ANNUAL REPORT PEKIN LIFE INSURANCE COMPANY 2013

Transcription

1 ANNUAL REPORT PEKIN LIFE INSURANCE COMPANY 2013

2 Table of Contents Letter to Shareholders Significant Figures Financial Highlights Financial Bar Graphs Independent Auditor s Report Financial Statements Statutory Balance Sheets Statutory Statements of Operations and Changes in Unassigned Surplus Statutory Statements of Cash Flow Notes to Financial Statements Note 1 Nature of Operations and Summary of Significant Accounting Practices Note 2 Pension Plan, Post-Retirement Benefits, and Deferred Compensation Note 3 Affiliated Entity Transactions Note 4 Bonds and Common Stocks Note 5 Fair Value Measurement Note 6 Annuity Actuarial Reserves and Deposit Liabilities by Withdrawal Characteristics...28 Note 7 Life and Health Reserves Note 8 Federal Income Taxes Note 9 Capital and Surplus and Dividends Inner Circle Club Members Board of Directors, Officers, and Advisors Vision, Mission, and Values

3 To Our Shareholders The ongoing low interest rate environment has resulted in customers directing their assets to the safety net provided by the guarantees available in whole life and universal life products. Term and whole life premiums increased by $4.4 million, or 13.3 percent, while credit life and universal life premiums increased by $2.2 million and $1.5 million, or 29.8 percent and 6.7 percent, respectively. Additionally, this low interest rate environment has put downward pressure on the sales of fixed annuities and our bond portfolio investment returns. Profitability in all lines of business remains our focus as opposed to growth in premium. In 2013, our exit from the individual major medical market was completed. Health lines face market, regulatory, and government headwinds and we continue to evaluate the effects of the Affordable Care Act. Group health premiums have declined by $5.9 million, or 10.6 percent, as rate and underwriting standards have been strengthened. A bright spot in our health lines is our medicare supplement product which generated a 9.0 percent increase in premium during We continue to work on expansion into new states, providing a wider geographical footprint in which to diversify and grow. Financial products and pre-need premium has grown in 2013 with over $10.0 million in premium coming from Michigan, Pennsylvania, and Virginia. Ongoing product development plays an important role and in 2014 we will introduce a new suite of voluntary products developed to fill some of the voids in the employee benefit arena. Total premium income for 2013 was $227.0 million, an increase of $5.9 million, or 2.7 percent, from last year. This premium resulted in net income of $2.4 million, or $0.14 per share in 2013 compared to net income of $7.6 million in 2012, or $0.44 per share. The net loss before realized capital gains of $789,000 is compared to net income before realized capital gains of $399,000 last year. The fixed income investment markets played a significant role in generating realized capital gains during During the year, there were realized capital gains of $3.2 million or $0.19 per share, compared to realized capital gains of $7.2 million, or $0.42 per share, in Investment income excluding capital gains decreased by $587,000 to $53.1 million in 2013, a change of 1.1 percent from last year. This decrease reflects premium dollars that have been invested in the growing bond portfolio at lower rates than available in previous years. Additionally, our bond portfolio is comprised of high quality holdings, all of which are investment grade. As of December 31, 2013, assets were $1.3 billion, an increase of $92.3 million or 7.6 percent over December 31, Book value increased by $3.5 million, or 2.9 percent, over year end Book value per share was $7.19 at December 31, 2013, compared to $6.98 at December 31, Gordon Walker retired after 43 years of service, including the last six as Chief Executive Officer. Gordon continues as Chairman of the Board, which he has served as since Scott Martin succeeds Gordon as Chief Executive Officer and remains as President. Scott has been with Pekin Insurance for 37 years. In these challenging economic and regulatory times, the Company remains dedicated to our mission of providing financial protection and peace of mind for our policyholders by offering quality insurance products through independent agents. In all we do, we are dedicated to going Beyond the expected. We are sincerely thankful for the continued support of our shareholders, agents, and employees. GORDON M. WALKER Chairman of the Board SCOTT A. MARTIN President and Chief Executive Officer 1

4 Significant Figures Life Insurance in Force CHANGE Ordinary $13,427,915,000 $12,796,446, % Credit 687,774, ,684, % Group 427,140, ,200, % Total Life Insurance in Force 14,542,829,000 13,765,330, % Assets 1,301,555,082 1,209,239, % Policy Reserves 961,737, ,749, % Premium Income 226,967, ,070, % Payments to Policyholders and Beneficiaries 155,803, ,472, % Investment Income 53,077,695 53,664, % Net Rate of Return on Investments 4.43% 4.83% -8.3% Net Income (Loss) Before Realized Capital Gains Per Share (789,234) 398, % Net Income 2,419,151 7,595, % Net Income (Loss) Before Realized Capital Gains Per Share (.05) % Realized Capital Gains Per Share % Net Income Per Share % Book Value Per Share % Premium Income By Product Line Amount % of Total Amount % of Total Ordinary Life $ 60,437,941 27% $ 54,623,478 25% Annuity 14,457,650 6% 25,846,505 12% Pre-Need Life and Annuity 43,028,855 19% 34,965,797 16% Group Life and Health 52,294,055 23% 58,327,053 26% Group Annuity 10,971,017 5% 3,099,503 1% Individual Health 28,127,426 12% 30,520,219 14% Credit Life and Health 17,650,157 8% 13,688,400 6% Total $226,967, % $221,070, % 2

5 Financial Highlights Market Price Premium Income Per Share Investment Income Per Share (.02) (.05) (A)(C) Earnings Per Share (.32) (.14) (D) Realized Capital Gains (Losses) Per Share (.16) (A)(B) Earnings Per Share Dividends Declared Per Share (A) Tangible Book Value Per Share 17,068 17,068 17,068 17,068 17,068 17,068 17,068 17,068 17,068 17,068 Common Shares Outstanding (000) 17,068 17,068 17,068 17,068 17,068 17,068 17,068 17,068 17,068 17,068 Weighted Average Shares Outstanding (000) % Price to Book Value Year End P/E Ratio Year End Dividend Yield (%) 101, , , , , , , , , ,693 Net Worth ($000) % Profits Retained to Common Equity % Cash Dividends to Net Profit (A) The statutory basis of accounting applies (used for reporting to the respective Insurance Departments). (B) Includes realized capital gains (losses). (C) Excludes realized capital gains (losses). (D) Effective January 1, 2001, the statutory basis of accounting requires that unrealized capital losses on investments that are determined to be other than temporary declines in value must be reclassified to be realized capital losses. In 2009, 2008 and 2006, realized capital losses of $(0.41), $(0.34), and $(0.02) per share, respectively, are considered to be other than temporary declines in value and are charged to earnings. 3

6 Premium Income (In Millions) Life Insurance In Force (In Millions) 4

7 Cash and Invested Assets (In Millions) Investment Income (In Millions) 5

8 INDEPENDENT AUDITOR S REPORT To the Board of Directors and Shareholders Pekin Life Insurance Company Pekin, Illinois We have audited the accompanying statutory balance sheets of Pekin Life Insurance Company (the Company) as of December 31, 2013 and 2012, and the related statutory statements of operations and changes in unassigned surplus, and cash flow for the years then ended, and the related notes to the statutory financial statements. Management s Responsibilities for the Statutory Financial Statements Management is responsible for the preparation and fair presentation of these financial statements in accordance with the accounting practices prescribed or permitted by the Illinois 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. Auditor s Responsibility Our responsibility is to express an opinion on these 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 audits 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 the auditor s 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, the auditor considers 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 opinions. 6

9 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 in accordance with accounting practices prescribed or permitted by the Illinois Department of Insurance, which is a basis of accounting other than accounting principles generally accepted in the United States of America, to meet the requirements of the State of Illinois. The effects on the statutory 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, have not been determined but 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, 2013 and 2012, and the results of its operations and its cash flow for the years then ended. Opinion on Regulatory Basis of Accounting In our opinion, the statutory financial statements referred to above present fairly, in all material respects, the financial position of the Company as of December 31, 2013 and 2012, and the results of its operations, changes in unassigned surplus, and its cash flow for the years then ended, in accordance with the accounting practices prescribed or permitted by the Illinois Department of Insurance described in Note 1. Madison, Wisconsin March 19, 2014 Strohm Ballweg, LLP 2 7

10 Statutory Balance Sheets December 31, 2013 and Admitted Assets: Bonds $ 1,131,944,247 $ 1,047,251,111 Common Stocks 13,852,529 10,586,500 Real Estate Occupied by the Company, Net of Depreciation 572, ,200 Cash and Short-Term Investments 13,465,291 24,795,595 Contract Loans 16,350,270 16,197,493 Securities Lending Reinvested Collateral Assets 81,684,438 68,813,861 Receivables for Securities ,208 Total Cash and Invested Assets 1,257,868,939 1,168,433,968 Life and Health Premiums Due and Unpaid 2,160,739 1,696,501 Life Premiums Deferred 17,695,435 16,311,407 Investment Income Accrued 11,952,756 12,194,306 Amounts Recoverable from Reinsurers 1,846,320 2,701,963 Current Federal Income Tax Recoverable 1,558,981 1,325,829 Net Deferred Tax Asset 8,233,922 5,950,364 Other Assets 237, ,662 Total Admitted Assets $ 1,301,555,082 $ 1,209,239,000 Liabilities: Aggregate Reserve for Contracts: Life $ 540,706,907 $ 483,429,641 Annuity 398,526, ,298,353 Health 22,503,973 21,021,686 Total Aggregate Reserve for Contracts 961,737, ,749,680 Contract Claims: Life 9,848,763 7,062,705 Health 15,322,896 17,570,425 Total Contract Claims 25,171,659 24,633,130 Other Policy Liabilities: Premium and Annuity Considerations Received in Advance 1,415,398 1,112,873 Policyholders' Dividends 17,420 17,802 Deposit Administration Contracts 46,450,769 45,023,392 Other Deposit-Type Contracts 16,860,023 8,399,564 Total Other Policy Liabilities 64,743,610 54,553,631 Interest Maintenance Reserve 18,344,710 15,768,421 Expenses and Taxes Accrued 9,594,592 8,946,200 Amounts Withheld or Retained 1,217,853 9,517,153 Asset Valuation Reserve 7,036,037 5,683,132 Due to Parent 1,278,559 1,456,617 Drafts Outstanding 4,688,340 6,049,158 Payable for Securities Lending 81,684,438 68,813,861 Pension Benefit Obligations 793, ,551 Post-Retirement Benefit Obligations 422,551 - Other Liabilities 2,147,899 1,144,722 Total Liabilities 1,178,861,790 1,090,042,256 Capital and Surplus: Capital Stock, Par Value $1.25; 22,000,000 Shares Authorized; Shares Issued - 17,600,000; and Shares Outstanding - 17,068,023 22,000,000 22,000,000 Paid-In Surplus 900, ,000 Unassigned Surplus 104,062, ,566,348 Treasury Stock, Shares at Cost, 531,977 in 2013 and 2012 (4,269,604) (4,269,604) Total Capital and Surplus 122,693, ,196,744 Total Liabilities, Capital and Surplus $ 1,301,555,082 $ 1,209,239,000 8 The accompanying notes are an integral part of the financial statements.

