Quality Experience Protection Courteous Prompt Annual Report 2009 Large Enough to be Safe, Small Enough to be Human
table of contents Chairman and President s Message...2 About Western Reserve Group...3 Personal Lines...4 Commercial / Farm Lines...5 Technology and the Future...6 Claims...7 & 8 Commitment to the Community...9 Financial Highlights...10 Selected Financial Data...11 Combined Statutory Statements of Income...12 Combined Statutory Statements of Admitted Assets, Liabilities, and Surplus...13 Directors and Officers...14 1
chairman and president s message 2009 was a year marked by improved financial results despite weather losses again playing a significant role in our underwriting performance. Although consecutive years of substantial weather losses made it difficult to post underwriting gains, several key measures of financial strength improved in 2009, including an increase in total assets (+4.3%), invested assets (+5.2%), premiums written (+3.3%), and policyholders surplus (+5.2%). A noteworthy accomplishment in 2009 was premium growth. Premiums written were $152.7 million, up $4.9 million or 3.3% compared to 2008. Contributing to the growth in premiums were an increase in new business policy counts of 19.9% and an increase in the policy retention ratio to 87.7%. New business production was strong across all product lines with sales increasing in personal lines (19.1%), commercial lines (20.8%), and farm (30.1%). We remain committed to retaining customers and successfully competing for new business by delivering competitive products, exceptional services, and new technology capabilities. We thank our agents for placing new business with us during 2009. Policyholders surplus ended the year at $224.8 million, an increase of $11.1 million or 5.2%. The investment portfolio contributed $7.2 million of gains and net income from operations added $4.4 million to surplus in 2009. The Group s financial strength has been a cornerstone of our success for over 100 years. During 2009, A.M. Best affirmed our rating of A (Excellent) for the 14th consecutive year. The Group s financial strength allows us to continue to invest in our future, but more importantly, it provides a source of security for our policyholders and a stable market for our agents. The Group s combined ratio ended the year at 106.7%, consistent with 2008. 2009 was the second worst weather loss year in the Group s history, following the all-time worst weather loss year in 2008. In 2009, weather losses were $20.1 million contributing 14.2 points to the loss ratio, almost three points higher than the ten-year average. Along with the increase in storm losses, a $4.3 million targeted investment in our information technology infrastructure added 2.9 points to the combined ratio. The investment portfolio performed well in 2009 and contributed favorably to the growth in policyholders surplus. The Group s total portfolio return was 18.9% generating net unrealized investment gains of $7.2 million. Our long-term strategy of maintaining a well diversified portfolio of asset classes, including common stocks, has allowed the Group to endure volatile market cycles while adding to our capital strength over time. We enter 2010 with an optimistic outlook for our future and thank our agents for their loyalty and trust in our company. Premium growth, balanced with sound underwriting and pricing decisions, is an important initiative for the Group moving forward. We are committed to enhancing the efficiency of our technology capabilities and making it easier for agents to do business with the Western Reserve Group. Finally, we remain dedicated to an advantage that policyholders and agents value most, our unsurpassed claims service. We appreciate your business and the confidence you place in the Western Reserve Group. 2
about the Western Reserve Group For over 100 years Western Reserve Group, working with professional independent agents, has provided the highest quality property/casualty insurance products, competitive pricing, and exemplary service to hundreds of thousands of policyholders. Headquartered in Wooster, Ohio, with a regional claims office in Lebanon, Indiana, the company is supported by 275 employees and over 2,400 licensed agents from over 500 locations. The Western Reserve Group consists of Western Reserve Mutual Casualty Company, Lightning Rod Mutual Insurance Company, and Sonnenberg Mutual Insurance Company, three Ohio-domiciled property/casualty insurance companies. As a regional carrier doing business exclusively in Ohio and Indiana, Western Reserve Group has developed extensive expertise and understands the unique needs of our customers. Whether it be for auto, home, business, or farm, we have products to protect them all. Even in today s volatile financial environment, Western Reserve Group maintains a superior record of financial stability and fiscal responsibility. Our sound financial condition and successful operating strategies have earned us an A (Excellent) rating from A. M. Best, the nation s leading insurance rating organization. A. M. Best bases its ratings on financial strength, operating performance, and the ability to meet obligations to policyholders. 3
