542	$	(200,948	)	$	722,597	$	87,688	$	(43,042	)

The impact of derivatives instruments reported on the Statement of Income for the years ended December 31, 2020 and 2019, segregated by derivatives designated and qualifying as hedging instruments and derivatives not designated and not qualifying as hedging instruments, is reported in the tables below:

Derivative Instruments Designated and Qualifying as Hedging Instruments are as follows:

Year Ended December 31,	2020		2019
	Benefits paid to policyholders and beneficiaries		Benefits paid to policyholders and beneficiaries
Cash flow hedges:
Equity options	$	69,804	$	36,319
Total qualifying hedges	$	69,804	$	36,319

Derivative Instruments Not Designated and Not Qualifying as Hedging Instruments are as follows:

Year Ended December 31,	2020			2019
	Net Investment Gains/(Losses)			Net Investment Gains/(Losses)
Equity options	$	7,029		$	(28,691	)
Interest rate swaps		(15,916	)		—
Total nonqualifying hedges	$	(8,887	)	$	(28,691	)

The change in unrealized capital gains/(losses) for derivative instruments not designated and not qualifying as hedging instruments are as follows for the years ended December 31:

	2020		2019
Equity options	$	6,659	$	32,045
Interest rate swaps		21,907		—
Total	$	28,566	$	32,045

CREDIT RISK  The Company is exposed to credit related losses in the event of non-performance by counterparties to derivative financial instruments. In order to minimize credit risk, the Company and its derivative counterparties require collateral to be posted in the amount owed under each transaction, subject to minimum transfer amounts that are functions of the counterparties credit rating. As of December 31, 2020 and 2019, the Company was fully collateralized thereby eliminating the potential for an accounting loss. Additionally, certain agreements with counterparties allow for contracts in a positive position to be offset by contracts in a negative position. This right of offset also reduces the Company’s exposure. As of December 31, 2020 and 2019, the Company has received net

Page 22 The Penn Insurance and Annuity Company

($ in Thousands)

collateral of $216,860 and $207,884, respectively, in the form of cash. The cash received from held collateral that is not invested in an interest bearing money market fund is invested mainly in fixed income securities.

Note 6.  FAIR VALUE OF FINANCIAL INSTRUMENTS

FAIR VALUE MEASUREMENT  Fair value is defined as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. Fair value measurement is based on assumptions market participants would make in pricing an asset or liability. Inputs to valuation techniques to measure fair value are prioritized by establishing a three-level fair value hierarchy. The fair value hierarchy gives the highest priority to quoted prices in active markets and the lowest priority to prices derived from unobservable inputs. An asset or liability’s classification within the fair value hierarchy is based on the lowest level of significant input to its fair value measurement.

The Company has categorized its assets and liabilities into the three-level fair value hierarchy based upon the priority of the inputs. The following summarizes the types of assets and liabilities included within the three-level hierarchy:

Level 1 Fair value is based on unadjusted quoted market prices in active markets for identical assets or liabilities that are accessible at the measurement date. These generally provide the most reliable evidence and are used to measure fair value whenever available. Active markets are defined as having the following for the measured asset/liability: i) many transactions, ii) current prices, iii) price quotes not varying substantially among market makers, iv) narrow bid/ask spreads and v) most information publicly available. Prices are obtained from readily available sources for market transactions involving identical assets and liabilities.

Level 2 Fair value is based on significant inputs, other than quoted prices included in Level 1, that are observable for the asset or liability, either directly or indirectly, for substantially the full term of the asset or liability through corroboration with observable market data. Prices for assets classified as Level 2 are primarily provided by an independent pricing service or are internally priced using observable inputs. In circumstances where prices from pricing services are reviewed for reasonability but cannot be corroborated to observable market data as noted above, these security values are recorded in Level 3 in the fair value hierarchy.

Level 3 Fair value is based on significant inputs that are unobservable for the asset or liability. These inputs reflect the Company’s assumptions about the assumptions market participants would use in pricing the asset or liability. These are typically less liquid fixed maturity securities with very limited trading activity. Prices are determined using valuation methodologies such as option pricing models, discounted cash flow models, market approach and other similar techniques. Prices may be based upon non-binding quotes from brokers or other market makers that are reviewed for reasonableness, based on the Company’s understanding of the market but are not further corroborated with other additional observable market information.

The determination of fair value, which for certain assets and liabilities is dependent on the application of estimates and assumptions, can have a significant impact on the Company’s results of operations. The following sections describe the valuation methodologies used to determine fair values as well as key estimates and assumptions surrounding certain assets and liabilities, measured at fair value on a recurring basis, that could have a significant impact on the Company’s results of operations or involve the use of significant unobservable inputs.

The fair value process is monitored on a monthly basis by financial and investment professionals who utilize additional subject matter experts as applicable. The purpose is to monitor the Company’s asset valuation policies and procedures by ensuring objective and reliable valuation practices and pricing of financial instruments, as well as addressing fair valuation issues, changes to valuation methodologies and pricing sources. To assess the continuing appropriateness of third party pricing service security valuations, the Company regularly monitors the prices and reviews price variance reports. In addition, the Company performs an initial and ongoing review of the third party pricing services methodologies, reviews inputs and assumptions used for a sample of securities on a periodic basis. Pricing challenges are raised on valuations considered not reflective of market and are monitored by the Company.

