Alliance Mutual Insurance Company | North Carolina

PRESIDENT'S MESSAGE
ALLIANCE MUTUAL INSURANCE COMPANY
ANNUAL POLICYHOLDER MEETING
MARCH 25, 2005

2004 was a year of contrasts for Alliance Mutual. On one hand, Alliance Mutual made great
strides on several strategic issues identified as important to the company's future financial
health and growth, achieved a very attractive earned premium loss ratio, successfully
restructured its financial and operational organization to comply with the results of recently
completed financial and market conduct audits, and achieved an after tax profit for the year. On
the other hand, the changes required to accomplish these positive results were stressful for both
employees and agents and the expenses and reserve strengthening associated with these
accomplishments outweighed the favorable underwriting results to generate an underwriting
loss for the year.

Alliance Mutual ended calendar year 2004 with a 102.8% combined earned premium ratio,
which resulted in a net income after investment income and taxes of $271,349.00 (a 158.3%
increase from 2003). This combined earned premium ratio was generated by a 46.7% loss
ratio, an 11.4% loss adjustment expense ratio, and a 44.7% other underwriting expense ratio.
Although this combined ratio resulted in a net underwriting loss of $225,411.00, this
underwriting loss was offset by a net investment income of $331,367.00, a service charge
income of $46,971.00, and a miscellaneous income of $258,363.00. Several significant events
and decisions impacted these financial and operational results for 2004.

First, Alliance Mutual began a major project in November 2003 to replace the company's
outdated DOS based policy production, billing, claims, and accounting automation systems,
which were originally installed in 1990, and to install automated communication, data
warehouse, workflow, and disaster recovery systems. Although these projects were not
finalized during 2004, the company successfully installed several of the projects' components.
These components included an automated accounting system, an automated payment
disbursement system, an automated bank reconciliation system, an automated telephone
system, an automated data warehouse and underwriting workflow system, and an automated
backup power system.

Alliance Mutual will complete the installation of these necessary projects during the fourth
quarter of 2005. When completed and fully implemented, these projects will greatly enhance
Alliance Mutual's internal productivity and premium production and will ultimately reduce
underwriting costs. The significant investment of capital to acquire the new hardware and
software programs along with the costs to install and implement these new systems will impact
Alliance Mutual's 2005 underwriting expenses and surplus levels, but to a lesser degree than
the 2004 impact.

Second, property loss severity during 2004 was above normal compared to Alliance Mutual's
historic levels. Over the prior ten years Alliance Mutual has been fortunate to experience
relatively few large property or casualty losses, with a large loss being defined as a loss greater
than $100,000. Unfortunately, during the first half of 2004 Alliance Mutual suffered slightly more
than three times this ten year average number of large property losses, which greatly affected
the overall 2004 loss ratio.

Alliance Mutual took several steps during 2004 to amend property underwriting criteria to
address the hazards and characteristics that often lead to deteriorating underwriting
performance. Since many of these undesirable hazards and risk characteristics have been
identified throughout the property book of business, it will take time to see the full effect of these
underwriting changes. However, the tightening of underwriting guidelines and risk selection
criteria will ultimately have the desired effect of returning loss trends to or below historical levels.

Third, personal automobile loss experience deteriorated significantly during 2004. Throughout
2004 Alliance Mutual saw the tread that began during 2003 continue with personal auto liability
and physical damage loss frequency and severity increasing dramatically. Alliance Mutual did
introduce new underwriting criteria in mid-2004; however, these new underwriting guidelines
were unable to adequately address the overall unfavorable risk characteristics found throughout
the personal auto book of business.

In addition to the underwriting criteria introduced during 2004, Alliance Mutual began a
reunderwriting effort in late 2004 to review and evaluate underwriting acceptability for the entire
personal auto book of business. This reunderwriting effort will continue throughout 2005 with its
goal to bring personal auto loss ratios back to historical levels by 2006.

Fourth, Alliance Mutual restructured its operational structure to segment operational activities
from professional activities. This restructuring was initiated to prepare for the technological
enhancements that will result from the introduction of new automation systems and to maximize
the ability of Alliance Mutual's professional staff to concentrate on their respective areas of
responsibility. In conjunction with this restructuring, Alliance Mutual began a personnel
recruiting effort during 2004 designed to improve the professional and technical knowledge of its
underwriting staff.

These recruiting efforts have been very successful with Alliance Mutual attracting underwriting
candidates with proven track records in their respective disciplines. The addition of these
professional underwriters will allow Alliance Mutual to achieve its immediate goal of improving
underwriting results, but it will also provide the knowledge and expertise Alliance Mutual
requires to implement its strategic plan to maintain below industry average loss ratios and to
reduce underwriting expenses.

Finally, Alliance Mutual conducted a comprehensive actuarial review of its loss and loss
adjustment expense reserves in light of the deteriorating loss results mentioned above. The
result of this actuarial review was a strengthening in Alliance Mutual's incurred but not reported
loss and loss adjustment expense reserves by $190,000 to account for the increase costs to
adjust future losses. This reserve strengthening was the first such change that Alliance Mutual
has had to make in several years. With the underwriting steps being taken to address the
claims issues mentioned above, further such reserve strengthening should not be required
during 2005.

The management and staff of Alliance Mutual are keenly aware of the responsibility they hold to
protect the interests of the owners of the company, our policyholders. As I look towards 2005
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.).

It is Alliance Mutual’s goal for 2005 to continue to move the company forward and to position
Alliance Mutual to become a stronger partner for its agents and policyholders. As you consider
a business relationship with Alliance Mutual, please remember that at Alliance Mutual we are
Planning Today for Tomorrow’s Insurance.