UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
ANNUAL REPORT PURSUANT TO SECTION 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 1996
Commission File No. 1-11941
FARM FAMILY HOLDINGS, INC.
(Exact name of registrant as specified in its charter)
Delaware IRS No. 14-1789227
344 Route 9W, Glenmont, New York 12077
Registrant's telephone number: (518) 431-5000
Securities registered pursuant to Section 12(b)
of the Act:
Name of each exchange
Title of each class on which registered
------------------- -------------------
Common Stock, par value $0.01 New York Stock Exchange
per share (the "Common Stock")
Securities registered pursuant to Section 12(g) of the Act: None
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes X No
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K.
On February 24, 1997, Registrant had 5,253,813 shares of Common Stock
outstanding. Of these, 5,242,002 shares, having an aggregate market value (based
on the closing price of these shares as reported in a summary of composite
transactions in the Wall Street Journal for stocks listed on the New York Stock
Exchange February 24, 1997) of approximately $117,945,000, were owned by
stockholders other than directors and executive officers of the Registrant.
<PAGE>
Documents Incorporated By Reference
Portions of the following documents are incorporated by reference as
follows:
Documents Incorporated Part of Form 10K
Farm Family Holdings, Inc. I and II
Annual Report to Stockholders
for the fiscal year ended
December 31, 1996
(the "Annual Report")
Farm Family Holdings, Inc. III
Proxy Statement for the
1997 Annual Meeting of
Stockholders
(the "Proxy Statement")
<PAGE>
PART I
ITEM 1. BUSINESS
Overview
The following discussion includes the operations of Farm Family Holdings,
Inc. ("Farm Family Holdings") and its wholly owned subsidiary, Farm Family
Casualty Insurance Company ("Farm Family Casualty") and Farm Family Casualty's
wholly owned subsidiary, Rural Agency and Brokerage, Inc. (collectively referred
to as the "Company"). The operations of the Company are also closely related
with those of its affiliates, Farm Family Life Insurance Company ("Farm Family
Life")and Farm Family Life's wholly owned subsidiary, United Farm Family
Insurance Company (United Farm Family).
On July 26, 1996, Farm Family Mutual Insurance Company ("Farm Family
Mutual") converted from a mutual property and casualty insurance company to a
stockholder owned property and casualty insurance company and became a wholly
owned subsidiary of Farm Family Holdings pursuant to a plan of Reorganization
and Conversion (the "Plan"). In addition, Farm Family Mutual was renamed Farm
Family Casualty Insurance Company. As part of the Plan, Farm Family Holdings was
formed and the Farm Family Mutual policyholders received 2,237,000 shares of
Farm Family Holding's common stock and $11,735,000 in cash in exchange for their
membership interest in Farm Family Mutual.
On July 23, 1996, Farm Family Holdings made an initial public offering of
its common stock at a price of $16.00 per share. Farm Family Holdings received
net proceeds of $41,453,000 for 2,786,000 shares sold in the initial public
offering. In addition, Farm Family Holdings received $3,427,000 for 217,000
shares purchased by policyholders of Farm Family Mutual in a subscription
offering. In addition, pursuant to the Plan, holders of Farm Family Mutual debt
could elect to exchange their debt instruments for shares of common stock or
cash. As a result, there were 17,000 common shares and $1,107,000 in cash
exchanged for debt with an outstanding principal amount of $1,371,000.
Farm Family Casualty is a specialized property and casualty insurer of
farms, other generally related businesses and residents of rural and suburban
communities principally in the Northeastern United States. Farm Family Casualty
provides property and casualty insurance coverages to members of the state Farm
Bureau organizations in New York, New Jersey, Delaware, West Virginia and all of
the New England states. Membership in the state Farm Bureau organizations is a
prerequisite for voluntary insurance coverage (except for employees of the
Company and its affiliates).
Farm Family Casualty markets its insurance products through more than 200
Farm Family agents and field managers who are located in the rural and suburban
communities it serves. These agents generally sell insurance products only for
Farm Family Casualty and Farm Family Life. The Company believes that the
distinctive focus of the Company and its agents on meeting the specialized
insurance needs of rural communities has provided the Company with the knowledge
and experience to adapt to changes in the demographics of its markets and in the
nature of agricultural related businesses. In addition to insuring those engaged
in agricultural pursuits such as dairy, vegetable and fruit farming, the Company
insures a wide range of other businesses related to agriculture, such as
distributors of agricultural products, horse breeding and training facilities,
landscapers, nurseries, florists, wineries and growers of specialty products. In
recent years, the Company has also introduced businessowners products for
certain retail and contractor businesses and for owners of apartment and office
buildings, as well as a homeowners product.
The Company's principal strategy is to maintain its focus on meeting many
of the specialized insurance needs of Northeastern rural and suburban
communities. The Company's flagship product, the Special Farm Package, is a
flexible policy that can be adapted to meet the needs of a variety of
agricultural and agricultural related businesses. As evidenced by its
introduction of businessowners products in 1990, the Company also seeks to
leverage its local reputation, agency force, knowledge and experience to expand
its product offerings to a wider variety of customers in the rural and suburban
communities in which it currently operates. In addition, the Company will
continue to seek to facilitate and expedite sales, underwriting and policy
administration functions through the expanded use of local service centers and
computer networking communications with the home office.
<PAGE>
Related Party Transactions
The operations of the Company are closely related with those of its
affiliates, Farm Family Life and Farm Family Life's wholly owned subsidiary,
United Farm Family. The affiliated companies operate under similar Board of
Directors and have similar senior management. In addition, the affiliated
companies share home office facilities, data processing equipment, certain
personnel and other operational expenses.
The Company and Farm Family Life are parties to an Amended and Restated
Expense Sharing Agreement, effective as of February 14, 1996 (the "Expense
Sharing Agreement"), pursuant to which shared expenses for goods, services and
facilities are allocated between the Company and Farm Family Life. In 1995 and
1994, the parties shared expenses under a similar expense sharing agreement.
Under the Expense Sharing Agreement, expenses are allocated in accordance with
applicable provisions of the New York Insurance Law and regulations promulgated
thereunder. Direct expenses are charged as incurred to the Company and Farm
Family Life, as applicable, at cost. For each of the years ended December 31,
1996, 1995, and 1994, 65%, 61%, and 60%, respectively, of aggregate operating
expenses totaling $30.7 million, $26.7 million and $23.8 million, respectively,
were allocated to the Company, under a similar expense sharing arrangement.
The Company and Farm Family Life are parties to a Lease Agreement dated
July 1, 1988, as amended by Amendment to Lease Agreement, effective January 1,
1994, as so amended, (the "Lease Agreement") pursuant to which the Company
leases home office space in Glenmont, New York from Farm Family Life. Annual
rent under the Lease Agreement was approximately $712,000, $687,000, and
$629,000 for each of the years ended December 31, 1996, 1995, and 1994,
respectively.
The Company's reinsurance program includes reinsurance agreements with
United Farm Family. In accordance with the provisions of these reinsurance
agreements, premiums earned, losses and expenses ceded by the Company to United
Farm Family were as follows:
<TABLE>
<CAPTION>
($ in thousands) 1996 1995 1994
---- ---- ----
<S> <C> <C> <C>
Premiums Earned $9,334 $9,238 $9,750
Losses 7,049 6,447 7,158
Expenses 446 199 213
--- --- ---
Net $1,839 $2,593 $2,379
====== ====== ======
</TABLE>
The Company and United Farm Family are parties to a service agreement dated
July 25, 1988 (the "Service Agreement") pursuant to which the Company provides
United Farm Family with certain administrative and special services necessary
for its operations, including, but not limited to, claims management,
underwriting, accounting, tax and auditing, investment management, and
functional support services. In addition, the Company provides United Farm
Family with certain personnel, property, equipment and facilities for its
operations. For each of the years ended December 31, 1996, 1995, and 1994,
United Farm Family incurred approximately $0.7 million, $0.8 million, and $0.5
million, respectively, in direct and allocated expenses and overhead under the
Service Agreement.
<PAGE>
Products
The Company offers a variety of property and casualty insurance products
primarily designed to meet the unique insurance needs of its agricultural
clients and the general insurance needs of the rural and suburban communities in
which it does business. Many policyholders have more than one policy with the
Company, most commonly, a property policy (such as a Special Farm Package or
homeowners policy) and an automobile policy.
The following table sets forth by product the direct premiums written by the
Company for the periods indicated:
<TABLE>
<CAPTION>
Year Ended December 31,
% of % of % of
1996 Total 1995 Total 1994 Total
----- ----- ----- ----- ---- -----
($ in millions)
<S> <C> <C> <C> <C> <C> <C>
Personal Automobile $50.0 34.2% $46.5 34.2% $40.3 33.0%
Special Farm Package 35.9 24.5% 34.0 25.0% 32.7 26.8%
Commercial Automobile 24.1 16.5% 22.7 16.7% 20.2 16.6%
Workers' Compensation 9.7 6.5% 9.1 6.7% 8.1 6.6%
Businessowners 7.6 5.2% 6.6 4.9% 5.3 4.3%
Homeowners 6.1 4.2% 5.2 3.8% 4.1 3.4%
Umbrella 4.6 3.1% 4.4 3.2% 4.2 3.4%
Commercial General Liability 3.9 2.7% 3.4 2.5% 3.0 2.5%
Special Home Package 2.9 2.0% 2.8 2.1% 2.8 2.3%
Fire, Allied, Inland Marine 1.2 0.8% 1.0 0.7% 1.0 0.8%
Products Liability 0.3 0.2% 0.2 0.1% 0.2 0.2%
Pollution 0.1 0.1% 0.1 0.1% 0.1 0.1%
-------------------------------------------------------------
Total $146.4 100.0% $136.0 100.0% $122.0 100.0%
-------------------------------------------------------------
</TABLE>
Personal Automobile. Personal automobile is the Company's largest product.
The Company's industry standard policies are generally marketed in conjunction
with its other products, such as the Special Farm Package, the businessowners
policy or the homeowners policy.
Special Farm Package. The Special Farm Package, developed in 1980, is a
flexible, multi-line package of insurance coverages which the Company regards as
its "flagship" product. As a result of its flexible features, this product can
be adapted to meet the needs of a variety of agricultural and related
businesses. The Special Farm Package policy combines personal, farm and business
property and liability insurance for the farm owner, as well as owners of other
agricultural related businesses, such as horse breeding and training facilities,
nurseries, wineries and greenhouses.
Commercial Automobile. Commercial automobile is the Company's third largest
product. The Company's industry standard policies are generally marketed in
conjunction with the Special Farm Package or the businessowners policy.
Workers' Compensation. The Company generally does not seek to market or
write its workers' compensation policy apart from a Special Farm Package or a
businessowners policy.
Businessowners. The Company introduced a businessowners product (based on
the industry standard policy form) in 1990 to meet the needs of small businesses
within its rural and suburban markets. This product is marketed to two distinct
groups: (i) "mercantile businessowners" with property based risks, including
apartment and office building owners and small to medium-sized retail
businesses, such as florists and farm markets and (ii) small, established
artisan contractors principally serving the agricultural community.
Special Home Package and Homeowners Policy. The Special Home Package was
developed in 1980 as a companion product for the Special Farm Package policy.
The Company's homeowners policy, introduced in 1989, is a standard homeowners
multi-peril policy for the rural and suburban homeowner. Increasingly, the
homeowners policy is being sold to provide coverage for the insured's principal
residence, while the Special Home Package is used by the Company to insure
rural-based, tenant occupied residences. Like the Special Farm Package, the
Special Home Package combines personal and commercial property and liability
coverages, and contains flexible features which also allow it to be adapted to
meet the needs of a variety of customers.
Umbrella Liability. The Company writes commercial and personal line excess
liability policies covering business, farm and personal liabilities of its
policyholders in excess of amounts covered under Special Farm Package,
homeowners, businessowners and automobile policies. Such policies are available
with limits of $1.0 million to $5.0 million. The Company does not generally seek
to market its excess liability policies unless it also writes an underlying
liability policy.
Commercial General Liability. The Company writes an industry standard
commercial general liability policy which is generally marketed in connection
with the Special Farm Package or, as an accommodation to policyholders in
connection with the commercial automobile policy. The commercial general
liability policy is generally not written apart from these other policies. The
policy is usually written by the Company for unique business situations, such as
horse breeding and training facilities and certain landscaper risks, which do
not meet the criteria for liability coverage under a businessowners or Special
Farm Package policy. The policy insures businesses against third party liability
from accidents occurring on their premises or arising out of their operations or
products. Most of the Company's products liability line is written as part of
the commercial general liability product.
Pollution. The Company writes a small number of pollution liability
policies covering specified farm risks on a "claims-made" basis. The policy
insures against losses incurred from third party liability, including bodily
injury and property damages, for pollution incidents, such as those caused from
pesticides, fertilizers, herbicides and manure piles. An "extended reporting
period" option is available under certain circumstances which allows for claim
reporting after the policy expiration. As of December 31, 1996, The Company had
approximately 260 pollution policies in force.
Marketing
The following table sets forth the Company's direct written premiums by
state for the periods indicated:
<TABLE>
<CAPTION>
Year Ended December 31,
-----------------------
($ in millions) % of % of % of
1996 Total 1995 Total 1994 Total
----- ----- ----- ----- ----- -----
<S> <C> <C> <C> <C> <C> <C>
New York $56.5 38.6% $53.2 39.1% $47.0 38.5%
New Jersey 33.1 22.6% 28.3 20.8% 23.9 19.6%
Massachusetts 10.3 7.0% 10.5 7.7% 10.1 8.3%
Connecticut 9.8 6.7% 9.1 6.7% 8.2 6.7%
West Virginia 8.1 5.5% 7.8 5.7% 7.3 6.0%
Maine 6.8 4.7% 6.9 5.1% 6.7 5.5%
New Hampshire 6.7 4.6% 6.8 5.0% 6.7 5.5%
Vermont 5.7 3.9% 5.3 3.9% 5.0 4.1%
Delaware 5.0 3.4% 4.4 3.3% 4.1 3.4%
Rhode Island 4.4 3.0% 3.7 2.7% 3.0 2.4%
--------- --------- ---------- --------- -------- ---------
$146.4 100.0% $136.0 100.0% $122.0 100.0%
--------- --------- ---------- --------- -------- ---------
</TABLE>
As of December 31, 1996, the Company marketed its property and casualty
insurance products in its ten state region through approximately 189 full-time
agents, 15 field managers and 10 associate field managers. Many of the Company's
agents are established residents of the rural and suburban communities in which
they operate and often have specific prior experience in agricultural related
businesses. The Company's agents generally market and write the full range of
its products. In addition to marketing the Company's property and casualty
insurance products, the agency force also markets life insurance products for
Farm Family Life. The Company's policies are marketed exclusively through its
agency force. In 1996, Agent compensation was comprised entirely of commissions,
office expense allowances and incentive bonuses.