2020 Statutory Financial Statements Page 23

($ in Thousands)

BONDS  The fair values of the Company’s debt securities are generally based on quoted market prices or prices obtained from independent pricing services. In order to validate reasonability, prices are reviewed by investment professionals through comparison with directly observed recent market trades or color or by comparison of significant inputs used by the pricing service to the Company’s observations of those inputs in the market. Consistent with the fair value hierarchy described above, securities with quoted market prices or corroborated valuations from pricing services are generally reflected within Level 2. Inputs considered to be standard for valuations by the independent pricing service include: benchmark yields, reported trades, broker/dealer quotes, issuer spreads, two-sided markets, benchmark securities, bids, offers, reference data and industry and economic events. In circumstances where prices from pricing services are reviewed for reasonability but cannot be corroborated to observable market data as noted above, these security values are recorded in Level 3 in the Company’s fair value hierarchy. Under certain conditions, the Company may conclude pricing information received from third party pricing services is not reflective of market activity and may over-ride that information with a valuation that utilizes market information and activity. As of December 31, 2020, there was 1 debt security carried at a fair value of $1,732 that was valued in this manner. As of December 31, 2019, there was 1 debt security carried at a fair value of $3,446 that was valued in this manner.

In circumstances where market data such as quoted market prices or vendor pricing is not available, internal estimates based on significant observable inputs are used to determine fair value. This category also includes fixed income securities priced internally. Inputs considered include: public debt, industrial comparables, underlying assets, credit ratings, yield curves, type of deal structure, collateral performance, loan characteristics and various indices, as applicable. Also included in Level 2 are private placement securities. Inputs considered are: public corporate bond spreads, industry sectors, average life, internal ratings, security structure, liquidity spreads, credit spreads and yield curves, as applicable. If the discounted cash flow model incorporates significant unobservable inputs, these securities would be reflected within Level 3 in the Company’s fair value hierarchy.

In circumstances where significant observable inputs are not available, estimated fair value is calculated by using unobservable inputs. These inputs reflect the Company’s assumptions about the inputs market participants would use in pricing the asset, and are therefore included in Level 3 in the Company’s fair value hierarchy. Circumstances where observable market data is not available may include events such as market illiquidity and credit events related to the security.

EQUITY SECURITIES  Equity securities consist principally of investments in common and preferred stock of publicly traded companies. The fair values of most publicly traded equity securities are based on quoted market prices in active markets for identical assets and are classified within Level 1 in the Company’s fair value hierarchy.

CASH, CASH EQUIVALENTS AND SHORT-TERM INVESTMENTS  Short-term investments and cash equivalents carried at Level 1 consist of money market funds and investments purchased with maturities less than or equal to 12 months. These are carried at amortized cost and approximate fair value.

DERIVATIVE INSTRUMENTS  The fair values of derivative contracts are determined based on quoted prices in active exchanges or prices provided by counterparties, exchanges or clearing members as applicable, utilizing valuation models. The fair values of derivative contracts can be affected by changes in interest rates, foreign exchange rates, commodity prices, credit spreads, market volatility, expected returns and liquidity as well as other factors.

The Company’s exchange traded futures are valued using quoted prices in active markets and are classified within Level 1 in our fair value hierarchy.

Derivative positions traded in the OTC and cleared OTC derivative markets where fair value is determined by third party independent sources are classified within Level 2. These investments included: interest rate swaps, interest rate caps, total return swaps, swaptions, equity options, inflation swaps, forward contracts, and credit default swaps. OTC derivatives classified within Level 2 are valued using models generally accepted in the financial services industry that use actively quoted or observable market input values from external market data providers, broker dealer quotations, third-party pricing vendors and/or recent trading activity. Prices are reviewed by investment professionals through comparison with directly observed recent market trades, comparison with valuations estimated through use of valuation models maintained on an industry standard analytical and valuation platform, or comparison of all significant inputs used by the pricing service to observations of those inputs in the market.

Page 24 The Penn Insurance and Annuity Company

($ in Thousands)

SEPARATE ACCOUNT ASSETS  Separate account assets primarily consist of mutual funds. The fair value of mutual funds is based upon quoted prices in an active market, resulting in classification in Level 1.

The following table presents the financial instruments carried at fair value by caption on the Statement of Admitted Assets, Liabilities and Capital and Surplus and by valuation hierarchy (as described above):

December 31, 2020	FV Level 1		FV Level 2			FV Level 3		Total
Common stock — unaffiliated	$	34,635	$	—		$	846	$	35,481
Derivatives		—		289,542			—		289,542
Separate account assets(1)		53,424		—			—		53,424
Total assets	$	88,059	$	289,542		$	846	$	378,447
Derivatives		—		(200,948	)		—		(200,948	)
Total liabilities	$	—	$	(200,948	)	$	—	$	(200,948	)

(1) Separate account assets represent segregated funds that are invested for certain customers. Investment risks associated with market value changes are borne by the customers, except to the extent of minimum guarantees made by the Company with respect to certain accounts. Separate account liabilities are not included in the above table as they are reported at contract value and not fair value in the Company’s Statement of Admitted Assets, Liabilities and Capital and Surplus.

The following table presents the financial instruments carried at fair value by caption on the Statement of Admitted Assets, Liabilities and Capital and Surplus and by valuation hierarchy (as described above):

December 31, 2019	FV Level 1		FV Level 2			FV Level 3		Total
Common stock — unaffiliated		26,636		—			823		27,459
Derivatives		—		87,688			—		87,688
Separate account assets(1)		50,651		—			—		50,651
Total assets		77,287		87,688			823		165,798
Derivatives		—		(43,042	)		—		(43,042	)
Total liabilities		—		(43,042	)		—		(43,042	)

(1) Separate account assets represent segregated funds that are invested for certain customers. Investment risks associated with market value changes are borne by the customers, except to the extent of minimum guarantees made by the Company with respect to certain accounts. Separate account liabilities are not included in the above table as they are reported at contract value and not fair value in the Company’s Statement of Admitted Assets, Liabilities and Capital and Surplus.