11 Statutory Statements of Operations and Changes in Unassigned Surplus Years Ended December 31, 2013 and Income: Life Premiums $ 112,958,200 $ 97,370,819 Annuity Considerations 27,580,932 30,712,782 Health Premiums 86,427,969 92,987,354 Net Investment Income 53,077,695 53,664,994 Total Income 280,044, ,735,949 Deductions: Benefits to Policyholders and Beneficiaries: Life 56,086,158 49,379,637 Annuity 32,188,577 26,126,903 Health 67,528,426 79,965,531 Total Benefits to Policyholders and Beneficiaries 155,803, ,472,071 Additions to Policy Reserves: Life 57,277,266 46,384,543 Annuity 10,228,542 20,742,122 Health 1,482, ,694 Total Additions to Policy Reserves 68,988,095 67,532,359 Expenses: Commissions and Service Fees 23,068,529 21,008,161 General Insurance Expenses 29,703,516 27,367,346 Taxes, Licenses and Fees 2,999,209 2,678,281 Total Expenses 55,771,254 51,053,788 Total Deductions 280,562, ,058,218 Income (Loss) Before Federal Income Tax Expense and Net Realized Capital Gains (517,714) 677,731 Federal Income Tax Expense 271, ,003 Income (Loss) Before Net Realized Capital Gains (789,234) 398,728 Net Realized Capital Gains 3,208,385 7,196,973 Net Income $ 2,419,151 $ 7,595,701 Net Income (Loss) Before Net Realized Capital Gains Per Share $ (0.05) $ 0.02 Net Realized Capital Gains, Net of Income Taxes Per Share Net Income Per Share $ 0.14 $ 0.44 Shares Outstanding 17,068,023 17,068,023 Unassigned Surplus: Unassigned Surplus - Beginning of Year $ 100,566,348 $ 99,280,114 Changes in Unassigned Surplus: Net Income 2,419,151 7,595,701 Net Unrealized Capital Gains 2,442, ,911 Asset Valuation Reserve (1,352,905) (859,299) Net Deferred Tax Asset 2,283,558 (3,596,341) Non-Admitted Assets 74,270 (50,280) Pension Benefit Obligations (411,472) (382,295) Post-Retirement Benefit Obligations (422,551) - Shareholder Dividends - Cash ($0.09 and $0.12 per share) (1,536,122) (2,048,163) Net Increase 3,496,548 1,286,234 Unassigned Surplus - End of Year $ 104,062,896 $ 100,566,348 The accompanying notes are an integral part of the financial statements. 9

12 Statutory Statements of Cash Flow Years Ended December 31, 2013 and 2012 Cash from Operations: Premiums Collected, Net of Reinsurance Net Investment Income Miscellaneous Income Total Cash Received Benefits and Loss Related Payments Commissions, Expenses Paid, and Other Deductions Dividends Paid to Policyholders Federal Income Taxes Paid Total Cash Disbursed Net Cash from Operations $ 226,153,348 $ 220,348,262 53,100,896 54,070,935 1,385,292 1,341, ,639, ,760, ,196, ,722,029 57,665,483 53,027,324 17,337 18, , , ,383, ,973,511 68,255,936 61,787,291 Cash from Investments: Proceeds from Investments Sold, Matured, or Repaid: Bonds Stocks Other Invested Assets - Capital Note Miscellaneous Proceeds Total Investment Proceeds Cost of Investments Acquired: Bonds 151,601, ,527,119 6,050,407 7,703,121-3,177, , ,752, ,407, ,685, ,707,363 6,153,745 7,688,758 Stocks Other Invested Assets - Capital Note - 3,021,456 Miscellaneous 12, ,790 Total Investments Acquired Net Increase in Contract Loans Net Cash from Investments 236,852, ,530, , ,019 (79,252,803) (51,348,576) Cash from Financing and Miscellaneous Sources: Dividends to Shareholders Net Deposits on Deposit-Type Contracts Other Cash Provided (Applied) Net Cash from Financing and Miscellaneous Sources Net Change in Cash and Short-Term Investments Cash and Short-Term Investments at Beginning of Year Cash and Short-Term Investments at End of Year (1,536,122) (2,048,163) (541,995) 1,124,688 1,744,680 (18,380) (333,437) (941,855) (11,330,304) 9,496,860 24,795,595 15,298,735 $ 13,465,291 $ 24,795,595 The accompanying notes are an integral part of the financial statements. 10

13 1. Nature of Operations and Summary of Significant Accounting Practices Pekin Life Insurance Company (Company) is a regional Midwest life and accident and health insurance company domiciled in the State of Illinois. The Company sells insurance primarily through independent agents. Insurance products primarily include ordinary life, group health, credit life and health, annuities, and pre-need life. The accompanying financial statements have been prepared in conformity with accounting practices prescribed or permitted by the Illinois Department of Insurance (statutory accounting practices). Prescribed statutory accounting practices include the National Association of Insurance Commissioners (NAIC) Accounting Practices and Procedures Manual as well as state laws, regulations, and general administrative rules. Permitted statutory accounting practices encompass all accounting practices not so prescribed when such practices are approved by the insurance department of the insurer s state of domicile. The Company does not use any permitted practices. Accounting Estimates The preparation of statutory financial statements requires management to make estimates and assumptions that affect the amounts reported in the financial statements and accompanying notes. Actual results could differ from those estimates. Estimates that are particularly susceptible to significant change in the near term relate to: 1) the estimated life, annuity, health and disability insurance contract reserves, 2) the assumptions regarding the other than temporary impairment analysis of the investment portfolio, 3) the assumptions, including the discount rate, used to determine the benefit obligations for the defined benefit pension plan and other post-retirement benefit plan, and 4) the amount of deferred tax assets expected to be realized in future years. Summary of Significant Differences Between Statutory Accounting and GAAP A description of the significant accounting practices used by the Company and significant variances from accounting principles generally accepted in the United States of America (GAAP) are as follows: A. Investments Bonds and stocks are valued in accordance with rules prescribed by the NAIC, whereby bonds eligible for amortization under such rules are stated at amortized cost. The Company uses a modified scientific method for amortizing bonds. Common stocks are carried at fair market value. Loan-backed securities (mortgage-backed and asset-backed securities) are stated at amortized cost using a prospective basis. The prospective approach recognizes, through the recalculation of the effective yield to be applied to future periods, the effects of all cash flow whose amounts differ from those estimated earlier. Changes in amortization and amortized cost will occur in future periods. Assumptions for loan-backed securities are updated on a quarterly basis. Agency pass-through and collateralized mortgage obligations use the threemonth generic prepayment speed assumption. Non-agency collateralized mortgage obligations and asset-backed securities are updated using projected principal payment windows. 11

14 Investment income is recorded when earned. Realized gains and losses on sale or maturity of investments are determined on the basis of specific identification. Aggregate unrealized capital gains and losses are credited or charged directly to unassigned surplus without income tax effect. Unrealized capital losses on investments that are determined to be other than temporary declines in value must be recognized as realized capital losses. The Company reviews its investment portfolio on a periodic basis to determine other than temporary declines in value. In evaluating whether a decline in value is other than temporary, management considers several factors including, but not limited to: 1) the Company s ability and intent to retain the security for a sufficient amount of time for it to recover, 2) the extent and duration of the decline in value, 3) the probability of collecting all cash flows according to contractual terms in effect at acquisition or restructuring, 4) relevant industry conditions and trends, and 5) the financial condition and current and future business prospects of the issuer. Under GAAP, equity securities that have readily determinable fair values and debt securities would be classified into three categories: held-to-maturity, trading, and available-for-sale. Held-to-maturity securities would be reported at amortized cost. Trading securities would be reported at fair value, with unrealized gains and losses included in earnings. Available-forsale securities would be reported at fair value, with unrealized gains and losses, net of applicable taxes, reported as a separate component of unassigned surplus. Contract loans are stated at the aggregate of unpaid loan balances, which approximate fair value. These stated values are not in excess of cash surrender values of related policies. The investment in the Company s wholly owned subsidiary is accounted for using the statutory equity method in which undistributed earnings are reported as unrealized gains and losses; under GAAP, the financial statements of the subsidiary would be consolidated with those of the Company. The asset valuation reserve (AVR) is maintained as prescribed by the NAIC for the purpose of stabilizing surplus against fluctuations in the market values of invested assets. The AVR is reported as a liability and changes are charged or credited directly to unassigned surplus. The AVR would not be required under GAAP. The interest maintenance reserve (IMR) is maintained as prescribed by the NAIC to defer realized capital gains and losses which result from changes in interest rates for fixed income securities and to amortize these capital gains and losses into investment income over the remaining life of the investments sold, rather than reflecting the gains or losses in the year of sale. Under GAAP, realized capital gains and losses would not be deferred, amortized, or combined with investment income. An occupancy rental charge on home office real estate owned is recorded as investment income and as offsetting rental expense; under GAAP, no such rental charge would be recognized. B. Non-Admitted Assets Certain assets, designated as non-admitted assets, aggregating $1,926,366 and $2,011,122 at December 31, 2013 and 2012, respectively, are not recognized by statutory accounting practices. These assets are excluded from the balance sheet, and the net change in such assets is charged or credited directly to unassigned surplus. Non-admitted deferred tax assets are not included in the amounts above. The change in the non-admitted deferred tax asset is charged or credited directly to unassigned surplus. Under GAAP, such assets would be recognized at the lower of cost or net realizable value. 12