The Company emphasizes personal contact between its agents and the
policyholders. The Company believes that its name recognition, policyholder
loyalty and policyholder satisfaction with agent and claims relationships are
the principal sources of new customer referrals, cross-selling of additional
insurance products and policyholder retention. In addition, the Company believes
that its relationship with the Farm Bureaus in its target markets promotes the
Company's name recognition and new customer referrals among Farm Bureau members.
See " Relationship with Farm Bureaus."
Relationship with Farm Bureaus
The Company was organized through the efforts of certain Farm Bureaus, and
its relationship with the Farm Bureaus in its ten state region continues to be a
fundamental aspect of its business. These Farm Bureaus are affiliated with the
American Farm Bureau Federation, the nation's largest general farm organization
with over four million members, which has traditionally sought to advance the
interests of the agricultural community. The Company was established in 1955
through the efforts of certain Farm Bureaus to provide property and casualty
insurance for Farm Bureau members in the Northeast. Substantially all of the
directors of the Company are associated with Farm Bureau organizations in the
Northeast. The Company has the exclusive endorsement of the Farm Bureaus to
market property and casualty insurance in the ten states in which it operates.
The endorsement of the Farm Bureaus generally means that the Farm Bureaus
provide the Company with the right to utilize their membership lists and
authorize the use of their name and service marks in connection with the
marketing of the Company's products. In exchange for these rights, the Company
pays to each of the Farm Bureaus an annual fee of $7.50 per Farm Bureau member,
pursuant to agreements with each Farm Bureau (the "Membership List Purchase
Agreements"). The current term of each Membership List Purchase Agreement is six
years, commencing on January 1, 1996. Pursuant to the Membership List Purchase
Agreements, the Farm Bureaus may not endorse the products of other property and
casualty insurers within the Company's ten state region. Farm Family Life has
entered into similar membership list purchase agreements with each of the Farm
Bureaus.
Underwriting
The Company seeks to write its commercial and personal lines risks by
evaluating loss experience and underwriting profitability with consistently
applied standards. The Company maintains information on all aspects of its
business which is routinely reviewed by the Company's staff of underwriters in
relationship to product line profitability. The Company's underwriters generally
specialize by agency territory. Specific information is monitored with regard to
individual insureds which is used to assist the Company in making decisions
about policy renewals or modifications.
The Company concentrates on its established major product lines (personal
and commercial auto, Special Farm Package, businessowners and homeowners
policies). It generally does not pursue the development of products with risk
profiles with which it is not familiar, nor does it, typically, actively market
its automobile, workers' compensation or general liability policies except to
policyholders who may also purchase its Special Farm Package, businessowners or
homeowners products. The Company believes its extensive knowledge of local
markets in its region is a key element in its underwriting process.
Claims
Claims on insurance policies written are usually investigated and settled
by one of the Company's staff claims adjusters, located in nine field offices.
The Company's claims philosophy emphasizes timely investigation, evaluation and
settlement of claims, while maintaining adequate reserves and controlling claim
adjustment expenses. The claims philosophy is designed to support the Company's
marketing efforts by providing agents and policyholders with prompt service.
Claims settlement authority levels are established for each adjuster and
claims manager based upon the employee's ability and level of experience. Claims
are reported directly to the claims department, located at a field office or
through the central claim reporting unit at the home office. Specialized units
exist at the home office for no-fault automobile and workers' compensation
claims, as well as subrogation and large, litigated or certain other claims. The
Company also has on staff a special investigator to investigate suspected
insurance fraud, including arson. The claims department is responsible for
reviewing all claims, obtaining necessary documentation, estimating the loss
reserves and resolving the claims.
Reinsurance
Reinsurance Ceded
The Company's reinsurance arrangements are generally placed with
non-affiliated reinsurers through reinsurance brokers. In addition, certain
reinsurance coverages are also placed directly with United Farm Family. See
"Related Party Transactions." The largest net per risk exposure retained by the
Company on any one individual property or casualty risk is $100,000. Property
and casualty risks in excess of $100,000 are covered on an excess of loss basis
up to $300,000 per risk by United Farm Family. Per risk property losses in
excess of $300,000 but less than $4 million are reinsured on an excess of loss
basis by unaffiliated reinsurers. Facultative coverage is available for certain
property risks in excess of $4 million per risk. Casualty losses per risk in
excess of $300,000 but less than $1 million (which is generally the maximum
limit of liability written by the Company's casualty insurance policies, other
than workers' compensation and umbrella liability policies) are covered on an
excess of loss basis by unaffiliated reinsurers. Clash coverage provided by
unaffiliated reinsurers covers casualty losses, including workers' compensation,
in excess of $1 million but less than $5 million. In addition, workers'
compensation claims, on a per occurrence basis with a $600,000 per person limit,
in excess of $3 million but less than $10 million are separately reinsured on an
excess of loss basis by an unaffiliated reinsurer. The Company reinsures 95% of
its umbrella liability losses (including a 5% quota share participation by
United Farm Family) under $1 million per loss on a quota share basis and 100% of
umbrella liability losses in excess of $1 million up to $5 million per loss by
unaffiliated reinsurers.
The Company 's property catastrophe reinsurance provides for recovery of
95% of the losses over $6 million up to a maximum of $51 million per occurrence
and approximately 79% of the losses between $3 million and $6 million per
occurrence. The Company retains the first $3 million of losses per occurrence
under its property catastrophe program. United Farm Family is a participant in
Farm Family's property catastrophe reinsurance program and assumes 2% of losses
per occurrence between $11 million and $51 million and approximately 16% of
losses between $3 million and $6 million.
The insolvency or inability of any reinsurer to meet its obligations to the
Company could have a material adverse effect on the results of operations or
financial condition of the Company. As of December 31, 1996, more than 95% of
the Company's reinsurance program was provided by reinsurers which were rated
"A-" (Excellent) or above by A.M. Best Company, Inc. ("A.M. Best").
In June 1995, the Company terminated its excess casualty reinsurance
agreement with American Agricultural Insurance Company to reduce administrative
and financial costs associated with the reinsurance arrangement. The reinsurance
arrangement was commuted for casualty and workers' compensation risks for
accident years 1980 to 1988 and prior to 1975. As a result of the termination of
this arrangement, the Company does not have reinsurance in effect for any future
development on casualty and workers' compensation losses for accident years 1980
to 1988 and prior to 1975. The Company received approximately $1.8 million in
cash as a result of the termination of this arrangement and established
additional net loss reserves of approximately $1.7 million for any casualty and
worker's compensation losses for accident years 1980 to 1988 and prior to 1975.
Separate reinsurance agreements with American Agricultural Insurance Company,
however, continue to remain in effect for property and umbrella risks for those
accident years.
Reinsurance Assumed
The Company assumes voluntary reinsurance covering primarily property,
property catastrophe and casualty risks located outside of the Northeast. The
Company believes that, among other benefits, its assumed reinsurance
arrangements balance to a limited extent the geographic concentration of its
risks in the Northeast. The Company also assumes an insignificant amount of
reinsurance covering substandard automobile policies from United Farm Family.
For the year ended December 31, 1996, the Company earned premiums of $1.6
million under various voluntary proportional and non-proportional reinsurance
agreements. In 1996, the Company generally retroceded 50% of all assumed
reinsurance to United Farm Family.
Loss and Loss Adjustment Expense ("LAE") Reserves
The Company's reserve for losses is an estimate of the unpaid amount , as
of December 31, of the losses incurred in both the current year and all prior
years. The LAE reserve is an estimate of the unpaid expenses required to settle
losses incurred in both the current year and all prior years. The Company is
required to maintain reserves for payment of estimated loss and LAE for both
reported claims and claims which have been incurred but not yet reported. The
ultimate liability incurred by the company may be different from current reserve
estimates.
Adjustments in aggregate reserves, if any, are reflected in the operating
results of the period during which such adjustments are made. Although claims
for which reserves are established may not be paid for several years, reserves
for losses and LAE are not discounted, except for certain lifetime workers'
compensation indemnity reserves where the reserves are discounted at 3.5%.
<PAGE>
The following table provides a reconciliation of beginning and ending loss and
LAE reserve balances of the Company for each of the years in the three year
period ended December 31, 1996.
Reconciliation of Liability for Loss
and Loss Adjustment Expenses
<TABLE>
<CAPTION>
($ in thousands)
For the years ended December 31,
1996 1995 1994
---- ---- ----
<S> <C> <C> <C>
Reserves for losses and loss adjustment expenses at the
beginning of the year $ 137,978 $ 127,954 $ 123,477
Less: Reinsurance recoverables and receivables 28,655 28,230 28,761
------ ------ ------
Net reserves for losses and loss adjustment expenses at
beginning of year 109,323 99,724 94,716
------- ------ ------
Provision for losses and loss adjustment expenses for claims occurring in:
Current year 100,418 88,366 86,370
Prior years (5,441) (5,182) (3,690)
------ ------ ------
Total incurred losses and loss adjustment expenses 94,977 83,184 82,680
------ ------ ------
Loss and loss adjustment expenses payments for claims occurring in:
Current year 50,122 40,519 43,232
Prior years 39,795 33,066 34,440
------ ------ ------
Total payments 89,917 73,585 77,672
------ ------ ------
Net reserves for losses and loss adjustment expenses at end of year 114,383 109,323 99,724
Add: Reinsurance recoverables and receivables 26,837 28,655 28,230
------ ------ ------
Reserves for losses and loss adjustment expenses at end of year $141,220 $137,978 $127,954
======== ======== ========
</TABLE>
Analysis of Loss and Loss Adjustment Expense Development
The following table reflects the development of losses and loss adjustment
expenses for the periods indicated at the end of that year and each subsequent
year. Each calendar year-end reserve includes the estimated unpaid liabilities
for that accident year and for all prior accident years. The data presented
under the caption "Cumulative Amount of Reserves Paid Through" show the
cumulative amounts paid related to the reserve as of the end of each subsequent
year. The data presented under the caption "Reserves, Net, Reestimated as of"
show the original recorded reserve as adjusted as of the end of each subsequent
year to reflect the cumulative amounts paid and all other facts and
circumstances discovered during each such year. The line "Cumulative Redundancy
(Deficiency)" reflects the difference between the latest reestimated reserve
amount and the reserve amount as originally established.
In evaluating the information in the table below, it should be noted that
each amount includes the effects of all changes in amounts of prior periods. For
example, if a loss determined in 1993 to be $150,000 was first reserved in 1985
at $100,000, the $50,000 deficiency (actual loss minus original estimate) would
be included in the cumulative deficiency in each of the years 1986 through 1992
shown below. This table presents development data by calendar year and does not
relate the data to the year in which the accident actually occurred. Conditions
and trends that have affected the development of these reserves in the past may
not necessarily recur in the future.
<PAGE>
The following table sets forth the development of loss and loss
adjustment expenses reserves of the Company for the ten-year period ended
December 31, 1996:
<TABLE>
<CAPTION>
Analysis of Loss and
Loss Adjustment
Expense Development
($ in thousands)
Year Ended December 31, 1986 1987 1988 1989 1990 1991 1992 1993 1994 1995 1996
------ ------ ------ ------ ------ ------ ------ ------ ------ ------ ------
Reserves for Losses
and Loss
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Adjustment Expenses $41,718 $53,126 $65,543 $78,339 $94,135 $110,135 $117,497 $123,477 $127,954 $137,978 $141,220
Reinsurance Recoverable
on Unpaid Losses (5,053) (5,468) (7,126) (11,784) (22,123) (25,048) (24,463) (28,761) (28,230) (28,655) (26,837)
--------------------------------------------------------------------------------------------------
Reserves for Losses
and Loss Adjustment
Expenses, Net 36,665 47,658 58,417 66,555 72,012 85,087 93,034 94,716 99,724 109,323 114,383
--------------------------------------------------------------------------------------------------
Reserves, Net,
Reestimated as of:
One year later 37,961 50,145 57,932 69,036 76,786 84,514 91,561 88,296 94,542 103,882
Two years later 38,047 50,572 63,348 72,478 76,442 84,305 89,666 82,876 87,592
Three years later 39,057 53,540 65,399 72,926 76,832 83,960 86,876 81,556
Four years later 39,981 55,303 65,842 73,130 77,879 82,750 85,204
Five years later 41,097 55,445 66,289 74,599 77,375 81,690
Six years later 41,088 56,018 68,298 74,391 76,811
Seven years later 41,072 57,751 68,370 74,578
Eight years later 42,622 58,323 68,678
Nine years later 42,759 58,754
Ten years later 44,734
Cumulative Redundancy
(Deficiency) (8,069) (11,096) (10,261) (8,023) (4,799) 3,397 7,830 13,160 12,132 5,441
-----------------------------------------------------------------------------------------
Cumulative Amount of
Reserves Paid Through:
One year later 16,621 21,931 23,852 29,587 29,446 32,708 36,692 34,439 33,066 39,796
Two years later 26,294 33,879 40,454 46,469 47,392 53,455 57,236 49,867 53,121
Three years later 31,636 42,838 51,147 57,838 60,737 65,951 66,127 62,138
Four years later 35,838 48,480 57,239 65,803 67,401 70,176 73,409
Five years later 38,588 51,216 62,168 68,950 68,634 74,752
Six years later 39,836 54,644 64,423 68,652 71,697
Seven years later 40,920 55,794 63,815 71,075
Eight years later 41,693 55,313 65,940
Nine years later 41,116 57,174
Ten years later 41,698
</TABLE>
Prior to 1990, the Company had a history of cumulative deficiencies in
reserving for losses and LAE. These deficiencies were primarily caused by the
underestimation of reserves for workers' compensation, automobile and other
liability claims. In 1991, the Company reviewed and revised its process for
estimating reserves for losses and LAE, and in recent years the Company has
generally experienced overall redundancies. The redundancies at December 31,
1996 of $13.2 million, $12.1 million and $5.4 million for the December 31, 1993,
1994 and 1995 reserves, respectively, were primarily attributable to favorable
development of IBNR and case reserves for personal automobile, commercial
automobile, automobile physical damage, and workers' compensation claims.
