STATE OF UTAH INSURANCE DEPARTMENT

REPORT OF FINANCIAL EXAMINATION

of

DESERET MUTUAL INSURANCE COMPANY

of

Salt Lake City, Utah

as of

December 31, 2012

TABLE OF CONTENTS

SALUTATION .................................................................................................................... 3 SCOPE OF EXAMINATION ........................................................................................... 3 SUMMARY OF SIGNIFICANT FINDINGS ................................................................ .4 SUBSEQUENT EVENTS ................................................................................................. 4 COMPANY HISTORY ..................................................................................................... 4

General ............................................................................................................................. 4 Dividends and Capital Contributions ............................................................................... 5 Mergers and Acquisitions ................................................................................................ 5

CORPORATE RECORDS ............................................................................................... 5 MANAGEMENT & CONTROL INCLUDING CORPORATE GOVERNANCE ..... 5

Conflict of Interest Procedures ........................................................................................ 7 Organization Chart ........................................................................................................... 8 Holding Company ............................................................................................................ 8

FIDELITY BONDS AND OTHER INSURANCE ......................................................... 8 PENSIONS, STOCK OWNERSHIP AND INSURANCE PLANS ............................... 8 TERRITORY AND PLAN OF OPERATION ................................................................ 8 GROWTH OF COMPANY .............................................................................................. 9 MORTALITY AND LOSS EXPERIENCE .................................................................. lO REINSURANCE .............................................................................................................. 10 ACCOUNTS AND RECORDS ....................................................................................... 10 STATUTORY DEPOSITS .............................................................................................. 11 FINANCIAL STATEMENTS ........................................................................................ 11

BALANCE SHEET (ASSETS) ..................................................................................... 12 BALANCE SHEET (LIABILITIES, SURPLUS AND OTHER FUNDS) ................... 13 SUMMARY OF OPERATIONS ................................................................................... 14 RECONCILIATION OF CAPITAL AND SURPLUS ................................................. 15

COMMENTS ON FINANCIAL STATEMENTS ........................................................ 16 SUMMARY OF RECOMMENDATIONS .................................................................... 16 ACKNOWLEDGEMENT .............................................................................................. 16

January 30, 2014

Honorable Todd E. Kiser, Commissioner Utah Insurance Department 3110 State Office Building Salt Lake City, Utah 84114

Pursuant to your instructions and in compliance with statutory requirements, an examination, as of December 31, 2012, has been made of the financial condition and business affairs of:

DESERET MUTUAL INSURANCE COMPANY Salt Lake City, Utah

hereinafter referred to in this report as the Company, and the following report of examination is respectfully submitted.

SCOPE OF EXAMINATION

Period Covered by Examination

We have performed our multi-state risk-focused examination of Deseret Mutual Insurance Company. This examination covers the period of January 1, 2008 through December 31,2012.

Examination Procedure Employed

We conducted our examination in accordance with the applicable laws of the State of Utah, insurance rules promulgated by the Utah Insurance Department (Department), Statements of Statutory Accounting Principles (SSAP) and the NAIC Financial Condition Examiners Handbook (Handbook). The Handbook requires that we plan and perform the examination to evaluate the financial condition and identify prospective risks of the Company by obtaining information about the Company including corporate governance, identifying and assessing inherent risks within the Company, and evaluating system controls and procedures used to mitigate those risks. An examination also includes assessing the principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation, management's compliance with Statutory Accounting Principles, and annual statement instructions when applicable to domestic state regulations.

All accounts and activities of the Company were considered in accordance with the risk focused examination approach. The extent of review on any given account or key activity was based on the results of a prescribed planning process that included an evaluation of the Company's internal controls, as well as other factors which included an analytical review of financial data, the Company's financial performance during the

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examination period, prior examination findings and materiality. Consideration was also given to the use of audit work performed by the Company's independent accounting firm and where appropriate has been utilized herein. Specific details pertaining to the various phases of the examination are set forth under the appropriate caption in subsequent sections of this report.

Status of Prior Examination Findings

The last exam was completed as of December 31, 2007. Items of significance noted in the prior examination report summary were corrected during the previous examination.

SUMMARY OF SIGNIFICANT FINDINGS

The results of this examination disclosed that as of December 31, 2012, the Company had admitted assets of $48,381,647, liabilities of $41,259,349, and capital and surplus of $7,122,308. As a result of this examination, there was no adjustment to the capital and surplus, as reported in the Company's 2012 Annual Statement.