CHANGES IN LEVEL 3 RECURRING FAIR VALUE MEASUREMENTS  When a determination is made to classify a financial instrument within level 3, the determination is based upon the significance of the unobservable parameters to the overall fair value measurement. However, level 3 financial instruments typically include, in addition to the unobservable or level 3 components, observable components (that is, components that are actively quoted and can be validated to external sources); accordingly, the gains and losses in the table below include changes in fair value due in part to observable factors that are part of the valuation methodology.

The Company recognizes transfers into Level 3 as of the end of the period in which the circumstances leading to the transfer occurred. The Company recognizes transfers out of Level 3 at the beginning of a period in which the circumstances leading to the transfer occurred.

There were no assets transferred into Level 3 and there were no assets transferred out of Level 3 for the year ended December 31, 2020. There were no assets transferred into Level 3 and 2 assets transferred out of Level 3 due to increase in fair value for the year ended December 31, 2019.

2020 Statutory Financial Statements Page 25

($ in Thousands)

The tables below include a rollforward of the Statements of Admitted Assets, Liabilities and Surplus amounts for the years ended December 31, 2020 and December 31, 2019 (including the change in fair value), for financial instruments classified by the Company within Level 3 of the valuation hierarchy.

	2020						2019
	Unaffiliated Common Stock			Total			Unaffiliated Common Stock			Total
Balance January 1	$	823		$	823		$	7,678		$	7,678
Transfers in		—			—			—			—
Transfers out		—			—			—			—
Total gains or losses (realized/unrealized) included in:
Income/(loss)		—			—			—			—
Surplus		—			—			—			—
Amortization/Accretion
Purchases/(Sales):
Purchases		17,623			17,623			1,745			1,745
(Sales)		(17,600	)		(17,600	)		(8,600	)		(8,600	)
Balance December 31	$	846		$	846		$	823		$	823

The following summarizes the fair value, valuation techniques and significant unobservable inputs of the Level 3 fair value measurements that were developed as of December 31, 2020:

	Fair Value		Valuation Technique		Significant Unobservable Inputs		Rate/Range or / weighted avg.
Assets:
Investments
Common stock, unaffiliated	$	846		Set by issuer-FHLB-PGH(1)		Not available		N/A
Total investments	$	846

(1) Fair Value approximates carrying value. The par value of the FHLB capital stock is $100 and set by the FHLB. The capital stock is issued, redeemed and repurchased at par.

The following table summarizes the aggregate fair value for all financial instruments and the level within the fair value hierarchy in which the fair value measurements in their entirety fall, for which it is practicable to estimate fair value, at December 31:

2020	Aggregate Fair Value		Admitted Value		Level 1		Level 2		Level 3
Financial Assets:
Bonds	$	5,821,908	$	5,207,479	$	28,914	$	5,792,994	$	—
Preferred stock		58,990		54,928		58,990		—		—
Common stock-unaffiliated		35,481		35,481		34,635		—		846
Cash, Cash Equivalents and short-term investments		226,007		226,007		226,007		—		—
Derivatives		844,375		529,812		—		844,375		—
Separate account assets		53,424		53,424		53,424		—		—
Financial Liabilities:
Investment-type contracts:
Individual annuities	$	201,803	$	202,908	$	—	$	—	$	201,803
Derivatives		571,268		324,569		—		571,268		—
Separate account liabilities		53,424		53,424		53,424		—		—

Page 26 The Penn Insurance and Annuity Company

($ in Thousands)

2019	Aggregate Fair Value		Admitted Value		Level 1		Level 2		Level 3
Financial Assets:
Bonds	$	4,828,376	$	4,464,451	$	15,092	$	4,813,284	$	—
Preferred stock		48,861		46,890		39,867		8,994		—
Common stock-unaffiliated		27,459		27,459		26,636		—		823
Cash and short-term investments		214,304		214,304		214,304		—		—
Derivatives		417,089		241,942		—		417,089		—
Separate account assets		50,651		50,651		50,651		—		—
Financial Liabilities:
Investment-type contracts:
Individual annuities	$	188,235	$	183,686	$	—	$	—	$	188,235
Derivatives		203,746		94,191		—		203,746		—
Separate account liabilities		50,651		50,651		50,651		—		—

During 2020, there were no securities with transfers from Level 3 to to Level 2.

Note 7.  LIFE RESERVES BY WITHDRAWAL CHARACTERISTICS

The withdrawal characteristics of the Company’s life reserves are illustrated below as of December 31:

December 31, 2020	Account Value		General Account Cash Value		Reserve
Subject to Discretionary Withdrawal,
Surrender Values, or Policy Loans:
Universal Life	$	593,249	$	593,149	$	603,129
Universal Life with Secondary Guarantees		871,037		679,777		1,690,766
Indexed Universal Life		3,912,089		3,681,792		3,789,666
Indexed Universal Life with Secondary Guarantees		658,835		617,116		1,164,805
Miscellaneous Reserves		—		—		48,740
Not Subject to Discretionary
Withdrawal or No Cash Values:
Accidental Death Benefits		—		—		14
Disability — Active Lives		—		—		288
Disability — Disabled Lives		—		—		3,197
Miscellaneous Reserves		—		—		—
Total		6,035,210		5,571,834		7,300,605
Less: Reinsurance ceded		1,011,394		857,415		2,158,065
Net	$	5,023,816	$	4,714,419	$	5,142,540

2020 Statutory Financial Statements Page 27

($ in Thousands)

Life reserves of $323,631 with a surrender charge of 5% or more as of December 31, 2020 will have less than a 5% surrender charge in 2021.