<PAGE>
<TABLE>
<CAPTION>
Year Ended December 31,
($ in thousands) 1996 1995 1994
-------- -------- --------
Reserve for unpaid losses and loss adjustment expenses:
<S> <C> <C> <C>
Gross liability ........................................... $141,220 $137,978 $127,954
Reinsurance recoverable ................................... 26,837 28,655 28,230
------ ------ ------
Net liability ............................................. $114,383 $109,323 $ 99,724
======== ======== ========
One year later:
Gross reestimated liability ............................... $126,779 $116,672
Reestimated reinsurance recoverable ....................... 22,897 22,130
------ ------
Net reestimated liability ................................. $103,882 $ 94,542
======== ========
Two years later:
Gross reestimated liability ............................... $105,637
Reestimated reinsurance recoverable ....................... 18,045
------
Net reestimated liability ................................. $ 87,592
========
</TABLE>
The Company believes that its reserves at December 31, 1996 are adequate.
Conditions and trends that have historically affected the Company's claims may
not necessarily occur in the future. Accordingly, it would not be appropriate to
extrapolate future deficiencies or redundancies based on the results set forth
above. Future adjustments to loss reserves and LAE that are unanticipated by the
Company could have a material adverse impact upon the Company's financial
condition and results of operations.
Investments
An important component of the operating results of the Company has been the
return on invested assets. The Company's investment objective is to maximize
current yield while maintaining safety of capital together with adequate
liquidity for its insurance operations. In an effort to improve the quality and
safety of its investments, the Company embarked on a plan in 1995 to
significantly reduce its holdings of non-investment grade fixed maturity
securities.
The Company manages all of its investments internally. Investment decisions
and guidelines are made and implemented by the Company's investment department
under the supervision of an investment committee comprised of members of the
board of directors. In addition, the Company maintains a Credit Watch Committee
comprised of the Chief Executive Officer, Executive Vice President - Finance &
Treasurer, and the Senior Vice President - Investments in order to monitor
securities which have experienced late payments, adverse changes in credit
rating or financial condition of the borrower or any modifications of terms. At
December 31, 1996, the Company had five investments totaling $4.9 million on the
Credit Watch Report, of which none were considered non-performing or in default.
Farm Family Casualty reduced its holdings of NAIC Class 3 through 6 bonds,
generally considered non-investment grade, from $10.8 million, or 5.6% of its
fixed maturity portfolio, as of December 31, 1995 to $6.9 million, or 3.2% of
its fixed maturity portfolio, as of December 31, 1996. Due to uncertainties in
the economic environment, however, it is possible that the quality of
investments currently held in Farm Family Casualty's investment portfolio may
change.
<PAGE>
The following table sets forth certain information concerning the Company's
investments:
<TABLE>
<CAPTION>
($ in thousands)
December 31, 1996 December 31, 1995
Amortized Market Amortized Market
Type of Investment Cost Value(3) Cost Value(3)
---- -------- ---- --------
<S> <C> <C> <C> <C>
Available For Sale Portfolio:
Fixed Maturities(1)
United States government and
government agencies and authorities $18,401 $18,743 $22,700 $24,243
States, municipalities and political subdivisions 42,568 43,950 21,871 23,480
Public utilities 26,244 26,233 20,008 21,126
All other corporate bonds 109,241 111,643 99,311 104,245
Mortgage-backed securities 9,676 10,342 1,082 1,130
Redeemable preferred stock 8,096 8,277 6,722 6,965
--------------------------------------------------
Total Fixed Maturities $214,226 $219,188 $171,694 $181,189
Equity securities 2,546 7,908 334 4,746
--------------------------------------------------
Total Available for Sale $216,772 $227,096 $172,028 $185,935
--------------------------------------------------
Held to Maturity Portfolio:
Fixed Maturities(2)
--------------------------------------------------
States, municipalities and political $5,423 $5,482 $5,925 $6,298
subdivisions
All other corporate bonds 4,359 4,491 6,461 6,802
--------------------------------------------------
Total Held to Maturity $9,782 $9,973 $12,386 $13,100
--------------------------------------------------
Mortgage loans $1,745 $1,745 $1,822 $1,822
Short-term investments 5,333 5,333 6,532 6,532
Other Invested Assets 748 748 1,246 1,246
--------------------------------------------------
Total Investments $234,380 $244,895 $194,014 $208,635
==================================================
(1) Fixed maturities (bonds, redeemable preferred stocks and mortgage-backed
securities) and equity securities in the Available for Sale Portfolio are
carried at market value in the consolidated financial statements of the Company.
Mortgage loans, cash and short-term investments and other invested assets are
carried at cost, which approximates market value.
(2) Fixed maturities in the Held to Maturity Portfolio are carried at amortized
cost.
(3) The Company primarily obtains market value information through the pricing
service offered by Interactive Data Corporation. Market values are also
obtained, to a lesser extent, from various brokers who provide price quotes.
</TABLE>
<PAGE>
The Company's investments in fixed maturity securities are composed primarily of
intermediate-term, investment grade securities. The table below contains
additional information concerning the investment ratings of the Company's fixed
maturity investments at December 31, 1996.
<TABLE>
<CAPTION>
Amortized Market
Type/Ratings of Investment(1) Cost Value Percentage(4)
($ in Thousands)
<S> <C> <C> <C>
Available for Sale Portfolio:(2)
U.S. Government and Agencies $27,125 $28,103 12.8%
AAA 20,229 21,034 9.6%
AA 30,900 31,145 14.2%
A 62,070 64,205 29.3%
BBB 66,075 66,876 30.5%
------------------------------------------------
Total BBB or Better 206,399 211,363 96.4%
BB 5,877 5,924 2.7%
B and Below 1,950 1,901 0.9%
------------------------------------------------
Total Available for Sale $214,226 $219,188 100.0%
------------------------------------------------
Held to Maturity Portfolio:(3)
U.S. Government and Agencies $ - $ - 0.0%
AAA 3,115 3,188 32.0%
AA 1,270 1,326 13.3%
A 4,091 4,207 42.1%
BBB - - 0.0%
------------------------------------------------
Total BBB or Better 8,476 8,721 87.4%
BB 1,306 1,252 12.6%
B and Below - - 0.0%
------------------------------------------------
Total Held to Maturity $9,782 $9,973 100.0%
------------------------------------------------
</TABLE>
(1) The ratings set forth in this table are based on the ratings, if any,
assigned by Standard & Poor's Corporation ("S&P"). If S&P's ratings were
unavailable, the equivalent ratings supplied by Moody's Investors Services,
Inc., Fitch Investors Service, Inc. or the NAIC were used where available. The
percentage of securities that were not assigned a rating by S&P at December 31,
1996 was 4.7%.
(2) Fixed maturities in the Available for Sale Portfolio are carried at market
value in the consolidated financial statements of the Company.
(3) Fixed maturities in the Held to Maturity Portfolio are carried at amortized
cost.
(4) Represents percent of market value for classification as a percent of total
for each portfolio.
<PAGE>
The table below sets forth the maturity profile of the Company's fixed maturity
investments as of December 31, 1996:
<TABLE>
<CAPTION>
Maturity Amortized Cost(1) Market Value(2) Percentage
Available for Sale: ($ in thousands)
<S> <C> <C> <C>
1 year or less $771 $746 0.3%
More than 1 year through 3 years 15,844 15,988 7.3%
More than 3 years through 5 years 12,217 12,768 5.8%
More than 5 years through 10 years 100,668 102,102 46.6%
More than 10 years through 15 years 44,228 44,786 20.4%
More than 15 years through 20 years 14,032 14,389 6.6%
More than 20 years 16,790 18,067 8.2%
Mortgage backed securities 9,676 10,342 4.7%
---------------------------------------------------------
Total $214,226 $219,188 100.0%
---------------------------------------------------------
Held to Maturity:
1 year or less $350 $358 3.6%
More than 1 year through 3 years 706 716 7.2%
More than 3 years through 5 years 211 207 2.1%
More than 5 years through 10 years 3,186 3,173 31.8%
More than 10 years through 15 years 5,329 5,519 55.3%
More than 15 years through 20 years - - -
More than 20 years - - -
---------------------------------------------------------
Total $9,782 $9,973 100.0%
---------------------------------------------------------
(1) Fixed maturities in the Available for Sale Portfolio are carried at market
value in the consolidated financial statements of the Company. Fixed maturities
in the Held to Maturity Portfolio are carried at amortized cost.
(2) The Company obtains market value information primarily through the pricing
service offered by Interactive Data Corporation. Market values are also
obtained, to a lesser extent, from various brokers who provide price quotes
</TABLE>
The average duration and average maturity of the Company's fixed maturity
investments as of December 31, 1996 were approximately 6.2 and 10.1 years,
respectively. As a result, the market value of the Company's investments may
fluctuate significantly in response to changes in interest rates. In addition,
the Company may also be likely to experience investment losses to the extent its
liquidity needs require the disposition of fixed maturity securities in
unfavorable interest rate environments.
For the year ended December 31, 1996, compared with the prior year, the
amortized cost of the Company's cash and invested assets increased 13.4% to
$238.5 million, primarily as a result of the proceeds from the Company's initial
public offering. As a result of the reduction in holdings of certain
non-investment grade securities, the Company anticipates that future investment
yields may be lower than they otherwise would be. For the years ended December
31, 1996, 1995 and 1994, the Company's net investment income, average cash and
invested assets and return on average cash and invested assets were as follows:
Years Ended December 31,
($ in millions) 1996 1995 1994
---- ---- ----
Net investment income $16.0 $14.3 $ 13.2
Average cash and invested asset $212.0 $187.8 $173.9
Return on average cash and invested assets 7.5% 7.6% 7.6%
<PAGE>
Information Services
The Company's automated information processing capabilities are supported
by centralized computer systems and a network of personal computers linking
agents, claims offices and service centers with the Company's home office data
center and information services division. This network enables field employees
and agents to work directly with clients in response to service questions and
policy transactions. A specialized client information system containing policy
and claim information for each customer's portfolio is utilized by the Company's
agents to monitor policy activity. Also, personalized summaries of material
events affecting each agent's policies are updated daily on the network and
forwarded to agents. Substantially all of the Company's information services
equipment, including the centralized computer systems and computer network, is
owned by Farm Family Life. Information systems expenses are shared by the
Company and Farm Family Life pursuant to an agreement. (See Related Party
Transactions.)
A.M. Best Rating
A.M. Best, which rates insurance companies based on factors of concern to
policyholders, currently assigns an "A-" (Excellent) rating (its fourth highest
rating category) to Farm Family Casualty. A.M. Best assigns "A" or "A-" ratings
to companies which, in its opinion, have demonstrated excellent overall
performance when compared to the standards established by A.M. Best. Companies
rated "A" or "A-" have a strong ability to meet their obligations to
policyholders over a long period of time. In evaluating a company's financial
and operating performance, A.M. Best reviews the company's profitability,
leverage and liquidity, as well as the company's book of business, the adequacy
and soundness of its reinsurance, the quality and estimated market value of its
assets, the adequacy of its loss reserves, the adequacy of its surplus, its
capital structure, the experience and competency of its management and its
market presence. No assurance can be given that A.M. Best will not reduce the
Company's current rating in the future.
Competition
The property and casualty insurance market is highly competitive. The
Company competes with stock insurance companies, mutual companies, local
cooperatives and other underwriting organizations. Certain of these competitors
have substantially greater financial, technical and operating resources than the
Company. The Company's ability to compete successfully in its principal markets
is dependent upon a number of factors, many of which (including market and
competitive conditions) are outside the Company's control. Many of the lines of
insurance written by the Company are subject to significant price competition.
Some companies may offer insurance at lower premium rates through the use of
salaried personnel or other methods, rather than agents paid on a commission
basis, as the Company does. In addition to price, competition in the lines of
business written by the Company is based on quality of the products, quality and
speed of service (including claims service), financial strength, ratings,
distribution systems and technical expertise.
Seasonality
Although the insurance business generally is not seasonal, losses and loss
adjustment expenses tend to be higher for periods of severe or inclement
weather.
Employees
The Company shares most of its employees with Farm Family Life. As of
December 31, 1996, the total number of full time employees of the Company and
Farm Family Life was 389 employees in aggregate, of which 286 were employed in
the home office. Based on annual time studies, 63% of total employee expenses,
including salary expense, is currently allocated to the Company and 37% is
allocated to Farm Family Life and United Farm Family. See "Certain Relationships
and Related Transactions". None of these employees are covered by a collective
bargaining agreement, and the Company believes that its employee relations are
good.
Effect of Regulation
General
The Company is regulated by government agencies in the states in which it
does business. Such regulation usually includes (i) regulating premium rates and
policy forms, (ii) setting minimum capital and surplus requirements, (iii)
regulating guaranty fund assessments and residual markets, (iv) licensing
companies, adjusters and agents, (v) approving accounting methods and methods of
setting statutory loss and expense reserves, (vi) setting requirements for and
limiting the types and amounts of investments, (vii) establishing requirements
for the filing of annual statements and other financial reports, (viii)
conducting periodic statutory examinations of the affairs of insurance
companies, (ix) approving proposed changes in control and (x) limiting the
amount of dividends that may be paid without prior regulatory approval.
