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MARKET CONDUCT

EXAMINATION REPORT OF

WESTERN AGRICULTURAL INSURANCE COMPANY

WEST DES MOINES,

AS OF DECEMBER 31, 2012 West Des Moines, Iowa August 6, 2013

HONORABLE NICK GERHART Commissioner of Insurance State of Iowa Des Moines, Iowa

Commissioner:

In accordance with your authorization and pursuant to Iowa statutory provisions, a market conduct examination has been made of the records, business and marketing practices of

WESTERN AGRICULTURAL INSURANCE COMPANY

WEST DES MOINES, IOWA

AS OF DECEMBER 31, 2012 at its Home Office, 5400 University Avenue, West Des Moines, Iowa.

INTRODUCTION

This market conduct examination report, containing applicable comments, explanations and findings, is presented herein. In general, this is a report by exception. Comments regarding practices and procedures reviewed during the examination have been omitted from the report if no improprieties were found.

SCOPE OF EXAMINATION

Western Agricultural Insurance Company, hereinafter referred to as the “Company”, was last examined as of December 31, 2007. This market conduct examination covers the intervening period from January 1, 2008 to the close of business on December 31, 2012 and was conducted by examiners for the Iowa Insurance Division. A general review and survey was made of the Company’s marketing operations and treatment of policyholders for statutory compliance during the stated period. Other supporting evidences have been examined and evaluated to the extent deemed necessary. The Company’s parent, Farm Bureau Property & Casualty Insurance Company, formerly known as Farm Bureau Mutual Insurance Company, was examined concurrently with this examination.

HISTORY

The Company was organized and incorporated as a stock casualty insurance company under the laws of the State of on October 15, 1971.

The Company became a part of an insurance holding company system in 1996 upon consolidation of Farm Bureau Life Insurance Company (IA) and Western Farm Bureau Life Insurance Company (CO) under FBL Financial Group, Inc.

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At a special meeting held August 25, 2005, the stockholders approved the recommendation to change the domiciled state from Arizona to Iowa. The Articles of Incorporation were amended to reflect the re-domestication and were approved by the Iowa Insurance Commissioner on December 13, 2005. Effective December 28, 2005, the Company re-organized under Chapters 490 and 515 of the Code of Iowa. At December 31, 2012, Farm Bureau Property & Casualty Insurance Company holds 1,403,200 or 99.9 percent of the total outstanding common shares with the remaining shares held by other Farm Bureau entities.

INSURANCE HOLDING COMPANY SYSTEM

The Company is a member of an Insurance Holding Company System as defined by Chapter 521A, Code of Iowa. Effective January 1, 2010, Farm Bureau Mutual Insurance Company reorganized into a stock property casualty insurance company and was renamed Farm Bureau Property & Casualty Insurance Company. At the same time, Farm Bureau Mutual Holding Company (MHC), a mutual holding company, and Farm Bureau Multi-State Services, Inc., an intermediate holding company, was formed. MHC owns all of the shares of Farm Bureau Multi-State Services, Inc., which owns all of the shares of Farm Bureau Property & Casualty Insurance Company. MHC is owned by the policyholders of the converted property casualty insurance company. The Company is controlled by the Iowa Farm Bureau Federation by virtue of the fact that the Company is managed by FBL Financial Group, Inc. under a management agreement. The Iowa Farm Bureau Federation owns 72% of the voting stock of FBL Financial Group, Inc., having the ability to control the Company.

The Company owns a non-controlling interest in FBL Financial Group, Inc. The Company owns Class A and Class B shares with a total carrying value of $2.5 million at December 31, 2012.

Partial Organizational Chart

Farm Bureau Mutual Holding Company (A)

Farm Bureau Multi- State Services, Inc. (A)

Farm Bureau Property 22 Other Farm Public Iowa Farm & Casualty Insurance Bureau Stockholders Bureau Company (A) Organizations Federation

Western Agricultural FBL Financial Group, Inc. Insurance Company (A) Farm Bureau Life Insurance Company

FBL Insurance Brokerage (A)

(A) Managed by FBL Financial Group, Inc.

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RELATED PARTY SERVICE AGREEMENTS

Management Service Agreement

The Company participates in a management agreement with FBL Financial Group, Inc., under which FBL Financial Group, Inc. provides general business, administration, and management services to the Company. In addition, Farm Bureau Management Corporation, a wholly-owned subsidiary of the Iowa Farm Bureau Federation, provides certain management services to the Company under a separate arrangement with FBL Financial Group, Inc.

The FBL Financial Group, Inc. (FBL) shall provide personnel competent to perform the management functions. In addition, FBL shall perform such other functions related to, but not limited to, the following: personnel management, risk management, data processing, regulation and licensing compliance, underwriting, claims processing, reinsurance services, legal services, actuarial services, policyholder relations, marketing, financial and accounting services.

