Oregon Mutual2017 Annual Report

President’s Message

(As I delivered to the members at the annual meeting March 6, 2018)

Dear Members, I appreciate the opportunity to discuss the results of our collective efforts in 2017.

In short, 2017 was another welcome operational step in the right direction. Our business improvement feels like spring after a long winter. We see real signs of growth and we look forward to what we hope will be sunny days ahead.

Any financial discussion of the company must start with an affirmation that the financial condition of the company is strong, our balance sheet easily supports the exposure of our business and our financial credit rating was reaffirmed at A- “Excellent”.

2017 saw the company reemerge from years of negative premium growth to post gains in both written premium and, by the 4th quarter, the start of policy count growth for both personal and commercial lines. In addition to 4.6% direct premium growth we added 5% to our policyholder protection fund, commonly known as surplus. This combination in which surplus growth exceeds premium growth is an excellent result that supports our path forward.

Steven L. PattersonPresident & CEO

From our Mail room to our Board Room, member interest is our interest.

Operational highlights of the year include continued profitability improvements in most lines, premium growth and positive momentum on the technology front.

The profitability improvements have been fueled by the fantastic turn around that continues in our Commercial Lines Unit. After getting hit in farmowners in January, the Commercial Lines Unit finished 2017 with a combined ratio of 93.9%, with businessowners policies having an outstanding year at 86.1% and commercial auto an unbelievable 82.6% combined. Commercial auto has been a historically unprofitable line for the industry and was for us as well. But with commercial auto, as we have with other lines, we have again demonstrated our ability to remediate unprofitable lines of business, even as many competitors struggle with this line.

Members, these results are not accidents, commercial lines performance is the product of hard work, discipline, and collaboration. Commercial lines production is up and so is policy retention. This is our time to shine in commercial lines.

Personal auto continues to suffer here and throughout the Property and Casualty Industry. Our personal auto combined ratios are headed in the

right direction from over 141% combined ratio in 2015, to 122.1% in 2016 to 115.9% in 2017. (anything over 100 is not profitable) While happy and proud of the progress it has merely slowed and not stopped the bleeding.

While Homeowner’s had a tough year (120.2%) due primarily to the weather events (see below), our confidence in a return to better results is high.

After our termination of our systems transformation project last year, we selected a new vendor based on exposure and work we had done with them previously. Since June of 2017 we have developed and implemented a new rating engine and a Personal Umbrella System that has already received great customer satisfaction and increased production. We have developed the business specifications for the homeowners system that we will deliver to agents early in 2019. When we can provide agents with a new and intuitive, easy and agent friendly system, we expect the lure of our great products and competitive rates to attract the business that will fuel our profitable growth.

Operational Highlights

Weathering the Storm

Two events last year prevented us from achieving net income and adding more money to policyholder protection. The first was a historically bad winter storm that left property devastation in Eastern Oregon and Idaho in January, 2017. The amount and duration of the snow started falling in December of 2016 and didn’t really stop until February of 2017. The Company suffered almost $8 million in property losses and structure collapses.

To our members who suffered losses in this snow event, our thoughts and prayers have been with you during your recovery and as we fulfilled the promises we made to you in the coverage you purchased. This is why you bought insurance and we are proud to have responded to your call in your time of need.

The second event was the write-off of development costs associated with a policy administration system for homeowners and personal lines auto that was reported as an emerging issue last year. Despite our efforts and expense, the system did not meet the stated needs of our agents. In fact, our Company was roundly praised by our agency partners who appreciated our willingness to terminate the project rather than force on them a system simply out of pride or stubbornness.

Unfortunately, doing the right thing can come at a cost. These two events pushed our underwriting income to (-$9 million) and our net income to (-$4.5

million). These events, together with year-end federal tax law changes moderated more growth in our policy holder protection fund (surplus) despite very good investment returns.

Our policyholder protection fund increased from $68.6 million to over $72 million. The Company loss ratio, (which is our incurred losses divided by earned premium), was 58.3%. This was up slightly from 2016, but was accompanied by a slight decrease in our expense ratio (total underwriting expenses incurred divided by net written premium). Our year-end Company combined ratio finished at 106.5% after starting the year at over 180%.

Increasing Surplus

66

67

68

69

70

71

72

20152016

2017

68.3 68.6

72.0

125

130

135

140

145

150

20152016

2017

139.2

135.1

141.4

0.70

0.80

0.90

1.00

1.10

1.20

1.30

20152016

2017

121.7%

105.0% 106.5%

Combined Ratio

Direct Written Premium (Millions)

Policyholder Surplus (Millions)

Members, we hope you know the pride we take and the fulfillment we receive from performing a job well done. Whether it is our tireless IT Staff, who deliver business changing technologies and enhancements daily and operational changing technology to move us forward; or Customer Service Representatives, who literally answer the call when you and your agents need them, Underwriting and Marketing Departments who help us add the right risks so we can grow profitably, lower expense and therefore contain costs, most importantly premium costs, or our Claims Service Staff who think of you first on your worst days, guide you through the process, and uphold the promise of every Oregon Mutual Policy. (Did you know: Oregon Mutual Claims Service has been rated first in Oregon and #6 nationally by autobody repair professionals). We treat our members right and others notice.

From our Mail Room to our Board Room, member interest is our interest.

Know that our Values of Integrity, Respect, Innovation, Citizenship and Independence are not mere slogans. We hold ourselves to them, we will hold you and any people making claims against you to them, and we will hold your agents to them. To our Partner Agents, we say thank you. Our management group will manage the Company towards meeting the needs of your customers and your agency. We are committed to the independent agency model, we believe in the value agents bring to insurance transactions, and our members are smart to seek an agent’s advice.

Finally, like a sunny week near the end of a northwest winter, the sun feels good, but it doesn’t mean there won’t be more rain. We’ve done much, but we have much to do. Our energy and our focus will be on the stewardship and the perpetuation of this 123 year old experiment, started by local people for the needs of their neighbors.

We do not report to a board representing shareholders, we report to a board that represents the members of this Company and I thank them, for their discernment and patience as we have pursued the tough work of getting the organizational results turned around. We appreciate they did not demand short term fixes or shortsighted moves that often leads to lesser coverages, slashed budgets, employee displacement, sharp claims practices or operational window dressing. Instead they have encouraged and supported real structural course correction designed to light our path to a great future. Where management has provided rational and compelling direction, we have received support. Mutual company boards can do that and ours has done so over the history of Oregon Mutual.

My message today is one of optimism informed by results that are possible because we have tackled major challenges and find ourselves capable of capitalizing on the moments ahead of us. These improvements have led to our current path of three straight quarters of premium growth and operational profit. I know what we have done to get here. I thank a century and a quarter of history and those who made it possible, and I thank my executive partners and all the dedicated men and women of Oregon Mutual for all they do and for their dedication, best wishes, and support of my first 9 months as CEO. Mostly, I thank you, our members, for your trust, confidence, and your business. I look forward to next year in order to tell the exciting story we are working hard as a Company to write.

Steven L. PattersonPresident and CEOOregon Mutual Insurance Company

True to our Values