Leadingthe way

2012 Annual Report

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Message fromthe President

To our Affiliated Members,

As I look back on 2012, I am enthusiastic about the many positive results we achieved amidst the challenges we faced. The fact remains Grinnell Mutual recorded mixed year-end operating results, but by working together with our membership, we have made several important strides to address our experience. I want to thank you, our business partners, for working with us through difficult decisions. The result will be a stronger farm mutual industry.

I also thank our tremendous employees who work hard every day to provide the best service possible to our customers.

(Continued on next page)

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In terms of our 2012 operating results, Grinnell Mutual saw nice increases in both written premium and policyholders’ surplus. In fact, we set the pace to become a half billion dollar company by the end of 2013. The corporate combined ratio finished the year at 107 percent. Our Direct and Crop Hail divisions recorded an underwriting profit. The Direct division registered one of its best years with a combined ratio of 93.6 percent. Our Reinsurance division, however, recorded a significant underwriting loss for the fifth year in a row.

As we move forward, our primary focus continues to be improving our experience for our reinsurance business. In 2012, we developed and put into place a multi-year plan to accomplish this goal, including rate increases and changes in exposure. I’m pleased to report progress has been made in a number of areas as our staff diligently works to turn around our farm mutual reinsurance experience. With all of these efforts, I am very optimistic that our results will improve over the next 12-24 months.

In many ways, 2012 was a year of unprecedented change at Grinnell Mutual. Not only was I appointed the eighth president and CEO of this great company, but I was joined by several new vice presidents and assistant vice presidents. Together, we undertook an extensive planning process.

By listening to our key stakeholders, we’ve set strategic goals for the next five to 10 years that align with our vision to be the primary reinsurer of farm mutuals and insurer in the rural marketplace. I’m thrilled about the initiatives that are being implemented as a result, including the new leadership development programs for our employees.

In the pages that follow, you will read more about how Grinnell Mutual is leading the way to mutual success and how we’re connecting with customers in existing ways, both online and face-to-face. With the strength of an A (Excellent) A.M. Best rating, Grinnell Mutual continues to provide stability and security to America’s heartland through its partnership with farm mutual companies and independent agents.

We look forward to continuing our work together with you throughout 2013.

Larry J. Jansen President & CEO

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Guidingour future

Our Corporate VisionGrinnell Mutual is and will continue to be the industry leader regarding the reinsuring of farm mutuals. We will provide Reinsurance and Direct programs in a profitable manner in order to assure our company’s long term viability.

Our Direct lines will support our member mutuals with products and programs our membership cannot provide or is not comfortable providing.

Grinnell Mutual is primarily an insurer of the rural marketplace as well as communities of populations up to 50,000. This market will be our primary focus.

It will be imperative our member farm mutuals and Grinnell Mutual develop products and systems that will meet the needs of our agency force in this marketplace.

Commercial programs will be developed that will attract the better business risks in these areas.

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Mission StatementThe mission of Grinnell Mutual Reinsurance Company is to provide quality reinsurance and insurance products and services in a profitable manner through a partnership with member mutuals and agents.

Management decisions are considered in light of their effect on the welfare of the membership.

Core Values1. Act with integrity,

2. Trust and respect our employees,

3. Value our relationships, and

4. Serve and protect our customers.

Corporate Objectives1. Protect our financial strength and security.

2. Conduct business in a profitable and efficient manner, while respecting the rights, dignity, and value of our employees.

3. Advise and support member mutuals, agents, and other customers.

4. Provide value to our customers, optimizing our use of financial, technological, and human resources. Expand to support small mutual companies in additional states.

5. Be a responsible corporate citizen and encourage responsible corporate citizenship on the part of our employees.

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Securingour Success

“In the past year and a half, we’ve had more change in Grinnell Mutual leadership with a new president, vice presidents, and assistant vice presidents than we’ve had in the last 20 years,” said Grinnell Mutual Board Chairman Dale Bartelt, who manages DMC Mutual Insurance Association in Mediapolis, Iowa.

“With the challenges of a changing marketplace, we are confident that Larry and the executive management will provide the leadership Grinnell Mutual needs and we are excited about the possibilities moving forward.”

