2012

Adversity. Evolution. Growth.

1

Facing adversity may be a stressful part of

life, but without adversity, we would never

get to experience the joy that arises from

overcoming it. At Pharmacists Mutual, we

know life is going to continue to provide

challenges. It’s just the way it is. That is

why as a company, we continue to strive

for the best, but make sure we’re prepared

for the surprises that may lie ahead.

We like to think it is how we respond to

the challenges that come our way that

make us who we are today. Because in

the end, the challenges we face – and

ultimately overcome – are opportunities

for us to learn and grow. And when

we grow as a company, we continue

to move forward, no matter what may

come our way.

2

VISION, MISSION AND VALUESOur vision, mission and values are the guiding ideas and principles upon which we do business. Our vision is our idyllic future and represents the spirit of who we are and what we intend to become; while our mission describes the overall purpose of our organization and is an unmistakable depiction of why this company exists. Our values represent our commitment to our customers, employees and community.

O u r V i s i o nTo be the leading provider of insurance and risk management solutions by building enduring relationships with our select markets.

O u r M i s s i o nTo help our customers attain peace of mind through specialized insurance solutions and superior personal service.

O u r Va l u e sRelationships• Wearededicatedtobeingasuccessfulmutual

insurance company, accountable to and supported by our policyowners.

• Weofferadiverseandrewardingworkenvironmentfounded on respect, trust and teamwork.

• Weestablishmutuallybeneficialrelationships with associations that support the professional well-being of our customers.

• Wechoosebusinesspartnerswhoshareour core values.

Integrity• Wearehonestineverythingwedo.

• Wearecommittedtohighstandardsof ethical conduct.

Citizenship• Wesupportourcommunitiesandprofessional

associations.

• Weadvocatefortheinterestswesharewith our customers.

Excellence• Oursuccessdependsonthetalents,skills

and knowledge of our employees.

• Ourproducts,expertiseandservicedeliver value to our customers.

• Wearecommittedtocontinuousimprovement.

• Wemanagethecompany’sresourcestoensure itsprofitabilityandindependenceinorderto honor the promises we have made.

InShakespeare’sHenry IV, Part 3, the deposed King Henry laments, “Let me embrace thee, sour adversity, for wise men say it is the wisest course.” Adversity, whether thrust upon us or accepted willingly, often rewards us with renewed sense of purpose and a sense of accomplishment.

Some of my fondest memories were created during my six times running in the Hood to Coast Relay (H2C). H2C features over one thousand teams of twelve runners who accept the challenge of a 199 mile “race” from Mount Hood to Seaside,Oregon.Whileafewteamsrantowin,mostofthem,includingmine,ran to overcome the challenge, meet new friends and maybe be just a bit faster than the year before. Every year was different, one year over 90 degrees with blazing sunshine, the next 55 with drizzle (it was Oregon). One year my team left the start line at 5 p.m.; another year it was 6:45 a.m. However, I always felt invigorated with a can-do attitude during the days and weeks following the event, despite the sore muscles and blisters.

Whiletherunnersmayhavereceivedtheattention,theunsungheroeswereourvan drivers and race volunteers. The drivers managed to stay awake for 30 hours to transport us, and the race volunteers made sure no runner made a wrong turn at three in the morning.

My colleagues and I know that you face adversity regularly. Your challenges comefrommanydirectionsincludingauditsbypharmacybenefitmanagers,CMS’scompetitivebiddingprocess,crime,lawsuitsandpropertydamage,tolist just a few. Like the van drivers of H2C, Pharmacists Mutual is here to help you overcome many types of adversity. Our specialized insurance solutions and superiorpersonalservicewillhelpyoureachyourownpersonalfinishline.

Wetakeveryseriouslyourresponsibilitytohonorthepromisesthatwehavemade to our members, our communities and to each other. Our ability to respondforourmembersdependsonourfinancialstrength,thetalentofouremployees and your loyalty. Your loyalty to Pharmacists Mutual is well placed.