personal lines Personal Lines launched several initiatives in 2009 to enhance growth, improve profitability, and deliver quality services. The direct written premium growth plan for 2009 was exceeded for Personal Lines with retention levels remaining strong. The retention levels for both auto and home reached a record level in 2008 and retention was again exceeded in 2009. We are expecting positive growth and profitability in the foreseeable future. Western Reserve Group is focused on expanding automation that will support the ease of doing business for agencies. The addition of rate bridging capabilities for Personal Auto provides greater opportunities and flexibility for our agents by streamlining the quoting process. The work accomplished in 2009 sets the stage for a continued release of technologies that will assist our agents with additional management systems and comparative rating options in 2010. We continue to focus employee efforts on providing superior personalized customer service. We support agencies with a one on one underwriting approach and emphasize interactions that enhance the overall agency/company relationship. This includes personalized training for products, services, and automation. In 2009, we examined many internal and external workflow processes and procedures with the goal of improving efficiencies for agencies and Western Reserve Group. This work will continue throughout 2010. We introduced several changes to our core products in 2009 and early 2010. The most significant were the expansion of the multi policy credit for home policies written with an umbrella policy and the introduction of a company car discount. Others included the added trust endorsement for auto and home policies and the functional replacement cost endorsement for homeowners. We will continue to deliver products and enhancements that make sense for customers and agents. We have made several adjustments within our operating staff and structure that will allow us to deliver products and services to agencies better than ever before. Our Department of Strategic Development is now in place and is designed to work closely with our Underwriting and Marketing teams to deliver timely product enhancements and rate reviews to existing lines as well as working to further automation capabilities. In addition, the Department of Strategic Development will research and develop new products and solutions. You will see the benefits of this new operating structure in 2010. We have set the foundation for a solid future and are committed to working with our agency partners and customers. 4
commercial/farm lines The Agents Advisory Board assists us with identifying and prioritizing our projects to enhance the success of our agents and Western Reserve Group. The number one request from the Agents Advisory Board was to expand our current Commercial Lines product offerings. It was apparent that we could not meet the agents and our own expectations without investing in a new Commercial Lines system. We now have a new system that will enable us to offer the most current ISO products, forms, and rating along with new and enhanced proprietary forms. In addition, we purchased a new print solution that greatly improves the commercial policy appearance. During 2009, we converted Commercial Auto to the new system. We are currently working on the development of Commercial Liability and Commercial Umbrella. This multi year project will eventually pay big dividends by providing our agents with expanded commercial product offerings. Commercial Lines has traditionally been a very profitable line for Western Reserve Group. We continue to strive to enhance our Commercial Lines presence in each agency. The Farm writings for 2009 represented our 11th straight year of increased premium in this line of business. Prior to 2008, the farm line was profitable. During 2008 and 2009 farm profitability deteriorated mostly due to abnormally high storm losses. A new and improved Farm Umbrella was introduced during 2009. This new product addresses both the personal and farm liability exposures of today s farmer. We continue to improve our products and systems to earn our agents best business. 5
technology and the future Technology plays a key role in helping us fulfill our mission. The independent agents who represent Western Reserve Group are very aware of the importance of technology in the insurance marketplace. They see it every day. Western Reserve Group has initiated a multi-year plan of system improvements that will enhance all areas of our business. Our web development plan makes the most effective use of our technology resources and ensures that our focus, while flexible, is tailored to meet our business needs. We are well into the third year of major and targeted investments in our information infrastructure. Real-time technology used for both comparative raters and rate bridging is critical to our Personal Lines success. PL Rating for Personal Auto, Agency Management Integration Support (rate bridging) for AMS AFW, AMS 360, and Applied TAM for Personal Auto were implemented. We updated and refreshed our Western Reserve