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2012 Board of Directors Dale R. Bartelt, Chair DMC Mutual Insurance Assn. Mediapolis, Iowa

Tom B. Jones, First Vice Chair Black Hawk Mutual Insurance Assn. Hudson, Iowa

Thomas G. Knoll, Second Vice Chair Southwest Iowa Mutual Insurance Assn. Clarinda, Iowa

James D. Buch Benton Mutual Insurance Assn. Keystone, Iowa

Mark D. Knouse White Pigeon Mutual Insurance Assn. Wilton, Iowa

William J. Lampe Preston Mutual Insurance Assn. Preston, Iowa

Wilbur J. Maas Farmers Mutual Insurance Assn. Hull, Iowa

Wayne L. Roush West Side Mutual Insurance Assn. Palo, Iowa

Stephen J. Smith Western Cherokee Mutual Insurance Assn. Marcus, Iowa

Paul G. Stueven Fairmont Farmers Mutual Insurance Co. Fairmont, Minn.

Susan K. Taggart Remington Farmers Mutual Insurance Co. Remington, Ind.

Steven L. Underwood United Mutual Insurance Co. Washington, Mo.

2012 Corporate Officers Larry J. Jansen, CPCU President and Chief Executive Officer

Verne L. Cadwell Vice President, Crop Insurance

Dennis G. Day, CPCU, ARe, JD Senior Vice President, Corporate Services; Secretary and General Counsel

Kurt E. Eaves, CPCU, ARM Vice President, Direct Underwriting and Production

Hutch A. Kracht, CPCU, AIAF Controller

Dennis H. Mehmen Vice President, Business Information Services and Chief Information Officer

Jeffrey R. Menary, MBL, CPCU Vice President, Reinsurance

Kimberly I. Pickett, AAM, CPS Assistant Secretary

Phyllis A. Steffen, CPCU Vice President, Direct Claims

David M. Wingert, CPCU, CPA Vice President, Finance; Treasurer & Chief Financial Officer

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MutualSuccess

The year 2012 entered on the heels of several years of adverse weather patterns in the Midwest that had taken their toll on the insurance industry.

In partnership with member mutuals and its agency force, Grinnell Mutual led the way in 2012 to improve operating results of past years and to set the pace to be a leader in the rural insurance marketplace.

At the direction of new corporate leadership, Grinnell Mutual developed strategic goals for the future, found new ways to connect with customers, and celebrated a culture of excellence fostered by its employees.

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New leadership appointedIn February, Larry Jansen was named the eighth President and CEO in Grinnell Mutual’s history. For the past 10 years, Jansen served as the senior vice president of Direct Underwriting/Production. During his 33-year career at Grinnell Mutual, Jansen served in a variety of roles, including personal lines underwriting manager, regional underwriting manager, and regional vice president. He is a past president of the Mutual Insurance Association of Iowa, as well as a former trustee of the Iowa Automobile Insurance Plan and former chairman of the Iowa Fair Plan.

In the preceding months and those that followed, new executive leadership was also named to three of Grinnell Mutual’s business units. Verne Cadwell was promoted to Vice President of Crop Hail, Jeff Menary was named Vice President of Reinsurance, and Kurt Eaves became Vice President of Direct Underwriting/Production. Several supporting leaders were also appointed in 2012. Adam Smith was named Assistant Vice President of Reinsurance. In the Direct division, Steve Scherf was named Assistant Vice President of Commercial Lines Underwriting, Todd Millburn replaced Scherf as a Director of Commercial Lines Underwriting, and Bill Gallagher assumed a new position as Direct Marketing Director. Scott Sharp was also named Assistant Vice President of Commercial Claims.

“In the past year and a half, we’ve had more change in Grinnell Mutual leadership with a new president, vice presidents, and assistant vice presidents than we’ve had in the last 20 years,” said Grinnell Mutual Board Chairman Dale Bartelt, who manages DMC Mutual Insurance Association in Mediapolis, Iowa. “With the challenges of a changing marketplace, we are confident that Larry and the executive management team will provide the leadership Grinnell Mutual needs and we are excited about the possibilities moving forward.”

Developing strategic goalsUnder this new leadership, Grinnell Mutual focused on improving the experience of its assumed book of business in the short-term as well as setting strategic goals to guide the company for the next five to 10 years. Much of 2012 was dedicated to gathering feedback from key stakeholders, including mutual managers, agent advisory groups, members of the President’s Club and the Large Farm committee as well as employees and the Grinnell Mutual Board of Directors. Ideas and input were collected on issues related to growth and financial stability, remaining relevant to stakeholders, leveraging technology, and leadership development.

Mapping a strategic plan

Setting the Course

Assist mutuals to expand

their writing of profitable

business.

Prepare for mutual industry

consolidation.

Develop additional profitable

products with emphasis on ag business/ rural market.

Develop technology to be considered

the highest standard by customers.

Change the culture to

high employee engagement

and ownership.

