Alliance Mutual Insurance Company | North Carolina

PRESIDENT'S MESSAGE
ALLIANCE MUTUAL INSURANCE COMPANY
ANNUAL POLICYHOLDER MEETING
MARCH 26, 2004

As I look back on 2003, it is easy to say that this has been a significant year in the history of Alliance Mutual. I am extremely pleased to state that Alliance Mutual did 'weather' the financial impact of Hurricane Isabel, and was able to post a small profit for 2003. I would like to thank our policyholders, agents, and employees for the assistance, patience, and commitment each demonstrated as Alliance Mutual dealt with this major storm event.

Alliance Mutual closed calendar year 2003 with a 100.6% combined earned premium ratio, which resulted in a net income after investment income and taxes of $171,398.00 (a 54.3% reduction from 2002). This combined earned premium ratio was generated by a 46.5% loss ratio, a 7.0% loss adjustment expense ratio, a 45.3% other underwriting expense ratio, and a 1.8% underwriting deduction for private passenger auto escrows. Although this combined ratio resulted in a net underwriting loss of $42,774.00, this underwriting loss was offset by a net investment income for the year of $267,250.00.

It is impossible to discuss Alliance Mutual's financial results for 2003 without mentioning the significant impact Hurricane Isabel had on those results. During the first eight months of the year, Alliance Mutual had generated an underwriting profit of $546,703, which was a 47.3% increase over the first eight months of 2002. Unfortunately in the months that followed Hurricane Isabel, this underwriting gain was ultimately reduced to the underwriting loss mentioned above. Of the $1.06 million increase in net losses which occurred in 2003, more than one-half of those net losses resulted from Hurricane Isabel claims.

In spite of the impact Hurricane Isabel had on Alliance Mutual's 2003 bottom line, there were some very positive results during the previous year. Some examples of these positive results are: an increase in net premium income of 14.0% ($921,249); an increase in net investment income of 49.5% ($88,441); a decrease in other underwriting expenses of 2.6%; and an increase in policyholder surplus of 285.3% ($174,048).

While the financial impact of Hurricane Isabel was a major part of Alliance Mutual's 2003 story, it was actually the third of three major events that occurred during 2003, which will have an ongoing impact on the future of Alliance Mutual. The first of these major events was the decision in April by the Board of Directors to seek new leadership for the company. In late June, I had the pleasure of joining Alliance Mutual as its President and Chief Executive Officer. I was excited by this opportunity and by the challenge presented to me by the Board of Directors to improve upon the financial success the company has experienced the last few years. With this change in leadership, Alliance Mutual will be entering a new chapter in its history, and will strive to rise above its current operational plateau. After my first few months with Alliance Mutual, I am confident that Alliance Mutual is taking the correct steps to meet its challenges and to take advantage of its opportunities.

The second of the three major events to occur in 2003 was the decision in August to initiate a study to review and evaluate the automation systems at Alliance Mutual. As a result of this study, Alliance Mutual developed a new strategic plan for its automation systems. This new strategic plan will change Alliance Mutual's internal operations and dramatically upgrade its automation capabilities. The goal of this strategic plan was to provide Alliance Mutual with the tools necessary to become a premier provider of property and casualty insurance products and services to its agents and policyholders. This upgrade to the automation systems began with the signing of a contract with ScientlS, LLC, in September 2003 to upgrade and manage Alliance Mutual's automation platforms and network infrastructure. This upgrade continued with the signing of a contract with AGO Insurance Software, Inc., in November 2003 to provide a web enable policy production, claims, and accounting system to replace Alliance Mutual's fourteen year old DOS based insurance automation system.

As I look towards 2004 and beyond, I see a bright and successful future for Alliance Mutual. As a small mutual insurance company, Alliance Mutual will continue to face many obstacles that some of our larger competitors do not have to address (ex. limited ability to raise outside capital, limited geographic spread of risks, etc.); however, Alliance Mutual will be able to capitalize on the many advantages it has over these larger companies (ex. adequate capitalization, a history of underwriting profitability, reserve adequacy, adequate pricing, etc.).

With these obstacles and advantages in mind, Alliance Mutual has developed action plans for 2004, which include some major changes and initiatives to be introduced during the year. It is Alliance Mutual's belief that these actions will continue to move the company forward and will position Alliance Mutual to become a stronger partner for its agents and policyholders. The following information provides brief overviews of some of the key action plans that Alliance Mutual will be implementing during 2004. As you review these items and consider a business relationship with Alliance Mutual, please remember that at Alliance Mutual we are Planning Today for Tomorrow's Insurance.

Effective January 1, 2004, Alliance Mutual initiated a budgetary process designed to enhance expense control management for the company. This budgetary process required management to improve the scope of its annual budget and to establish more effective monitoring and reporting criteria for items included within the budget. Combined with ongoing operational changes being made at Alliance Mutual, the use of this new budgetary process is expected to assist the company in ultimately reducing the earned premium underwriting expense ratio to 35%.