15 C. Policy Reserves and Claim Reserves Policy reserves on life insurance are based on statutory mortality and interest rate requirements and are computed using principally net level and modified preliminary term methods with interest rates ranging primarily from 2.25 percent to 6.0 percent. The use of a modified reserve basis partially offsets the effect of immediately expensing policy acquisition costs. Policy reserves on annuities are based on statutory mortality and interest requirements with interest rates ranging primarily from 3.50 percent to 9.25 percent. Under GAAP, reserves would be based on mortality, lapse, withdrawal, and interest rate assumptions that are based on Company experience. Liabilities for accident and health policies include unearned premiums and additional reserves. The liability for future policy benefits and claims on life and health insurance products includes estimated unpaid claims that have been reported to the Company and claims incurred but not yet reported. Changes in estimates are reflected in current operations. D. Reinsurance The Company has long-standing reinsurance treaties in place for its life and health insurance business to reduce exposure to large losses. Although reinsurance does not relieve the Company of its legal liability to its policyholders, it provides a measure of protection against catastrophic losses and provides a means of risk reduction on individual losses. In order to maintain an appropriate balance between the cost of reinsurance and surplus growth, the Company periodically evaluates its retention levels correlated to specific types of life and health insurance policies. E. Premiums Premiums deferred and uncollected represent modal premiums, either due and uncollected or not yet due, where policy reserves have been provided on the assumption that the full modal premium for the current policy year has been collected. Also, where policy reserves have been provided on a continuous premium assumption, premiums uncollected are similarly defined. Premiums and annuity considerations are recognized as income over the premium paying period of the policies. Acquisition costs, such as commissions and other costs related to the new business, are expensed as incurred. Contracts that permit the insured to change the amount and timing of premium payments, such as universal life products, are recorded as revenue when received. Under GAAP, revenues would include only policy charges for the cost of insurance, contract initiation and administration, surrender charges, and other fees that have been assessed against contract account values, and benefits would represent the excess of benefits paid over the policy account value and interest credited to the account values. Additionally, acquisition costs under GAAP would be capitalized and amortized over the policy period. F. Cash and Short-Term Investments For purposes of reporting cash flows, the Company follows statutory accounting practices and considers cash in checking accounts and certain money market funds and highly liquid debt instruments purchased with a remaining maturity of one year or less to be cash and short-term investments. The Company occasionally has on deposit in a financial institution a balance in excess of amounts insured by the Federal Deposit Insurance Corporation. The Company does not believe it is exposed to any significant credit risks on this account. 13

16 G. Subsequent Events On January 1, 2014, the Company will be subject to an annual fee under Section 9010 of the Affordable Care Act (ACA). This annual fee will be allocated to individual health insurers based on the ratio of the amount of the entity s net premiums written during the preceding calendar year to the amount of health insurance for any United States health risk that is written during the preceding calendar year. A health insurance entity s portion of the annual fee becomes payable once the entity provides health insurance for any United States health risk for each calendar year beginning on or after January 1, As of December 31, 2013, the Company has written health insurance subject to the ACA assessment, expects to conduct health insurance business in 2014, and estimates their portion of the annual health insurance industry fee to be payable on September 30, 2014, to be $520,844. As of January 1, 2014, the Company is no longer writing individual major medical health insurance business. Of the estimated ACA fee of $520,844, the individual major medical portion is $179,860. This assessment is not expected to impact risk-based capital. Subsequent events were evaluated through March 19, 2014, which is the date the financial statements were available to be issued. H. Other Treasury stock is recorded at cost and reported as a reduction of capital and surplus under both statutory accounting practices and GAAP. Deferred income taxes are provided for differences between the financial statement and the tax bases of assets and liabilities and are reduced by a valuation allowance when it is more likely than not that some portion or all of the deferred tax assets will not be realized. Additionally, under statutory accounting practices, limitations are placed on the admissibility of deferred tax assets. All changes in deferred tax assets and liabilities are reported as changes in surplus, and state income taxes are not included in deferred tax calculations; under GAAP, deferred income taxes would be provided for differences between the financial statement and the tax bases of assets and liabilities and any deferred tax assets would be reduced by a valuation allowance when it is more likely than not that some portion or all of the deferred tax assets will not be realized. Changes in deferred tax assets and liabilities would be reported through operations and/or surplus depending on their characteristics and state income taxes would be included in the deferred tax calculation. Statutory financial statements are prepared in a form using language and groupings substantially the same as the annual statement filed with the NAIC and state regulatory authorities which differ from the presentation and disclosure of financial statements presented under GAAP. Necessary reclassifications are made in prior period financial statements, whenever appropriate, to conform to the current presentation. 2. Pension Plan, Post-Retirement Benefits, and Deferred Compensation Retirement Benefits The Company, its parent (The Farmers Automobile Insurance Association), and its affiliates participate in a trusteed non-contributory defined benefit pension plan. This plan covers full-time employees who have completed one year of service and have reached the age of 21. Effective January 1, 2013, the Company adopted an amendment to freeze participation in the Plan for employees hired after January 1, The Company s funding policy is to contribute annually an amount that represents the current cost of benefits expected to be earned in the current year offset by the expected asset return higher than the discount rate, but no more than the maximum amount that can be deducted for federal income tax purposes. Each affiliate is charged for its applicable share of such contributions based on a percent of projected benefit obligation. 14

17 Pursuant to a retirement plan for Directors elected prior to 2004, eligible Directors will receive a retirement benefit equal to the annual retainer in effect on the Directors retirement dates. The benefits paid were $58,300 in 2013 and 2012, respectively. The liability for the Directors retirement benefit is $537,356 and $554,532 at December 31, 2013 and 2012, respectively. 401(k) Savings Plan The Company and its affiliates participate in a voluntary 401(k) savings plan for eligible participants. New full-time employees are automatically enrolled in the Plan with instant entry after approximately 30 days of employment. The Company may elect, in its sole discretion, to contribute a matching contribution to the savings plan. In 2012, the Company elected to match 25 percent of the employee s contribution up to a maximum match of $400. In 2013, the same matching was offered to employees hired prior to January 1, Employees hired after January 1, 2013, may receive, at the discretion of the Company, a contribution from the Company based on a percentage of eligible earnings and a Company match of the employee s percentage of contribution. For 2013, the Company contributed 3.5 percent of employees eligible earnings and a 75.0 percent match of the employees percentage of contribution not to exceed 6.0 percent. Employer contributions of $40,881 and $37,660, respectively, were made to this plan for all participants in 2013 and Post-Retirement Benefits In addition to providing pension benefits, the Company and its affiliates provide certain health care and life insurance benefits (post-retirement benefits) for retired employees. Substantially all employees may become eligible for these benefits if they reach retirement age while working for the Company. Deferred Compensation The Company maintains a deferred compensation plan for the Directors. This plan allows for voluntary deferral of all or any part of the compensation to which a Director might otherwise be entitled to as Directors fees, in accordance with the plan provisions. During 2013 and 2012, $10,000 and $9,000 of Directors fees were deferred. The liability for Directors deferred compensation was $123,949 and $121,905 at December 31, 2013 and 2012, respectively. Expected Cash Flows The Company expects to contribute $1,200,000 to the Pension Plan and $400,000 to the Post- Retirement Benefit Plan in The following benefit payments, which reflect expected future service, as appropriate, are expected to be paid: Year Pension Benefits Post-Retirement Benefits 2014 $ 489,939 $ 338, , , , , , , ,246, , to ,211,033 3,199,467 15

18 Assets, Obligations, and Assumptions A summary of assets, obligations, and assumptions of the Pension and Post-Retirement Benefit Plans for the Company is as follows at December 31: Pension Benefits Underfunded Post-Retirement Benefits Underfunded Change in Benefit Obligation: Benefit Obligation at Beginning of Year $ 21,401,710 $ 18,687,030 $ 5,481,976 $ 6,609,535 Service Cost 1,330,233 1,136, , ,612 Interest Cost 813, , , ,906 Actuarial Loss (Gain) (2,090,867) 1,485, ,320 (1,439,789) Benefits Paid (4,503,091) (856,300) (214,024) (215,288) Plan Amendments 509,825-5,664,133 - Benefit Obligation at End of Year $ 17,461,331 $ 21,401,710 $ 12,427,785 $ 5,481,976 The projected benefit obligation of the Company in relation to the total obligation of the Company and its affiliates (excluding inactive participants) is the basis for allocating the plan assets and the net periodic benefit cost. The net periodic benefit cost of the Other Post- Retirement Benefit Plan is measured on a seriatim basis that projects future benefit costs participant by participant based on demographic characteristics. The projected costs are discounted to a present value. A summary of the plan assets, funded status, and net periodic benefit cost of the Pension and Post-Retirement Benefit Plans for the Company is as follows for the years ended December 31: Change in Plan Assets: Fair Value of Plan Assets at Beginning of Year Actual Return on Plan Assets Employer Contribution Benefits Paid Fair Value of Plan Assets at End of Year Pension Benefits Post-Retirement Benefits $ 12,092,142 $ 10,349,734 $ 3,293,830 $ 2,957,866 2,183,468 1,538, , ,750 2,755,900 1,060, , ,298 (4,503,091) (856,300) (158,494) (142,084) $ 12,528,419 $ 12,092,142 $ 4,218,392 $ 3,293,830 Funded Status: Recognized Liabilities Accrued Benefit Costs $ 1,631,902 $ 1,730,345 $ 3,776,567 $ 3,368,456 Liability for Pension Benefits 793, , ,551 - Total Liabilities Recognized $ 2,425,669 $ 2,456,896 $ 4,199,118 $ 3,368,456 Unrecognized Liabilities $ 2,507,243 $ - $ 4,010,275 $ - Accumulated Benefit Obligation $ 12,434,623 $ 14,927,586 $ 12,427,785 $ 5,481,976 16