SUBSEQUENT EVENTS

In September 2013, the Company transitioned the BYU- Idaho Student Health Plan to a self-insured trust in the name of the University. The Company and BYU entered into an agreement whereby the Company is a Third Party Administrator for the Plan.

COMPANY HISTORY

General

The Company was organized pursuant to the Insurance Code of the State of Utah Title 31, Chapter 30 on January 14, 1969, by the name Far-West Mutual Life Insurance Association. Concurrent with the commencement of business, the Company was issued a Certificate of Authority to transact accident and health, annuity, life and variable annuities. In 1970 the Corporation of the President of the Church of Jesus Christ of Latter-day Saints (Church) assumed control of the Company upon issuance of Company insurance contracts to Church associates. The name of the Company was then changed to Deseret Mutual Benefit Association and obtained a Certificate of Authority dated March 1, 1987 authorizing the Company to transact business pursuant to Utah Annotated Code Title 31A, Chapters 1 and 20. The Company is authorized to transact life, annuity, variable life and/or annuity and disability insurance. The name of the Company changed to Deseret Mutual Insurance Company on December 4, 1987.

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The Company is licensed to do business as a life insurance company in the State of Utah to provide life, annuity, accident and health, variable life and/or annuity, and disability insurance. The Company is also licensed in Hawaii and Idaho to transact business as an accident and health insurance company.

During the examination period the Articles of Incorporation and Bylaws were amended to provide flexibility for the annual meeting.

Dividends and Capital Contributions

The Company is a mutual insurance company owned and operated for the exclusive benefit of its members pursuant to its articles of incorporation. During the examination period, January 1, 2008 through December 31, 2012, there were no dividends declared or paid to policyholders.

There were no capital contributions to the Company during the examination period.

Mergers and Acquisitions

The Company had no mergers and acquisitions during the years covered by this examination.

CORPORATE RECORDS

The minutes of the meetings of the board of directors and committees of the Company were reviewed for the period under examination. The corporate records adequately approved and supported Company transactions and events. The previous examination report as of December 31, 2007, dated August 28, 2008 was distributed to the board of directors on November 12, 2009.

MANAGEMENT & CONTROL INCLUDING CORPORATE GOVERNANCE

The bylaws of the Company indicated the number of directors not exceed nine (9) Directors. The following persons served as directors for the Company as of December 31, 2012:

N arne and Location

Fraser Bullock Highland, Utah

Roger G. Christensen South Jordan, Utah

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Title and Principal Occupation

Managing Director Sorenson Capital

Assistant to the Commissioner Church Educational System

Robert A. Johnson Cottonwood Heights, Utah

Roger G. Clarke Salt Lake City, Utah

Keith B. McMullin Bountiful, Utah

Sandra Rogers Orem, Utah

Benson L. Porter Draper, Utah

President & CEO Deseret Mutual Insurance Company

Managing Director, President & CEO Ensign Peak Advisors

President & CEO Deseret Management Corporation

Professor College of Nursing, Brigham Young University

Managing Director of Human Resources Corporation of the President of The Church of

Jesus Christ of Latter-day Saints

The Company's bylaws provide for officers to consist of a President, a Secretary, and a Treasurer. The Board may elect, or the President may appoint, other officers as the business may require. The officers of the Company as of December 31, 2012 were as follows:

N arne and Location

Robert A. Johnson Cottonwood Heights, UT

Scott C. Thornton Centerville, Utah

Scott E. Eastmond Lehi, Utah

Kent A. Misener Bountiful, Utah

Title and Principal Occupation

President & CEO Deseret Mutual Insurance Company

Sr. Vice President, CFO & Chief Actuary Deseret Mutual Insurance Company

Vice President, Secretary & General Counsel Deseret Mutual Insurance Company

Vice President & Treasurer Deseret Mutual Insurance Company

As of December 31, 2012, the Company itself had no significant committees of the board; however, the following are principal committees assigned to serve for the benefit of all entities under common control of Deseret Management Corporation:

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Name and Location

Roger G. Christensen South Jordan, Utah

Roger G. Clarke Salt Lake City, Utah

Benson L. Porter Draper, Utah

Craig L. Christensen Centerville, Utah

Name and Location

Roger G. Clarke Salt Lake City, Utah

Thomas Kirby Brown, Jr. Park City, Utah

Steven R. Thorley Orem, Utah

F. James Cowan Centerville, Utah

Robert A. Johnson Cottonwood Heights, Utah

Keith B. McMullin Bountiful, Utah

Conflict of Interest Procedures

Audit Committee Title and Principal Occupation

Assistant to Commissioner Church Educational System

Managing Director, President & CEO Ensign Peak Advisors

Managing Director of Human Resources Corporation of the President

Managing Director Finance & Records Department Corporation of the Presiding Bishopric

Investment Committee Title and Principal Occupation

Managing Director, President & CEO Ensign Peak Advisors

President & CEO Beneficial Life

Professor of Finance Brigham Young University

Senior Vice President, Director Ensign Peak Advisors (Retired)

President & CEO Deseret Mutual Insurance Company

President & CEO Deseret Management Corporation

The Company has an established Code of Conduct and Conflict of Interest Policy administered by DMBA. Through interviews with management and observation, the organization is dedicated to high standards of business ethics. Since there is low turnover conflict of interest statements are not obtained annually. However, any new director, executive officer, or employees is required to become familiar with the ethics package and sign a conflict of interest statement upon hire or appointment.

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Organization Chart

The following organizational chart identifies the Company's relationship with its parent as of December 31,2012:

Deseret Management Corporation

I Deseret Mutual Insurance Company

Holding Company

The Company is a member of an insurance holding company system. According to an order issued by the Commissioner on October 22, 1998, Deseret Management Corporation is the ultimate controlling parent of the Company. Therefore, the Department permits the company to file an abbreviated organizational chart excluding religious and educational entities in the filing of its annual statements. During November 2011, the Company transferred its 100% investment interest in Deseret Mutual Benefit Administrators (DMBA) to the Corporation of the President of the Church of Jesus Christ of Latter-day Saints. Therefore, DMBA is no longer within the insurance holding company systems.

As of December 31, 2012, the Company had no agreements in place with its Parent.

FIDELITY BONDS AND OTHER INSURANCE

The minimum fidelity coverage suggested by the National Association of Insurance Commissioners (NAIC) for the Company's size and premium volume is not less than $350,000. As of the examination date, the Company was a named insured on financial institution bond coverage of $3,000,000 and specified limits for forgery and alteration, securities, trading loss, and computer system fraud. The Company was also a named insured on policies providing property and liability coverage.

PENSIONS, STOCK OWNERSHIP AND INSURANCE PLANS

The Company has no employees, and thus offered no employee benefit programs as of December 31,2012.

TERRITORY AND PLAN OF OPERATION

As of December 31, 2012, the Company was licensed to transact business in three (3) states - Hawaii, Idaho and Utah. Certificates of Authority and/or other evidence of

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permission to transact business in the respective states were reviewed and found to be in proper order and effect.

The Company is a mutual life insurance company organized in accordance with the provisions of the Utah Insurance Code whose policyholders are companies or organizations affiliated with The Church of Jesus Christ of Latter-day Saints. The Company writes individual and group annuity products, group life, and accident and health and long-term disability insurance for employees and students of its policyholders.

As of December 31, 2012, the Company did not solicit insurance sales to the general public, and it did not conduct any form of media advertising.

As of December 31, 2012, the Plan "Z" remained within the Company. However, Plan "Z" meets the definition of self-insurance under U.C.A. § 31A-1-301(150)(b)(ii), because the Church provides for spreading of its risk by a systematic plan and indemnifies the General Authorities for liability or risk , which is related to their service not only as employees but also directors and officers. Therefore, Plan "Z" is exempt from regulation under U.C.A. Section 31A-1-103(3)(f), because it does not apply to self-insurance.

Insurance benefits available to employees of the Church and its related organizations or corporations outside the United States, through various international employee benefit programs, were made available through an International Insurance Agreement ("IIA"). The types of coverage available under this agreement include medical, death, occupational accident death and dismemberment, disability and twenty-four hour accidental death and dismemberment benefits. These plans are exempt under U.C.A. § 31A-21-101(1)(2); therefore, they fall outside the scope and purview of Title 31A.

During the examination period, the Company transitioned certain plans to self-insured trusts. In 2012, the Brigham Young University ("BYU")- Hawaii Student Health Plan was transitioned out of the Company into a self-insured trust.