Insurance companies are also affected by a variety of state and federal
legislative and regulatory measures and judicial decisions that define and
extend the risks and benefits for which insurance is sought and provided. These
include redefinitions of risk exposure in areas such as products liability,
environmental damage and workers' compensation. Certain state insurance
departments and legislatures may prevent premium rates for some classes of
insureds from reflecting the level of risk assumed by the insurer for those
classes. Several states place restrictions on the ability of insurers to
discontinue or withdraw from some lines of insurance. Such developments may
adversely affect the profitability of various lines of insurance.
Risk-Based Capital
State insurance departments have adopted a methodology developed by the
NAIC for assessing the adequacy of statutory surplus of property and casualty
insurers which includes a risk-based capital formula that attempts to measure
statutory capital and surplus needs based on the risks in a company's mix of
products and investment portfolio. The formula is designed to allow state
insurance regulators to identify potential inadequately capitalized companies.
Under the formula, a company determines its "risk-based capital" ("RBC") by
taking into account certain risks related to the insurer's assets (including
risks related to its investment portfolio and ceded reinsurance) and the
insurer's liabilities (including underwriting risks related to the nature and
experience of its insurance business). The risk-based capital rules provide for
different levels of regulatory attention depending on the ratio of a company's
total adjusted capital to its "authorized control level" of RBC. Based on
calculations made by the Company, the risk-based capital level for the Company
exceeds a level that would trigger regulatory attention. At December 31, 1996,
the Company's total adjusted capital was $83.2 million, and the threshold
requiring the least regulatory attention was $26.7 million.
NAIC-IRIS Ratios
The NAIC's Insurance Regulatory Information System ("IRIS") was developed
by a committee of state insurance regulators and is primarily intended to assist
state insurance departments in executing their statutory mandates to oversee the
financial condition of insurance companies operating in their respective states.
IRIS identifies 12 ratios for the property and casualty insurance industry and
specifies a range of "usual values" for each ratio. Departure from the "usual
value" range on four or more ratios may lead to increased regulatory oversight
from individual state insurance commissioners. The Company did not have any
ratios which varied from the "usual value" range in 1996, 1995 or 1994.
Risk Factors
In addition to the normal risks of business, the Company is subject to
significant risk factors, including but not limited to: (i) the inherent
uncertainty in the process of establishing property-liability loss reserves,
including reserves for the cost of pollution claims, and the fact that ultimate
losses could materially exceed established loss reserves and have a material
adverse effect on results of operations and financial condition; (ii) the
potential material adverse impact on its financial condition, results of
operations and cash flow of losses arising out of catastrophes; (iii) the
insolvency or inability of any reinsurer to meet its obligations to Farm Family
Casualty may have a material adverse effect on the business and results of
operations of the Company; (iv) the need for Farm Family Casualty to maintain
appropriate levels of statutory capital and surplus, particularly in light of
continuing scrutiny by rating organizations and state insurance regulatory
authorities, and to maintain acceptable financial strength and claims-paying
ability ratings; (v) there can be no assurance that Farm Family Casualty will be
able to maintain its current A.M. Best rating and that the Company's business
and results of operations could be materially adversely affected by a rating
downgrade; (vi) the fact that the property and casualty market is highly
competitive and certain of its competitors may have substantially greater
financial, technical and operating resources than the Company; (vii) the
extensive regulation and supervision to which Farm Family Casualty is subject,
various regulatory initiatives that may affect the Company, and regulatory and
other legal actions involving the Company; (viii) Farm Family Holdings' primary
reliance, as a holding company, on dividends and other payments from Farm Family
Casualty for funds to meet its obligations, and regulatory restrictions on Farm
Family Casualty to pay such dividends; (ix) the inherent uncertainty in the
economic environment may cause the quality of the investments currently held in
the Company's investment portfolio to change; (x) the impact on the revenues and
profitability of the Company from prevailing economic, regulatory, demographic
and other conditions in New York, New Jersey and the other states in which the
company operates; (xi) the fact that since a substantial portion of the
Company's business is concentrated in a relatively small number of states, a
significant change in or the termination of the Company's relationship with the
Farm Bureaus in certain of these states could have a materially adverse effect
on the Company's results of operations and financial condition; and (xii) the
Company has entered into an agreement with the shareholders of Farm Family Life
pursuant to which the Company has the option, for a two year period beginning
July 26, 1996, to acquire Farm Family Life in exchange for common and/or
preferred stock of the Company, the exercise price for the shares of Farm Family
Life has not been determined, and there is uncertainty whether the option to
purchase will be exercised, the Company's common stock may be diluted, depending
on the valuation of Farm Family Life and certain Farm Family Life shareholders
may become significant shareholders of the Company if the option is exercised.
The Company has experienced, and can be expected in the future to experience,
storm and weather related losses which may have a material adverse impact on the
Company's results of operations, financial condition and cash flow.
"Safe Harbor" statement under the Private Securities Litigation Reform Act of
1995
With the exception of historical information, the matters discussed or
incorporated by reference in this Report on Form 10-K are forward-looking
statements that involve risks and uncertainties that could cause actual results
to differ materially from those expected and projected. Such risks and
uncertainties include, but are not limited to, the following: exposure to
catastrophic loss,general economic conditions and conditions specific to the
property and casualty insurance industry including its cyclical nature,
regulatory changes and conditions, rating agency policies and practices,
competitive factors, claims development and the impact thereof on loss reserves
and the Company's reserving policy, the adequacy of the Company's reinsurance
programs, developments in the securities markets and the impact on the Company's
investment portfolio and other risks indicated in this Report on Form 10-K and
other risk factors listed from time to time in the Company's Securities and
Exchange Commission Filings.
<TABLE>
Executive Officers of the Registrant
<CAPTION>
Date First Elected
Officer of
Registrant or
Name Age Position Presently Held with Registrant Subsidiary
- ---------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Philip P. Weber 48 President & Chief Executive Officer 1987
James J. Bettini 42 Executive Vice President - Operations 1990
Victoria M. Stanton 37 Executive Vice President, 1991
General Counsel and Secretary
Timothy A. Walsh 35 Executive Vice President - Finance and Treasurer 1996
William T. Conine 48 Senior Vice President - Information Services of 1985
Farm Family Casualty Insurance Company
Stuart C. Henderson 41 Senior Vice President - Casualty Operations of 1991
Farm Family Casualty Insurance Company
Raymond A. Osterhout 52 Senior Vice President - Investments of Farm 1987
Family Casualty Insurance Company
Dale E. Wyman 54 Senior Vice President - Marketing of Farm Family 1989
Casualty Insurance Company
</TABLE>
There are no family relationships among any of such officers nor are there any
arrangements or understandings between any person pursuant to which he/she was
elected as an officer. All officers serve at the pleasure of the Board of
Directors, but subject to the foregoing, are elected for terms of approximately
one year until the next Annual Meeting of the Company.
All the Executive Officers of the Registrant have been employed by the
Registrant or its Subsidiary in various executive or administrative capacities
for at least five years, except for the following:
Mr. Walsh has served as Executive Vice President - Finance & Treasurer of Farm
Family Holdings and Executive Vice President - Finance of Farm Family Casualty
since December 1996, and as Treasurer of Farm Family Holdings from October 1996
to December 1996. Mr. Walsh was Senior Vice President - Finance of Farm Family
Casualty from March 1996 to December 1996, and was previously Director of
Corporate Development for Farm Family Casualty from August 1995 to March 1996.
Previously, Mr. Walsh was Vice President, Finance & Chief Financial Officer with
MPW Industrial Services, Inc., Columbus, OH, from April 1994 to August 1995,
Corporate Controller of NSC Corporation, Methuen, MA from July 1992 to April
1994 and Senior Manager at KPMG Peat Marwick from July 1983 to July 1992.
<PAGE>
ITEM 2. PROPERTIES
The Company currently leases space for its home office in Glenmont, New
York from Farm Family Life. The Lease Agreement provides for Farm Family
Casualty to pay Farm Family Life an annual rental of approximately $712,000. The
lease expires on December 31, 1998. See "Related Party Transactions".
ITEM 3. LEGAL PROCEEDINGS
The Company is subject to litigation in the normal course of business.
Based upon information presently available to it, the management believes that
resolution of these legal actions will not have a material adverse effect on the
Company's consolidated financial condition. However, given the uncertainties
attendant to litigation, there can be no assurance that the Company's
consolidated results of operations and financial condition will not be
materially adversely affected by any threatened or pending litigation.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None
PART II
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON STOCK AND RELATED
STOCKHOLDER MATTERS
The Company's common stock is traded on the New York Stock Exchange. There
were approximately 34,000 registered holders of the Company's common stock at
February 24, 1997. The Company currently intends to retain any earnings in order
to develop its business and support its operations, and, as such, does not
anticipate that it will pay any dividends to stockholders in the foreseeable
future. The declaration of dividends in the future are at the discretion of the
Board of Directors of the Company, are subject to certain regulatory constraints
and will depend upon, among other things, the Company's results of operations,
financial condition, cash requirements, future prospects and other factors.
The high and low New York Stock Exchange closing market price for the
Company's Common Stock for each quarter since the Company's initial public
offering on July 26, 1996 were as follows:
For the Quarter Ended,
----------------------
September 30, 1996 December 31, 1996
------------------ -----------------
High Low High Low
19.125 16.000 20.500 18.125
<PAGE>
ITEM 6. SELECTED FINANCIAL DATA
The following table sets forth certain consolidated financial data for the
Company and its subsidiaries prior to and after the reorganization pursuant to
the Plan that took place during 1996. The consolidated statement of income data
set forth below for the years ended December 31, 1996, 1995, 1994 and 1993 and
the consolidated balance sheet data as of December 31, 1996, 1995 and 1994 are
derived from the consolidated financial statements of the Company which have
been audited by Coopers & Lybrand L.L.P, independent auditors. The consolidated
statement of income data for the year ended December 31, 1992 and the
consolidated balance sheet data as of December 31, 1993 and 1992 are derived
from the unaudited consolidated financial statements of the Company. The Company
believes that such unaudited financial data fairly reflect the consolidated
results of operations and the consolidated financial condition of the Company
for such periods. This data should be read in conjunction with Item 7
Management's Discussion and Analysis of Financial Condition and Results of
Operations as well as Item 8 Financial Statements and Supplementary Data
included elsewhere herein.
<TABLE>
<CAPTION>
($ in millions except per share data) Year Ended December 31,
Statement of Income Data: 1996 1995 1994 1993 1992
---- ---- ---- ---- ----
Revenues:
<S> <C> <C> <C> <C> <C>
Premiums $130.8 $116.9 $101.5 $96.7 $90.0
Net investment income 15.9 14.3 13.2 13.8 12.9
Net realized investment gains (losses), net (0.6) 0.9 1.3 (0.2) 1.0
Other income(1) 0.9 0.9 0.7 0.7 0.05
----------------------------------------------------
Total revenues 147.0 133.0 116.7 111.0 104.4
----------------------------------------------------
Losses and Expenses:
Losses and loss adjustment expenses 95.0 83.2 82.7 73.2 72.1
Underwriting expenses 38.2 34.9 28.8 26.8 24.0
Early retirement program expense 1.2 - - - -
Interest and other expense 0.5 0.3 0.3 0.3 0.3
----------------------------------------------------
Total losses and expenses 134.9 118.4 111.8 100.3 96.4
----------------------------------------------------
Income before federal income tax and extraordinary item 12.1 14.6 4.9 10.7 8.0
Federal income tax expense 3.7 5.0 1.4 3.1 1.8
----------------------------------------------------
Income before extraordinary item 8.4 9.6 3.5 7.6 6.2
Extraordinary item - Demutualization expense 1.5 - - - -
----------------------------------------------------
Net Income $6.9 $9.6 $3.5 $7.6 $6.2
----------------------------------------------------
Income before extraordinary item per share $2.13 $3.20 $1.18 $2.53 $2.07
----------------------------------------------------
Net income per share $1.74 $3.20 $1.18 $2.53 $2.07
----------------------------------------------------
Weighted average shares outstanding(2) 3,979,115 3,000,000 3,000,000 3,000,000 3,000,000
----------------------------------------------------
Balance Sheet Data (at December 31):
Total investments(3) $244.7 $207.9 $170.6 $177.7 $160.8
Total assets 319.4 278.3 243.1 244.1 221.5
Long term debt 1.3 2.7 2.7 2.8 2.8
Total liabilities 208.7 204.1 190.1 183.6 175.0
Total equity(3) 110.7 74.2 53.0 60.5 46.5
Book value per share $21.08 $24.72 $17.66 $20.17 $15.48
----------------------------------------------------
GAAP Ratios:
Loss and loss adjustment expense ratio(4) 72.6% 71.1% 81.5% 75.7% 80.2%
Underwriting expense ratio(5) 29.2% 29.8% 28.4% 27.7% 26.6%
Combined ratio(6) 101.8% 100.9% 109.9% 103.4% 106.8%
Statutory Data:
Statutory Combined Ratio(7) 101.8% 101.0% 108.9% 104.2% 106.0%
Statutory Surplus $83.2 $55.9 $42.9 $39.1 $33.5
Ratio of annual written premiums to surplus -
statutory basis(8) 1.61x 2.16x 2.46x 2.52x 2.73x
</TABLE>
(1) Primarily represents service fee income on the Company's property and
casualty insurance business.
(2) Gives effect to the allocation of 3,000,000 shares to eligible policyholders
on July 26, 1996 pursuant to aFarm Family Casualty's conversion from a mutual
company to a stockholder owned company.
(3) Due to the adoption by the Company on December 31, 1993 of SFAS No. 115,
"Accounting for Certain Investments in Debt and Equity Securities," total
investments and policyholders' equity were adjusted to reflect changes in market
value, which resulted in an increase of $6.8 million, a reduction of $11.1
million and an increase of $11.7 million as of December 31, 1993, 1994 and 1995,
respectively.
(4) Calculated by dividing losses and loss adjustment expenses by
premiums.
(5) Calculated by dividing underwriting expenses by premiums.
(6) The sum of the Loss and Loss Adjustment Expense Ratio and the Underwriting
Expense Ratio.