19 Pension Benefits Post-Retirement Benefits Components of Net Periodic Benefit C ost: Service C ost $ 1,840,273 $ 1,349,739 $ 487,835 $ 196,612 Interest C ost 1,125,442 1,127, , ,906 Expected (Return) Loss on Plan Assets (996,117) (879,854) (224,314) (136,978) Transition Obligation 32,606 29, ,422 Net Losses 496, , Prior Service C ost 238,415 5, ,023 - Settlement Expense 767, Total Net Periodic Benefit C ost $ 3,505,270 $ 2,126,638 $ 1,382,188 $ 394,962 The settlement expense is reflective of a portion of unrecognized loss due to total annuity purchases and lump sum distributions in excess of total service cost and interest cost for the year. The settlement expense is charged to income as a component of net periodic benefit cost. Following are components of net periodic benefit cost as they related to unassigned surplus at December 31, 2013: Pension Post-Retirement Benefits Benefits Amounts in Unassigned Surplus Recognized as Components of Net Periodic Benefit Cost: Items Not Yet Recognized from Prior Year $ 7,186,261 $ (515,412) Net Transition Obligation Recognized (32,606) (879) Net Prior Service Cost Arising During the Period 509,825 5,664,133 Net Prior Service Cost Recognized (238,415) (552,023) Net (Gain) Loss Arising During the Period (3,241,694) 422,551 Net Gain Recognized (839,032) - Items Not Yet Recognized Current Year $ 3,344,339 $ 5,018,370 Amounts in Unassigned Surplus Expected to Be Recognized in the Next Fiscal Year as Components of Net Periodic Benefit Cost: Net Transition Obligation Recognized $ (32,606) $ 879 Net Prior Service Cost $ 168,304 $ 551,097 Net Recognized Losses $ 77,536 $ - Amounts in Unassigned Surplus Not Yet Recognized as Components of Net Periodic Benefit Cost: Net Transition Obligation Recognized $ 164,984 $ 879 Net Prior Service Cost $ 342,718 $ 5,112,226 Net Recognized (Gains) Losses $ 2,836,637 $ (94,735) 17

20 Weighted average assumptions used to determine the projected benefit obligation are shown below at December 31: Pension Benefits Post-Retirement Benefits Discount Rate Rate of Compensation Increase 4.88% 3.99% 5.33% 4.77% 3.50% to 7.00% 3.50% to 7.00% N/A N/A Weighted average assumptions used to determine the net periodic benefit cost for the years ended December 31: Pension Benefits Post-Retirement Benefits Discount Rate Rate of Compensation Increase Expected Long-Term Rate of Return on Plan Assets 3.99% 4.94% 4.77% 4.94% 3.50% to 7.00% 4.00% to 8.00% N/A N/A 6.25% 6.50% 6.25% 6.50% The health care portion of the post-retirement benefit plan is contributory, with participants contributions adjusted annually as determined by the Company; the life insurance portion of the post-retirement benefit plan is non-contributory. The health care cost trend rate in 2013 was assumed to be 8.5 percent for one year, then 8.0 percent for one year, then 5.0 percent by In 2012, the health care cost trend was assumed to be 7.0 percent for one year, then 6.0 percent for three years, then 5.5 percent thereafter. Assumed health care cost trend rates have a significant effect on the amounts reported for the health care plans. A one-percentage-point change in assumed health care trend rates would have the following effects: One Percentage Point Increase One Percentage Point Decrease Effect on Total of Service and Interest Cost Components $ 266,492 $ (204,122) Effect on Post-Retirement Benefit Obligation $ 2,360,679 $ (1,855,588) During 2013, the Company adopted Statement of Statutory Accounting Principle No. 102, Accounting for Pensions, which requires the difference between the projected benefit obligation and the fair value of plan assets to be recorded on the statutory balance sheet. If the projected benefit obligation is greater than the fair value of plan assets, a liability is recorded. However, if the projected benefit obligation is less than the fair value of plan assets, a non admitted asset is recorded. In addition, non-vested participants are to be included in calculations such as the projected benefit obligation and net periodic pension cost. The surplus impact of this new pronouncement can be recognized upon adoption or amortized over a period not to exceed ten years. As of December 31, 2013, the Company has recognized $793,767 and anticipates the remaining liability of $2,507,243 will be recognized over a three-year period. Additionally, the Company adopted Statement of Statutory Accounting Principle No. 92, Accounting for Postretirement Benefits Other Than Pensions, which requires a liability, equal to the accumulated post-retirement benefit obligation, be established for vested and non vested employees. The surplus impact of this new pronouncement can be recognized upon adoption or amortized over a period not to exceed ten years. As of December 31, 2013, the Company has 18

21 recognized $422,551 and anticipates the remaining liability of $4,010,275 will be recognized over a nine-year period. The retirement plan assets are held in a deposit administration contract and equity securities. The Trustees of the Farmers Automobile Insurance Association Retirement Plan maintain a deposit administration contract with the Company for pension benefits. The contract is a group annuity contract consisting of employer contributions with guaranteed interest, less annuities purchased to provide benefit payments to retirees and lump sum benefits paid directly to participants. The fair value of the contract included in plan assets of the Company and its affiliates was $25,225,265 and $27,974,521 as of December 31, 2013 and 2012, respectively, or 42 and 50 percent of total plan assets. Equity securities comprise the remaining plan assets. At December 31, 2013 and 2012, equity securities amounted to $35,327,650 and $27,723,868, respectively, or 58 and 50 percent of total plan assets. The expected long-term rate of return on plan assets was selected based upon current market conditions, company experience, and future company expectations. The specific goal of the investment portfolio is to maintain a fully funded plan over time to ensure the benefit for the plan participants. New contributions are invested in equity securities until the amount in equities exceeds 45 percent of the plan s total assets. Additional amounts will be paid into the deposit administration contract, unless the equity portfolio falls under 45 percent. If the equity portfolio exceeds 60 percent of the plan s assets, part of the equity portfolio will be liquidated and proceeds moved into the deposit administration contract within a reasonable time frame. There are three return objectives. The primary benchmark is the projected annual rate of return used by the plan s actuary. The average annualized investment performance of the invested assets, net of investment related expenses, should be equal to or in excess of this benchmark. The secondary (equity) benchmark is the percent total rate of return of a balanced portfolio comprised of a 70 percent weighting of the Standard & Poor s 500 Index and a 30 percent weighting of the Barclay s Government Corporate Index. The secondary (fixed income) benchmark is the weighted average rate of return of the Company s mortgage-backed securities portfolio less 0.75 percent which includes 0.25 percent for expenses and 0.50 percent for spread. All plan assets, in excess of those funds targeted for short-term cash flow needs, should be invested in a manner consistent with the basic principles of prudent long-term portfolio management. Derivatives, private placement securities, and commodity contracts are prohibited investment vehicles. The Trustees of the plan recognize the long-term nature of the majority of the plan s assets. The Farmers Automobile Insurance Association Retirement Plan maintains an account to partially fund health benefits provided to certain retirees and eligible dependents through a deposit administration contract with the Company. The permissible account funding was determined in accordance with generally recognized and accepted actuarial principles and practices, which are consistent with the Actuarial Standards of Practice. As of December 31, 2013 and 2012, the fair value of the contract was $21,225,504 and $17,048,871, respectively. Contributions of $4,232,911 and $1,666,500 were made in 2013 and 2012, respectively, into the deposit administration contract. The Company s share of the contribution was $918,547 and $353,298 in 2013 and 2012, respectively. The Company utilizes the following valuation techniques in determining the level, within the fair value hierarchy, of the Pension Plan and Post-Retirement Plan assets: Level 1 Quoted market prices reported on the active markets on which the individual stocks and money market funds are traded. Level 3 Principal valuation technique is discounted cash flow. Unobservable inputs are credit rate and payout date. 19

22 The following table sets forth by level, within the fair value hierarchy, the assets of the Pension Plan and Post-Retirement Plan at fair value as of December 31, 2013: Assets at Fair Value as of December 31, 2013 Level 1 Level 2 Level 3 Total Pension Plan Assets: Equity Securities Consumer Discretionary $ 3,027,080 $ - $ - $ 3,027,080 Consumer Staples 3,487, ,487,485 Energy 3,576, ,576,100 Financials 5,914, ,914,907 Health Care 2,538, ,538,950 Industrials 4,856, ,856,775 Information Technology 3,545, ,545,385 Materials 918, ,950 Telecommunications 1,029, ,029,222 Utilities 6,282, ,282,090 Total Equity Securities $ 35,176,944 $ - $ - $ 35,176,944 Cash and Cash Equivalents 150, ,706 Deposit Administration Contract ,225,265 25,225,265 Total Pension Plan Assets $ 35,327,650 $ - $ 25,225,265 $ 60,552,915 Post-Retirement Plan Assets: Deposit Administration Contract ,225,504 21,225,504 Total Post-Retirement Plan Assets $ - $ - $ 21,225,504 $ 21,225,504 The following table sets forth by level, within the fair value hierarchy, the assets of the Pension Plan and Post-Retirement Plan at fair value as of December 31, 2012: Assets at Fair Value as of December 31, 2012 Level 1 Level 2 Level 3 Total Pension Plan Assets: Equity Securities Consumer Discretionary $ 2,237,510 $ - $ - $ 2,237,510 Consumer Staples 2,899, ,899,210 Energy 2,392, ,392,003 Financials 4,027, ,027,180 Health Care 1,943, ,943,212 Industrials 3,657, ,657,415 Information Technology 2,568, ,568,766 Materials 787, ,730 Telecommunications 891, ,524 Utilities 6,117, ,117,465 Total Equity Securities $ 27,522,015 $ - $ - $ 27,522,015 Cash and Cash Equivalents 201, ,853 Deposit Administration Contract ,974,521 27,974,521 Total Pension Plan Assets $ 27,723,868 $ - $ 27,974,521 $ 55,698,389 Post-Retirement Plan Assets: Deposit Administration Contract ,048,871 17,048,871 Total Post-Retirement Plan Assets $ - $ - $ 17,048,871 $ 17,048,871 20