The Brigham Young University ("~YU")- Idaho Student Health Plan was being offered through September 2013 when it was transitioned to a self-insured trust in the name of the University.

The Company's health plan for senior missionaries, the Senior Service Medical Plan ("SSMP"), is exempt from Title 31A regulation under U.C.A. § 31A-1-103, because its principal purpose is to achieve charitable, educational, social or religious objectives. The SSMP was discontinued and a self-insured trust established as of July 1, 2011.

Effective January 26, 2009, the student health plan offered by the Company to students attending LDS Business College was granted an exemption from regulation by the Department in accordance with U.A.C. Rule R590-240.

GROWTH OF COMPANY

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The Company provides insurance to a captive group of participants; therefore, no significant variations exist in new business or in the volume of services sold. The decrease in premiums in 2012 was in connection with the transitioning of BYU-Hawaii to a self-insured trust in September 2012. Annuity premiums vary considerably from year to year depending on interest rates, among other factors. There were fewer annuities sold in 2012 than in 2011.

During the examination period, net premiums to surplus decreased from 461.5% in 2008 to 244.5% in 2012 primarily due to the transitioning the accident and health plans to self­insured trusts.

MORTALITY AND LOSS EXPERIENCE

In 2011, the Company experienced an unusually high level of death claims from the international business with claims returning to normal levels in 2012 consistent with 2010 claims recorded. In connection with BYU-Hawaii transitioning its student health plan to a self-insured trust, the accident and health claims decreased in 2012 over 2011.

REINSURANCE

As of December 31, 2012, the Company, Deseret Healthcare Employee Benefits Trust, and Deseret Mutual Benefits Administrators, As Trustee of the Deseret Senior Service Medical Plan Trust, were included on three layers of medical catastrophe excess of loss reinsurance contracts ceded to certain unaffiliated reinsurers. Each contract layer covered included any loss or losses which may occur under any in force Policies covering Group Medical Insurance Benefits and Long Term Disability Coverage. According to the reinsurance contracts, the Reinsurer is liable in respect of each Loss Occurrence irrespective of the number and kinds of policies involved.

The First Excess Layer attaches at $1,500,001, whereby the Reinsurer accepts $8,500,000 over and above the initial retention of $1,500,000 up to an aggregate Ultimate Net Loss for all Loss Occurrences of $25,000,000.

The Second Excess Layer attaches at $10,000,001, with the Reinsurer accepting the next $10,000,000 up to an aggregate Ultimate Net Loss for all Loss Occurrences of $30,000,000.

The Third Excess Layer attaches at $20,000,001, with the Reinsurer accepting the next $30,000,000 up to an Ultimate Net Loss of $50,000,000 for every Loss Occurrence.

ACCOUNTS AND RECORDS

The Company's accounting systems consisting of a general ledger, journals, registers and statistical records were maintained on a network. Subsidiary records were maintained in commercial software applications and stored on a shared network drive.

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An independent certified public accounting firm audited the Company's records during the period covered by this examination. Audit reports generated by the auditors for the years 2008 through 2012 were made available for the examiner's use.

STATUTORY DEPOSITS

The Company's statutory deposit requirement was $400,000 pursuant to U.C.A. § 31A-5-211(2)(a). The examination confirmed the Organization maintained a statutory deposit consisting of U.S. Treasury Note with a market value of $1,615,195 and a par value of $1,050,000 which was adequate to cover the required deposit of $400,000.

FINANCIAL STATEMENTS

The following financial statements were prepared from the Company's accounting records and the valuations and determination made during the examination. The accompanying COMMENTS ON FINANCIAL STATEMENTS are an integral part of the financial statements.

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DESERET MUTUAL INSURANCE COMPANY BALANCE SHEET (ASSETS)

As of December 31, 20 12

Bonds Common stocks Cash and short-term investments Receivables for securities Investment income due and accrued Reinsurance:

Amounts recoverable from reinsurance Current federal and foreign income tax recoverable and interest thereon Net deferred tax asset Electronic data processing equipment and software Furniture and equipment, including health care delivery assets Receivables from parent, subsidiaries and affiliates

Total assets

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Net admitted assets

$38,154,350 1,682,585 5,840,838

906,603 537,880

200,000

371,551 401,001 165,431

0 121,409

$48.381.647

DESERET MUTUAL INSURANCE COMPANY BALANCE SHEET (LIABILITIES, SURPLUS AND OTHER FUNDS)

