2000 Report to Members

Let me add my welcome to the many you've already received as we commence our annual shareholders meeting. It's rewarding to note that the enthusiasm we share for this organization hasn't diminished after fifteen years together. It's a powerful asset that I continue to count on.

This millennium convention marks a significant anniversary that is echoed in our meeting theme. Befitting the occasion, we'll spend our time reflecting hard on what initially brought us together as an organization and, more important, how we keep the "marriage" together. First Monetary has become far more than the D&O insurance company it was originally conceived as. While the changes we've adopted through the years helped us succeed long after similarly structured captives folded camp, the operating environment we find ourselves in today demands even more. The decisions we're now making confront those demands head on. The outcomes of those decisions will determine where we take First Monetary in the future.

Those who buy commercial insurance for their companies had a relatively pleasant task much of the past decade, but that's changing. Recent indications are that insurance companies have run out of room to chase market share by cutting premiums and are relying almost exclusively on investment income to earn profits. The industry has been muddling through, quarter after quarter, as excess capacity has progressively forced premiums prices below the level of claims and expenses, turning whole lines of business unprofitable. Standby. Prices have begun to firm, and in some cases rise - as a new emphasis on underwriting results takes precedence over market share.

First Monetary isn't immune to these pressures, but we are able to tolerate them a bit better. The company posted a small operating loss in 1999 that was anticipated, paralleled operating plan projections and was in no way attributable to a departure from First Monetary's disciplined approach to balance sheet management.

First Monetary today remains strongly positioned to avoid the problems that plague conventional insurers, namely, breakdowns in asset quality, quality of reinsurance or adequacy of claim reserves. Our asset quality is excellent. We have $2,000,000 in FDIC insured investments on deposit at shareholder banks. Our reinsurers are A-rated. First Monetary successfully recovered reinsurance protection in two of the past three years, and our relationships with our partners are so strong that one extended support in excess of the coverage limits provided by the reinsurance treaty. Consistently conservative reserving has permitted us to settle substantial claims without posting changes to reserves that would drag down earnings in under-reserved companies.

The easily tolerable loss we sustained was the direct result of conscious decisions that have, on balance, benefited us. Much of the current loss is attributable to a tax decision that, over time, is still a net winner. The remainder could have been offset with modest premium increases, but we've pursued a different strategy to date.

A key element of that strategy has been to move members into wraparound insurance positions. While this action had the immediate impact of reducing gross written premiums, we shed far greater amounts of risk to other companies who will bear the brunt of expenses when claims activity ultimately increases. Simply stated, we have elected to suffer a budgeted operational loss today rather than incur potentially more significant claims in the future.