FRANKLIN D. ROOSEVELT

Annual Report

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Board and Executive Staff

Board of DirectorsJack B. Healan, Jr., ChairmanWilliam Bond, Jr., Vice ChairmanWalter L. BanksGeorge D. Gabel, Jr.Mary Ann RichardsonJoseph G. Seay

FHM Management TeamMatthew J. Lupino, President and Chief Executive Officer Jack Lemine, Executive Vice President Corporate Services Heather McCoy, Vice President FinanceSam R. Boone, Jr., President ClaimsRon Warble, Executive Vice President ClaimsLiz Morris, Vice President ClaimsMatt Whisenant, Vice President Insurance Services

“ If you don’t know where you are going, you might end upsomewhere else. “

Presidents Message

To Our Agents and Customers;

As I began to craft this 2016 annual report on our operations, I felt that the theme of “navigating the stormy seas” was not only appropriate to summarize the challenges that FHM Insurance faced throughout 2016, but also felt the theme was appropriate to describe my expectation for the foreseeable future.

When I wrote to you last year, I described a number of challenges that we would face during 2016 including the uncertainty and additional costs arising from the Florida Supreme Court ruling in the Castellanos case as well as the impacts of an aging workforce, the opioid abuse crisis, and uncertainty about the future of the

healthcare system. As predicted, each of these issues still weighs heavily on our workers compensation system. Despite all the challenges and uncertainty we faced, I am pleased to report the initiatives implemented by the FHM team bore fruit in the 2016 year in the form of improved financial results.

First and foremost, in May of 2017, A.M. Best once again affirmed our B++ rating. A rating ofB++ is considered a secure rating by A.M. Best and in the words of our analyst, the B++ rating continues to " reflect FHM Insurance Company’s highly favorable risk-adjusted capitalization” . FHM remains well-capitalized to meet our obligations to the policyholders. In addition to the strength of our capital position, our analysts also noted that "there appears to be evidence…that management’s efforts are having a positive effect” on our operations. All of FHM’s employees continue to be focused on improving our operational results by focusing on better underwriting profit and sales outcomes. As a result of these efforts, during 2016 we added more than 7% or $2.8M to our policyholders’ surplus thereby strengthening our already solid capital position. We continue to make the adjustments to our strategies that are needed to produce profitable results in an increasingly competitive and complex workers compensation market.

With respect to our efforts to improve our sales outcomes, FHM continues to seek out strategic partnerships with our independent agents. During 2016 we added a significant number of new agency partners and made great efforts to re-ignite existing relationships. These efforts resulted in a 16% increase in the amount of new business written in 2016 versus 2015. We also achieved increases in our hit (success) ratios which measures the number of policies and/or

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Matthew J. Lupino, CPCU President and Chief

Executive Officer

A Po

licy To Do More

Presidents Message

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Continued

amount of written premium as a percentage of the number of polices and/or amount quoted. These numbers indicate that our agencies are supportive of our efforts to grow our mutual business. I am also pleased to report that through the first six months of 2017 we are on pace to show further improvement in our new business premium writings and hit ratios.

Certainly, 2016 was a very good year for FHM by many measures and I am pleased to be able to share these improved results with you. But in keeping with the theme, the seas are by no means calm and we will have plenty of rough waters to navigate in the coming years.

There remains great uncertainty as to the state of health care in our country and we believe there will be changes forthcoming that will impact our industry. These impacts may take the form of cost shifting from health insurance to workers compensation, increases in the medical and pharmaceutical costs associated with workers compensation claims and potential shortages in medical provider availability. We also believe there will be continued challenges to the workers compensation system and how it functions. These challenges may result in increased attorney fees, increased benefits and even challenges to the “grand bargain” that created the workers compensation system as a means to secure wage and medical benefits for injured employees without the need for litigation. We understand these issues and are working diligently to best position our ship in order to secure safe passage for all our stakeholders through these murky waters.

We continue to appreciate our agency partners and our insured customers that have put their faith in FHM Insurance to handle their workers compensation needs. We remain committed to our “Policy To Do More” and we look forward to serving your needs effectively and efficiently as we have done consistently since 1954.

Respectfully,

Matthew J. Lupino, CPCU

President & CEO

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2016 Financial Summary

Admitted Assets: $80,600,271

Net Investment Gain: $2,268,870

Policyholder Surplus: $38,891,338

Net Written Premium: $27,583,189

Dividends: Paid 100% of Dividends earned since 1954

NPW to Surplus Ratio: .71Net Premium Written to Policyholder Surplus: This ratio is calculated by dividing the net premiums written by surplus. This is a key indicator of a company’s premium capacity and surplus protection. The Acceptable range for this ratio is below 2.0. The lower the ratio, the greater the writing capacity and surplus protection the company possesses.

Overall Liquidity: 193.3Overall Liquidity: This ratio is calculated by dividing total admitted assets by total liabilities. It indicates the company’s ability to cover net liabilities with total assets. The normal range for this ratio for long-tailed liability insurers is 100% to 150%. The higher percentage, the greater the company’s ability to cover net liabilities.