As of December 31, 2012

Aggregate reserve for life contracts Aggregate reserve for accident and health contracts Liability for deposit-type contracts Contract claims:

Life Accident and health

Premiums and annuity considerations for life and accident and health contracts received in advance Contract liabilities not included elsewhere:

Provision for experience rating refunds Interest Maintenance Reserve

Miscellaneous liabilities: Asset valuation reserve Payable for securities

Aggregate write-ins for liabilities Total Liabilities

Gross paid in and contributed surplus Unassigned funds (surplus) Surplus Totals

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Current Year

$18,626,939 2,082,450 4,970,944

58,132 1,484,121

229,403

8,970,969 689,269

541,660 3,060,587

544,875 $41,259,349

6,000 7,116,308

$7,122,308 $48,381,657

DESERET MUTUAL INSURANCE COMPANY SUMMARY OF OPERATIONS

For the Year Ended December 31, 20 12

Income: Premiums and annuity considerations Net investment income Amortization of Interest Maintenance Reserve (IMR) Aggregate write-ins for miscellaneous income

Total income

Deductions: Death benefits Annuity Benefits Disability benefits and benefits under accident and health contracts Interest and adjustments on contract or deposit-type contract funds Payments on supplementary contracts with life contingencies Increase in aggregate reserves for life and accident and health policies and contracts

Totals

Expenses: General insurance expenses Insurance taxes, licenses and fees Aggregate write-ins for deductions Totals Net gain from operations before dividends to policyholders and federal income taxes Dividends to policyholders Net gain from operations after dividends to policy holders and before federal income taxes Federal and foreign income taxes incurred Net gain from operations after dividends to policyholders and federal income taxes and before realized capital gains or (losses) Net realized capital gains (losses)( excluding gains (losses) transferred to the IMR) less capital gains tax Net Income

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Current Year

$ 17,413,341 2,091,191

95,071 582,944

$ 20, 182,54 7

$ 379,317 2,065,068

14,376,490 243,795

61,956

(299,300)

$16,827,326

2,287,350 272,709 373,694

$19,761,079

$ 421,468 0

$ 421,468 (50,462)

$ 471,930

123,019 $ 594,949

Capital and surplus, December 31, prior year

DESERET MUTUAL INSURANCE COMPANY RECONCaiA TION OF CAPITAL AND SURPLUS

2008 through 2012

2008 2009 2010

$7,261,522 $4,206,697 $6,780,243

2011 2012

$7,022,437 $6,147,692

Net income ($1,127,576) $1,398,322 $ 266,150 ($1,121,687) $ 594,949 Change in net unrealized

capital gains (losses) 0 (3,612) 84,110 (95,087) (3,453) Change in net deferred

Income tax 106,023 106,585 (43,623) (144,641) 2,085 Change in nonadmitted assets (2,254,733) 1,134,818 153,943 621,722 745,216 Change in asset valuation reserve 221,461 (62,567) (218,385) (135,053) (125,655) Cumulative effect of changes in accounting principles 0 0 0 0 (238,530)

Net change in capital and surplus for the year ($3,054,824) $2,573,545 $ 242,195 ($874,746) $ 974,613

Capital and surplus, December 31, current year $4,206,697 $6,780,243 $7,022,437 $6,147,692 $7,122,305

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COMMENTS ON FINANCIAL STATEMENTS

The Company's minimum capital requirement was $400,000 as defined in U.C.A. § 31A-5-211(2)(a). As defined by U.C.A. § 31A-17 Part 6, the Company had total adjusted capital of $7,663,968, which exceeded the company action level risk-based capital (RBC) requirement of $483,203 by $7,180,765.

SUMMARY OF RECOMMENDATIONS

There were no report recommendations made as a result of this examination.

ACKNOWLEDGEMENT

Scott A. Garduno, FSA, MAAA, of the actuarial firm of Taylor-Walker & Associates performed the actuarial phases of the examination and Joe Detrick, AES, CISA, CPA, CFE performed review of the Company's information systems. They join the undersigned in acknowledging the assistance and cooperation extended during the course of the examination by officers, employees, and representatives of the Company.

Respectfully Submitted,

Sharon E. Sybrandt, CPA, CFE The Huff Group Representing the Utah Insurance Department

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