December 31, 2019	Account Value		General Account Cash Value		Reserve
Subject to Discretionary Withdrawal,
Surrender Values, or Policy Loans:
Universal Life	$	553,678	$	553,581	$	610,085
Universal Life with Secondary Guarantees		801,231		619,273		1,531,201
Indexed Universal Life		3,336,710		3,134,975		3,251,291
Indexed Universal Life with Secondary Guarantees		591,668		547,576		1,026,428
Miscellaneous Reserves		—		—		54,607
Not Subject to Discretionary
Withdrawal or No Cash Values:
Accidental Death Benefits		—		—		15
Disability — Active Lives		—		—		272
Disability — Disabled Lives		—		—		3,116
Miscellaneous Reserves		—		—		16
Total		5,283,287		4,855,405		6,477,031
Less: Reinsurance ceded		977,471		820,475		2,073,406
Net	$	4,305,816	$	4,034,930	$	4,403,625

Note 8.  RESERVES AND FUNDS FOR THE PAYMENT OF ANNUITY BENEFITS

The withdrawal characteristics of the Company’s annuity actuarial reserves and deposit-type contracts are illustrated below:

December 31, 2020	General Account		Separate Account		Total		% of Total
Subject to discretionary withdrawal-with adjustments:
With market value adjustment	$	—	$	—	$	—		—	%
At book value less surrender charges		140,741		—		140,741		55	%
At market value		—		53,395		53,395		21	%
Subtotal		140,741		53,395		194,135		76	%
At book value — without adjustment		39,069		—		39,069		15	%
Not subject to discretionary withdrawal		23,393		—		23,393		9	%
Total annuity reserves and deposit liabilities, gross		203,203		53,395		256,598		100	%
Less: Reinsurance ceded		—		—		—		—	%
Total annuity reserves and deposit liabilities, net	$	203,203	$	53,395	$	256,598		100	%

Page 28 The Penn Insurance and Annuity Company

($ in Thousands)

There are no annuity and deposit-type contract reserves with surrender charges of 5% or more as of December 31, 2020 that will have less than a 5% surrender charge in 2021.

December 31, 2019	General Account		Separate Account		Total		% of Total
Subject to discretionary withdrawal-with adjustments:
With market value adjustment	$	—	$	—	$	—		—	%
At book value less surrender charges		120,654		—		120,654		51	%
At market value		—		50,651		50,651		22	%
Subtotal		120,654		50,651		171,305		73	%
At book value — without adjustment		36,415		—		36,415		16	%
Not subject to discretionary withdrawal		26,951		—		26,951		11	%
Total annuity reserves and deposit liabilities, gross		184,020		50,651		234,671		100	%
Less: Reinsurance ceded		—		—		—		—	%
Total annuity reserves and deposit liabilities, net	$	184,020	$	50,651	$	234,671		100	%

The following summarizes the total annuity actuarial reserves and liabilities for deposit-type contracts as of December 31:

	2020		2019
Statutory Statements of Admitted Assets, Liabilities and Capital and Surplus:
Policyholders’ reserves — group annuities	$	295	$	334
Policyholders’ reserves — individual annuities		194,024		174,914
Liabilities for deposit-type contracts		8,884		8,504
VM-21 reserves		—		268
Subtotal	$	203,203	$	184,020
Separate Account Annual Statement:
Annuities	$	53,395	$	50,651
Subtotal		53,395		50,651
TOTAL RESERVES	$	256,598	$	234,671

The Company has variable annuity contracts containing GMDB provisions that provide a specified minimum return upon death as follows:

RETURN OF PREMIUM  provides the greater of the account value or total deposits made to the contract less any partial withdrawals and assessments, which is referred to as “net purchase payments”. This guarantee is a standard death benefit on all individual variable annuity products.

RISING FLOOR  provides a variable death benefit equal to the greater of the current account value and the variable purchase payments accumulated at a set rate and adjusted for withdrawals and transfers.

The following table summarizes the account values and net amount at risk (death benefit in excess of account value), net of reinsurance, for variable annuity contracts with guarantees invested in the separate accounts as of December 31:

	2020		2019
Account value	$	53,424	$	50,651
Net amount at risk		2,583		3,934

2020 Statutory Financial Statements Page 29

($ in Thousands)

The Company has fixed indexed annuity contracts that have GMWB Rider options. The GMWB rider allows for guaranteed withdrawals from a benefit base after a selected waiting period. The GMWB riders are also available with inflation protection. The benefit base is calculated as the maximum of principal increase at a roll up rate less any partial withdrawals during the accumulation phase, the current account value, and the highest anniversary value over the first ten years. The withdrawal amount is stated as a percentage of the benefit base and varies based on whether the annuitant selects lifetime withdrawals or a specified period. One version of this rider has an inflation adjustment applied to the Guaranteed Withdrawal Amount.