Verne CadwellVice PresidentCrop Insurance

Jeff MenaryVice PresidentReinsurance

Kurt EavesVice President

Direct Underwriting

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“Insurance is a people business – it’s all about relationships. The benefit of fostering leadership is a more professional presence, better customer service, and better response time for our business partners and insureds,” said Kurt Eaves, who serves on the newly-formed leadership development team.

“I am excited about the opportunities we have before us and anticipate sharing planned initiatives in the upcoming year that are designed to strengthen our services to our business partners and their service to policyholders,” said Larry Jansen.

BuildingRelationships

(Continued from page 8)

“Our core mission is to provide reinsurance to farm mutuals. As we develop our strategic plan, it’s centered on our vision of reinsuring farm mutual companies and providing insurance to rural communities. We are going to focus on that marketplace,” said Jansen. “Meeting the needs of the future means you plan for them the best you can. We need to be proactive rather than reactive.”

Resulting strategic goals and objectives were incorporated into the company’s business plan for 2013. Some strategic initiatives were introduced as early as the fall of 2012. Among them was Grinnell Mutual’s new Center for Intentional Leadership, responsible for creating and delivering a series of leadership development programs for different employee groups throughout the organization.

Connecting with customers With the explosion of social networking in recent years and the increasing use of mobile devices, the ways in which people connect, build relationships, and communicate are changing. In 2012, Grinnell Mutual opened communication with customers online by launching a Facebook business page, www.facebook.com/myGrinnellMutual. The new page, along with the Grinnell Mutual Twitter account, promotes messages of safety and loss prevention, and company news, while focusing on the lifestyle of small Midwestern communities. Those messages not only engage customers, but they resonate with a growing group of agents and mutuals, some of whom share the company’s posts on their own Facebook pages – a practice that Grinnell Mutual encourages.

“The goal for our social media channels is to increase consumer exposure to Grinnell Mutual’s brand while increasing engagement with customers. It’s working. The social networking sites Facebook, Twitter, and LinkedIn present unprecedented opportunities to connect to customers,” said Director of Communications and Online Marketing Dawn Sly-Terpstra.

With the success of its new social networking channels, Grinnell Mutual made plans to develop a Front Porch community page on Facebook as a place for potential customers, policyholders, agents, and mutuals to join in conversations about farming, agriculture, and rural and small town living. The new Facebook page, www.facebook.com/GrinnellMutualFrontPorch, launched in January 2013 with a corresponding Twitter account to follow.

Also in 2012, system development was well underway to meet another online trend in the insurance industry – providing customers with online self-management access to their insurance policies. A new website, Manage My Account, will allow Grinnell Mutual and Grinnell Select customers to not only pay bills online but to access policy, billing, and claims information. The new site launched from grinnellmutual.com in early 2013.

32 percent of all Internet users are

using TwitterSource:

marketingland.com

Creating Connections

Active Facebook

users now total almost 900 million

Source: statisticbrain.com

77% of B2C companies and 43% of B2B companies aquire customers from Facebook

Source: statisticbrain.com

There were 175 million tweets sent from Twitter every

day in 2012Source:

Infographics Lab 23% of Facebook users check their account five or

more times a daySource: Socialnomics

Online marketing trends

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Behind Grinnell Mutual’s products and services are more than 700 dedicated, hard-working employees who take pride in where they work. For the second consecutive year, the Des Moines Register named Grinnell Mutual as one of Iowa’s Top Workplaces. The Register, in partnership with WorkplaceDyanmics, ranked Grinnell Mutual the 15th best large company to work for in the state. Iowa’s Top Workplaces were chosen based on survey responses of employees from 164 Iowa organizations with companies categorized by size.

“This designation shows that our employees think highly of our company and each other. We depend on them to serve our customers daily,” said Larry Jansen. “They are without a doubt our most valuable asset.”

Adding to its reputation as a top workplace, Grinnell Mutual extended new benefits to employees throughout 2012. These included a relaxed dress code and free ice cream sundaes on Fridays.

“I continue to be enthusiastic about our tremendous employee base at Grinnell Mutual. They work every day to make this a better company and also to give the best service possible to our customers,” said Jansen. “As I look ahead, I am excited about the opportunities we have before us. I have every confidence that by working together, we can make the changes that need to be made and successfully achieve our goals. It won’t happen overnight, but with some patience and belief in our partnership, I know we will succeed.”