(7) The sum of the Loss & Loss Adjustment Expense Ratio and the ratio of
statutory underwriting expense divided by net written premium (8) Calculated by
dividing statutory net written premiums for the period by statutory surplus at
the end of the period.
<PAGE>
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
The "Management's Discussion and Analysis of Financial Condition and Results of
Operations" on pages 11 - 15 of the Annual Report is incorporated herein by
reference.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The consolidated financial statements of the Company, including the accompanying
notes to the consolidated financial statements and Report of Independent
Accountants on pages 16 - 32 of the Annual Report are incorporated herein by
reference.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON
ACCOUNTING AND FINANCIAL DISCLOSURE
There were no disagreements with our independent auditors.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
Certain information regarding directors of the Company under "Item 1-Election of
Directors" beginning on page 2 of the Proxy Statement is incorporated herein by
reference .
Information regarding executive officers of the Company in Item 1 of Part 1 of
this Report under the caption "Executive Officers of the Registrant" hereof is
incorporated herein by reference.
Information required by Item 405 of Regulation S-K of the Securities and
Exchange Act of 1934 located on page 13 of the Proxy Statement under the caption
"Section 16(a) Beneficial Ownership Reporting Compliance" is incorporated herein
by reference.
ITEM 11. EXECUTIVE COMPENSATION
Information regarding executive compensation is incorporated by reference to the
material under the captions "Item 1 Election of Directors - Compensation of
Directors" on page 6, "Item 3 - Approval of the Corporation's Omnibus Securities
Plan" on pages 6-10, "Executive Compensation" on pages 14-19, and "Common Stock
Performance Graph" on page 20 of the Proxy Statement.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
MANAGEMENT
Information regarding security ownership of certain beneficial owners and
management located in the material under the caption "Stock Ownership of
Management and Certain Beneficial Owners" on pages 11-13 of the Proxy Statement
is incorporated herein by reference.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Information regarding certain relationships and related transactions located in
the material under the headings "Certain Relationships and Related Transactions"
on pages 21-22 of the Proxy Statement is incorporated herein by reference.
<PAGE>
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON
FORM 8-K
(a) 1
and 2 An "Index to Financial Statements and Financial
Statement Schedules" has been filed as a part of this
Report beginning on page S-1 hereof.
(a) 3 Exhibits:
An "Exhibit Index" has been filed as a part of this
Report beginning on page E-1 hereof and is incorporated
herein by reference.
(b) Reports on Form 8-K:
On October 29, 1996, a Report on Form 8-K was filed
regarding a press release announcing the Company's
operating results for the three month period and the
nine month period ended September 30, 1996.
On November 6, 1996, a Report on Form 8-K was filed
regarding a press release announcing the resignation of
Charles E. Simon as Executive Vice President and
Treasurer.
On December 16, 1996, a Report on Form 8-K was filed
regarding a press release announcing the implementation
of a voluntary early retirement program and other
changes in the Company's benefit plans.
<PAGE>
FARM FAMILY HOLDINGS, INC. AND SUBSIDIARIES
INDEX TO FINANCIAL STATEMENTS AND FINANCIAL STATEMENT SCHEDULES
Year Ended December 31, 1996
The following consolidated financial statements, notes thereto and related
information of Farm Family Holdings, Inc. and Subsidiaries are incorporated
herein by reference to the Company's Annual Report.
Page in
Annual Report
Consolidated Statements of Income 16
Consolidated Balance Sheets 17
Consolidated Statements of Stockholders' Equity 18
Statements of Consolidated Cash Flows 19
Notes to Consolidated Financial Statements 20
Report of Independent Accountants 32
The following additional financial statement schedules are furnished herewith
pursuant to the requirements of Form 10-K.
Page
Report of Independent Accountants S-2
Schedule I Summary of Investments -
Other than Investments in Related Parties S-3
Schedule II Condensed Financial Information of the Registrant S-4
Schedule IV Reinsurance S-8
Schedule VI Supplemental Information Concerning
Property - Casualty Insurance Operations S-9
S-1
<PAGE>
Report of Independent Accountants
To the Shareholders and Board of Directors
of Farm Family Holdings, Inc.
Our report on the consolidated financial statements of Farm Family Holdings,
Inc. and Subsidiaries has been incorporated by reference in this Form 10-K from
page 32 of the 1996 Annual Report to Shareholders of Farm Family Holdings, Inc.
and Subsidiaries. In connection with our audits of such financial statements, we
have also audited the related financial statement schedules listed in the index
on page S-1 of this Form 10-K
In our opinion, the financial statement schedules referred to above, when
considered in relation to the basic financial statements taken as a whole,
present fairly, in all material respects, the information required to be
included therein.
Coopers and Lybrand L.L.P.
Albany, New York
February 13, 1997
S-2
<TABLE>
FARM FAMILY HOLDINGS, INC. AND SUBSIDIARIES
SCHEDULE 1 - SUMMARY OF INVESTMENTS
OTHER THAN INVESTMENTS IN RELATED PARTIES
DECEMBER 31, 1996
<CAPTION>
($ in thousands)
Cost
Amortized/ Balance Sheet
Type of Investment Cost Fair Value Carrying Value
- ------------------ ---- ---------- --------------
Available for sale
Fixed maturities:
<S> <C> <C> <C>
United States Government and government agencies $18,401 $18,743 $18,743
States, municipalities and political subdivisions 42,568 43,950 43,950
Public utilities 26,244 26,233 26,233
Corporate 109,241 111,643 111,643
Mortgage-backed 9,676 10,342 10,342
Redeemable preferred stock 8,096 8,277 8,277
-----------------------------------------------
Total fixed maturities 214,226 219,188 219,188
-----------------------------------------------
Equity securities:
Common stocks:
Public utilities 1,219 1,314 1,314
Banks, trusts and insurance companies 244 5,490 5,490
Industrial and miscellaneous 1,083 1,104 1,104
-----------------------------------------------
Total equity securities 2,546 7,908 7,908
Total available for sale 224,598 234,922 234,922
-----------------------------------------------
Held to maturity
States, municipalities and political subdivisions 5,423 5,482 5,423
Corporate 4,359 4,491 4,359
-----------------------------------------------
Total held to maturity 9,782 9,973 9,782
-----------------------------------------------
Mortgage loans on real estate 1,745 1,745 1,745
Short-term investments 5,333 5,333 5,333
Other invested assets 748 748 748
-----------------------------------------------
Total investments $234,380 $244,895 $244,704
-----------------------------------------------
</TABLE>
S-3
<PAGE>
FARM FAMILY HOLDINGS, INC. AND SUBSIDIARIES
SCHEDULE II
CONDENSED FINANCIAL INFORMATION OF REGISTRANT
STATEMENT OF OPERATIONS
($ in Thousands)
For the Year Ended
December 31, 1996
-----------------
Revenues:
Investment Income $319
Expenses:
General and Administrative Expenses 580
-----------------
Loss Before Federal Income Tax Benefit (261)
Federal Income Tax Benefit 87
-----------------
Net Loss from operations (174)
-----------------
Income From Investment in Subsidiary 7,098
-----------------
Net Income $6,924
=================
S-4
<PAGE>
FARM FAMILY HOLDINGS, INC. AND SUBSIDIARIES
SCHEDULE II
CONDENSED FINANCIAL INFORMATION OF REGISTRANT
BALANCE SHEET
($ in Thousands)
As of
Assets: December 31, 1996
-----------------
Fixed Maturities Available for Sale $7,438
Investment in Subsidiaries 100,419
Short-term Investments 3,350
Cash 1
Other Assets 362
-----------------
Total Assets $111,570
=================
Liabilities:
Payable to Affiliates $356
Other Liabilities 473
-----------------
Total Liabilities 829
Commitments and Contingencies
Stockholders' Equity
Common Stock, $.01 par value, 10,000,000 shares authorized
and 5,253,813 shares issued and outstanding 53
Additional Paid in Capital 35,337
Retained Earnings 75,316
Unrealized Investment Gains 35
-----------------
Total Stockholders' Equity 110,741
-----------------
Total Liabilities and Stockholders' Equity $111,570
=================
S-5
<PAGE>
FARM FAMILY HOLDINGS, INC. AND SUBSIDIARIES
SCHEDULE II
CONDENSED FINANCIAL INFORMATION OF REGISTRANT
STATEMENT OF CASH FLOWS
($ in Thousands)
For the Year Ended
CASH FLOWS FROM OPERATING ACTIVITIES: December 31, 1996
- ------------------------------------- -----------------
Net Income $6,924
Amortization of Bond Discount (4)
Changes in:
Equity in Net Income of Subsidiary (7,098)
Accrued Investment Income (152)
Federal Income Taxes Recoverable (133)
Other Assets (47)
Payable to Affiliates 356
Other Liabilities (72)
Total Adjustments (7,150)
-----------------
Net Cash Provided by Operating Activities (226)
-----------------
CASH FLOWS FROM INVESTING ACTIVITIES:
- -------------------------------------
Investment Purchases:
Investment in Subsidiary (20,001)
Fixed Maturities Available for Sale (7,380)
Change in Short-Term Investments (3,350)
-----------------
Net Cash Used in Investing Activities (30,731)
-----------------
CASH FLOWS FROM FINANCING ACTIVITIES:
- -------------------------------------
Proceeds from IPO & Subscription Offerings 44,880
Demutualization Payments to Policyholders and Noteholders (12,842)
IPO Expenses Paid (1,080)
-----------------
Net Cash Provided by Financing Activities 30,958
-----------------
Net Change in Cash 1
Cash, beginning of year -
-----------------
Cash, end of year $1
=================
S-6
<PAGE>
FARM FAMILY HOLDINGS, INC. AND SUBSIDIARIES
SCHEDULE II
CONDENSED FINANCIAL INFORMATION OF REGISTRANT
NOTES TO CONDENSED FINANCIAL INFORMATION
($ in Thousands)
Basis of Presentation
The financial statements of the registrant should be read in conjunction with
the Consolidated Financial Statements and notes thereto included in the Farm
Family Holdings, Inc. 1996 Annual Report.
The accompanying condensed financial information includes the accounts of Farm
Family Holdings, Inc. Farm Family Holdings, Inc. was incorporated on February
14, 1996.
S-7
<PAGE>
<TABLE>
FARM FAMILY HOLDINGS, INC. AND SUBSIDIARIES
SCHEDULE IV
REINSURANCE
($ in Thousands)
<CAPTION>
Earned Premiums
---------------
Percentage
Ceded to Other Assumed from of Amount
Gross Companies Other Net Amount Assumed to
Amount Companies Net
--------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Year Ended December 31, 1996
Property/Casualty Insurance $142,794 $18,945 $6,931 $130,780 5.3%
Year Ended December 31, 1995
Property/Casualty Insurance 131,717 21,333 6,552 116,936 5.6%
Year Ended December 31, 1994
Property/Casualty Insurance 117,384 23,608 7,690 101,466 7.6%
</TABLE>
S-8
FARM FAMILY HOLDINGS, INC. AND SUBSIDIARIES
SCHEDULE VI
SUPPLEMENTAL INFORMATION CONCERNING CONSOLIDATED
PROPERTY-CASUALTY INSURANCE OPERATIONS
($ in Thousands)
<TABLE>
<CAPTION>
Reserve for Adjustment
Unpaid Expense
Claims Incurred Amortization Paid Claims
Deferred & Claim Discount Net Related to of Deferred and Claim
Acquisition Adjustment if any Unearned Earned Investment Current Prior Acquisition Adjustment Premium
Costs Expenses Deducted Premiums Premiums Income Year Year Costs Expenses Written
Affiliation with
Registrant
- ---------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Year Ended
December 31, 1996
Property and
Casualty business $ 10,682 $141,220 $55,945 $130,780 $15,952 $100,418 $(5,441) $26,348 $89,917 $133,844
Year Ended
December 31, 1995
Property and
Casualty business 10,527 137,978 52,799 116,936 14,326 88,366 (5,182) 23,162 73,585 120,834
Year Ended
December 31, 1994
Property and
Casualty business 8,671 127,954 48,843 101,466 13,190 86,370 (3,690) 19,469 77,672 105,614
</TABLE>
S-9
EXHIBIT INDEX
FARM FAMILY HOLDINGS, INC. FORM 10-K
FOR THE YEAR ENDED DECEMBER 31, 1996
<TABLE>
Sequential
Page Number
Exhibit Number Document Description
*2.1 Plan of Reorganization and Conversion dated February 14, 1996 as amended by
Amendment No. 1, dated April 23, 1996
*3.1 Certificate of Incorporation of Farm Family Holdings, Inc.
*3.2 Bylaws of Farm Family Holdings, Inc.
*10.1 Option Purchase Agreement, dated February 14, 1996, among Farm Family Holdings, Inc.
and The Shareholders of Farm Family Life Insurance Company Listed Therein
10.2 Amended and Restated Expense Sharing Agreement, made effective as of February 14,
1996, by and among Farm Family Mutual Insurance Company, Farm Family Life Insurance
Company and Farm Family Holdings, Inc.