The following table summarizes the account values for the different benefit types as of December 31, 2020:

Rider Type	Contracts		Fund Value		Cash Value
GMWB		437	$	88,880	$	83,209
GMWB w/ inflation		50		8,312		7,793
Total		487	$	97,192	$	91,002

The following table summarizes the account values for the different benefit types as of December 31, 2019:

Rider Type	Contracts		Fund Value		Cash Value
GMWB		399	$	79,406	$	73,578
GMWB w/ inflation		46		7,831		7,223
Total		445	$	87,237	$	80,801

Variable annuity reserves for living and death benefits are based on the methodology specified in Valuation Manual — 21: Requirements for Principle-Based Reserves for Variable Annuities (VM-21), which specifies the reserve as the Company Stochastic Reserve plus the Additional Standard Projection Amount. The individual policy reserve is floored at cash surrender value. The Company Stochastic Reserve is based on the Conditional Tail Expectation (“CTE”) 70% of 1,000 stochastically generated interest rate and equity return scenarios. Prudent estimate assumptions including margins for uncertainty are used to calculate the Company Stochastic Reserve. Key assumptions needed in valuing the liability include full withdrawals, partial withdrawals, mortality, the Consumer Price Index, investment management fees and revenue sharing, expenses, fund allocations and other policyholder behavior. The Additional Standard Projection Amount requires prescribed assumptions to be used in place of company assumptions for most key assumptions. The reserve also requires the projection of in-force general account assets and assets from reinvested cash flows. The key assumptions needed in valuing the assets, including the maximum reinvestment earned rate spreads and default rates, are prescribed. In addition, the method for projecting interest rates and equity returns is prescribed for both the Company Stochastic Reserve calculation and the Additional Standard Projection Amount calculation. The final reserve balance for policies that fall within the scope of VM-21, which covers both Living and Death Benefit guarantees, is $53,393 and $50,918 as of December 31, 2020 and December 31, 2019, respectively.

Fixed indexed annuity reserves for living benefits are based on the methodology specified in Actuarial Guideline XXXV, which specifies the reserve as the sum of the nonelective benefit reserve and the elective benefit reserve. The elective benefit reserve is calculated using the elective benefit path that results in the highest present value of future benefits. The final reserve balance for policies that fall within the scope of Actuarial Guideline XXXV is $156,226 and $133,862, as of December 31, 2020 and December  31, 2019, respectively.

Note 9.  FEDERAL INCOME TAXES

The Company follows Statement of Statutory Accounting Principles No. 101 — Income Taxes, A Replacement of SSAP No. 10R and SSAP No. 10 (“SSAP 101”). SSAP 101 includes a calculation for the limitation of gross deferred tax assets for insurers that maintain a minimum of 300% of their authorized control level RBC computed without net deferred tax assets. The Company exceeded the 300% minimum RBC requirement at December 31, 2020 and 2019.

Page 30 The Penn Insurance and Annuity Company

($ in Thousands)

The Company is required to evaluate the recoverability of deferred tax assets and to establish a valuation allowance if necessary to reduce the deferred tax asset to an amount which is more likely than not to be realized. Considerable judgment is required in determining whether a valuation allowance is necessary, and if so, the amount of such valuation allowance. In evaluating the need for a valuation allowance, the Company considers many factors, including: (1) the nature of the deferred tax assets and liabilities; (2) whether they are ordinary or capital; (3) the timing of their reversal; (4) taxable income in prior carryback years as well as projected taxable income exclusive of reversing temporary differences and carryforwards; (5) the length of time that carryovers can be utilized; (6) unique tax rules that would impact the utilization of the deferred tax assets; and (7) any tax planning strategies that the Company would employ to avoid a tax benefit from expiring unused; although the realization is not assured, management believes it is more likely than not that the deferred tax assets, will be realized. The Company has not recorded a valuation allowance as of December 31, 2020 and 2019.

The components of deferred tax asset (DTAs) and deferred tax liabilities (DTLs) recognized by the Company are as follows as of December 31:

Description	2020									2019
	Ordinary			Capital			Total			Ordinary			Capital			Total
Gross DTAs	$	135,515		$	1,566		$	137,081		$	117,310		$	1,453		$	118,763
Adjusted gross DTAs		135,515			1,566			137,081			117,310			1,453			118,763
Adjusted gross DTAs nonadmitted		(35,428	)		—			(35,428	)		(34,112	)		—			(34,112	)
Subtotal admitted adjusted DTA		100,087			1,566			101,653			83,198			1,453			84,651
Gross DTL		(6,875	)		(25,587	)		(32,462	)		(8,250	)		(14,217	)		(22,467	)
Net admitted DTA/(DTL)	$	93,212		$	(24,021	)	$	69,191		$	74,948		$	(12,764	)	$	62,184

The changes in components of deferred tax asset (DTAs) and deferred tax liabilities (DTLs) recognized by the Company are as follows:

Description	Changes during 2020
	Ordinary			Capital			Total
Gross DTAs	$	18,205		$	113		$	18,318
Adjusted gross DTAs		18,205			113			18,318
Adjusted gross DTAs nonadmitted		(1,316	)		—			(1,316	)
Subtotal admitted adjusted DTA		16,889			113			17,002
Gross DTA/(DTL)		1,375			(11,370	)		(9,995	)
Net admitted DTA/(DTL)	$	18,264		$	(11,257	)	$	7,007

2020 Statutory Financial Statements Page 31

($ in Thousands)

Admitted DTA’s are comprised of the following admission components based on paragraph 11 SSAP No. 101 as of December 31:

Description	2020						2019
	Ordinary		Capital		Total		Ordinary		Capital		Total
Admitted DTA 3 years:
Federal income taxes paid that can be recovered:
Remaining adjusted gross DTAs expected to be realized in 3 years (lesser of 1 or 2):	$	67,625	$	1,566	$	69,191	$	60,731	$	1,453	$	62,184
1. Adjusted gross DTA expected to be realized		67,625		1,566		69,191		60,731		1,453		62,184
2. Adjusted gross DTA allowed per limitation threshold		—		—		90,328		—		—		84,465
Adjusted gross DTA offset by existing DTLs		32,462		—		32,462		22,467		—		22,467
Total admitted DTA realized within 3 years	$	100,087	$	1,566	$	101,653	$	83,198	$	1,453	$	84,651

Description	Changes during 2020
	Ordinary		Capital		Total
Admitted DTA 3 years:
Federal income taxes paid that can be recovered:
Remaining adjusted gross DTAs expected to be realized within 3 years (lesser of 1 or 2):	$	6,894	$	113	$	7,007
1. Adjusted gross DTA expected to be realized		6,894		113		7,007
2. Adjusted gross DTA allowed per limitation threshold		—		—		5,863
Adjusted gross DTA offset by existing DTLs		9,995		—		9,995
Total admitted DTA realized within 3 years	$	16,889	$	113	$	17,002

The authorized control level RBC and total adjusted capital computed without net deferred tax assets utilized when determining the amount of net deferred tax was as follows:

December 31:	2020			2019
Ratio percentage used to determine recovery period and threshold limitation amount		454	%		484	%
Amount of adjusted capital and surplus used to determine recovery period and threshold limitation	$	683,419		$	625,851

The impact of Tax planning strategies on the determination of adjusted gross DTA’s and net admitted DTA’s is as follows:

	December 31, 2020									December 31, 2019												Change
	Ordinary			Capital			Total			Ordinary			Capital			Total			Ordinary			Capital			Total
Adjusted gross DTAs		87	%		100	%		87	%		75	%		100	%		75	%		12	%		—	%		12	%
Net admitted DTAs		88	%		100	%		88	%		77	%		100	%		77	%		12	%		—	%		11	%

Page 32 The Penn Insurance and Annuity Company

($ in Thousands)

The Company’s tax planning strategies do not include the use of internal and external reinsurance during 2020 to support DTA realization.

There are no temporary differences for which a DTL has not been established.

Current income taxes incurred consist of the following major components for the years ended December 31:

Description	2020		2019
Current federal income tax expense/(benefit)	$	10,281	$	41,481
Income tax effect on realized capital gains/(losses)		3,746		(749	)
Federal and foreign income taxes incurred	$	14,027	$	40,732

As reported on the capital gains and losses, net of tax as disclosed within the income statement, the Company’s accounting policy is to record tax expense or benefit as calculated pursuant to the Internal Revenue Code, adjusted for taxes transferred to the IMR reserve.

The tax effects of temporary differences that give rise to significant portions of the DTA’s and DTL’s are as follows as of December 31:

	2020			2019			Change
DTA resulting in book/tax difference in:
Ordinary:
Future policy benefits	$	27,355		$	19,435		$	7,920
DAC		52,371			44,720			7,651
Investments — ordinary		16,467			15,033			1,434
Deferred gain on reinsurance		18,272			18,272			—
Nonadmitted assets		3			—			3
LIHTC		21,035			19,837			1,198
Net operating loss carryforward		—			—			—
Other — ordinary		12			13			(1	)
Subtotal — gross ordinary DTAs		135,515			117,310			18,205
Nonadmitted ordinary DTAs		(35,428	)		(34,112	)		(1,316	)
Admitted ordinary DTAs		100,087			83,198			16,889
Capital:
OTTI on investments		1,566			1,453			113
Capital gross DTAs		1,566			1,453			113
Nonadmitted capital DTAs		—			—			—
Admitted capital DTAs		1,566			1,453			113
Admitted DTAs		101,653			84,651			17,002
DTLs resulting in book/tax differences in:
Ordinary:
Future policy benefits — 8 year spread		(6,875	)		(8,250	)		1,375
Ordinary DTLs		(6,875	)		(8,250	)		1,375
Capital:
Alternative asset investments		(5,271	)		(3,646	)		(1,625	)
Net unrealized investment gains		(20,316	)		(10,571	)		(9,745	)
Capital DTLs		(25,587	)		(14,217	)		(11,370	)
DTLs		(32,462	)		(22,467	)		(9,995	)
Net deferred tax asset	$	69,191		$	62,184		$	7,007

2020 Statutory Financial Statements Page 33

($ in Thousands)

The change in deferred income taxes is comprised of the following (this analysis is exclusive of nonadmitted assets as the Change in nonadmitted assets is reported separately from the Change in net deferred income taxes in the surplus section of the Annual Statement):

	2020			2019			Change
Total deferred tax assets	$	137,081		$	118,763		$	18,318
Total deferred tax liabilities		(32,462	)		(22,467	)		(9,995	)
Net deferred tax asset/liabilities		104,619			96,296			8,323
Net deferred tax asset/liability after SVA	$	104,618		$	96,296
Tax effect on unrealized (gains)/losses								9,745
Change in net deferred income taxes							$	18,068

The provision for federal income taxes incurred is different from that which would be obtained by applying the statutory federal income tax rate to income before income taxes including realized capital gains/(losses). The significant items causing the differences as of December 31, 2020 are as follows:

Description	Amount			Tax Effect			Effective Tax Rate
Income before taxes	$	(1,288	)	$	(270	)		21.00	%
Dividends received deduction		(2,162	)		(454	)		35.27	%
Separate Account DRD		(138	)		(29	)		2.25	%
Income from affiliates		(1,717	)		(361	)		28.00	%
IMR amortization		(503	)		(106	)		8.20	%
LIHTC		—			(2,487	)		193.16	%
Other		(1,590	)		(334	)		25.94	%
Total	$	(7,398	)	$	(4,041	)		313.82	%
Federal income tax expense incurred					10,281			-798.51	%
FIT expense/on Realized Capital Gains/Loss					1,904			-147.87	%
FIT in IMR Gains/Losses					1,842			-143.05	%
Change in net deferred income taxes					(18,068	)		1,403.25	%
Total statutory taxes				$	(4,041	)		313.82	%

For the year ended December 31, 2020, the Company utilized $25,257 of net operating loss carryforwards available that originated in 2015. In addition, the Company utilized $1,289 of the total LIHTC available of $19,837 as of December 31, 2019 that will begin to expire in 2030.