Award WinningWorkplace

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(Continued from page 10)

“Consumers want to maintain their own accounts such as looking at a policy, printing an ID card and paying a bill without calling an agent or waiting for it in the mail. It’s important for us to keep pace with the self-service trends initiated by our competitors. No matter how big or small we are we have to meet the consumer expectations established by the industry,” said Vice President of Business Information Services and CIO Dennis Mehmen.

Working together with business partnersWhile Grinnell Mutual sought new ways to connect with policyholders online, connecting face-to-face with business partners continued to be a priority in 2012. In May regional marketing managers were divided into the Reinsurance and Direct Underwriting/Production divisions to provide further specialized assistance to mutual members and agencies.

“Our direct lines marketing personnel are in place to collaborate with our agencies,” said Gallagher. “In addition to providing information about new products and company news, we are also focusing on providing training to agencies on Grinnell Mutual’s online quoting systems and the agent secured site.”

In the Reinsurance division, specialization proved valuable as Grinnell Mutual began conducting operational reviews of the entire membership. The process of examining operations is increasing the regional marketing managers’ understanding of the membership and how they can better serve each company.

“Our Reinsurance regional marketing managers work with mutual insurance companies to help them run efficiently, improve profitability, and interface with their reinsurer,” said Smith. “This year the regional marketing managers, through the operational review process, are learning more about each of the unique companies they serve.”

“By specializing in serving mutual companies, our marketing managers are developing more expertise about both our members’ operations and our reinsurance programs. That helps them put together reinsurance programs that fit our members’ operations,” said Assistant Vice President of Reinsurance Rick Tjarks.

Serving Our Customers

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FinancialOverview

Grinnell Mutual Reinsurance Company saw challenging financial operating results in 2012, which continued the trend and volatility experienced over the last six years.

The U.S. property and casualty industry has sustained near-record catastrophe losses in recent years due to more frequent and severe thunderstorms, tornadoes, and other related weather events. In addition to the U.S. weather events, global reinsurers suffered catastrophic losses in 2011, including the 9.0 magnitude earthquake in Japan (the most expensive in world history from an insured loss perspective), flooding in Australia, and earthquakes in New Zealand.

As a result of these significant losses, the global reinsurance companies from which Grinnell Mutual purchases protection have increased their costs for our reinsurance coverage as well as priced the reinsurance to move us to retaining more of the exposures and losses.

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The results for 2008 were impacted by the Parkersburg, Iowa, tornado along with the investment downturn from the economic crisis; 2011 included losses from multiple catastrophic windstorms, hailstorms, and tornadoes in Iowa, Missouri, Minnesota, and Illinois; and while 2012 experienced no property catastrophe events, we were charged much higher costs for our reinsurance protection while having to retain and absorb more of our property losses. (Our Grinnell Mutual property mainframe reinsurance program did not have any recoveries in 2012.)

-$50,000

$0

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2007 2008 2009 2010 2011 2012

Earned Premium Losses and LAE Other Expenses Underwriting Gain (Loss)

Premium, Loss & Underwriting Results

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$0

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2007 2008 2009 2010 2011 2012

Net Income (Loss) Other Change in Surplus

Net Income & Change in Surplus

Examining our Results

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Focus onthe Future

We are focused on returning Grinnell Mutual to profitable operations so that the company has the capital to provide support to our Farm Mutual members and ultimately protect our policyholders. Strong capital levels are also important to maintain our A.M. Best rating of ‘A’ (Excellent). Like other insurance companies during the last 12 to 18 months, we have analyzed and implemented premium increases to better reflect the continued increasing insurance exposures and higher loss experience, assessed surcharges where necessary to better manage risks, and enhanced the process to better evaluate the underwriting and management processes to properly price insurance coverage.

Grinnell Mutual is committed to providing security to you and your policyholders. The results of the last several years have demonstrated that we need to closely manage our business and be sure it is appropriately priced and underwritten for the exposures we are all taking – policyholder, farm mutual company, Grinnell Mutual Reinsurance Company, and our global reinsurers – to make sure we are there to meet our commitments and to maintain a financially strong farm mutual industry.

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2012 ResultsPremiums earned increased 8.5% in 2012, primarily from increased rates to member mutuals along with continued expansion of business in Oklahoma. Premiums ceded to reinsurers reduced earned premiums by $70.2 million in 2012 compared to $66.3 million in 2011.

Loss and loss adjustment expenses increased slightly to 76.0% in 2012 from 75.5% in 2011. The continued high ratio was due to unfavorable weather impacting member mutual business along with significant fire losses.

