Hitting the

HighNotes

2011 Annual Report

In many ways 2011 was a repeat of what we’ve experienced during the past several decades. We’re part of a conservative industry that’s slow to change; however, we’re seeing a complex mix of economic, regulatory, competitive, and technological factors working together to create change in the property and casualty insurance industry.

Many of my co-workers have heard me say, “Slow and steady wins the race.” While I believe in this mantra, I also know that if we fail to adapt to the changing landscape, our company will be left behind, and eventually we’ll become a nonfactor in our competitive industry.

The good news contained in our 2011 annual report is that we ARE changing. The 1,000-plus associates at West Bend have worked hard to overcome the challenges our economy, government, and industry have presented. They’ve also worked very hard to take advantage of the opportunities to move our company forward. I firmly believe we’ve positioned West Bend to grow our company profitably, to build on our excellent reputation, and to be an industry leader.

Like our independent agency partners, we compete every day to write business. At our recent agency meetings, I shared our strategy to compete and win in the marketplace. This winning strategy is a combination of what we’ve done for many years and the changes we’ve made and continue to make. So, what is our strategy?

First, we need to provide our independent agency partners with the products and services they need to compete. We’ve accomplished this by offering a premier personal lines package policy; Association Plus,® our personal lines affinity marketing program; a full compliment of diversified commercial lines products, including our small business platform, SMARTbusiness™; Argent, our monoline workers’ compensation division; the many programs offered by our specialty division, NSI; a strong surety program; and a service center with many capabilities.

Second, our agents must find it easy to do business with us. To help accomplish this goal, we offer many automated solutions to our agency partners that make it easier for them to place business with West Bend. In 2011, West Bend was again recognized as one of the top three companies in a nationwide ease-of-doing-business survey.

Finally, we place a high level of importance on our relationships with our agency partners. Our vision is to be the company of choice in every one of our agencies. The relationships we build, grow, and nurture help us realize our vision.

Most of the success you’ll read about in our annual report is the result of our focus on this strategy – to compete and win in the marketplace.

I thank our associates for their commitment to our Silver Lining® brand and for always doing the right thing. I thank our agents for their willingness to work with us and make us their company of choice. And, finally, I thank our policyholders – our owners – for the opportunity to provide them with peace of mind through sound insurance and exceptional service.

Kevin A. Steiner, CPCUPresident & Chief Executive Officer

2011: From the President & CEO

If the past five years of the property/casualty insurance market could be described as an opera, Madame Butterfly, or perhaps Phantom of the Opera, might come to mind. Sad. Depressing. Many low notes: Low growth. Low returns on investments. Low – and more likely no – profit.

But in 2011 things started looking up for West Bend. In fact, we hit many high notes. Direct written premium increased 7.8%. Every division contributed to this growth by writing a new-business record for our company of $110 million! And our 2011 combined ratio for our production divisions came in at 103.1%, better than most of our peers and certainly better than the industry. While we took some lumps due to record industry losses in the international assumed business (another low note), our total combined ratio of 106.8% was still very competitive in the industry.

How did we do it?

West Bend’s Commercial Lines division had an outstanding year in 2011 with a 6.1% increase in written premium! New written business exceeded expectations, coming in at 16% above goal.

Introduced in 2009, West Bend’s SMARTbusiness™ program focuses on “Main Street” type businesses and has become a popular package offering. Last year, West Bend’s Commercial Lines division exceeded its SMARTbusiness premium goal, including collateral lines, by 6%!

For the past several years, diversifying our book of business has been a focal point in Commercial Lines. We continued to successfully work toward that goal in 2011, ending the year with 32% of construction premium mix, down from the mid-40s just a few years ago.

Commercial Lines

Personal Lines

West Bend’s Personal Lines division grew .8% in 2011 and despite unprecedented weather losses industry-wide, ended the year with a 101% combined ratio. This is an incredible achievement given that weather-related homeowners’ losses alone totaled $36 million in 2011. To put that into perspective, from 1999 to 2009, West Bend experienced only one year in which homeowners’ losses exceeded that number for ALL perils combined.

Personal Lines also generated more than $1.3 million in new written premium through business transfer agreements.

Our level of pricing sophistication has increased by converting homeowner rating to a credit-based insurance score specifically designed to predict the likelihood of homeowner loss.