At December 31, 2020, the Company had no Alternative Minimum Tax (“AMT”) credit carryforwards.

The Company has not made any deposits regarding the suspension of running interest (protective deposits) pursuant to Internal Revenue Code Section 6603.

The Company’s federal income tax return is consolidated with its parent, Penn Mutual, and Penn Mutual’s non-insurance subsidiaries. The method of tax allocation among the companies is subject to a written agreement, whereby the tax allocation is made on a benefits for loss basis. In addition, the Company is party to a tax agreement with PIAre I whereby PIAre I will pay its federal income tax liability or receive a refund for its net operating losses from the Company determined on a separate return basis.

A listing of the companies included in the consolidated return is as follows:

Penn Mutual Life Insurance Company (Parent)

Penn Insurance & Annuity Company

PIA Reinsurance Company of Delaware I

Page 34 The Penn Insurance and Annuity Company

($ in Thousands)

For the year ended December 31, 2020, PIAre I had a taxable net loss of $28,926 generating an amount payable from PIA to PIAre I of $6,051.

For the year ended December 31, 2019, PIAre I had a taxable net loss of $20,074 generating an amount payable from PIA to PIAre I of $4,216, which was paid in 2020.

Tax years 2017 and subsequent are still subject to audit by the Internal Revenue Service.

The Company recognizes interest and penalties, if any, related to unrecognized tax benefits, as a component of tax expense. During the years ended December 31, 2020 and December 31, 2019, the Company did not recognize or accrue penalties or interest.

The Company has no tax loss contingencies for which it is reasonably possible that the total liability will significantly increase within the next twelve months of the reporting date.

Note 10.  REINSURANCE

The Company has assumed and ceded reinsurance on certain life and annuity contracts under various agreements. Reinsurance ceded permits recovery of a portion of losses from reinsurers.

The table below highlights the reinsurance amounts shown in the accompanying financial statements.

	Direct		Assumed		Ceded		Net Amount
December 31, 2020
Premium and annuity considerations	$	663,259	$	208,425	$	86,207	$	785,477
Reserves and funds for payment of future insurance and annuity benefits		4,539,667		2,964,141		2,158,065		5,345,743
December 31, 2019
Premium and annuity considerations	$	611,157	$	244,214	$	86,376	$	768,995
Reserves and funds for payment of future insurance and annuity benefits		3,959,260		2,701,791		2,073,406		4,587,645

INTERCOMPANY REINSURANCE The Company maintains various reinsurance agreements with affiliates. The following table summarizes premium and reserves balances associated with such agreements as of and for the years ended December 31:

			Assumed/(Ceded)
			2020						2019
	Affiliate		Premium			Reserves			Premium			Reserves
Coinsurance funds withheld		PML	$	36,560		$	1,370,240		$	39,278		$	1,291,692
Coinsurance funds withheld		PIAre I		(50,417	)		(2,153,832	)		(52,023	)		(2,010,948	)
Coinsurance — Inforce		PML		46,680			485,990			54,750			429,976
Coinsurance		PML		112,295			1,101,466			137,447			973,754
YRT — Index credits		PIAre I		12,890			6,445			12,739			6,370
YRT — Over retention		PML		(3,284	)		(384	)		(2,923	)		(356	)
Total			$	154,724		$	809,925		$	189,268		$	690,488

Coinsurance funds withheld  Effective December 31, 2013, the Company ceded a closed block of business to PIAre I on a 100% coinsurance funds withheld basis. Effective December 31, 2014, the Company entered into a contract with PML to assume reserves pursuant to transactions subject to the requirements of Section 7 of the NAIC XXX

2020 Statutory Financial Statements Page 35

($ in Thousands)

and AXXX Reinsurance Model Regulation. The Company then contemporaneously reinsured the policies to PIAre I. At inception, the agreement generated an after-tax gain of $87,008, which was a direct increase to surplus and is amortized into income over the life of the agreement.

Coinsurance — Inforce Effective January 1, 2015, the Company assumed from PML an inforce block of single life index universal life policies issued by PML between 2012 and 2014. The Company assumed 100% of the risk, net of inuring reinsurance.

Coinsurance  The Company assumes certain risks under reinsurance agreements with Penn Mutual relating to various fixed and indexed universal life business.

YRT — Index credits Effective January 1, 2017, the Company assumes the equity risk associated with PIAre I’s indexed UL products on a YRT basis.

YRT — Over retention The Company ceded to PML policies issued after October 1, 2006 and before October 1, 2014 that resulted in retention greater than $1,000 per life.

