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Homesteaders

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Annual report of company performance

For 2009 calendar year

Financial Assurance

Chairman and President Graham J. Cook

Given the relative state of the economy, 2009 was an outstanding year for Homesteaders: Sales were up 6%, total revenue increased 6%, assets increased 10% and surplus increased by 19%. There are many factors that have contributed to our success. I want to share three things I feel play a significant role in our success. First, I believe we have the greatest number of and best-trained salaried field staff. Customers appreciate and deserve the level of service and commitment that our 30 account executives provide to help them grow their business and preserve the value of funeral service. We are also pleased to be associated with the largest and most innovative independent marketing organizations in the nation. In 2009, we saw many new and old customers turning to our marketing partners to help them grow their pre-need business, which contributes to the firms' long-term success. Finally, our customers tell us that the helpful attitude, accessibility and responsiveness of our knowledgeable home office customer service and marketing support staff are big reasons they do business with us. This feedback is supported by our customer satisfaction surveys with 97%+ scores in all of these service categories. Speaking of customer satisfaction, I believe we are living our commitment to the success of our funeral home customers. Our 2009 survey of more than 2,000 customers confirms that: 1) 98% feel we have met or exceeded their expectations, 2) 99% say we are close to being the ideal provider and 3) 97% would most likely recommend Homesteaders to another firm. I also need to give credit to CFO Glen Hare and his staff. Like everyone else, we have had our share of investment impairments, especially in 2008. In 2009, Glen's staff strategically divested our portfolio of many of these bonds. Fortunately, we were able to do so without incurring material losses in our financial statement. Today, as in the past, our investment portfolio is rated AA, which is important to the long-term security of our policy owners and funeral home customers. To sum it up, we remain conservative in our approach to investments and expenses, and maintain an unwavering focus on the long-term security of our policy owners and funeral home customers. Thank you for your continued trust and confidence in Homesteaders Life Company.

Graham J. Cook, Chairman and President

A message from Homesteaders

Annual report of company performance for 2009

Homesteaders

Financial Assurance

Summary of Operations Twelve months ending Dec. 31, 2009

t

1,762 94.4 100 90 80 70 60 50 40 30 2009

Financial officers comment

"Homesteaders' financial performance in 2009 was strong. We've maintained our A.M. Best Financial Strength rating of B++ (Good) and have nearly seven times the amount of capital required by the state of Iowa. Glen R. Hare In 2009, we continued a trend of Executive Vice President Treasurer/CFO consistently profitable operating earnings through competitive product pricing and controlled expenses. I'm pleased to say that Homesteaders is in an excellent position for continued growth while ensuring the long-term security our policy owners demand."

Homesteaders

GROWTH IN ASSETS AND CAPITAL

Glen Hare

1600 1100 600 100 2004 1,070 60.5

1,198 63.2

1,340 67.8

1,474 74.7

1,602 79.2

2005

2006 Assets

2007 Capital

(DOLLARS IN MILLIONS)

2008

We're pleased to report that in 2009

Homesteaders achieved excellent outcomes in sales, surplus and customer satisfaction. Highlights of the year include record setting sales, a 19% increase in surplus and continued outstanding customer satisfaction ratings. Chairman and President Graham J. Cook put these achievements in context:

"As always, we view these record-setting achievements in light of the impact they have on the long-term security of our policy owners and funeral home customers." Chief Operating Officer Steve Lang summed up the year as follows: "In addition to setting a record in sales revenue, Homesteaders strengthened the quality of our investments and grew surplus, all of which contributes to our primary financial goal to protect the long-term security of our policy owners."

"Homesteaders continues a tradition of conservative management with a singular commitment to the security of our funeral home customers and policy owners. Managing our crediting rates and controlling expenses James P. Koher, FSA, MAAA supported our strategy for Executive Vice President Chief Actuary long-term financial stability. We ended 2009 in a very strong position and look forward to a good 2010."

Jim Koher

t t

A publication of Homesteaders Life Company, P.O. Box 1756, Des Moines, IA 50306-1756 On the Web at homesteaderslife.com and myHomesteaders.com

"Homesteaders has a well diversified portfolio with no more than 34% exposure to any one asset category. In 2009, we divested a significant number of bonds that dropped below investment grade during the Kevin L. Kubik, CFA recent economic downturn. We Vice President-Investments have always taken a conservative approach to our investment strategy, and I'm proud to say our portfolio is AA credit quality with very limited exposure to below investment grade securities. Overall, we have a very solid portfolio, which protects our policy owners and funeral home customers."

Kevin Kubik

2

Annual report of company performance for 2009

Investments

NonAgency CMO 2% Asset Backed 2% Government 5% BIG* (2%)

Homesteaders

Customers speak

BBB (10%)

Taxable Municipal 34%

Agency CMO 28%

A (21%)

Government (33%)

"Homesteaders makes us aware of what's happening in the funeral industry and assures us that our families' money is secure."