23 The table below sets forth a summary of changes in the fair value of the Pension Plan and Post Retirement Plan s level three assets for the years ended December 31: Level 3 Assets Pension Benefits Post-Retirement Benefits Balance, Beginning of Year $ 27,974,521 $ 26,304,752 $ 17,048,871 $ 15,531,843 Interest income 1,067,354 1,218, , ,453 Purchases 12,700,000 5,000,000 4,232,911 1,666,500 Withdrawals (16,516,610) (4,548,834) (788,743) (841,925) Balance, End of Year $ 25,225,265 $ 27,974,521 $ 21,225,504 $ 17,048, Affiliated Entity Transactions The Farmers Automobile Insurance Association (Association) and its wholly owned subsidiary, Pekin Insurance Company, owned percent and percent of the Company at December 31, 2013 and 2012, respectively. The Company and the Association utilize many common facilities, management, administrative and office personnel, and services. The Association incurs such expenses and allocates the related cost to the Company on a specific identification basis. Intercompany balances are paid periodically throughout the year based on estimates and settled within 45 days after year end based on actual allocated expenses. Such expenses allocated to the Company were $6,999,482 in 2013 and $6,321,250 in The Company owns 100 percent of the common stock of Pekin Financial Life Insurance Company, a stock life insurance company. The carrying value of the subsidiary was $24,199 and $31,476, respectively, as of December 31, 2013 and Notes receivable include demand notes and a surplus note due from Pekin Financial Life Insurance Company totaling $525,000 as of December 31, 2013 and The Company s home office building has a book value of $572,148 and was constructed on land leased from the Association for a term expiring on December 31, 2026, with a year-to-year extension of the lease thereafter. Automatic termination would occur with change of control of the Company. The Association has an irrevocable option to purchase the building at any time during the lease or in the event the lease is canceled. The purchase price of the building shall be the fair market value as of the closing date. The annual lease payment is $1,000. In connection with structured settlements, the Association purchased 15 annuities from the Company in 2013 and 20 annuities in The single premium for these annuities totaled $891,237 and $650,500 in 2013 and 2012, respectively. The reserve carried by the Company at December 31, 2013 and 2012, is $5,323,101 and $4,779,670, respectively. The Association s claimant is the payee. 21

24 4. Bonds and Common Stocks The admitted value, unrealized gain and loss, and market value of investments in bonds as of December 31, 2013, are as follows: 2013 Admitted Unrealized Unrealized Market Obligation Value Gain Loss Value U.S. Government $ 1,939,797 $ 112,140 $ - $ 2,051,937 Other Government 7,973, ,758-8,244,683 U.S. States, Territories and Possessions 5,999,920 23,800 70,800 5,952,920 U.S. Political Subdivisions 9,972, , ,856 10,536,639 U.S. Special Revenue and Special Assessment 84,289,563 6,302, ,280 90,353,159 Industrial and Miscellaneous 712,818,067 50,323,075 19,774, ,366,515 Loan-Backed Securities 308,950,067 7,551,999 7,797, ,704,371 Total $ 1,131,944,247 $ 65,269,235 $ 28,003,258 $ 1,169,210,224 The admitted value, unrealized gain and loss, and market value of investments in bonds as of December 31, 2012, are as follows: 2012 Admitted Unrealized Unrealized Market Obligation Value Gain Loss Value U.S. Government $ 1,963,218 $ 168,162 $ - $ 2,131,380 Other Government 7,426,238 1,333,042-8,759,280 U.S. States, Territories and Possessions 5,999, ,200-6,638,120 U.S. Political Subdivisions 9,989,571 1,415,098-11,404,669 U.S. Special Revenue and Special Assessment 85,687,572 15,990,873 10, ,668,425 Industrial and Miscellaneous 687,748, ,641, , ,843,956 Loan-Backed Securities 248,436,429 17,578,552 53, ,961,843 Total $ 1,047,251,111 $ 144,765,637 $ 609,075 $ 1,191,407,673 22

25 The admitted value and market value of bonds at December 31, 2013, by contractual maturity, are shown below: Due in One Year or Less Due After One Year Through Five Years Due After Five Years Through Ten Years Due After Ten Years Total Loan-Backed Securities Total Admitted Value Market Value $ 5,523,882 $ 5,614,356 94,189, ,245, ,304, ,215, ,975, ,431, ,994, ,505, ,950,067 * 308,704,371 $ 1,131,944,247 $ 1,169,210,224 *The admitted value of mortgage-backed securities includes $3,845,208 and $5,462,632 of U.S. Government Guaranteed Securities for 2013 and 2012, respectively. The Company does not engage in direct subprime residential mortgage lending. The Company s minimal exposure to subprime lending is limited to investments within the fixed maturity investment portfolio which contain securities collateralized by mortgages that have characteristics of subprime lending such as adjustable rate mortgages and alternative documentation mortgages. These investments are in the form of asset-backed securities collateralized by subprime mortgages and collateralized mortgage obligations backed by alternative documentation mortgages. The total carrying value of these investments is $1,151,780 and $1,386,131 at December 31, 2013 and 2012, respectively, comprising 0.10 percent of the Company s total fixed maturity portfolio. The adjusted cost and market value of investments in common stock as of December 31 are as follows: Adjusted Market Adjusted Market Common Stock Cost Value Cost Value Common Stock $ 9,870,509 $ 13,852,529 $ 9,054,376 $ 10,586,500 Gross Unrealized Gains $ 4,066,768 $ 1,761,209 Gross Unrealized Losses $ 84,748 $ 229,085 23

26 Securities with unrealized losses based on estimated market values as of December 31, 2013, are shown below: Description of Securities Less Than 12 Months 12 Months or More Total Market Unrealized Market Unrealized Market Unrealized Value Losses Value Losses Value Losses U.S. States, Territories and Possessions $ 3,929,120 $ 70,800 $ - $ - $ 3,929,120 $ 70,800 U.S. Political Subdivisions 2,184, , ,184, ,856 U.S. Special Revenue and Special Assessment 5,496, , ,496, ,280 Industrial and Miscellaneous 213,488,321 14,070,418 62,792,763 5,704, ,281,084 19,774,627 Loan-Backed Securities 159,033,094 7,797, ,033,094 7,797,695 Subtotal Debt Securities 384,131,929 22,299,049 62,792,763 5,704, ,924,692 28,003,258 Common Stocks 990,976 62, ,319 21,990 1,193,295 84,748 Total Securities with Unrealized Losses $ 385,122,905 $ 22,361,807 $ 62,995,082 $ 5,726,199 $ 448,117,987 $ 28,088,006 Securities with unrealized losses based on estimated market values as of December 31, 2012, are shown below: Description of Securities Less Than 12 Months 12 Months or More Total Market Unrealized Market Unrealized Market Unrealized Value Losses Value Losses Value Losses U.S. Special Revenue and Special Assessment $ - $ - $ 1,989,980 $ 10,020 $ 1,989,980 $ 10,020 Industrial and Miscellaneous 72,733, , ,733, ,917 Loan-Backed Securities 2,908,980 52,881 35, ,944,978 53,138 Subtotal Debt Securities 75,642, ,798 2,025,978 10,277 77,668, ,075 Common Stocks 2,109, , ,253 96,611 3,078, ,085 Total Securities with Unrealized Losses $ 77,752,140 $ 731,272 $ 2,994,231 $ 106,888 $ 80,746,371 $ 838,160 24

27 Proceeds from sales of investments in debt securities, excluding calls and maturities, during 2013 and 2012, were $143,991,667 and $277,929,119, respectively. Gross gains of $7,725,737 and $19,670,528 and gross losses of $595,480 and $635,254 were realized on those sales, respectively. Net gains in the amount of $4,634,667 and $12,603,916 were deferred to the IMR in 2013 and 2012, respectively. In 2013 and 2012, there were $0 and $156,288 realized capital gains from the sale of other invested assets. In 2013 and 2012, there were no unrealized capital losses on investments that were determined to be other than temporary declines in value and were recognized as realized capital losses. Bonds carried at $1,515,715 and $1,529,275 at December 31, 2013 and 2012, respectively, are on deposit with the Illinois Department of Insurance as required by law. Bonds carried at $424,082 and $433,943 at December 31, 2013 and 2012, respectively, are on deposit with the Virginia Department of Insurance. Securities Lending The Company lends securities to agreed upon borrowers through an agreement with its custodian. The Company s policy is to require initial collateral from the borrower in an amount that is not less than 102 percent and 105 percent of the fair value of the domestic and foreign securities loaned at the outset of the contract as collateral. All collateral so received is held either in the physical custody of the custodian or for the account of the custodian by their agent or a central bank. The offsetting collateral liability is included in Payable for Securities Lending. At December 31, 2013 and 2012, respectively, the amount of securities loaned was $81,462,109 and $67,453,270, and the related collateral was $83,292,617 and $68,676,771. At December 31, 2013, collateral assets valued at $4,097,997 had maturity dates beyond one year. The aggregate amount of cash collateral received as of December 31, 2013 and 2012, is shown below by maturity date: Maturity Date Fair Value Fair Value Open $ 13,793,257 $ 10,411, Days or Less 10,603,150 11,153, to 60 Days 16,183,755 10,610, to 90 Days 18,332,705 13,103,528 Greater Than 90 Days 24,379,750 23,398,176 Total Collateral Received $ 83,292,617 $ 68,676,771 25