Note 11.  RELATED PARTIES

The Company entered into a revolving loan agreement with JMS on August 19, 2011, to provide funding to JMS in an amount not to exceed $40,000. Terms of the loan specify that semi-annual interest be paid on the outstanding balances based on market rates determined at the dates of the loans. The principal balances are not due until maturity in August 2030. The Company recorded $3,660 and $3,650 in interest income on this note for the years ended December 31, 2020 and December 31, 2019, respectively. At December 31, 2020 and December 31, 2019, the Company had outstanding principal receivable from JMS of $0 and outstanding interest receivables of $920 and $920, respectively, relating to this agreement.

The Company has received a rating equivalent to an NAIC 1 for the note receivable from JMS.

The Company’s unconsolidated subsidiaries had combined assets of $2,486,902 and 2,488,679 and combined liabilities of $2,371,211 and 2,330,934 as of December 31, 2020 and 2019, respectively. The admitted value of the Company’s investments in subsidiaries includes goodwill of $4,301 and $4,301 and other intangible assets of $267 and $267 at December 31, 2020 and 2019, respectively.

During 2019, Dresher Run sold its investment in Longevity Insurance Company. All remaining assets held by Dresher Run are nonadmitted. Dresher Run paid a $12,840 return of capital and a $1,463 dividend to PIA in 2019. The Company did not make any capital contributions in December 31, 2020 and December 31, 2019.

Under the terms of an expense allocation agreement, the Company reimbursed Penn Mutual for services and facilities provided on behalf of the Company, including direct and allocated expenses. For December 31, 2020 and December 31, 2019, the total expenses incurred under this agreement were $57,178 and $45,156, respectively. The amount due was $17,274 and $15,689 at December 31, 2020 and December 31, 2019, respectively.

Under the terms of investment management and administrative services agreements, the Company paid PMAM for investment management and accounting services provided on behalf of the Company. For December 31, 2020 and December 31, 2019, the total expenses incurred under these agreements were $5,394 and $4,583, respectively. The amount due was $477 and $870 at December 31, 2020 and December 31, 2019, respectively.

The Company agreed to provide certain accounting and administrative services, at cost, to PIAre I. The administrative costs for the years ended December 31, 2020 and December 31, 2019 were $0 and $400, respectively.

Note 12.  COMMITMENTS AND CONTINGENCIES

LITIGATION  The Company and its subsidiaries are involved in litigation arising in and out of the normal course of business, which seek both compensatory and punitive damages. In addition, the regulators within the insurance and brokerage industries continue to focus on market conduct and compliance issues. While the Company is not

Page 36 The Penn Insurance and Annuity Company

($ in Thousands)

aware of any actions or allegations that should reasonably give rise to a material adverse impact to the Company’s financial position or liquidity, the outcome of litigation cannot be foreseen with certainty.

GUARANTY FUNDS  The Company is subject to insurance guaranty fund laws in the states in which it does business. These laws assess insurance companies amounts to be used to pay benefits to policyholders and policy claimants of insolvent insurance companies. Many states allow these assessments to be credited against future premium taxes. The liability for estimated guaranty fund assessments net of applicable premium tax credits as of December 31, 2020 and December 31, 2019 was $60 and $60, respectively. The Company monitors sales materials and compliance procedures and makes extensive efforts to minimize any potential liabilities in this area. The Company believes such assessments in excess of amounts accrued will not materially impact its financial statement position, results of operation, or liquidity.

COMMITMENTS  In the normal course of business, the Company extends commitments relating to its investment activities. As of December 31, 2020 the Company had outstanding commitments totaling $114,268 relating to these investment activities. The fair value of these commitments approximates their face amount.

PIAre I has an adjustable 20 year, non-interest bearing financial instrument with a current face amount of $703,538 to support a modified coinsurance arrangement with an unaffiliated reinsurer. The Company is obligated to pay a financing fee on the reserve amount being financed. The Company may be subject to an early termination fee upon the occurrence of certain events through December 31, 2030. The modified coinsurance arrangement was effective December 31, 2013. Fees incurred during the years ended December 31, 2020 and December 31, 2019 were $2,241 and $2,070, respectively, which are included in other expenses in the Statements of Operations.

DIVIDEND RESTRICTIONS  The payment of dividends by the Company to Penn Mutual is subject to restrictions set forth in the State of Delaware insurance laws. These laws require that the maximum amount of ordinary dividends that can be paid by the Company to Penn Mutual without restriction cannot exceed the greater of the net gain from operations of the previous year or 10% of surplus as of the previous year end. Generally, these restrictions pose no short-term liquidity concerns for the Company. Based on these restrictions and 2020 statutory results, the Company could pay $67,138 in dividends in 2021 to Penn Mutual without prior approval from the Delaware Department of Insurance, subject to the notification requirement. In 2020 and 2019, the Company paid no dividends to Penn Mutual.

Note 13.  SUBSEQUENT EVENTS

The Company has evaluated events subsequent to December 31, 2020 and through the financial statement issuance date of February 18, 2021 and has determined that there were no other significant events requiring disclosure in the financial statements.

2020 Statutory Financial Statements Page 37

About The Penn Mutual Life Insurance Company

Penn Mutual helps people become stronger. Our expertly crafted life insurance is vital to long-term financial health and strengthens people’s ability to enjoy every day. Working with our trusted network of financial professionals, we take the long view, building customized solutions for individuals, their families, and their businesses. Penn Mutual supports its financial professionals with retirement and investment services through its wholly owned subsidiary Hornor, Townsend & Kent, LLC member FINRA/SIPC.

Visit Penn Mutual at www.pennmutual.com.

           

^© 2021 The Penn Insurance and Annuity Company, Philadelphia, PA 19172, www.pennmutual.com

T4471-PIA 02/21