Laurens Fish III Weed-Corley-Fish Funeral Home Austin, Texas

Private Placement 1%

Corporate 28%

AA (27%)

AAA (7%)

BOnD POrTFOLIO DIVErSIFICATIOn The $1.55 billion fixed income bond portfolio is well diversified with no more than 34% of the portfolio in any single asset category.

QuALITy DISTrIBuTIOn The portfolio is AA credit quality, with 33% of the investments in government or government-guaranteed investments. The portfolio has very limited exposure to below investmentgrade securities or bonds with subprime borrowers as collateral. *Below investment-grade

"We compared other insurance companies, and the more we researched, the more we leaned toward Homesteaders. The number one reason to work with Homesteaders is their stability."

Amy Wappner-Bove Wappner Funeral Directors, Mansfield, Ohio

Financial Position As of Dec. 31, 2009

Assets Bonds Mortgages Preferred Stock Real Estate Policy Loans Cash Other

$

2009 1,546,480 134,130 2,952 12,113 1,907 14,237 50,412

$

2008

$

liAbilities Policy Reserves Other Policy Liabilities Accrued Expenses Asset Reserves Other

$

2009 1,618,530 24,276 4,116 11,808 9,069

$

2008

$

1,368,610 144,990 3,952 12,384 1,904 29,347 41,238

$

1,483,243 21,515 3,756 4,811 9,891

$

"Homesteaders sole commitment to the funeral industry and its financial stability. That, in itself, is rare today."

Joel LaCanne LaCanne Family Funeral Services Windom, Minnesota

totAl

Surplus

1,667,799

1,523,217

totAl

1,762,231

1,602,425

94,432

$

79,208

$

Amounts listed in thousands.

totAl

1,762,231

1,602,425

Amounts listed in thousands.

Projections under various economic scenarios indicate that Homesteaders' reserve funds are sufficient to meet future policy liabilities. These projections also point out that assets and policy liabilities are well matched.

"It was very simple ­ I looked for a product that I felt would meet everyone's needs. With Homesteaders, I felt my customers were protected. I know my families' claims will be paid."

Linda Mitchell Black and Clark Funeral Home Dallas, Texas

Annual report of company performance for 2009

3

Year-End Operating Statement

Homesteaders

Financial Assurance

What follows are just a few questions we

sometimes hear from funeral home customers. If you have additional questions, feel free to contact your Homesteaders account executive for more information or go to homesteaderslife.com.

Homesteaders' operations produced nearly $452 million in income in 2009. Homesteaders used 48% of this income to pay policy benefits and 30% to establish reserves for payments of future policy benefits. Another 11% funded new policy acquisition, and 6% covered operating expenses and taxes. A hundred percent of all after tax earnings were contributed to surplus.

income Premium Investment Other Income

$

s s s s

2009 358,289 91,833 1,624

$

$

2008 339,864 84,987 1,412

$

Question: How secure is Homesteaders Life Company? Answer: Graham Cook: I'm assuming you're asking, "Will HLC be able to pay my families' claims now and in the future?" Without hesitation, the answer is "yes." Every time a policy is issued, a reserve or liability is established for that policy to pay the future claim. As you can see in this annual report, our investment policy is solid. We are committed to our business philosophy that we will provide long-term security for our policy owners, customers and employees. We carefully manage our costs and our product pricing to ensure that we meet our long-term commitments. Question: How is Homesteaders dealing with the issue of reinsurance? Answer: Jim Koher: Reinsurance is a very common practice, especially with life insurance companies that have limited access to capital. Homesteaders, like many companies, has used reinsurance as a source of capital to support the acquisition of new business during times of high sales volume. We took reinsurance out after we experienced 26% increase in sales in 2002. We continue to receive payments as expected on these reinsured blocks of business. Reinsurance does not shift the responsibility for servicing the business or paying the claims ­ HLC continues to be solely responsible for claim payment and servicing the block of business shared with the reinsurance company. Question: What is the quality of Homesteaders' investment portfolio? Answer: Kevin Kubik: First of all, our bond portfolio's average rating is "AA." This indicates our bond investments to be very good and stable. Our investment policy ­ approved and monitored by our board of directors ­ is very conservative, disciplined and focused on the long-term security of our policy owners. In terms of national Association of Insurance Commissioners rating, Homesteaders' bond portfolio has a lower risk rating than many of our direct competitors, according to our analysis of the six nAIC rating categories by amount invested.

totAl

451,746

426,263

Amounts listed in thousands.

expenses Policy Benefits Policy Reserve Commissions Expenses

$

2009 218,041 136,008 51,359 28,240

$

$

2008 213,989 47,905 27,098

$

122,984

totAl

Gain Federal Taxes Operating Gain/(Loss) Capital Gain/(Loss) Surplus Contribution

433,648

18,099 (7,687) 10,412 (86)

$

411,976

14,287 (5,965) 8,322 (8,162)

$

10,326

160

Amounts listed in thousands.

For more information visit us online at homesteaderslife.com

P.O. Box 1756, Des Moines, IA 50306-1756 homesteaderslife.com

©2010 Homesteaders Life Company. All rights reserved.

M1196-0310

Annual report of company performance for 2009

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