28 The aggregate amount of cash collateral reinvested as of December 31, 2013 and 2012, is shown below by maturity date: Amortized Fair Amortized Fair Cost Value Cost Value 30 Days or Less $ 23,927,961 $ 23,928,128 $ 19,302,655 $ 19,302, to 60 Days 15,871,436 15,872,718 10,508,746 10,509, to 90 Days 9,396,760 9,397,424 6,334,270 6,334, to 120 Days 13,378,058 13,378,871 5,774,765 5,776, to 180 Days 6,832,505 6,833,996 8,454,400 8,456, to 365 Days 8,265,317 8,261,853 6,935,399 6,939,050 1 to 2 Years 3,754,201 3,755,184 2,678,584 2,678,748 2 to 3 Years 258, ,188 2,756 2,756 Greater Than 3 Years - - 8,822,286 8,810,565 Total Collateral Reinvested $ 81,684,438 $ 81,686,362 $ 68,813,861 $ 68,811,650 As of December 31, 2013, the Company had $136,005,347 in gross restricted assets related to securities lending agreements. This amount represents securities that are available to be borrowed and as such are not available for general use by the Company. 5. Fair Value Measurement Statutory Accounting Practices establishes a framework for measuring fair value. That framework provides a fair value hierarchy that prioritizes the inputs to valuation techniques used to measure fair value. The hierarchy gives the highest priority to unadjusted quoted prices in active markets for identical assets (level one measurements) and the lowest priority to unobservable inputs (level three measurements). The three levels of the fair value hierarchy under statutory accounting are described below: Level 1 Inputs to the valuation methodology are unadjusted quoted prices for identical assets in active markets that the Company has the ability to access. Level 2 Inputs to the valuation methodology include quoted prices for similar assets in active markets; quoted prices for identical or similar assets in inactive markets; inputs other than quoted prices that are observable; or inputs that are derived principally from or corroborated by observable market data by correlation or other means. The fair values of the Level 2 securities are obtained from independent pricing services or from the Company s investment manager and are determined using quoted market prices from an orderly market at the reporting date for those or similar investments. Level 3 Inputs to the valuation methodology are unobservable and significant to the fair value measurement. The following table sets forth by level, within the fair value hierarchy, the Company s financial instruments that are reported at fair value within the statutory balance sheet as of December 31, 2013: 2013 Description Level 1 Level 2 Level 3 Total Common Stock $ 12,467,116 $ 1,385,413 $ - $ 13,852,529 26

29 The following table sets forth by level, within the fair value hierarchy, the Company s financial instruments that are reported at fair value within the statutory balance sheet as of December 31, 2012: 2012 Description Level 1 Level 2 Level 3 Total Common Stock $ 9,572,998 $ 1,013,502 $ - $ 10,586,500 The Company does not have any liabilities measured at fair value at December 31, 2013 and There were no Level 3 assets at December 31, In 2012, the Level 3 asset, valued at $30,867 as of January 1, 2012, was transferred into Level 1 and subsequently sold. The Company did not have any transfers between levels in 2013 or The aggregate fair value of all financial instruments as of December 31, 2013, is shown below. Aggregate Admitted Fair Value Assets Level 1 Level 2 Level 3 Bonds $ 1,169,210,224 $ 1,131,944,247 $ 2,051,937 $ 1,167,158,287 $ - Common Stock 13,852,529 13,852,529 12,467,116 1,385,413 - Short-Term Investments 8,119,112 8,119,112 8,119, The aggregate fair value of all financial instruments as of December 31, 2012, is shown below. Aggregate Admitted Fair Value Assets Level 1 Level 2 Level 3 Bonds $ 1,191,407,673 $ 1,047,251,111 $ 2,131,380 $ 1,180,243,634 $ 9,032,659 Common Stock 10,586,500 10,586,500 9,572,998 1,013,502 - Short-Term Investments 19,532,989 19,532,989 19,532, The type of security included within each hierarchy in the above tables is as follows: Level 1 Measurements Bonds: Comprised of actively traded U.S. Treasury notes. Common Stock: Comprised of actively traded exchange listed mutual funds and common stocks. Short-Term Investments: Comprised of money market mutual funds. Level 2 Measurements Bonds: Comprised of U.S. Government, municipal, and corporate securities. Common Stock: Comprised of privately placed corporate securities. Level 3 Measurements Certain Asset-Backed Bonds: Comprised primarily of corporate pass-through bonds. 27

30 6. Annuity Actuarial Reserves and Deposit Liabilities by Withdrawal Characteristics Annuity actuarial reserves and deposit liabilities, by withdrawal characteristics, as of December 31 are as follows: Subject to Discretionary Withdrawal - With Adjustment: With Market Value Adjustment With Fair Value Adjustment and Surrender Charge of 5% or More At Book Value Less Surrender Charge of 5% or More At Market Value Subtotal Subject to Discretionary Withdrawal - Without Adjustment: At Book Value (Minimal or No Charge or Adjustment) Not Subject to Discretionary Withdrawal Provision $ 201,224,931 $ 186,777,833 16,869,948 36,287,714 26,386,991 25,425, , , ,653, ,707, ,731, ,240,418 73,496,114 64,827,564 Total Annuity Actuarial Reserves and Deposit Liabilities 461,880, ,775,243 Less Reinsurance (42,839) (53,934) Total Annuity Actuarial Reserves and Deposit Liabilities $ 461,837,687 $ 441,721,309 Included in the annuity actuarial reserves and deposit liabilities, $46,450,769 and $45,023,392 for 2013 and 2012, respectively, relates to the deposit administration contract for the Farmers Automobile Insurance Association Retirement Plan, of which the Company is a participant. Reconciliations of total annuity actuarial reserves and deposit liabilities as of December 31 are as follows: Annuities, Net Deposit-Type Contracts $ 398,526,895 $ 388,298,353 63,310,792 53,422,956 Total Annuity Actuarial Reserves and Deposit Fund Liabilities $ 461,837,687 $ 441,721,309 28

31 7. Life and Health Reserves A. Life Contracts and Deposit-Type Contracts The Company waives deduction of deferred fractional premiums upon death of an insured and returns any portion of the final premium beyond the date of death. Surrender values are not promised in excess of the legally computed reserves. Policies subject to an extra premium because the insured is placed in a special rating class are valued as follows: Premium-Paying Policies Extra premiums are charged for all substandard lives plus the gross premium for the insured s age. Mean reserves are determined by computing the regular mean reserve for the plan at the insured s age holding in addition one-half (1/2) of the extra premium charge for the year. Paid-Up Policies For whole life policies that are known to have been based on a substandard mortality table, the reserves are those based on the same substandard table. As of December 31, 2013 and 2012, the Company had $253,574,720 and $214,413,057, respectively, insurance in force for which the gross premiums are less than the net premiums according to the standard valuation set by the State of Illinois. Deficiency reserves to cover the difference between gross and net premiums totaled $1,983,292 and $1,291,554 at December 31, 2013 and 2012, respectively. The insurance amount does not include insurance on policies for which deficiency reserves are either exempted or calculated to be zero on a seriatim basis. Tabular interest, tabular less actual reserve released, and tabular cost have been determined by formulas used in accordance with the Statutory Accounting Practices. Tabular interest on deposit funds not involving life contingencies are computed based on the interest rate actually credited to the funds using interest rates as approved by the Board of Directors. 29

32 B. Liability for Health Claim Reserves Activity in the claim reserves is summarized as follows: Balance at January 1 Less Reinsurance Recoverables Net Balance at January 1 Incurred Related to: Current Year Prior Years Total Incurred Paid Related to: Current Year Prior Years Total Paid Net Balance at December 31 Plus Reinsurance Recoverables Balance at December $ 21,700,373 $ 23,588,506 37, ,402 21,663,038 22,659,104 72,820,973 82,059,182 (5,042,721) (2,251,872) 67,778,252 79,807,310 55,437,521 62,833,474 14,313,844 17,969,902 69,751,365 80,803,376 19,689,925 21,663,038 31,204 37,335 $ 19,721,129 $ 21,700,373 Health claim reserves of $4,367,029 and $4,092,613 and health contract claims of $15,322,896 and $17,570,425 as of December 31, 2013 and 2012, respectively, are included in the previous table and their respective liabilities in the balance sheet. As a result of actual claim payments varying from previous estimates of insured events and subsequent reserve changes, the provision for claim benefits decreased by $5,042,721 and $2,251,872 in 2013 and 2012, respectively. C. Premium and Annuity Considerations Deferred Deferred life insurance premiums and annuity considerations as of December 31 are as follows: Ordinary New Business Ordinary Renewal Group Life Total Net of Net of Gross Loading Gross Loading $ 1,293,364 $ 753,951 $ 1,176,214 $ 648,350 9,322,586 15,581,264 8,829,260 14,364, ,969 1,360, ,770 1,298,509 $ 11,421,919 $ 17,695,435 $ 10,843,244 $ 16,311,407 30