Ed Yorty President & CEO ‘‘

Let me embrace thee, sour adversity, for wise men say it is the wisest course.

—WilliamShakespeare,HenryIV‘‘

4

Since we are not owned by shareholders, our members have beenourfirstconcernsince1909.Wehopetheknowledgethatyou have a specialty insurer behind you allows you to better serve your patients.

In his accompanying message, Chair Kirk Hayes discusses someofthechallengesfacedduringthecompany’shistory. The company has emerged stronger by overcoming each one. Along with compounding pharmacists across the country, we aredealingwithasignificantchallengeas2013getsunderway.The tragedy that resulted from contaminated injectable steroids produced by New England Compounding Center (NECC) has impacted patients, other pharmacies and Pharmacists Mutual.

The media has reported factually that Pharmacists Mutual providedprofessionalliabilityinsuranceforNECC.Whilepossibleclaimpaymentsmaybelarge,wehavesignificantreinsurance protection in place. Our challenge will be the resulting increased cost of reinsurance and how we continue to serve all sectors of pharmacy, which we are committed to do.Weareintheprocessofimplementingnewunderwritingprotocols to better manage this risk. One of the collateral benefitsofthisprocesswillbetheavailabilityin2013of web-based rather than paper questionnaires.

Apportioning the cost of the protection we offer in an equitable mannerwillbeofsignificantconcern.Thenewunderwritingprotocols for pharmacy will help, but despite these efforts, the cost to insure compounding operations, especially sterile compounding, will need to increase.

DespitetheimpactoftheNECCclaim,yourcompany’sfinancialconditionimprovedmarkedlyin2012followingthedisappointing results of the year prior. The accompanying financialstatementshowsunderwritingincomeof$404thousandandnetincomeof$4.9million.Duringtheyear,thenumber of policies increased by more than 500, and our policy retention rate is over 90 percent. Over the past ten years, we have increased our policy count by more than 25 percent. The Board of Directors also declared a dividend, continuing thecompany’sunbrokentrackrecord.

Wemanagedmanyothersuccessesduring2012aswell.Ourprofessional liability and business insurance products are now available in Maine, New Hampshire, New Jersey, New York and Vermont.Ourwebsitehasbeenupdatedinconjunctionwithourleapintosocialmedia.Weexpandedourclaimreportingservice by ensuring our claim professionals are available any day at any time. Our businessowners policy was enhanced to provide additional protection for your business or practice. Finally,wemadesignificantchangesinourinvestmentmanagement area with the intent to reduce our risk while generating consistently positive returns.

The upcoming year also promises to attract additional members anddeliverbettervalue.WeplantorequestalicensetooperateinFlorida,astatewithover1,300independentpharmacies.Wewillbe updating our professional liability product and underwriting to better manage this risk and apportion the cost. Our business continuity efforts will be increased by relocating our technology disaster recovery facility to a more secure location. And, sticking with our theme of adversity, we will be launching the largest technologyupgradeinthecompany’shistory.Theoutcome,whencompleted,willgiveusmoreefficiencytocontrolcostsandprovide you with a customer portal.

Although a customer portal will provide additional convenience, we know that the personal service we offer sets us apart. Weareintheprocessofimprovinghowwedeliverthatserviceby introducing Customer Account Representatives (CARs). Each member will receive a CAR personally assigned to ensure you receive superior service. The CAR will also ensure that you, yourfieldrepresentativeandunderwriterareworkingtogethereffectively.Ofcourse,ifyourCARisawayfromtheoffice,theircoworkers will be able to step in to help.

The adversity faced by King Henry led to his imprisonment in the Tower of London. Your outlook is much brighter with my colleagues and the resources of Pharmacists Mutual on yourside.Westandreadytoserveyou.