Casualty Company Service Agreement with Farm Bureau Life

Under this agreement the Company shall provide to Farm Bureau Life Insurance Company, a wholly owned subsidiary of FBL Financial Group, Inc., certain services including, but not limited to, sales management, sales meetings, advertising and other sales promotions associated with supporting life sales. The Company received $0.6 million related to this agreement in 2012 that was used to reduce underwriting expenses.

CROP HAIL AND MULTIPLE PERIL CROP INSURANCE PROGRAM

Western Agriculture Insurance Company writes Multiple Peril Crop Insurance (and other crop related lines) through Rain & Hail, LLC (a Managing General Agent, MGA). WAIC cedes 100% of the business to ACE American Insurance Company, the SRA holder. The ACE American business is pooled, ceded to the FCIC and retro ceded to other reinsurers, including Farm Bureau Property & Casualty Insurance Company. For the annual statement year 2012, the MGA produced $169,374,214 of MPCI premium and $18,103,111 of crop hail premium or approximately 69% of total WAIC written premium.

TERRITORY AND PLAN OF OPERATION

The Company operates as an Iowa stock insurer to provide various types of property and casualty insurance coverage. The Company writes commercial agricultural (farmowners), commercial automobile and nonstandard automobile primarily in Midwest and Western states.

The Company is also a direct writer of multiple peril crop insurance (and other crop related lines) through Rain & Hail, LLC (MGA). The majority of this premium is written in , Iowa and with multiple peril crop premiums totaling $169 million in 2012.

Direct written premiums in 2012 totaled $272 million.

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The Company is authorized to write business in the following jurisdictions:

Alabama Michigan Arizona Arkansas Missouri Tennessee Colorado Texas Nebraska Illinois Nevada Virginia Indiana Iowa Kansas Ohio

COMPLAINT HANDLING

The Company has written processes and best practices for complaint handling procedures. Written complaints received by the Company are primarily administered by the Office of General Counsel. During the period of examination, the Company only recorded complaints filed with state insurance departments into a complaint log. Subsequently, in 2013, the Company began recording all complaints into a complaint log, bringing them into compliance with Iowa Administrative Code 191-15.13 (507B).

MARKETING AND SALES

The Company’s advertising materials are managed through a dedicated marketing group with compliance/legal review procedures in place. Western Agricultural Insurance Company utilizes various forms of marketing campaigns directed towards policyholders. In conjunction with Farm Bureau Financial Services, the Company maintains a website at www.fbfs.com.

POLICYHOLDER SERVICES

The Company maintains policyholder service centers located throughout the writing territory. Representatives are provided training and are subject to regular quality performance reviews. Registered policyholders may utilize online services for policy and billing information.

POLICY UNDERWRITING

The Company has not entered any new writing territories during the exam period. On a monthly basis management performs an in-depth underwriting analysis by state and by line of business. Policy pricing is determined through actuarial studies with a primarily automated rating function.

The Company’s signature policy is called ‘Farm Bureau Member’s Choice’ and is a bundled insurance policy with one deductible for all covered possessions damaged in a single occurrence. The Company also provides an ‘AgMax’ policy that covers larger, more complex farming operations.

A study of 32 policy files was conducted for a statutory compliance review of unfair trade practices. The sample included 16 files from Farm Bureau Property & Casualty Insurance Company and 16 files from Western Agriculture Insurance Company. The purpose of the study was to verify compliance with Iowa Codes, 507B, 522B.13, 515.125, 515.126, 515.129A, 515.129B, 515.129C and 515.133. The study also included a review of the Company’s use of insurance scores in the policy underwriting/rating process. The Company demonstrated that consumers were provided proper disclosures, the score used was timely, and the Company took affirmative action to notify the consumer of any adverse action taken as a result of the insurance score, in accordance with Iowa Code 515.103.

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CLAIM PRACTICES

The Company maintains written processes and best practices for the adjudication of claims. Loss adjusters are provided training and are subject to regular quality performance reviews. Registered policyholders may utilize online services for claim information.

A study of 107 claim files was conducted for a statutory compliance review of unfair trade practices. The purpose of the study was to verify compliance with Iowa Code 507B.4. With the exception of two payments, a time payment study was performed which demonstrated payments were made within 15 days sufficient information was received, in accordance with Iowa Administrative Code 191-15.41 and 15.42 (507B). Of the two exceptions, one payment was to a third party vendor that bills monthly and one payment was subject to an additional medical review.