33 8. Federal Income Taxes The Company is taxed as a life insurance company on the basis of combined net investment income, capital gains, and underwriting income. Federal income tax expense differs from the amount obtained by applying the federal income tax rate of 34 percent to pretax income for the years ended December 31, 2013 and 2012, due to the following: Computed Expected Federal Income Tax Expense $ (176,020) $ 230,429 Increase (Decrease) in Taxes Resulting from: Statutory Reserves Versus Tax Reserves 34,413 (258,097) Investment Income (739,754) (430,177) Deferred Federal Income Acquisition Tax Costs Expense 634, ,107 All Others 518, ,741 Federal Income Tax Expense $ 271,520 $ 279,003 The components of the net deferred tax asset as of December 31, 2013 and 2012, are as follows: 2013 Ordinary Capital Total Gross Deferred Tax Assets $ 12,508,736 $ 373,052 $ 12,881,788 Statutory Valuation Allowance Adjusted Gross Deferred Tax Assets 12,508, ,052 12,881,788 Deferred Tax Assets Non-Admitted 2,705,495-2,705,495 Subtotal Net Admitted Deferred Tax Asset 9,803, ,052 10,176,293 Deferred Tax Liabilities 588,484 1,353,887 1,942,371 Net Admitted Deferred Tax Assets $ 9,214,757 $ (980,835) $ 8,233, Ordinary Capital Total Gross Deferred Tax Assets $ 10,434,714 $ 3,056,420 $ 13,491,134 Statutory Valuation Allowance Adjusted Gross Deferred Tax Assets 10,434,714 3,056,420 13,491,134 Deferred Tax Assets Non-Admitted 5,489,058 4,652 5,493,710 Subtotal Net Admitted Deferred Tax Asset 4,945,656 3,051,768 7,997,424 Deferred Tax Liabilities 2,047,060-2,047,060 Net Admitted Deferred Tax Assets $ 2,898,596 $ 3,051,768 $ 5,950,364 Change Ordinary Capital Total Gross Deferred Tax Assets $ 2,074,022 $ (2,683,368) $ (609,346) Statutory Valuation Allowance Adjusted Gross Deferred Tax Assets 2,074,022 (2,683,368) (609,346) Deferred Tax Assets Non-Admitted (2,783,563) (4,652) (2,788,215) Subtotal Net Admitted Deferred Tax Asset 4,857,585 (2,678,716) 2,178,869 Deferred Tax Liabilities (1,458,576) 1,353,887 (104,689) Net Admitted Deferred Tax Assets $ 6,316,161 $ (4,032,603) $ 2,283,558 31

34 The net admitted deferred tax asset was determined using the guidance related to admissibility provided in the following paragraphs of NAIC Statement of Statutory Accounting Principles No. 101 (SSAP 101). SSAP 101 was adopted by the Company effective January 1, Admissible Under Paragraph: 2013 Ordinary Capital Total 11a. Ability to Recover Taxes Paid in Prior Years $ 1,151,295 $ - $ 1,151,295 11b. Expected to be Realized, After Application of Threshold Limitations 6,709, ,052 7,082,627 11c. Offset of Deferred Tax Liabilities 1,942,371-1,942,371 Total Admitted Deferred Tax Assets $ 9,803,241 $ 373,052 $ 10,176,293 Admissible Under Paragraph: 2012 Ordinary Capital Total 11a. Ability to Recover Taxes Paid in Prior Years $ 554,482 $ 3,051,768 $ 3,606,250 11b. Expected to be Realized, After Application of Threshold Limitations 2,344,114-2,344,114 11c. Offset of Deferred Tax Liabilities 2,047,060-2,047,060 Total Admitted Deferred Tax Assets $ 4,945,656 $ 3,051,768 $ 7,997,424 Admissible Under Paragraph: Change Ordinary Capital Total 11a. Ability to Recover Taxes Paid in Prior Years $ 596,813 $ (3,051,768) $ (2,454,955) 11b. Expected to be Realized, After Application of Threshold Limitations 4,365, ,052 4,738,513 11c. Offset of Deferred Tax Liabilities (104,689) - (104,689) Total Admitted Deferred Tax Assets $ 4,857,585 $ (2,678,716) $ 2,178, Ratio Used to Determine Recovery Period and Threshold Limitation Amount Under Paragraph 11b % % Amount of Adjusted Capital and Surplus Used to Determine Recovery Period and Threshold Limitation Under Paragraph 11b $121,448,919 $118,938,413 32

35 The major components of current income taxes incurred and net deferred tax assets as of December 31, 2013 and 2012, are as follows: Change Current Income Tax Federal $ 68,633 $ 393,112 $ (324,479) Prior Year Under (Over) Accrual of Tax Reserves 202,887 (114,109) 316,996 Federal Income Tax Expense $ 271,520 $ 279,003 $ (7,483) Deferred Tax Assets: Ordinary: Stat vs. Tax Reserves $ 2,239,331 $ 2,138,355 $ 100,976 DAC 6,188,058 5,553, ,550 Discounting of A&H Claim Reserves 43,742 68,917 (25,175) Unearned Premium 872, ,024 Pension Accrual 554, ,317 (33,470) Post-Retirement Accrual 1,284,033 1,145, ,758 Transition Liability for Pension Benefits 269, ,881 Transition Liability for Post-Retirement Benefits 143, ,667 Deferred Compensation 69,565 68,020 1,545 Directors Pension Liability 182, ,541 (5,840) Non-Admitted Assets 654, ,781 (28,817) Other 5,923-5,923 Total Ordinary Deferred Tax Assets 12,508,736 10,434,714 2,074,022 Statutory Valuation Allowance Adjustment Non-Admitted 2,705,495 5,489,058 (2,783,563) Admitted Ordinary Deferred Tax Assets 9,803,241 4,945,656 4,857,585 Capital: Capital Loss Carry-Forward $ 373,052 $ 3,044,792 $ (2,671,740) Other - 11,628 (11,628) Total Capital Deferred Tax Assets 373,052 3,056,420 (2,683,368) Statutory Valuation Allowance Adjustment Non-Admitted - 4,652 (4,652) Admitted Capital Deferred Tax Assets 373,052 3,051,768 (2,678,716) Admitted Deferred Tax Assets $ 10,176,293 $ 7,997,424 $ 2,178,869 Deferred Tax Liabilities: Ordinary: Accrual of Discount $ 350,899 $ 319,020 $ 31,879 Bonus Depreciation 231, ,326 (69,967) Dividend Accrual Adjustment 6,226 6,667 (441) Other - 1,420,047 (1,420,047) Total Ordinary Deferred Tax Liabilities 588,484 2,047,060 (1,458,576) Capital: Unrealized Gains Common Stock $ 1,353,887 $ - $ 1,353,887 Total Capital Deferred Tax Liabilities 1,353,887-1,353,887 Total Deferred Tax Liabilities $ 1,942,371 $ 2,047,060 $ (104,689) Net Deferred Tax Assets $ 8,233,922 $ 5,950,364 $ 2,283,558 33

36 As of December 31, 2013 and 2012, the Company had no operating loss carry-forwards. Capital loss carry-forwards available at December 31, 2013 and 2012, were $1,097,212 and $8,955,000, respectively. The following are income taxes incurred in the current and prior years that will be available for recoupment in the event of future net losses: 2013 $ 63, $ 584, $ 503,070 Federal income tax returns of the Company have been examined by the Internal Revenue Service for all years through In the opinion of management, the liability for federal income taxes is sufficient to cover computed taxes for the current and prior years that are currently payable. As of December 31, 2013, the Company has not identified any material loss contingencies arising from uncertain tax positions. The Company has no tax-planning strategies that had a material impact on adjusted gross and net admitted deferred tax assets. 9. Capital and Surplus and Dividends The Company is required to maintain minimum surplus established by the Department of Insurance. The Company is also subject to Risk-Based Capital (RBC) requirements promulgated by the NAIC and adopted by the Department. The RBC standards establish minimum surplus requirements for insurance companies. The RBC formula applies various weighting factors to financial balances or various levels of activities based on the perceived degree of risk. At December 31, 2013, the Company s surplus exceeded the minimum levels required by the Department and RBC standards. The Company s unassigned surplus was increased (reduced) by the following cumulative amounts at December 31, 2013 and 2012, respectively: Net Unrealized Gains $ 3,906,219 $ 1,463,600 Non-Admitted Assets $ (1,926,366) $ (2,011,122) Asset Valuation Reserve $ 7,036,038 $ 5,683,132 Provision for Reinsurance $ 10,497 $ - Non-cumulative dividends are paid quarterly as determined by the Board of Directors. The maximum amount of dividends which can be paid by a State of Illinois domiciled insurance company to shareholders without prior approval of the Director of Insurance is limited to the greater of 10 percent of statutory surplus or the net income of the company for the preceding year. Statutory surplus at December 31, 2013, was $122,693,292. The maximum dividend payout which may be made without prior approval in 2014 is $12,269,

37 Inner Circle Club Members TOP PRODUCERS FOR 2013: Andrew Anderson Northwoods Insurance Services, LLC Winter, Wisconsin Steve Anderson A.W. Anderson Agency, Inc. Loves Park, Illinois Gary Ashley Harmon and Harmon Insurance Agency, Inc. Abingdon, Illinois Scot Blessinger James A. Blessinger Agency, Inc. Jasper, Indiana Jessica Booton Doran Insurance & Services, Inc. Stronghurst, Illinois Darryl Bouxsein Comprehensive Insurance Services, Inc. Peoria, Illinois Keith Boyd Keith Boyd Insurance Johnston City, Illinois Clay Bradley The Insurance House Marion, Illinois Anthony Burkhart Burkhart Insurance Agency, Inc. Vincennes, Indiana Terry Busch Busch Insurance Agency, Inc. Platteville, Wisconsin Richard Butler Dick Butler & Associates, Inc. Mattoon, Illinois Greg Cannedy Prairie State Insurance Agency, Inc. Springfield, Illinois Michael Cardilli Hicks Insurance Group Mokena, Illinois Al Czerniewski Czerniewski Insurance Agency Crivitz, Wisconsin Thomas Doran Doran Insurance & Services, Inc. Stronghurst, Illinois Andrew Drewes Kinmundy Insurance Service Kinmundy, Illinois Marshall Eccher Eccher & Associates Insurance Agency, Inc. Millstadt, Illinois Dale Edgecombe Decatur Mutual Insurance Agency, LLC Decatur, Illinois Michael Edwards Hugh F. Miller Insurance Agency, Inc. Rock Falls, Illinois Joseph Feldbruegge Feldbruegge Insurance Agency, LLC Abbotsford, Wisconsin Matthew Flynn Krell Insurance Services, Inc. Verona, Wisconsin Robert Fortner Fortner Insurance Agency, Inc. Peoria, Illinois Jay Freeman Norris Insurance Agency, Inc. Amboy, Indiana Ryan Fuhrman Fuhrman Insurance Agency Unlimited, Inc. Franksville, Wisconsin Terry Garner Garner Insurance Lancaster, Ohio Bill Gower Gower Insurance Agency, Inc. Metropolis, Illinois 35