The ceded reinsurance property retention levels were increased in 2012 resulting in no losses being ceded during the year compared to $152.7 million of recoveries in 2011. The corporate underwriting loss was $29.9 million in 2012 and $29.4 million in 2011.

Expenses increased 5.9%, mainly for commissions on higher direct and assumed premium and increased contractor salaries. These expense increases were partially offset by lower claim adjustment expenses from fewer large storms. The combined ratio improved slightly to 107% in 2012 from 108% in 2011.

Net investment gain was unchanged as a result of realized after-tax gains that increased $1.0 million in 2012 from portfolio allocation rebalancing that offset lower net investment income. Net investment income declined as a result of the current interest rate environment, which is causing yields on new investments available in the market to be less than those of investments maturing from the portfolio.

The overall increase in surplus of $14.5 million in 2012 was comprised of:

• unrealized investment gains on equity holdings of $5.4 million after-tax;• the cumulative effect of accounting change for deferred income taxes of $3.5 million;• the change in deferred income taxes of $3.8 million and the change in non-admitted assets of $2.9

million, both items primarily a result of increased deferred income tax assets with more of those tax assets able to be admitted;

• and a reduction in the additional liability for the pension plan of $1.0 million after-tax.

The surplus increase combined with the higher premium growth increased the capacity ratio to 117% in 2012 from 111% in 2011.

Financial Details

Premiuims Earned

8.5%

Reinsurance Premium

Costs

$3.9 million

Reinsurance Recoveries

$152.7 million

Surplus

$14.5 million

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Grinnell Mutual Reinsurance Company Year Ended December 31 2012 2011 (000s)Assets Bonds $ 532,936 $ 470,529 Stocks 63,619 61,400 Subsidiaries 35,259 34,142 Other investments 5 5 Real estate (occupied by Company) 4,369 4,188 Cash and short-term investments 42,988 46,140 Total investments 679,176 616,404 Accrued investment income 5,436 5,086 Premiums and agents’ balances receivable 69,994 66,160 Reinsurance balances 7,393 29,155 Current and deferred income tax 27,517 19,787 Data processing equipment 4,984 4,917 Other 1,484 1,428 Total assets $ 795,984 $ 742,937

Liabilities

Unpaid losses and loss adjustment expenses $ 257,437 $ 225,853 Unearned premiums 137,837 127,593 Accrued expenses and accounts payable 36,285 35,211 Reinsurance balances 3,411 5,872 Drafts outstanding 939 1,249 Additional liability for pension plan 7,912 9,527 Statutory reserve 1,168 1,169 Total liabilities 444,989 406,474Surplus 350,995 336,463 Total liabilities and surplus $ 795,984 $ 742,937

BalanceSheets

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Statements of Operations & Surplus

Grinnell Mutual Reinsurance Company Year Ended December 31 2012 2011 (000s)Underwriting Premiums earned $ 400,237 $ 368,903 Losses incurred (270,035) (243,407) Loss adjustment expenses incurred (33,994) (35,926) Underwriting and general expenses incurred (126,061) (119,005) Underwriting gain (loss) (29,853) (29,435)Investment Net investment income 23,700 24,584 Net realized gains 1,067 110 Net investment gains 24,767 24,694

Other 743 835 Income (loss) before tax (4,343) (3,906)

Federal income tax expense (benefit) (2,209) (5,029) Net income (loss) (2,134) 1,123Other surplus changes Net unrealized investment gains 5,427 437 Change in nonadmitted assets 2,937 28 Change in deferred income tax 3,768 (1,821) Change in additional liability for pension plan 1,049 (6,192) Cumulative effect of change in accounting 3,485 - Change in statutory reserve - 2 Total surplus changes 14,532 (6,423)Surplus at beginning of year 336,463 342,886 Surplus at end of year $ 350,995 $ 336,463

Expenses by classification Claim adjustment services $ 6,582 $ 10,308 Commissions 69,168 62,940 Advertising 2,640 2,496 Boards, bureaus, and associations 2,712 2,478 Salaries and payroll taxes 39,203 38,045 Employee relations and welfare 8,450 8,323 Travel 1,951 1,817 Equipment and depreciation 7,726 8,365 Postage, telephone, and express 2,484 2,237 Taxes, licenses, and fees 5,891 5,343 Outside services 5,059 4,912 Other 9,171 8,817 Total expenses $ 161,037 $ 156,081

Expenses by function Loss adjustment $ 33,994 $ 35,926 Underwriting and general 126,061 119,005 Investment 982 1,150 Total expenses $ 161,037 $ 156,081

The desire to reach for the sky runs deep in our human psyche. ~Cesar Pelli

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