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UNDERWRITING EXPERIENCE

Direct underwriting experience, as taken from data filed with the N.A.I.C. for each of the years, is as follows:

Classification 2008 2009 2010

Premiums earned $345,685,149 $ 326,973,605 $210,006,321

Incurred deductions Losses incurred $328,311,207 $ 193,080,668 $ 85,486,834 Defense and cost containment 421,117 1,339,757 662,450 Adjusting and other expenses 1,590,000 2,622,000 3,862,000 Commission and brokerage 5,412,361 7,370,641 8,548,947 Taxes, licenses and fees 1,221,551 1,208,555 1,262,043 Other acquisition expenses 13,140,000 28,119,000 9,298,000 General expenses incurred 2,149,000 2,403,000 2,639,000

Total deductions $352,245,236 $ 236,143,621 $ 111,759,274

Underwriting gain (loss) $ (6,560,087) $ 90,829,984 $ 98,247,047

Classification 2011 2012 Total

Premiums earned $281,153,716 $ 267,552,759 $1,431,371,550

Incurred deductions Losses incurred $249,049,128 $ 381,914,745 $1,237,842,582 Defense and cost containment 1,321,740 1,596,596 5,341,660 Adjusting and other expenses 5,248,000 6,030,000 19,352,000 Commission and brokerage 9,515,506 11,237,238 42,084,693 Taxes, licenses and fees 1,435,347 1,618,181 6,745,677 Other acquisition expenses 8,179,000 11,872,000 70,608,000 General expenses incurred 3,407,000 3,442,000 14,040,000

Total deductions $278,155,721 $ 417,710,760 $1,396,014,612

Underwrit ing gain (loss) $ 2,997,995 $(150,158,001) $ 35,356,938

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Expressed in the ratio of incurred deductions to premiums earned the percentages are:

2008 2009 2010 2011 2012 Average Incurred deductions Losses incurred 95.0% 59.1% 40.7% 88. 5% 142.7% 86.5% Defense and cost containment 0.1 0.4 0.3 0.5 0.6 0.4 Adjusting and other expenses 0.5 0.8 1.8 1.9 2.3 1.3 Commission and brokerage 1.6 2.2 4.1 3.4 4.2 2.9 Taxes, licenses and fees 0.3 0.4 0.6 0.5 0.6 0.5 Other acquisition expenses 3.8 8.6 4.4 2.9 4.4 4.9 General expenses incurred 0.6 0.7 1.3 1.2 1.3 1.0

Total deductions 101.9% 72.2% 53.2% 98.9% 156.1% 97.5%

Underwriting gain (loss) -1.9% 27.8% 46.8% 1.1% -56.1% 2.5%

DIRECT UNDERWRITING BY STATE

Five-Year Average Five-Year 2012 2012 Earned Operating Earned Operating State Premium Ratio Premium Ratio

Arizona $ 6,093,022 83.3% $ 8,613,584 96.7% Arkansas 197,996 21.7 Colorado 1,205,737 122.5 632,587 200.8 Idaho 67,325 108.1 12,743 101.6 Illinois 1,621,225 61.5 9,822 47.2 Indiana 5,618,489 78.1 Iowa 81,716,134 105.7 76,874,748 182.7 Kansas 95,717,400 93.8 100,603,694 154.6 Kentucky 3,104 68.1 Michigan 4,826,862 74.4 377 (10,211.8) Minnesota 16,873,913 83.0 17,231,679 80.7 Missouri 1,027,737 107.8 202,562 489.9 Montana 261,114 69.5 135,462 118.5 Nebraska 32,071,655 101.2 35,405,844 185.1 New Mexico 6,767,931 102.5 8,309,099 116.2 North Dakota 5,135,883 72.2 12 6,849,148.3 Ohio 1,644,830 117.5 Oklahoma 618,575 122.1 147,849 59.6 South Dakota 10,287,525 82.4 11,057,663 107.2 Tennessee 53,384 181.6 Texas 5,358,864 132.3 Utah 4,459,337 123.5 7,227,955 116.5 Virginia 793,446 94.0 328,682 55.6 Washington 420,405 382.1 Wisconsin 2,449,933 74.5 Wyoming 982,484 96.0 758,397 78.6

Total $286,274,310 97.5% $267,552,759 156.1%

For crop year 2012, MPCI had a loss ratio of 101.4% due to drought conditions in the states of Iowa, Kansas and Nebraska.

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CONCLUSION

Acknowledgment is hereby made of the cooperation and assistance extended by the officers and employees of the Company during this examination.

In addition to the undersigned, Iowa Insurance Division examiners Bob Wong, CFE, Alex Matovu and Randy Guzman participated in the examination and preparation of this report.

Respectfully submitted,

______VIRGINIA R. WEST, CFE Examiner-in-charge Insurance Division State of Iowa

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