38 Inner Circle Club Members (Continued) Robert Gredy Gredy Insurance Bloomington, Indiana Adam Grimes Harris Agency, Inc. Rossville, Illinois Nicole Grisanzio Broadmoor Agency, Inc. Rockford, Illinois Rick Hamilton Weber Insurance and Realty Brokers, Inc. Robinson, Illinois Larry Hardesty Mid Illinois Insurance Services, Inc. Peoria, Illinois Daniel Harnish Marvin F. Uecker Agency Lena, Illinois Bart Hartauer Hartauer Insurance Agency, Inc. La Salle, Illinois Rodney Henry Taylor, Dodd & Wood Insurance Agency, Inc. Anna, Illinois Stephen Henson Prairieland Insurance Group Champaign, Illinois Mike Hermes Northeast Insurance, Inc. Green Bay, Wisconsin Douglas Hoch Hoch Insurance Agency, Inc. Fort Wayne, Indiana Jeffrey Hoffman Crum-Halsted Agency, Inc. Sycamore, Illinois Loren Holzhueter ISC, Inc. Watertown, Wisconsin Linda Huber C F & H Insurance Agency, Inc. Monticello, Illinois Timothy Hughes Grojean Realty & Insurance Agency, Inc. Jacksonville, Illinois Timothy Humpal A.W. Anderson Agency, Inc. Loves Park, Illinois Brenda James James Insurance Agency, Inc. Mitchell, Indiana Cheryl Jennings Jennings Insurance Agency, Inc. Rochester, Indiana Brian Kampmeier Mt. Carroll Insurance Agency, Inc. Mount Carroll, Illinois Robert Keller Frimark/Keller & Associates, LLC Schaumburg, Illinois Austin Kendall Coale Insurance Services, Inc. Marshall, Illinois Lucas Knight Knight Insurance Services Chrisman, Illinois Dennis Koch Koch Insurance Agency, Inc. Nashville, Illinois William Krell Krell Insurance Services, Inc. Verona, Wisconsin Kevin Krug Lakeshore Financial Group, LLC Fond du Lac, Wisconsin Jonathan Lacine Lighthouse Insurance Agency, Inc. Tuscola, Illinois 36

39 Inner Circle Club Members (Continued) Phillip Larrick Larrick Insurance Agency Wilmington, Ohio Chester Lawrence Lawrence & Bean Insurance Agency, Inc. Vienna, Illinois John Leezer Leezer Insurance Agency, Inc. Toulon, Illinois Jay LeFevre First Gabrielson Agency Clear Lake, Iowa Steven Lendosky Brechler-Lendosky Group, LLC Fennimore, Wisconsin Bill Livengood Griffin-Rahn Insurance Agency, Inc. Pekin, Illinois Luke Lohmeyer Frisbie & Lohmeyer, Inc. Woodstock, Illinois Brian Loman Loman-Ray Insurance Group, Inc. Broadlands, Illinois Steven Lundy Financial Insurance Brokers, Inc. Grayslake, Illinois Travis Mains C.H. Smith Insurance Agency, Inc. Danville, Illinois David Marcell Marcell Insurance Agency, Inc. Schofield, Wisconsin Christopher Marks Roberts Insurance Agency Marion, Illinois Casey Martin Dempster Insurance Agency, LLC Peoria, Illinois David Merwin Klein-Merwin-Karrer & Associates, Inc. Fairview Heights, Illinois Kurt Morgan First Gabrielson Agency Belmond, Iowa Connie Murphy Banterra Insurance Services, Inc. Eldorado, Illinois Eldon Neighbor Neighbor Insurance Services, Inc. Alburnett, Iowa Mark Neighbor Neighbor Insurance Services, Inc. Central City, Iowa Robert Oetting Bob Oetting and Associates Charleston, Illinois Jeffrey Olson Insure-Rite Evergreen Park, Illinois Jim Pauley Pufalt Pauley Insurance Agency, Inc. Belleville, Illinois Jay Peterson Peterson Insurance Services, Inc. Clinton, Illinois James Petrov PLR Insurance Services Tremont, Illinois Andrew Prahl Loman-Ray Insurance Group, Inc. Broadlands, Illinois Patrick Przykopanski Downing, Przykopanski, Clements & May Insurance Agency, Inc. Mount Pulaski, Illinois Ryan Ramsey Ramsey Financial Services, Inc. Bowen, Illinois 37

40 Inner Circle Club Members (Continued) Christopher Rodbro Chris Rodbro Insurance Oxford, Ohio Richard Runyon Runyon Insurance Agency, Inc. Olney, Illinois Dexter Sattler ISC - Insurance Shoppe Chilton, Wisconsin Chad Schmitt Smith & Hatch Insurance Agency, Inc. Eden, Wisconsin Thomas Schwab Schwab Insurance & Real Estate, Inc. Nora Springs, Iowa John Schweighart The Hillard Agency, Inc. Tuscola, Illinois Marshall Sheffer Sheffer Insurance Agency Herrin, Illinois Daniel Springer Springer-Springer Insurance Orleans, Indiana Greg Steffen Compass Insurance Partners Le Roy, Illinois James Stout Stout Insurance Agency, LLC Freeport, Illinois Thomas Strangstalien Carrier Insurance Agency, Inc. La Crosse, Wisconsin George Thompson George Thompson Insurance Agency McHenry, Illinois Brian Van De Hey Brian Van De Hey Insurance & Financial Planning, Inc. De Pere, Wisconsin Guy Van Dyn Hoven Van Dyn Hoven Insurance Agency, Inc. Little Chute, Wisconsin Michael Vollmer Bartonville Insurance Agency, Inc. Bartonville, Illinois Thomas Wagner Oshkosh Insurance Services Oshkosh, Wisconsin Robert Weller Weller Hooker Agency Dwight, Illinois Jay Wessler Wessler Bros. Agency, Inc. Arenzville, Illinois Scott Wilde Harman-Wilde Insurance Osage, Iowa Bruce Wonsmos First Gabrielson Agency Thornton, Iowa Tina Yates Greene County Insurance, LLC Xenia, Ohio James Tackitt Tackitt Insurance Agency, Inc. Avon, Indiana Lon Tay The Hillard Agency, Inc. Villa Grove, Illinois 38

41 Board of Directors Gordon M. Walker, Chairman Steven R. Anderson, Vice Chairman Craig W. Concklin Daniel V. Connell Byron A. Dodd Thomas C. Hornstein A. Richard Kriegsman Scott A. Martin Christine A. Schwartz Officers Gordon M. Walker Chairman of the Board Scott A. Martin President Chief Executive Officer Daniel V. Connell Senior Vice President Chief Financial Officer Secretary Brian K. Lee Senior Vice President Chief Operating Officer Todd A. Clark Senior Vice President Gregory L. Feller Vice President Sales Joel M. Jackson Vice President Marketing Neal P. Kaderabek Vice President Information Technology Diane K. Steiner Vice President Life Underwriting Assistant Secretary Michael A. Zabinski Vice President Controller Advisors Auditors Strohm Ballweg, LLP General Counsel Kuhfuss & Proehl, P.C. Medical Director James R. Smalley, M.D., Ph.D. 39

42 Vision Statement Our vision is to set the standard of excellence among insurance providers by being innovative, being financially strong, and exceeding customer expectations. We will attract and retain the very best employees and agents to help us achieve this goal. Mission Statement Pekin Insurance provides financial protection and peace of mind for our policyholders by offering quality insurance products through independent agents. In all we do, we are dedicated to going Beyond the expected. Our Values In today s uncertain world, Pekin Insurance still stands strong by adhering to our foundation of values: we are people-focused and motivated by a genuine caring for our employees, policyholders, agents, and community. Our philosophy is conservative. Our solutions, high-tech. But above all, our values are best expressed not through words, but actions. We respond. Follow through. Until we get results that go beyond... Beyond the expected. 40

43 For our employees, agents, and policyholders, we strive to be... Quick. To communicate. To respond. To solve. Innovative. In our products. Our technology. Our thinking. Nimble. We challenge. We adapt. We bend, never break. Sensible. We listen. We weigh all sides. We are prudent. Reliable. We are dependable. Steady. The calm inside the storm. Tech-Savvy. We are efficient. Effective. Easy to do business with. Respected. By our agents. Our policyholders. Our team. The industry. When you need us, we re there. Not only with answers, but with the right questions. We re innovative. Yet practical. We look for the how. Not why. We find new ways. We listen. We understand. We deliver. Our rule is golden: Give customers what we would want ourselves. Service that goes the extra mile. Products that meet today s needs and tomorrow s. And the financial stability that provides what we all want in today s world: peace of mind. Pekin Insurance is committed to going beyond. Beyond the expected. 41

44 Universal Life Preferred Whole Life Term Life Transitional Life Flexible & Single Premium Annuities Medicare Supplement Disability Income Credit Life Debt Protection Group Insurance Qualified Retirement Programs for Individual & Business Needs Funeral Preplanning Self-Funded Employee Benefit Plan Administration Pekin Life Insurance Company, headquartered in Pekin, llinois, became an integral member of the Pekin Insurance group of companies in April Joining together with our property/casualty companies, The Farmers Automobile Insurance Association; Pekin Insurance Company; and PAC, Inc., we are committed to providing quality insurance service to our policyholders spanning a nineteen-state marketing area. Our property/casualty products deliver coverage to protect homes, autos, businesses, and a wide range of other insurance needs. The Company s life and health products listed on the left offer a diverse portfolio of coverages to help families and businesses achieve secure financial futures. Whether for property/casualty, life, annuity, or group health insurance, we are committed to going the extra mile to provide the products and services necessary for your peace of mind. Now, more than ever, it is important that policyholders have complete trust in their insurance company. Pekin Insurance... going Beyond the expected to meet your insurance needs. PEKIN LIFE INSURANCE COMPANY