Cordially yours,

5

In 1909 Pharmacists Mutual (Druggists Mutual originally) was chartered by a small group of leading Iowa pharmacist store owners. A special company founded to provide affordable property insurance and fair claims settlements. Today, Pharmacists Mutual is a nationally recognized leader specializing ininsuranceproductsandfinancialservicestopharmacists, pharmacies, dentists, and other health care businesses.

Inacareerspanningfiftyyears,oneexperiencesverygood years and the not so good ones…the cyclical ups and downs of growing a company to become an industry leader. The challenge of the insurance business brings together many risk factors and at least in the short term, yearly results are unpredictable. Perhaps this is no different from the challenges and experiences you face yearly in your business or practice.

In the business of insurance there are years when loss severity and loss frequency or claim numbers are high and investment returns are poor. Business is growing very slowly, if at all. Then, of course, there are years when just the opposite occurs and losses are below

the norm, the investment portfolio return is fantastic and the business is growing rapidly. Yes, a really unpredictable business!

In the early 1930s when the company was very small,afiredestroyedthedowntownareaofanIowacommunity and four Pharmacists Mutual insured pharmacies. For many years this stood as the worst loss situation the company had experienced in its young history. Also, poor economic conditions during the great depression forced the company to discontinue operations in several states. In recent years the company has experienced the unpredictable with the occasional large property or catastrophe loss along with very serious and large liability and workers compensation losses. These losses can involve multiple claims and millions of dollars in claim payments…claims thatmayworsenovertimewithfinaloutcomesdifficultto manage and quantify.

Conversely, the company has been blessed with very good years, expanding into new states, adding new customersandgrowingsteadilywithstrongprofitsand dividend payments to policyholders. This has

‘‘

‘‘Logic will get your from A to B. Imagination will take you everywhere.

—Albert Einstein

In a career spanning fifty years, one experiences very good years and the not so good ones…the cyclical ups and downs of growing a company to become an industry leader. The challenge of the insurance business brings together many risk factors and at least in the short term, yearly results are unpredictable.

Kirk Hayes Chairman

included the founding and growth of a life insurance subsidiary (The Pharmacists Life), providing new quality assurance and risk management programs, enhanced product lines and expansion of its subsidiary agency (Pro Advantage Services) to include health, bonds and other specialty coverages.

Through adversity we become stronger as a company. There is much hesitancy and gloomy talk in the business community today, but there is none at Pharmacists Mutual. True to core values ofcustomerserviceandqualityproductsinahighlyefficientorganization and environment, we are looking for those new opportunities.Weareoptimisticaboutthefuture,foritisabout thefuture…thenextdecadeandbeyond!Wewillbeprepared for hard times, here to serve you and ready for tomorrow!

Withregards,

Randall S. Myers, R.Ph. Ohio

Surviving the premature birth ofourfirstchild.

William A. Stuart, R.Ph. California

Opening a new pharmacy in another state.

Susan L. Sutter, R.Ph. Wisconsin

Having three children in 3.5 years – also my greatest joy.

Donnie R. Calhoun, R.Ph.

Alabama

Becomingthefirstpersoninourentirefamilyto attend college.

Edward J. Yorty, FCAS, MAAA Iowa

Onboarding as CEO at PMC to perpetuate, enhance and honor the achievements of everyone who has come before me.

Holly Whitcomb Henry, R.Ph. Washington

Relationships – developing, nurturing and cherishing them with family, friends and colleagues; through thick and thin, and over many years.

Board of DirectorsW e a s k e d . T h e y a n s w e r e d .WeaskedourBoardofDirectorsthisquestion,“What’sthebiggestchallengeyouhavefaced in your life?” The answers they provided are diverse, but one thing they all had in common: theydidn’tgiveupinthefaceofadversity.Andthat’salessonfromwhichwecanalllearn.

7

F. Michael James, R.Ph.

North Carolina:

Going through a two-week survival school during flight training while in the Air Force.