Alliance Mutual has recently signed contracts with ScientlS, LLC, and AGO Insurance Software, Inc., to upgrade its automation systems. During 2004 and 2005, Alliance Mutual will be upgrading its hardware and internal network systems and installing a customized policy issuance and production system, a billing system and a claims system. These upgrades will greatly improve Alliance Mutual's internal operations and its ability to provide effective service to agents and policyholders. In addition to the internal processing and workflow improvements offered by these automation enhancements, Alliance Mutual will be gaining the ability to provide internet access for its agents and policyholders. Through these Internet capabilities, Alliance Mutual will eventually be able to offer its agents and policyholders remote billing, claims and policy inquiry; rate quotation for all lines of business; application and endorsement submission; and point of sale underwriting. The first phase of this automati on project will be completed by November 2004, and additional enhancements will be added to the system as they are available.

Effective January 1, 2004, the operations of the underwriting department changed to improve underwriter access, improve underwriter technical knowledge, speed processing time, and eliminate redundant functions. As a result of this reorganization, Alliance Mutual will be positioned to be more responsive to the needs of its agents and policyholders. Throughout 2004 the underwriting staff will be involved in a training program designed to improve each individual's knowledge base and to assure achievement of the goals of the underwriting department reorganization.

After reviewing the current personal automobile underwriting criteria utilized by Alliance Mutual, a project was begun to amend the personal automobile underwriting criteria to better identify the type of risk meeting Alliance Mutual's rating structure and to encourage growth in the personal automobile line of business. This expansion of the personal auto program will provide Alliance Mutual with the ability to successfully increase its retained premium income.

For the first time, Alliance Mutual will offer a cooperative advertising program for all agents. The major focus of this cooperative advertising program is to promote the benefits of doing business with Alliance Mutual and the agents representing Alliance Mutual. This program will offer agents a dollar for dollar match on approved advertising costs up to a specified amount. This cooperative advertising program is a new effort by Alliance Mutual, and it is available to all agents directly contracted with Alliance Mutual. Alliance Mutual has developed a set of approved radio spots and printed advertising slicks for interested agents. In addition, Alliance Mutual has partnered with Entercom Communications in the Triad area to coordinate advertising activities for agents within the Entercom Communications marketing area.

Alliance Mutual has contracted with ChoicePoint Services, Inc., to utilize ChoicePoint's internet based underwriting reports to improve the underwriting decision process for agents and potential policyholders. When fully implemented, agents will be able to access a variety of underwriting reports at the point of sale, which will lower underwriting expenses and improve service to applicants and policyholders by reducing or avoiding adverse underwriting actions due to information not previously available to the agent.

For our current agents, Alliance Mutual plans to remain an open market within the Beach and Seacoast territories for a limited amount of property production with a windstorm and hail exclusion. Alliance Mutual has allocated a portion of its 2004 property capacity for its existing agents to place property risks located with the Beach or the Seacoast territories. Due to the fact that our coastal property capacity will be limited, Alliance Mutual will reserve the majority of our coastal property exposure growth for agents located within the Beach and Seacoast territories.

Beginning in 2003, Alliance Mutual introduced the first phase of our improved web site (www.AllianceMutual.com). When it is fully updated in late 2004, this improved web site will become Alliance Mutual's primary portal for the distribution of information to agents and policyholders. This portal will include an agent specific intranet which will allow agents to access company specific information and materials. The goal of this agent intranet site is to provide Alliance Mutual agents with an interface to Alliance Mutual's new policy production, accounting, and claims automation system and to allow agents to obtain time sensitive information ranging from manuals, rates and forms to specific policyholder data and reports.

After conducting an extensive review of the personal and farm umbrella program offered by Alliance Mutual, a decision was reached to discontinue this program after 2004. Although the umbrella product had been provided for the last few years, only a very small number of policies were in effect, and the costs associated with the umbrella program did not support the continuance of this individual product line. The decision to phase out and discontinue the personal and farm umbrella product took into account the very small number of umbrella policies written by Alliance Mutual, the costs associated with continuing this product line, and the ability of agents to access umbrella products from companies specializing in personal and farm umbrella products. Agents licensed within North Carolina, who require a personal umbrella policy for a client, may access a mono-line umbrella program by going to the Jackson Sumner & Associates web site (www.jsausa.com).

A complete underwriting review was performed on Alliance Mutual's major lines of business, which resulted in a decision by Alliance Mutual to amend the underwriting guidelines for several of these programs. The goal of these revisions will be to better identify the risk characteristics meeting Alliance Mutual's pricing structure for each line of business. During 2004, Alliance Mutual will be implementing these new underwriting guidelines with the intent that these new underwriting criteria will become the foundation for the point of sale automated underwriting system that will be a part of the new automation system currently under development by AGO Insurance Software, Inc..