*10.3 Indenture of Lease, made the 1st day of January 1988,
between Farm Family Life Insurance Company and Farm Family
Mutual Insurance Company as amended by the Amendment to
Lease, effective January 1, 1994
10.4 Underlying Multi-Line Per Risk Reinsurance Contract, effective January 1, 1995,
issued to Farm Family Mutual Insurance Company by The Subscription Reinsurer(s)
Executing the Interests and Liabilities Agreement(s) Attached Thereto, as amended by
Addendum No. 1, effective January 1, 1996 (Incorporated by reference to Registration
Statement No. 333-4446), Addendum No. 2, effective January 1, 1996, Addendum No. 3,
effective July 26, 1996
10.5 Umbrella Quota Share Reinsurance Contract, effective January 1, 1995, issued to Farm
Family Mutual Insurance Company and United Farm Family Insurance Company, as amended
by Addendum No. 1, effective January 1, 1995 (Incorporated by reference to
Registration Statement No. 333-4446), and Addendum No. 2 effective July 26, 1996
*10.6 Excess Catastrophe Reinsurance Contract effective January 1, 1996, issued to Farm
Family Mutual Insurance Company
*10.7 Assumption Agreement, commencing January 1, 1995, between Farm Family Mutual
Insurance Company and United Farm Family Insurance Company
*10.8 Service Agreement, made effective as of July 25, 1988 by and between Farm Family
Mutual Insurance Company and United Farm Family Insurance Company
*10.9 Form of Membership List Purchase Agreement between Farm Family Mutual Insurance
Company and each of the Farm Bureaus
*10.10 Farm Family Mutual Insurance Company 8% Subordinated Surplus Certificate, as amended
by Certificate of Amendment No. 1 and Trust Indenture, dated as of December 29, 1976
relating to the 8% Subordinated Surplus Certificates
E-1
Sequential
Page Number
<S> <C>
Exhibit Number Document Description
*10.11 Farm Family Mutual Insurance Company 5% Debenture, as amended by Certificate of
Amendment, effective January 1, 1969, Certificate of Amendment No. 2, effective
January 1, 1979, Certificate of Amendment No. 3 and Supplemental Trust Indenture,
dated as of August 25, 1955 Amending Trust Indenture, dates as of May 16, 1955
Relating to The 5% Debentures, as amended by Certificate of Amendment, dated as of
August 25, 1955, Certificate of Amendment No. 2, dated as of August 25, 1955,
Certificate of Amendment No. 3 dated as of August 25, 1955
*10.12 Farm Family Mutual Insurance Company Officer Severance Pay Plan, adopted effective
August 1, 1994
*10.13 Farm Family Mutual Insurance Company Supplemental Employee Retirement Plan, adopted
as of January 1, 1994
10.14 Farm Family Holdings, Inc. Directors' Deferred Compensation Plan, effective January
1, 1997
10.15 Farm Family Holdings, Inc. Officers' Deferred Compensation Plan, effective January
1, 1997
10.16 Farm Family Holdings, Inc. Annual Incentive Plan effective January 1, 1997
10.17 Farm Family Supplemental Savings and Profit Sharing Plan effective January 1, 1997
10.18 Tax Payment Allocation Agreement effective January 1, 1996 by and between Farm
Family Holdings, Inc. and Farm Family Casualty Insurance Company
11 Computation of Earnings per Common Share
13 Farm Family Holdings, Inc. 1996 Annual Report
21 Subsidiaries of the Registrant
* Incorporated by reference to Registration Statement No. 333-4446
</TABLE>
E-2
<PAGE>
Exhibit 10.2
AMENDED AND RESTATED
EXPENSE SHARING AGREEMENT
This Amended and Restated Expense Sharing Agreement, made effective as of
February 14, 1996, by and among Farm Family Mutual Insurance Company ("FFMIC"),
Farm Family Life Insurance Company ("FFLIC"), and Farm Family Holdings, Inc.
("FFH").
WHEREAS, FFMIC and FFLIC entered into an Expense Sharing Agreement,
effective as of January 1, 1996 (the "Agreement"), providing for the sharing of
certain expenses between the parties and defining the methods to be used for
allocating such expenses; and
WHEREAS, FFMIC and FFLIC wish to amend and restate the Agreement, for the
purpose of making FFH a party; and WHEREAS, FFH wishes to become a party to the
Agreement, as amended and restated, for the purpose of sharing certain expenses
with FFMIC and FFLIC using the methodology described therein.
NOW, THEREFORE, in consideration of the premises and of the mutual
covenants herein contained, and intending to be legally bound hereby, FFMIC,
FFLIC and FFH agree that the text of the Agreement is hereby amended and
restated, effective February 14, 1996, to read in full as follows:
1. Methods of Allocation. Subject to New York Insurance Law and
Regulations, the methods for allocating expenses shared pursuant to this
Agreement shall be those used by the parties for internal cost distribution
including, where appropriate, time records prepared at least annually for this
purpose.
As used in this Agreement, the following capitalized terms shall have
the following meanings:
(a) Weighted Time Method. Weighted Time Method means the method of allocation
based on a series of ratios derived from weighted time studies conducted from
time to time for the purpose of quantifying the efforts of directors, officers
and employees as applied to each party.
(b) Written Premium Method. Written Premium Method means the method of
allocation based on the ratio of (i) the annual amount of direct written premium
written by each individual party to this Agreement as reported in the statements
filed with the New York Insurance Department to (ii) the annual amount of direct
written premium written by all parties to this Agreement in the aggregate as
reported in the statements filed with the New York Insurance Department. Such
direct written premiums for clauses (i) and (ii) shall be calculated as gross
premiums less return premiums.
(c) Actual Usage. Actual Usage means the estimated actual hours (or
fractions thereof) of use benefiting a party.
2. Direct Expenses. All expenses for goods, services or facilities that are
incurred for the sole benefit of any party shall be charged to the party for
whose benefit such expenses were incurred at cost.
3. Shared Expenses. If any party incurs an expense for goods, services, or
facilities that benefits the other parties to this Agreement, then that expense
shall be shared among the parties on a reasonable and equitable basis. Unless
otherwise agreed to by the parties hereto the following basis of allocation
shall be used:
(a) Salaries. Salaries and expenses related to officers and employees,
including but not limited to employee benefits and payroll taxes, shall be
allocated pro rata among the parties according to the Weighted Time Method.
(b) Directors' Expenses. Directors' expenses shall be allocated pro rata
among the parties according to the Weighted Time Method.
(c) Office Space. (i) Home office costs will be shared between FFMIC and
FFLIC pursuant to a presently existing lease between these companies, dated July
1, 1988, as amended. FFH agrees to reimburse FFMIC for its share of Home Office
costs according to the Weighted Time Method. (ii) The costs for all other joint
office space shall be allocated among the parties according to the Weighted Time
Method.
(d) Fixed Assets. Where fixed assets, including but not limited to office
equipment, furniture, computer equipment and motor vehicles, are held in the
name of one party and used jointly by the parties, the annual depreciation or
costs of such assets shall be allocated pro rata among the parties according to
the Weighted Time Method.
(e) General Expenses. (i) General expenses, including but not limited to
postage, telephone, equipment rental, books and subscriptions, shall be
allocated pro rata among the parties according to the Weighted Time Method. (ii)
The costs associated with conferences and meetings shall be allocated pro rata
among the parties according to the Written Premium Method. (iii) The costs of
electronic data processing services shall be allocated pro rata among the
parties according to Actual Usage.
(f) Advertising. Advertising expenses shall be allocated pro rata among the
parties according to the Written Premium Method.
(g) Other Shared Expenses. All other shared expenses, if any, shall be
allocated among the parties in accordance with the applicable New York Insurance
Law and Regulations, as the same may be amended from time to time.
4. Modification of Allocations. The methods and bases used to allocate the
expenses shared pursuant to this Agreement shall be reviewed, at least annually,
and modified and adjusted by the mutual agreement of the parties hereto where
necessary or appropriate to reflect fairly and equitably the actual incidence of
cost incurred by the parties.
To the extent that any allocation methodology set forth herein is
determined to be contrary to, or in violation of, an existing New York Insurance
Law or Regulation, the parties agree that this Agreement shall be automatically
conformed to comply with said Law or Regulation.
5. Payment. The amounts due hereunder shall be determined at the end of
each month using the same accounting principles and practices used for filing
quarterly and annual statements with the New York Insurance Department. All
charges under this Agreement shall be paid within fifteen (15) days following
the end of each month.
6. Termination and Modification. This Agreement or any part thereof shall
remain in effect until terminated in whole or in part by mutual consent or by
any party upon giving at least 60 days advance written notice.
This Agreement may be amended only by mutual consent in writing signed by
the parties.
7. Settlement on Termination. No later than thirty (30) days after the
effective date of termination of this Agreement, each party shall deliver to the
other parties a detailed written statement of all charges incurred and not
included in any statement prior to the effective date of termination. The amount
owed hereunder shall be due and payable within thirty (30) days of receipt of
such statement.
8. Assignment. This Agreement and any rights pursuant hereto shall not be
assignable by any party hereto, except by operation of law. Nothing in this
Agreement, expressed or implied, is intended to confer on any person other than
the parties hereto, or their respective legal successors, any rights, remedies,
obligations or liabilities, or to relieve any person other than the parties
hereto, or their respective legal successors, from any obligations or
liabilities that would otherwise be applicable.
9. Governing Law. This Agreement is made pursuant to and shall be governed
by, interpreted under, and the rights of the parties determined in accordance
with the laws of the State of New York.
10. Notice. All notices, statements or requests provided for hereunder
shall be in writing and shall be deemed to have been duly given when delivered
by hand to an officer of the other party, or when deposited with the U.S. Postal
Service, as certified or registered mail, postage prepaid, addressed:
(a) If to FFMIC to:
Farm Family Mutual Insurance Company
PO. Box 656 Albany, New York 12201
Attn: Corporate Secretary
(b) If to FFLIC to:
Farm Family Life Insurance Company
PO. Box 656
Albany, New York 12201
Attn: Corporate Secretary
(c) If to FFH to:
Farm Family Holdings, Inc.
P.O. Box 656
Albany, New York 12201
Attn: Corporate Secretary
or to such person or place as each party may from time to time designate by
written notice sent as aforesaid.
11. Headings. The headings of the various paragraphs of this Agreement are
for convenience only, and shall be accorded no weight in the construction of
this Agreement.
12. Entire Agreement. This Agreement, together with such Amendments as may
from time to time be executed in writing by the parties, constitutes the entire
Agreement among the parties with respect to the subject matter hereof.
<PAGE>
IN WITNESS WHEREOF, the parties have caused this Agreement to be executed
by their respective duly authorized officers as of the date and year first above
written.
FARM FAMILY MUTUAL INSURANCE COMPANY
BY: /s/ Charles E. Simon
--------------------------
Charles E. Simon
Senior Vice President
and Chief Financial Officer
FARM FAMILY LIFE INSURANCE COMPANY
BY: /s/ Philip P. Weber
------------------------
Philip P. Weber
Executive Vice President and Chief
Executive Officer
FARM FAMILY HOLDINGS, INC.
BY: /s/ Philip P. Weber
------------------------
Philip P. Weber
President and Chief Executive
Officer
<PAGE>
Exhibit 10.4
Addendum No. 2
to the
Underlying Multi-Line Per Risk
Reinsurance Contract
Effective: January 1, 1995
issued to
Farm Family Mutual Insurance Company
Glenmont, New York
(hereinafter referred to as the "Company")
It Is Hereby Agreed, effective January 1, 1996, that paragraph A of Article X -
Reinsurance Premium (BRMA 43K) - shall be deleted and the following substituted
therefor:
"A. As premium for the reinsurance provided hereunder, the Company shall pay the
Reinsurer 7.0% of its net earned premium (as defined in Article VII)."
The provisions of this Contract shall remain otherwise unchanged.
In Witness Whereof, the Company by its duly authorized representative has
executed this Addendum as of the date undermentioned at:
Glenmont, New York, this _______ day of ___________________________________
199___.
_/s/ Philip P. Weber_____________________________
Farm Family Mutual Insurance Company
<PAGE>
Addendum No. 2
to the
Interests and Liabilities Agreement
of
United Farm Family Insurance Company
Glenmont, New York
(hereinafter referred to as the "Subscribing Reinsurer")
with respect to the
Underlying Multi-Line Per Risk
Reinsurance Contract
Effective: January 1, 1995
issued to
Farm Family Mutual Insurance Company
Glenmont, New York
(hereinafter referred to as the "Company")
The Subscribing Reinsurer hereby accepts Addendum No. 2, as duly executed by the
Company, as part of the Contract, effective January 1, 1996.
In Witness Whereof, the Subscribing Reinsurer by its duly authorized
representative has executed this Addendum as of the date undermentioned at:
Glenmont, New York, this _______ day of ___________________________________
199___.
/s/ Charles E. Simon________________________
United Farm Family Insurance Company
<PAGE>
Addendum No. 3
to the
Underlying Multi-Line Per Risk
Reinsurance Contract
Effective: January 1, 1995
issued to
Farm Family Mutual Insurance Company
Glenmont, New York
(hereinafter referred to as the "Company")
It Is Hereby Agreed, effective July 26, 1996, that all references in this
Contract to "Farm Family Mutual Insurance Company" shall be amended to read
"Farm Family Casualty Insurance Company."
The provisions of this Contract shall remain otherwise unchanged.
In Witness Whereof, the Company by its duly authorized representative has
executed this Addendum as of the date undermentioned at:
Glenmont, New York, this ________ day of __________________________________
199___.
__/s/ Philip P. Weber_____________________________
Farm Family Casualty Insurance Company
<PAGE>
Addendum No. 3
to the
Interests and Liabilities Agreement
of
United Farm Family Insurance Company
Glenmont, New York
(hereinafter referred to as the "Subscribing Reinsurer")
with respect to the
Underlying Multi-Line Per Risk
Reinsurance Contract
Effective: January 1, 1995
issued to
Farm Family Mutual Insurance Company
Glenmont, New York
(hereinafter referred to as the "Company")
The Subscribing Reinsurer hereby accepts Addendum No. 3, as duly executed by the
Company, as part of the Contract, effective July 26, 1996.
In Witness Whereof, the Subscribing Reinsurer by its duly authorized
representative has executed this Addendum as of the date undermentioned at:
Glenmont, New York, this _______day of___________________________________199___.
___/s/ Timothy A. Walsh______________________
United Farm Family Insurance Company
<PAGE>
Addendum No. 2
to the
Umbrella Quota Share
Reinsurance Contract
Effective: January 1, 1995
issued to
Farm Family Mutual Insurance Company
Glenmont, New York
(hereinafter referred to as the "Company")
It Is Hereby Agreed, effective July 26, 1996, that all references in this
Contract to "Farm Family Mutual Insurance Company" shall be amended to read
"Farm Family Casualty Insurance Company."
The provisions of this Contract shall remain otherwise unchanged.
In Witness Whereof, the Company by its duly authorized representative has
executed this Addendum as of the date undermentioned at:
Glenmont, New York, this ____5____ day of __December____________________________
1996___.