Group public website to give it a new look and easier navigation. Over the next four years, we will be focused on three major programs: Commercial Lines, Agent Workbench, and product development. Our vision is to provide our agents, underwriters, and customer service representatives with a single, highly efficient, intuitive, and easy to use web based application of choice for quoting, binding, renewing, and amending WRG insurance policies that give WRG competitive marketplace advantages. Western Reserve Group, like any organization, has continually evolving needs. Our team of experienced web developers, partner agents, and forward-thinking management, enables Western Reserve Group to remain competitive by ensuring that its technology infrastructure supports the business objectives in this continually changing environment. 6
claims The true value of any insurance company is embedded in the foundation of its claim philosophy. At Western Reserve Group, our commitment to treat each customer in a way that we would like to be treated, is more than a cliché; it is fundamental to the way we do business. We recognize that an insurance policy is more than a mere financial transaction - it is a commitment of trust and an opportunity to make good on our promise to protect our insureds at a time of misfortune. Our approach to claim handling is simple: Provide prompt and fair claim service, delivered by an experienced staff who are responsive and sensitive to our insureds. In 2009, we completed the reorganization of our Property Department and finalized a merger of salvage and subrogation into a single Recovery Team. Our goals were to place select personnel into key positions, streamline operations, and optimize service. We believe these enhancements will enable us to meet and exceed policyholder expectations now and going forward. How did we do? A recent survey of policyholders who filed a claim indicated a 99% approval rating. Here are just a few of our recent customers comments: 7
We were extremely pleased from the beginning to the end of this claim. Thank you for such wonderful service! With the different companies I have dealt with in the past, none can compare to the service provided from your company. I recommend Western Reserve to my friends. The staff is informed and fair. Everyone involved was very good to us. Couldn t have been handled any better. Thanks! I was very satisfied with the way my claim was handled promptly. Thanks! Everyone involved was so nice, kind, and helpful. Great service is the reason I stay with Western Reserve. Thanks! It s been a wonderful experience. I was worried by stories others had told me about their insurance companies but I have to say I was pleasantly surprised! Thank you. 1st time claim and the process was easy and efficient! I am very pleased with the response time and courteous claims representative. I would like to thank you all for everything that was done. You are a great company. Thank you. 8
commitment to the community Just as a commitment to excellence is fundamental to our company s growth, commitment to the community is fundamental to our quality of life. It s why we work, live, and raise our families where we do. We consider it a responsibility to dedicate resources toward improving the well being of our home communities. We are profoundly aware that people are our core asset, and that, as a service business, it is people whom we serve. This includes the professional independent agents representing our company, as well as the individual policyholders who have placed their trust in us. We believe that when people work together, friendships develop, neighborhoods are strengthened, and great things happen. Through our Western Reserve Group Partnering Program, we join forces with our agents to help meet community needs, not only through financial means, but also through volunteerism. We work with agents to sponsor youth and high school sports as well as other events which contribute to each locality. This may run the gamut from popping popcorn at a community theater day to recognizing and honoring high school graduates. Our agents and employees have donated generously in both time and money to many organizations such as the United Way, Village Network (Boy s Village), YMCA, Chamber of Commerce, Relay for Life, Rails to Trails, Boy Scouts of America, as well as to their own favorite personal causes. These key fundamentals translate into a continuing commitment by our company to the communities we serve and the personal reward each of us enjoys from our fulfillment of that commitment. 9
financial highlights Thanks to strong financial performance, loyal independent agents and dedicated employees, Western Reserve Group is poised to deliver on its promise of protection while also investing in the future. (in millions) (in millions) (in millions) 10