Kirk M. Hayes, CPCU

Iowa

ProvidingclassifiedUSAFintelligencebriefingsforHeadquarter’sCommanding General.

Jonathan C. Grether, MSIM, CPCU

Iowa

Completingmymaster’sdegreeatage50.

Kelly S. Selby, R.Ph.

Texas

Achieving PCAB sterile and nonsterile accreditation for my compounding pharmacy.

Steven T. Simenson, R.Ph.

Minnesota

Sustaining and growing our community pharmacy, as well as being elected President of APhA.

Richard B. Moon, R.Ph., PharmD

New York

Keeping my family healthy, happy and safe.

Matthew C. Osterhaus, R.Ph.

Iowa

Balancing my duties and responsibilities as a pharmacist, an active community leader and a dad.

Board of Directors

9

ASSETS

Cash & Short-Term Investments To meet current losses and expenses.

$ 4,768,796

Bonds Amortized value of federal, municipal and corporate bonds.

150,077,544

Stocks Thecurrentvalueofunaffiliatedequityinvestments.

19,590,978

Subsidiaries The value of The Pharmacists Life, Pro Advantage Services and Pharmacy Marketing Group.

8,925,914

Real Estate Depreciated cost of owned land and buildings.

5,790,792

Other Investments Accrued interest and book value of leases, partnerships and loans.

1,700,061

Premiums Receivable Current unpaid accounts under 90 days old.

27,830,513

Deferred Taxes Futuretaxbenefitduetobook/taxdifferences.

4,615,000

Other Resources Reinsurance recoverables and other admitted assets.

5,416,350

TOTAL ASSETS Inaddition,thecompanyownsfurnitureandsoftwarevaluedat$776,191notincludedinTotalAssets.

$ 228,715,948

Financial HighlightsAS OF DECEMBER 31, 2012

10

*Financials are unaudited

LIABILITIES & POLICYOWNERS SURPLUSEstimate for Losses & AdjustingEstimated amount to be paid on losses and adjusting in process of settlement.

$ 93,115,444

Unearned Premiums The unearned portion of the premium recorded by the company carried to policy expiration.

43,819,966

Borrowed Money From Federal Home Loan Bank.

500,000

Accrued Expenses & Taxes For various taxes, bills payable and other liabilities.

12,865,333

Dividends Payable For 2012 dividends to be paid in 2013.

200,000

TOTAL LIABILITIES $ 150,500,743

Policyowners SurplusThis is an additional guarantee the company can meet contingencies and its obligation to insureds.

78,215,205

TOTAL LIABILITIES & POLICYOWNERS SURPLUS $ 228,715,948

ANNUAL COMPARISON 2011 2012Direct premiums written $ 99,733,529 $ 101,424,556

Assets 211,919,002 228,715,948

Policyowners surplus 67,983,480 78,215,205

INCOME STATEMENT & CHANGE IN SURPLUS 2011 2012Net premiums earned $ 80,065,202 $ 82,301,390

Loss & adjusting incurred 63,629,621 57,192,960

Underwriting expenses 24,585,147 24,505,877

Dividends to policyowners 863,033 198,393

UNDERWRITING INCOME AFTER DIVIDENDS ($9,012,599) $ 404,160

Investment income 5,533,525 5,413,712

Realized capital gains (losses) 377,192 (232,751)