/s/ Philip P. Weber________________________________
Farm Family Casualty Insurance Company
<PAGE>
Addendum No. 2
to the
Interests and Liabilities Agreement
of
Continental Casualty Company
Chicago, Illinois
(hereinafter referred to as the "Subscribing Reinsurer")
with respect to the
Umbrella Quota Share
Reinsurance Contract
Effective: January 1, 1995
issued to
Farm Family Mutual Insurance Company
Glenmont, New York
(hereinafter referred to as the "Company")
The Subscribing Reinsurer hereby accepts Addendum No. 2, as duly executed by the
Company, as part of the Contract, effective July 26, 1996.
In Witness Whereof, the Subscribing Reinsurer by its duly authorized
representative has executed this Addendum as of the date undermentioned at:
Chicago, Illinois, this_______day of____________________________________199___.
---------------------------------------------------
Continental Casualty Company
<PAGE>
Addendum No. 2
to the
Interests and Liabilities Agreement
of
United Farm Family Insurance Company
Glenmont, New York
(hereinafter referred to as the "Subscribing Reinsurer")
with respect to the
Umbrella Quota Share
Reinsurance Contract
Effective: January 1, 1995
issued to
Farm Family Mutual Insurance Company
Glenmont, New York
(hereinafter referred to as the "Company")
The Subscribing Reinsurer hereby accepts Addendum No. 2, as duly executed by the
Company, as part of the Contract, effective July 26, 1996.
In Witness Whereof, the Subscribing Reinsurer by its duly authorized
representative has executed this Addendum as of the date undermentioned at:
Glenmont, New York, this ____5____ day of ______December____________________
1996___.
/s/ Timothy A. Walsh_______________________________
United Farm Family Insurance Company
<PAGE>
Addendum No. 2
to the
Interests and Liabilities Agreement
of
Folksamerica Reinsurance Company
New York, New York
(hereinafter referred to as the "Subscribing Reinsurer")
with respect to the
Umbrella Quota Share
Reinsurance Contract
Effective: January 1, 1995
issued to
Farm Family Mutual Insurance Company
Glenmont, New York
(hereinafter referred to as the "Company")
The Subscribing Reinsurer hereby accepts Addendum No. 2, as duly executed by the
Company, as part of the Contract, effective July 26, 1996.
In Witness Whereof, the Subscribing Reinsurer by its duly authorized
representative has executed this Addendum as of the date undermentioned at:
New York, New York, this _______ day of ___________________________________
199___.
---------------------------------------------------
Folksamerica Reinsurance Company
<PAGE>
Addendum No. 2
to the
Interests and Liabilities Agreement
of
Kemper Reinsurance Company
Long Grove, Illinois
(hereinafter referred to as the "Subscribing Reinsurer")
with respect to the
Umbrella Quota Share
Reinsurance Contract
Effective: January 1, 1995
issued to
Farm Family Mutual Insurance Company
Glenmont, New York
(hereinafter referred to as the "Company")
The Subscribing Reinsurer hereby accepts Addendum No. 2, as duly executed by the
Company, as part of the Contract, effective July 26, 1996.
In Witness Whereof, the Subscribing Reinsurer by its duly authorized
representative has executed this Addendum as of the date undermentioned at:
Long Grove, Illinois, this _______ day of________________________________199___.
---------------------------------------------------
Kemper Reinsurance Company
<PAGE>
Addendum No. 2
to the
Interests and Liabilities Agreement
of
Signet Star Reinsurance Company
Wilmington, Delaware
(hereinafter referred to as the "Subscribing Reinsurer")
with respect to the
Umbrella Quota Share
Reinsurance Contract
Effective: January 1, 1995
issued to
Farm Family Mutual Insurance Company
Glenmont, New York
(hereinafter referred to as the "Company")
The Subscribing Reinsurer hereby accepts Addendum No. 2, as duly executed by the
Company, as part of the Contract, effective July 26, 1996.
In Witness Whereof, the Subscribing Reinsurer by its duly authorized
representative has executed this Addendum as of the date undermentioned at:
Florham Park, New Jersey, this _______ day of _______________________________
199___.
---------------------------------------------------
Signet Star Reinsurance Company
<PAGE>
Exhibit 10.14
FARM FAMILY HOLDINGS, INC.
DIRECTORS' DEFERRED COMPENSATION PLAN
<TABLE>
FARM FAMILY HOLDINGS, INC.
DIRECTORS' DEFERRED COMPENSATION PLAN
TABLE OF CONTENTS
Page No.
<S> <C> <C>
ARTICLE 1 DEFINITIONS 1
1.01 Accrued Benefit 1
1.02 Agreement 1
1.03 Annual Deferral Amount 1
1.04 Board of Directors 1
1.05 Change in Control 1
1.06 Code 2
1.07 Company 2
1.08 Compensation 2
1.09 Committee 2
1.10 Deferred Amounts 2
1.11 Designated Beneficiary(ies) 2
1.12 Director 2
1.13 Distribution Election 2
1.14 Earnings 3
1.15 Effective Date 3
1.16 Election of Deferral 3
1.17 Eligible Participant 3
1.18 ERISA 3
1.19 Notice of Discontinuance 3
1.20 Participant 3
1.21 Plan 3
1.22 Plan Year 3
1.23 Retirement Book Account 3
1.24 Secretary 3
1.25 Termination Date 3
1.26 Unforeseeable Emergency 3
ARTICLE 2 PARTICIPATION and ELIGIBILITY 4
2.01 Commencement of Participation 4
2.02 Cessation of Participation 4
2.03 Eligibility 4
2.04 Cessation of Eligibility 4
<PAGE>
ARTICLE 3 CONTRIBUTIONS 4
3.01 Election to Defer Compensation 4
3.02 Change of Election to Defer 4
3.03 Termination of Election to Defer 5
3.04 Deferral Amount 5
ARTICLE 4 ACCOUNTS AND ALLOCATIONS 5
4.01 Deferred Amounts 5
4.02 Earnings Credited to Retirement Book Account 5
4.03 Vested Interest 5
ARTICLE 5 DISTRIBUTIONS 5
5.01 Methods and Election of Distribution of Accrued Benefit 5
5.02 Time of Distribution 6
5.03 Distribution Upon Change in Control 6
5.04 Distribution in the Event of Unforeseeable Emergency 6
ARTICLE 6 ADMINISTRATION 6
6.01 Appointment of Committee 6
6.02 Compensation of Committee 6
6.03 Rules of Plan 6
6.04 Agents and Employees 6
6.05 Records 6
6.06 Delegation of Authority 7
6.07 Eligibility 7
6.08 Indemnification 7
ARTICLE 7 MISCELLANEOUS 7
7.01 No Trust Created 7
7.02 Benefits Payable Only From General Corporate Asset -
Unsecured General Creditor Status of Participant 7
7.03 No Contract of Retention 8
7.04 Benefits Not Transferable 8
7.05 Determination of Benefits 8
7.06 Amendment or Termination 9
7.07 Severability of Provisions 10
7.08 Headings 10
7.09 Inurement 10
7.10 Notice 10
7.11 Governing Law 10
7.12 Pronouns 10
</TABLE>
<PAGE>
FARM FAMILY HOLDINGS, INC.
DIRECTORS' DEFERRED COMPENSATION PLAN
Farm Family Holdings, Inc. hereby establishes this Directors' Deferred
Compensation Plan for the members of its Board of Directors and the members of
the Boards of Directors of its affiliates. The Plan is comprised of this plan
document and each valid, executed Directors' Deferred Compensation Plan
Agreement entered into by and between the Company and a Participant.
The Plan is not intended to be a qualified plan pursuant to the Code; the Plan
is intended to be unfunded and maintained to qualify for purposes of Sections
201(2), 301(a)(3), 401(a)(1) and 402(b)(6) of ERISA.
ARTICLE 1
DEFINITIONS
1.01 Accrued Benefit: The sum of all Deferred Amounts credited to the
Participant's Retirement Book Account and due and owing to the Participant or
Designated Beneficiary pursuant to the Plan and the applicable Agreement,
together with Earnings thereon, less any distributions made hereunder.
1.02 Agreement: The Directors' Deferred Compensation Plan Agreement entered
into by and between the Company and an Eligible Participant. The Agreement
includes an Eligible Participant's Election(s) of Deferral, Distribution
Election and Notice of Discontinuance.
1.03 Annual Deferral Amount: The amount selected for deferral by an
Eligible Participant pursuant to Article 3.
1.04 Board of Directors: The Board of Directors of the Company.
1.05 Change in Control: A change in control of the Company of a nature that
would be required to be reported in response to Item 6(e) of Schedule 14A of
Regulation 14A under the Securities Exchange Act of 1934, as amended (the
"Exchange Act"), whether or not the Company is subject to the Exchange Act at
such time; provided, however, that without limiting the generality of the
foregoing, a Change in Control will in any event be deemed to occur if and when:
(a) any person (as such term is used in paragraphs 13(d) and
14(d)(2) of the Exchange Act, hereinafter in this definition,
"Person"), other than the Company or a subsidiary or employee benefit
plan of the Company or subsidiary, becomes the beneficial owner (as
defined in Rule 13d-3 under the Exchange Act), directly or indirectly,
of securities of the Company representing more than twenty-five percent
(25%) of the combined voting power of the Company's then outstanding
securities;
(b) stockholders approve a merger, consolidation or other
business combination (a "Business Combination") other than a Business
Combination in which holders of common stock of the Company immediately
prior to the Business Combination have substantially the same
proportionate ownership of common stock of the surviving corporation
immediately after the Business Combination as immediately before;
(c) stockholders approve either (i) an agreement for the sale
or disposition of all or substantially all of the Company's assets to
any entity that is not a subsidiary of the Company, or (ii) a plan of
complete liquidation; or
(d) the persons who were members of the Board of Directors
immediately before a tender offer by any Person other than the Company
or a subsidiary, or before a merger, consolidation or contested
election, or before any combination of such transactions, cease to
constitute a majority of the Board of Directors as a result of such
transaction or transactions.
1.06 Code: The Internal Revenue Code of 1986, as amended.
1.07 Company: Farm Family Holdings, Inc., a Delaware Corporation, and any
successor thereto.
1.08 Compensation: The annual retainer and meeting fees, as applicable,
payable to an Eligible Participant by the Company or an affiliate thereof on
account of the Eligible Participant's services therefor as a Director.
1.09 Committee: The committee comprised of three (3) or more Directors
selected by the Board of Directors to --------- administer the Plan.
1.10 Deferred Amounts: Amounts of Compensation deferred under the Plan and
credited to a Retirement Book Account.
1.11 Designated Beneficiary(ies): A person or persons designated by the
Participant to receive the Participant's Accrued Benefit in this Plan upon the
death of the Participant. If no such designation has been received by the
Committee prior to the Participant's death, the Participant's then living spouse
shall be treated as the Designated Beneficiary. If the Participant is not
survived by a spouse, the then living children of the Participant, if any, shall
be treated as the Designated Beneficiary. If the Participant is not survived by
any children, the estate of the Participant shall be treated as the Designated
Beneficiary.
1.12 Director: A member of the Board of Directors of the Company and/or the
Board of Directors of one or more affiliates of the Company.
1.13 Distribution Election: A written election filed by the Participant as
part of the Agreement with the Committee specifying the method of distribution
of the Participant's Accrued Benefit.
1.14 Earnings: Interest credited to the Participant's Retirement Book
Account for each month, at the rate equal to the "Prime Rate" as published in
the "Money Rates" section of the Wall Street Journal, on the first business day
of the calendar quarter containing such month.
1.15 Effective Date: January 1, 1997.
1.16 Election of Deferral: A written notice filed by an Eligible
Participant with the Committee pursuant to which the Participant elects to defer
receipt of Compensation under the Plan. The Election of Deferral is part of the
Agreement.
1.17 Eligible Participant: An individual who is a Director.
1.18 ERISA: The Employee Retirement Income Security Act of 1974, as
amended.
1.19 Notice of Discontinuance: A written notice filed by the Eligible
Participant with the Committee requesting the withdrawal and cancellation, on a
prospective basis, of the Eligible Participant's most recent Election of
Deferral. The Notice is part of the Agreement.
1.20 Participant: An Eligible Participant and/or an individual with an
Accrued Benefit credited to a Retirement Book Account.
1.21 Plan: This Plan document, together with each executed, valid
Agreement.
1.22 Plan Year: The calendar year. The first Plan Year begins January 1,
1997.
1.23 Retirement Book Account: An account maintained for a Participant on
the Company's accounting system reflecting such Participant's Deferred Amounts
and Earnings thereon; provided, however, that the existence of such book entries
and a Retirement Book Account shall not create and shall not be deemed to create
a trust of any kind, or a fiduciary relationship between the Company and (a) the
Participant, (b) a Designated Beneficiary, or (c) other beneficiaries, under the
Agreement.
1.24 Secretary: The Corporate Secretary of the Company.
1.25 Termination Date: The effective date of a Participant's permanent
resignation or removal as a Director.
1.26 Unforeseeable Emergency: An unanticipated emergency resulting from a
sudden and unexpected illness or accident of the Participant or the
Participant's dependents or the Designated Beneficiary or the Designated
Beneficiary's dependents, loss of the Participant's or the Designated
Beneficiary's property due to casualty, or other similar extraordinary and
unforeseeable circumstance(s) arising as a result of events beyond the control
of the Participant or the Designated Beneficiary that would result in severe
financial hardship to the Participant or Designated Beneficiary if early
distribution of the Participant's Accrued Benefit were not permitted.
ARTICLE 2
PARTICIPATION and ELIGIBILITY
2.01 Commencement of Participation: An Eligible Participant shall become a
Participant when such Eligible Participant has fully and accurately completed
and executed an Agreement. Each Eligible Participant who is not already a
Participant in the Plan will be provided a copy of the Plan and an Agreement.
2.02 Cessation of Participation: An Eligible Participant or other
individual will cease to be a Participant in this Plan on the day when all
amounts to the credit of the Eligible Participant's or other individual's entire
Retirement Book Account have been distributed to such Eligible Participant or to
such Eligible Participant's Designated Beneficiary.