Western Reserve Group Selected Financial Data (in thousands) Years ended December 31 2009 2008 2007 2006 2005 Operating Data Direct premiums written 152,712 147,833 148,025 149,561 153,295 Net premiums written 144,880 140,219 140,766 139,935 143,739 Premiums earned 141,462 140,058 140,544 140,305 143,452 Net underwriting gain (loss) (10,786) (9,489) (5,731) 2,962 27,611 Investment income, net 8,854 10,101 9,418 7,701 8,233 Realized impairment losses* - (12,467) - - - Realized investment gains (losses), net 1,255 1,003 3,461 1,303 1,209 Net income, pre-tax 1,509 (8,709) 9,233 14,217 30,786 Net income 4,435 (9,152) 8,203 9,434 20,517 * The Group recorded $12.5 million of impairment losses in December required by statutory accounting as a result of the significant decline in the equity markets. Absent the impairment losses, the Group had capital gains of $1.0 million and net income of $3.1 million. (in thousands) Years ended December 31 2009 2008 2007 2006 2005 Balance Sheet Data Cash and invested assets 333,741 317,212 356,824 344,600 318,060 Total assets 372,893 357,439 392,404 378,042 352,864 Surplus as regards policyholders 224,756 213,706 240,625 229,899 208,469 (in thousands) Years ended December 31 2009 2008 2007 2006 2005 Ratios Loss ratio 60.4 61.9 58.7 51.4 40.0 Loss adjustment expense 10.4 11.4 10.4 10.2 7.5 Underwriting expense 35.9 33.4 34.9 36.4 33.1 Combined ratio 106.7% 106.7% 104.0% 98.0% 80.6% 11
Western Reserve Group Combined Statutory Statements of Income (in thousands) Years ended December 31 2009 2008 Underwriting gain (loss): Net premiums written $144,880 $140,219 (Increase) decrease in unearned premiums (3,418) (161) Premiums earned 141,462 140,058 Losses and expenses incurred: Losses 85,458 86,703 Loss adjustment expenses 14,720 15,977 Underwriting expenses 52,070 46,867 Losses and expenses incurred 152,248 149,547 Net underwriting gain (loss) (10,786) (9,489) Investment income: Interest 8,162 8,409 Dividends 2,918 3,958 Real estate income (primarily rent for own occupancy) 900 900 Realized impairment losses 0 (12,467) Realized gains on investments, net 1,255 1,003 Total investment income 13,235 1,803 Less: Investment expenses 3,125 3,166 Net investment income 10,110 (1,363) Net income: Other income, net 2,185 2,143 Income before federal income taxes 1,509 (8,709) Federal income tax expense (2,926) 443 Net income* $4,435 ($9,152) * In 2008, the Group recorded $12.5 million of impairment losses required by statutory accounting as a result of the significant decline in the equity markets. Absent the impairment losses, the Group had capital gains of $1.0 million and net income of $3.1 million. 12
Western Reserve Group Combined Statutory Statements of Admitted Assets, Liabilities and Surplus (in thousands) Years ended December 31 2009 2008 ADMITTED ASSETS Bonds, at amortized cost $196,590 $176,125 Stocks: Preferred, at market (cost $2,999 and $3,890, respectively) 3,277 4,014 Common, at market (cost $57,212 and $56,068 respectively) 94,352 83,594 Real estate, at cost less accumulated depreciation of $3,544 and $3,016 respectively 14,893 15,717 Cash and short-term investments 15,824 26,938 Other invested assets 8,805 10,824 Total cash and invested assets 333,741 317,212 Premiums in course of collection, net 31,930 29,865 Accrued investment income 2,270 2,079 Reinsurance recoverable on paid losses 848 1,573 Federal income tax recoverable 2,010 0 Deferred tax assets 1,589 5,914 Other assets 505 797 Total admitted assets $372,893 $357,440 LIABILITIES AND SURPLUS Loss and loss adjustment expense $55,314 $53,488 Unearned premiums 64,772 61,354 Ceded reinsurance balances payable 814 900 Amounts withheld for others 12,996 14,514 Commissions payable 4,524 3,731 Accrued expenses and taxes, other than income tax 8,106 7,369 Federal income tax payable 0 33 Other liabilities 1,611 2,345 Total Liabilities 148,137 143,734 Surplus 224,756 213,706 Total Liabilities and Surplus $372,893 $357,440 13
directors and officers DIRECTORS: Robert P. Bogner Retired (formerly Secretary and Treasurer of Bogner Construction Company) Kenneth G. Rhode Retired (formerly Chairman of the Board and President of the Western Reserve Group) C. Michael Reardon Chairman and President, United Titanium Kenneth L. Vagnini National Accounts Manager, PSC Metals Inc. Ronald E. Holtman Partner in law firm of Logee, Hostetler, Stutzman & Lehman, Chairman of the Board of the Western Reserve Group John P. Murphy President and Secretary of Western Reserve Group Eddie L. Steiner President and Chief Executive Officer, CSB Bancorp Inc. (L to R) Robert P. Bogner, Kenneth G. Rhode, C. Michael Reardon, Kenneth L. Vagnini, Ronald E. Holtman, John P. Murphy, Eddie L. Steiner OFFICERS: C. Michael Reardon Chairman, Executive and Investment Committees Kevin W. Day Executive Vice President William J. Blincoe Vice President Marketing and Underwriting Michael A. Shutt Vice President Finance, Chief Financial Officer, and Treasurer Gregory J. Owen Vice President Information Technology John P. Murphy President and Secretary (L to R) C. Michael Reardon, Kevin W. Day, William J. Blincoe, Michael A. Shutt, Gregory J. Owen, John P. Murphy 14
OUr Mission To provide the best insurance products, protection and service to our policyholders, delivered by a quality agency force, backed by enthusiastic and service-oriented employees, sound investments and financial strength. The Western Reserve Mutual Casualty Company Lightning Rod Mutual Insurance Company Sonnenberg Mutual Insurance Company