Other income (expense) 312,864 255,154

Federal income tax (716,801) 950,977

NET INCOME (LOSS) ($ 2,072,217) $ 4,889,298

Unrealized capital gains (losses) (864,302) 2,157,834

Other changes to surplus (163,002) 3,184,593

CHANGE IN SURPLUS ($ 3,099,521) $ 10,231,725

11

2012WHEREWE’VEBEENANDWHEREWE’REGOING–ANOVERVIEW

A Closer Look $101,424,556

$100,954,801

$99,733,529

$97,961,216

POLICIES IN FORCE POLICYOWNERSSURPLUS

2009 2010 2011 2012 2009 2010 2011 2012

78,215,205

69,983,480

71,083,001

65,996,637

86,615

86,082

84,880

83,318

12

TOTAL ASSETS

DIRECTWRITTENPREMIUM

2009

2010

2011

2012

$101,424,556

$100,954,801

$99,733,529

$97,961,216

2009 2010 2011 2012

$101,424,556

$100,954,801

$99,733,529

$97,961,216

$

228,715,948

211,919,002206,798,165

197,167,512

‘‘

—Lou Holtz‘‘92%

Overall Customer Satisfaction

91%

Customer Retention to Date

CLAIMS SATISFACTION SCORE

4.5VeryDissatisfied

VerySatisfied

How you respond to challenge in the second half will determine what you become after the game.

13

1912

Assets:

$3,602Surplus:

$3,602DirectWrittenPremium:

$8,665Direct Losses Paid:

$4,399Salaries:

$1,452

1937

Assets:

$333,320Surplus:

$228,463DirectWrittenPremium:

$308,037Direct Losses Paid:

$76,384Salaries:

$18,234

A Look Back 1912-2012Sources: techcrunch.com, thepeoplehistory.com

A lot has happened

in the last 100 years.

As we continue in

our second century

of doing business,

we reflect on how

things were 100, 75,

50 and 25 years ago

when compared

to today.

14

1987

1962 2012

Assets:

$22,668,006Surplus:

$7,183,376DirectWrittenPremium:

$13,540,704Direct Losses Paid:

$5,106,802Salaries:

$1,615,709

Assets:

$1,442,925Surplus:

$989,099DirectWrittenPremium:

$678,253Direct Losses Paid:

$154,224Salaries:

$125,928

Assets:

$228,715,948Surplus:

$78,215,205DirectWrittenPremium:

$101,424,556Direct Losses Paid:

$54,414,343Salaries:

$12,902,842

In 1987:On Monday, October 19th the

U.S. stock market crashed with a 508 point drop, or 22.6%

The average newly-built-home pricewas$92,000

The cost of a dozen eggs was 65 cents

One gallon of gas cost 89 cents

In 2012:40% of people socialized more

online than face-to-face

The average newly-built-home pricewas$286,300

Thecostofadozeneggswas$1.77

Onegallonofgascost$3.60

In 1962:America was shocked at the passing of Marilyn Monroe

The average newly-built-home pricewas$44,040

The cost of a dozen eggs was 32 cents

One gallon of gas cost 28 cents

15

AL Chuck Neyland Ronnie Wright

AK Anne Kelley

AR Joe Baker

AZ Ryan Goodrich

CA Christine Brough Mike Jarvis Lisa McGinty ISU Vansa*

Van Beurden Insurance Services**

CO Tom Quesenbery Jim Sajbel, Jr.

CT AI Martinelli

DC David DeFelice

DE David DeFelice

GA Hutton Madden

ID Kevin Dotseth

IL Dan Blank Clark Thompson

IN Brandon Allen Casey Delks

IA Kim Dornbier Karla Krogman

KS Tim Riddle Milt Siegfried

KY Tracy Curtis Bruce Lafferre

LA Matt Bourgeois

ME Kevin Kollasch

MA AI Martinelli

MD David DeFelice

MI Bill Given Steve Hephner Jerry Laridaen II

MN Tom Nilsson Sheila Welle LeeAnn Sonnenschein

MS Chuck Neyland Ronnie Wright

MO Ryan Ludwig Scott Naeger

MT Kevin Dotseth

NE Melissa McKean

NH Kevin Kollasch

NJ David DeFelice

NY Kevin Kollasch

NV Ryan Goodrich

NM Jim Sajbel, Jr.