Automation has played a key role in the success of the Personal Lines division in 2011. We released automated solutions to Dwelling Fire and Umbrella rating on West Bend Connect, including “What If ?” capability.

The introduction of Violation Predictor has reduced our MVR expense by 30% and allows us to focus this expense on drivers who are more likely to incur violations. In the same vein, use of the renewal MVR product, EARS, was expanded into Illinois and Indiana, further reducing our MVR expense.

Argent®

Argent may be the new kid on the block, but we’re generating business like seasoned professionals. Argent premium increased by 275% in 2011, our first full year of business!

As a monoline writer of Workers’ Compensation insurance, Argent specializes in delivering very high levels of loss control and claims services intended to help insureds control their insurance costs. By individually underwriting each account presented to us, we learn of current and potential exposures to loss and determine the best strategies to prevent and contain those losses. As part of that effort, Argent initiated an enterprise-wide medical management expertise program in 2011. A team of nurse case managers provides medical guidance and case management functions on Workers’ Compensation files at both Argent and West Bend to mitigate disability duration and medical costs. Their careful scrutiny of the medical aspects of these files helps control claims costs and results in positive financial and customer outcomes. The positive effects of their efforts will be realized far into the future.

Argent’s focus is on large Work Comp accounts, and currently writes business in Wisconsin, Iowa, and most recently, Nebraska. While our area of focus, and the number of agencies with which we do business, is limited, eight agencies wrote more than $1 million in premium with Argent in 2011.

NSI

For the 13th consecutive year, and since it was introduced, NSI has grown and produced an underwriting profit. In 2011, we grew by 12.2% and wrote $36 million of new business, an all-time high!

NSI’s application count increased by 12.8%. And of all the apps submitted in 2011, 56% of them were written by NSI underwriters.

Kentucky joined the growing list of states in which NSI products are now available. In 2011, written premium for Kentucky alone reached $2.2 million!

NSI’s safety initiatives are always cutting edge. In 2011, we launched CultureOfSafety.com, an online resource for policyholders, prospects, and the general public. Our goal was to create a destination that would showcase NSI’s loss prevention expertise for nonprofit, youth-focused, and community-based organizations. Less than one full year after launch, CultureOfSafety.com now garners more than 2,000 unique visits every month. This steep growth in traffic has been anchored by the addition of dozens of compelling safety articles, blog posts, training videos, and best practice guides.

NSI continued to develop a presence on social media in 2011. Through the “Child Care Safety” Facebook page, we connect with childcare providers and parents concerned with providing a safe environment for kids. We’ve also developed meaningful connections with nonprofit organizations, risk management experts, and safety advocates across the country through our Twitter account.

Bonds

Our Bonds division launched e-Surety, an online platform that serves our agents’ commercial and contract bond needs. e-Surety not only reduces paperwork and provides a faster way to obtain standard contract and commercial bonds, it also integrates our existing Instant Issue and Rapid Bond programs. Other program features, like online storage of account information, enhance this easy-to-use program even more!

With its eighth straight year of premium growth and strong profits, the Bond Department exceeded $10 million in written bond premium in 2011, up 7% from 2010! A number of factors played a significant role in achieving this huge milestone for our Bonds division:

• We sought other opportunities for growth, including the SBA Bond Guarantee Program and e-Surety.

• We strengthened existing relationships with more agency and contractor visits, and looked for opportunities in new markets through state expansion.

• We also adapted our underwriting approach to the strategic trends shaping the U.S. construction market.

Financial Results (statutory basis – thousands)

2011 2010Net Premium Written $656,221 $668,128

Underwriting Profit <Loss> $(42,288) $(41,473)

Net Investment Income $45,312 $42,728

Realized and Unrealized Gains $(1,044) $40,193 <Losses> on Investments

Net Income $20,098 $33,851

Total Surplus Increase from Operations $5,601 $52,222

Combined Ratio

106

104

102

100

98

96

94

92

90

882007 2008 2009 2010 2011

106.8%106.2%106.0%

100.7%

102.6%

Assets (millions)

$1,667$1,510 $1,560

$1,650

$1,447

$1,800

$1,500

$1,200

$900

$600

$300

02007 2008 2009 2010 2011

Policyholders’ Surplus (millions)

600

400

200

0

$548$490

$542$511

$397

2007 2008 2009 2010 2011

1900 South 18th Avenue West Bend, WI 53095 thesilverlining.com