FHM’s 193.3 is better than the 169.2 average for companies with an A.M. Best rating of “A -” and whose primary line of business is workers’ compensation.

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Underwriting and Policy Services

Looking at accounts on an individual basis and understanding their business is one of the keys to FHM’s Underwriting Department’s success. The Underwriting Team works together with our Agency Partners to understand the full nature and scope of the business, the exposure to loss and the support the client will need to lower their workers' comp insurance costs. Each submission is evaluated on its own individual merit. Predictive modeling is also utilized as a tool in the decision and pricing process.

FHM continues to deliver the highest level of service with the creation of our Small Business Program. For small business accounts, agents can submit, quote and bind accounts online as another way to experience the ease of doing business with FHM. Online account submissions receive the same exceptional service and quick turnaround time.

The FHM Underwriting Team has an average of a decade plus of experience evaluating accounts and coming up with solutions. FHM’s Underwriting Team takes ongoing professional development to better understand current marketplace trends, the changing legal environments and the latest technology. Underwriting is led by Matt Whisenant, Vice President Insurance Services. Matt is supported by both home office and field underwriters in all states FHM serves.

FHM’s Policy Services Department supports policyholders with the ongoing management of the processes of billing, payroll audit, policy and endorsement issuance, agency and agent appointment and computer system administration.

Policy Services truly embodies FHM’s “Policy To Do More” mission and does whatever it takes to provide exceptional service to both agents and policyholders alike. When needed, policyholders and agents always get a real person to talk to and assist them with their needs.

Matt Whisenant, CPCUVice President

Insurance Services

Claims Management

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Keeping up with a workers’ compensation claim can be very difficult for policyholders. Led by Liz Morris, Vice President FHM Claims, Claims Management allocates the time and resources to make the process run smoothly. Policyholders are assigned a dedicated FHM Adjuster to communicate timely and ensure each claim is handled properly and costs are kept to a minimum. Caseloads are kept low – no more than 135 at one time - so the adjuster can establish a working relationship with each policyholder. FHM Adjusters are backed up with the latest claims management tools so all the information is up-to-date and at their fingertips for follow-up, review and discussion.

FHM Adjusters are part of a team handling each claim. This includes the claim supervisor and VP Claims, a nurse case manager, legal counsel from our "Strategic Law Partners" network, utilization review/cost containment unit, subrogation unit, fraud unit and loss control specialist. An extensive medical provider network provides access to quality medical care and helps facilitate productive injured employees to return to work sooner with modified duties if needed. This benefits the employer with more effective cost outcomes.

FHM’s Risk Management Department supports Underwriting by evaluating prospective insureds and supporting existing policyholders in their safety and loss prevention efforts. It also supports Claims by investigating serious accidents. Our Risk Management team is committed to providing insureds with the most comprehensive risk management solutions designed to maximize impact and effectiveness.

Located throughout the states FHM serves, our team of experienced Risk Management Consultants make on-site visits to conduct thorough risk assessments. These visits are used to identify loss exposures and evaluate the adequacy of hazard controls. Our consultants then work with policyholders to set up an ongoing service plan tailored to their needs. Policyholders are assisted in addressing deficiencies by providing them with formal Loss Control Recommendations. The risk management process also includes a review of losses and a discussion of the actions taken to prevent a reoccurrence of the loss as well as the development of other suggestions on how to best control risk and minimize future losses.

“ Thought is the wind, knowledge the sail and mankind the vessel. “

Liz MorrisVice President FHM Claims

Risk Management

Corporate Services

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FHM’s Corporate Services is responsible for accounting, information technology, corporate compliance, human resources, enterprise risk management and insurance and is led by Jack Lemine, Executive Vice President Corporate Services.

Heather McCoy, Vice President of Finance, leads the accounting and financial reporting team. The team consistently produces financial statements that receive an “unqualified opinion” from the independent auditors as well as reports and analyses that are useful throughout the company. Automation and software integration are key to the efficiencies in producing timely and accurate reporting.

FHM utilizes a very sophisticated information systems structure in order to enable all of its users, internal and external, with the ability to access and utilize information that is essential for their needs.

Enterprise Risk Management (ERM) is the driving force which impacts all organizational levels and decision making of the company. Utilizing ERM in its strategic and tactical objective planning, risk identification and optimization processes, business performance management and compliance procedures enhances FHM's value to all of its stakeholders.

“ It is the set of the sails, not the direction of the wind that determines which way we will go. “

Jack Lemine, CPAExecutive Vice

President Corporate Services

Heather McCoy, AIAFVice President

Finance

INSURANCE SERVICES OFFICEP.O. Box 616648, Orlando, FL 32861-6648

Phone 407-351-1212 Toll Free 888-346-3461

CORPORATE SERVICES OFFICE4601 Touchton Road East, Suite 3150, Jacksonville, FL 32246

Phone 904-724-9890

www.fhmic.com