NC Bruce Bauer Nick Garrett

ND Sheila Welle

OH Bruce Wyke

OK Terry Potter Milt Siegfried

OR Kevin Dotseth Anne Kelley

PA Ed Costello Mark Kuhns Cliff Lange

RI AI Martinelli

SC Robby Peed

SD LeeAnn Sonnenschein

TN Tracy Curtis Chris Meulenberg

TX Grant Guthrie Mike Gwin Tim James Mark Knutson Shanna Richardson

UT Kim Dornbier

VA Stephen Peters

VT Kevin Kollasch

WA Kevin Dotseth Anne Kelley

WI Brad Damon Jerry Laridaen II

WV David DeFelice

WY Kevin Dotseth

TERRITORIES SERVED|REPRESENTATIVES

*ISUVansaisanindependentagency– WayneBrownstein,agent.

**VanBeurdenisanindependentagency fordentalservices–ErikVanBeurden,CEO.

16

COVERAGES AVAILABLE

RISK MANAGEMENT SERVICES

Forming enduring relationships with our customers means more than providing insurance solutions. It also means providing the resources and expertise they need to keep costs low by preventing losses from occurring. Risk management services are always just a call, email or tweet away.

Michael Warren, Risk Manager Jen Aultman, Risk Management Consultant

Professional Liability

Businessowners

Workers Compensation

Commercial Auto

Umbrella & Excess Liability

Home & Auto

Life & Annuities

Health & Disability

Long Term Care

Pharmacists Mutual Insurance Company and its subsidiaries provide a full range of business, professional, personal and specialty insurance coverages and financial products, including:

The only use of an obstacle is to be overcome. All that an obstacle does with brave men is, not to frighten, but challenge them.

—WoodrowWilson‘‘

‘‘Not licensed to sell all products in all states.

17

Edward J. Yorty, FCAS, MAAA President&ChiefExecutiveOfficer

Jonathan C. Grether, MSIM, CPCU, CIC ChiefOperatingOfficer

Kenneth M. Andrews Sr.VicePresident,NorthRegion

Kevin C. Banwart, CPA, AIAF Treasurer&ChiefFinancialOfficer

Richard M. Berke, PMP, FLMI, CMA Sr.VicePresident,SouthRegion

Thomas E. Claude, CIC Secretary&Sr.VicePresident, Underwriting & Product Development

Victor C. Garman, MSM, SCLA Sr.VicePresident,Claims

Thomas P. Goodrich, CPCU, CIC Sr.VicePresident,CorporateSales & Marketing

Steven M. Hoskins, CLU Sr.VicePresident,AgencyOperations

Don R. McGuire, Jr., R.Ph., J.D. GeneralCounsel&Sr.VicePresident, Compliance & Risk Management

Shirley A. Pierson, CISR, AU Sr.VicePresident,WestRegion

William H. Wiebelhaus ChiefInformationOfficer

Shelly A. Brown, AIS VicePresident,Marketing

Robert H. Christian, J.D., MAHRM VicePresident,HumanResources

Matthew J. Even, CIC, CRM VicePresident,CorporateAccounts

Julie L. Murphy VicePresident,ITSecurity

Mary J. Paulsen, CPA, AIAF VicePresident&Controller

Derrick D. Shannon, FCAS, MAAA, CPCU Chief Actuary

Alison A. VanOtterloo, CPA, CIA VicePresident,InternalAudit

Officers

Picturedabove(lefttoright):Backrow:JonGrether,BillWiebelhaus,RichBerke,EdYorty,DerrickShannon.Middlerow:KenAndrews,DonMcGuire,ShellyBrown,MaryPaulsen,VicGarman,ShirleyPierson,MattEven.Frontrow:JulieMurphy,TomClaude,BobChristian,SteveHoskins,TomGoodrich,KevinBanwart,AlisonVanOtterloo

800.247.5930 |www.phmic.com|

— Robert Louis Stevenson

‘‘ ‘‘We must accept life for what it actually is – a challenge to our quality without which we should never know of what stuff we are made, or grow to our full stature.

PMC 1107 AR (03/13)