2.03 Eligibility: Each Eligible Participant shall be permitted to make an
Election of Deferral for each respective Plan Year for which such Eligible
Participant is an Eligible Participant.
2.04 Cessation of Eligibility: An individual shall cease to be eligible to
make an Election of Deferral upon ceasing to be an Eligible Participant.
ARTICLE 3
CONTRIBUTIONS
3.01 Election to Defer Compensation: An Eligible Participant may elect an
Annual Deferral Amount hereunder by filing an Election of Deferral with the
Secretary. An Election of Deferral must be filed with the Secretary any time
prior to the end of the month preceding the beginning of the Plan Year to which
it will first pertain. The Election of Deferral shall be effective on the first
day of the Plan Year following the filing thereof, and may relate solely to
Compensation for services not yet performed as of the date of the election.
However, in the first Plan Year in which an individual is determined to be an
Eligible Participant, such Eligible Participant may make an Election of Deferral
with respect to Compensation for services as a Director to be performed
subsequent to the election, within thirty (30) days after the date such
individual is determined to be an Eligible Participant.
3.02 Change of Election to Defer: The Eligible Participant's initial
Election of Deferral shall continue in effect pursuant to the terms of the
Election of Deferral, unless and until the Eligible Participant files with the
Secretary a subsequent Election of Deferral specifying that the Eligible
Participant no longer wishes to have Compensation deferred. Each Election of
Deferral filed subsequent to the initial Election of a Deferral shall similarly
continue in effect until the Eligible Participant files a new Election of
Deferral. Any new Election of Deferral, to be effective, must be filed at any
time prior to the end of the month preceding the beginning of the Plan Year to
which it will pertain. Such new Election of Deferral shall be effective on the
first day of the Plan Year following the filing thereof, and may relate only to
Compensation for services not yet performed as of the date of the election.
3.03 Termination of Election to Defer: The Eligible Participant's most
recent Election of Deferral shall continue in effect, pursuant to the terms of
such Election of Deferral, until the Eligible Participant files with the
Secretary a Notice of Discontinuance or until the individual ceases to be an
Eligible Participant. A Notice of Discontinuance shall be effective if filed at
any time prior to the end of the month preceding the beginning of the Plan Year
to which it will pertain. Such Notice of Discontinuance shall be effective on
the first day of the Plan Year following the filing thereof, and may relate only
to Compensation for services not yet performed as of the effective date of the
Notice of Discontinuance. Within the sole discretion of the Committee, an
Eligible Participant's Election of Deferral may be discontinued for the
remainder of a Plan Year if, during a Plan Year, the Participant receives a Plan
distribution in the event of an Unforeseeable Emergency.
3.04 Deferral Amount: Commencing on the Effective Date, and continuing
through the Eligible Participant's Termination Date or the date as of which the
individual ceases to be an Eligible Participant, whichever occurs first,
the Eligible Participant may elect to defer Compensation under the Plan.
ARTICLE 4
ACCOUNTS AND ALLOCATIONS
4.01 Deferred Amounts: Each Eligible Participant's Deferred Amounts shall
be credited to a Retirement Book Account established for such Eligible
Participant as soon as administratively practicable after such Deferred Amounts
are earned.
4.02 Earnings Credited to Retirement Book Account: Each Participant's
Retirement Book Account will be credited with Earnings as soon as
administratively practicable after the last day of each calendar quarter.
Earnings shall be based on each respective Participant's Retirement Book Account
balance at the beginning of each month, less any distributions from such
Retirement Book Account made during such month.
4.03 Vested Interest: Each Participant shall always be fully vested in such
Participant's entire Accrued Benefit.
ARTICLE 5
DISTRIBUTIONS
5.01 Methods and Election of Distribution of Accrued Benefit: A Participant
may elect to receive the Accrued Benefit thereof in a single lump sum or in five
(5), ten (10) or fifteen (15) equal annual installments. Distributions will be
made to the Participant or, if the Participant is deceased, to the Participant's
Designated Beneficiary. The method of distribution must be elected when the
Participant's initial Election of Deferral is executed thereby. The Distribution
Election must be made on a Distribution Election Form. The Distribution Election
is irrevocable by the Participant; provided, however, that the Distribution
Election may be changed by the Committee in its sole discretion to another
acceptable method under the Plan. If no method is selected by the Participant,
the distribution of the Participant's Accrued Benefit shall be made in a single
sum.
5.02 Time of Distribution: Except as provided in Sections 5.03 and 5.04,
upon a Participant's Termination Date, the Company shall commence payment of the
Participant's entire Accrued Benefit as soon as administratively practicable
following the end of the month coincident with or in which the Participant's
Termination Date occurs, in accordance with the distribution method elected by
the Participant.
5.03 Distribution Upon Change in Control: If a Change in Control occurs,
each Participant, or if a Participant is deceased, such Participant's Designated
Beneficiary, shall receive the Participant's entire Accrued Benefit in a single
sum as soon as administratively practicable following the date of the Change in
Control.
5.04 Distribution in the Event of Unforeseeable Emergency: An early
distribution may be approved by the Committee in the event of an Unforeseeable
Emergency; provided, however, that such a distribution shall be permitted solely
to the extent reasonably necessary to meet the Participant's or the Designated
Beneficiary's financial needs with respect to the Unforeseeable Emergency.
ARTICLE 6
ADMINISTRATION
6.01 Appointment of Committee: The general administration of the Plan and
the responsibility for carrying out its provisions shall be placed with the
Committee which shall be appointed from time to time by the Board of Directors.
6.02 Compensation of Committee: The members of the Committee shall not
receive compensation for their services as such, other than regular meeting
fees, and, except as required by law, no bond or other security need be required
of them in such capacity in any jurisdiction.
6.03 Rules of Plan: Subject to the limitations of the Plan, the Committee
may, from time to time, establish policies for the administration of the Plan
and the transaction of its business. The Committee may correct errors, however
arising, and, as far as possible, adjust any benefit payments accordingly. The
determination of the Committee as to the interpretation of the provisions of the
Plan or any disputed question with respect to the Plan shall be conclusive upon
all interested parties.
6.04 Agents and Employees: The Committee may authorize one or more agents
to execute or deliver any instrument. The Committee may appoint or employ such
agents, counsel, auditors, physicians, clerical help and actuaries as in the
Committee's judgment shall be reasonable or necessary for the proper
administration of the Plan.
6.05 Records: The Committee shall maintain accounts showing the
transactions of the Plan. The Committee shall prepare and submit annually to the
Board of Directors a report setting forth the amounts credited to the Retirement
Book Accounts and the related corporate liability equal to the total Accrued
Benefit of all Participants. The report to the Board of Directors shall also
include a brief account of the operation of the Plan for the Plan Year.
6.06 Delegation of Authority: With the consent of the Board of Directors,
the Committee may, by resolution, delegate to any person or persons any or all
of its rights and duties hereunder. Any such delegation shall be valid and
binding on all persons, and the person or persons to whom any such authority has
been delegated shall, upon written acceptance of such authority, have full power
to act in all matters so delegated until the authority expires by its terms or
is revoked by the Committee.
6.07 Eligibility: The members of the Committee shall not be precluded from
becoming Participants or Eligible Participants in the Plan; provided, however,
that no member of the Committee who is a Participant or an Eligible Participant
shall have any authority with respect to his own participation in the Plan.
6.08 Indemnification: The Company shall indemnify each member of the
Committee for all expenses and liabilities (including reasonable attorneys'
fees) arising out of the administration of the Plan, other than any expenses or
liabilities resulting from the Committee's own gross negligence or willful
misconduct. The foregoing right of indemnification shall be in addition to any
other rights to which the members of the Committee shall be entitled as a matter
of law.
ARTICLE 7
MISCELLANEOUS
7.01 No Trust Created: Nothing contained in the Plan, and no action taken
pursuant to the Plan by the Company or any Participant shall create, or be
construed to create, a trust of any kind, or a fiduciary relationship between
the Company and the Participant, the spouse of any Participant, a Designated
Beneficiary or any other person. Any trust created by the Company and any assets
held by any such trust to assist the Company in meeting its obligations under
the Plan shall conform to the terms of the model trust described in Internal
Revenue Procedure 92-64 and as subsequently modified.
7.02 Benefits Payable Only From General Corporate Assets - Unsecured
General Creditor Status of Participant: Payments to any Participant, to any
Participant's spouse or to any Designated Beneficiary shall be made from assets
which shall continue, for all purposes, to be a part of the general,
unrestricted assets of the Company. Title to and beneficial ownership of any
assets, whether cash or investments which the Company may earmark to pay Accrued
Benefits hereunder, shall at all times remain in the Company and no Participant
or Designated Beneficiary shall have any property interest whatsoever in any
specific asset of the Company. No person shall have any interest in any such
assets by virtue of the provisions of this Plan. The Company's obligation
hereunder shall be unfunded, for tax purposes and for purposes of Title I of
ERISA, and an unsecured promise to pay money in the future. To the extent that
any person acquires a right to receive payments from the Company under the Plan,
such right shall be no greater than the right of any unsecured general creditor
of the Company, and no such person shall have nor acquire any legal or equitable
right, interest or claim in or to any property or asset of the Company.
In the event that, in its discretion, the Company purchases an insurance policy
or policies insuring the life of a Participant or any other property to allow
the Company to recover the cost of providing benefits, in whole or in part,
hereunder, neither the Participant, the Participant's Designated Beneficiary nor
any other person shall have any rights whatsoever to the proceeds therefrom. The
Company shall be the sole owner and beneficiary of any such insurance policy and
shall possess and may exercise all incidents of ownership therein. No such
policy, policies or other property shall be held in any trust for the
Participant or any other person nor as collateral security for any obligation of
the Company hereunder.
There is no obligation on the part of the Company to fund for any liability
which accrues as a result of the Plan.
7.03 No Contract of Retention: Nothing contained herein shall be construed
to be a contract of retention as a Director for any term of years, nor as
conferring upon any Participant the right to continue to be retained as a
Director in the Participant's present capacity, or in any capacity. It is
expressly understood that the Plan relates merely to the promise of payment of
deferred compensation for the Participant's services as a Director, payable
after the Participant's Termination Date.
7.04 Benefits Not Transferable: Neither the Participant, a Designated
Beneficiary nor any other beneficiary under the Plan shall have any power or
right to transfer, assign, anticipate, hypothecate or otherwise encumber any
part or all of the amounts payable hereunder. A Participant's or Designated
Beneficiary's rights to benefit payments under the Plan are not subject in any
manner to anticipation, alienation, sale, transfer, assignment, pledge,
encumbrance, attachment or garnishment by creditors of the Participant or of the
Designated Beneficiary, and no such amounts shall be subject to seizure by any
creditor of any Participant or Designated Beneficiary, by a proceeding at law or
in equity, nor shall such amounts be transferable by operation of law in the
event of bankruptcy, insolvency or death of the Participant or Designated
Beneficiary, or any other beneficiary hereunder. Any such attempted assignment
or transfer shall be void.
7.05 Determination of Benefits: A Participant who believes that such
Participant is being denied a benefit to which the Participant is entitled under
the Plan (hereinafter referred to as a "Claimant") may file a written request
for such benefit with the Committee, setting forth the Participant's claim. The
request must be addressed to the Secretary at the principal place of business of
the Company.
Upon receipt of a claim, the Secretary shall advise the Claimant that a reply
will be forthcoming within ninety (90) days and shall, in fact, deliver such
reply within such period. The Committee may, however, extend the reply period
for an additional ninety (90) days for reasonable cause.
If the claim is denied in whole or in part, the Committee shall render a written
opinion, using language calculated to be understood by the Claimant, setting
forth:
(a) The specific reason or reasons for such denial;
(b) The specific reference to pertinent provisions of the Plan
upon which such denial is based;
(c) A description of any additional material or information
necessary for the Claimant to perfect his claim and an
explanation why such material or such information is
necessary; and
(d) Appropriate information as to the steps to be taken if the
Claimant wishes to submit the claim for review and the time
period within which such review must be requested.
Within sixty (60) days after the receipt by the Claimant of the written opinion
described above, the Claimant may request in writing that the Board of Directors
review the determination of the Committee. Such request must be addressed to the
Board of Directors at the principal place of business of the Company. The
Claimant or the Claimant's duly authorized representative may, but need not,
review the pertinent documents and submit issues and comments in writing for
consideration by the Board of Directors. If the Claimant does not request a
review of the Committee's determination by the Board of Directors within such
sixty (60) day period, the Claimant shall be barred and estopped from
challenging the Committee's determination.
Within sixty (60) days after the Board of Directors' receipt of a request for
review from a Claimant, the Board of Directors shall review the Committee's
determination. If the Claimant is a member of the Board of Directors, the
Claimant shall be precluded from participating in the Board of Directors' review
of the Claimant's claim. After considering all material presented by the
Claimant, the Board of Directors shall render a written opinion, written in a
manner calculated to be understood by the Claimant, setting forth the specific
reasons for the decision and containing specific references to the pertinent
provisions of the Plan upon which the decision is based. If special
circumstances require that the sixty (60) day time period be extended, the Board
of Directors shall so notify the Claimant and will render the decision as soon
as possible, but not later than one hundred twenty (120) days after receipt of
the request for review from the Claimant.
7.06 Amendment or Termination: The Board of Directors, without the consent
of any Participant or Designated Beneficiary, may amend or terminate the Plan at
any time; provided, however, that no amendment shall be made or act of
termination taken which divests any Participant or Designated Beneficiary of the
unsecured right to receive payments under the Plan with respect to amounts
theretofore credited to the applicable Participant's Retirement Book Account.
7.07 Severability of Provisions: If any provision of the Plan is held
invalid or unenforceable, such invalidity or unenforceability shall not affect
any other provision of the Plan, and the Plan shall be construed and enforced as
if such invalid or unenforceable provision had not been included in the Plan.
7.08 Headings: Headings used throughout the Plan are for convenience only
and shall not be given legal significance.
7.09 Inurement: The Plan shall be binding upon and shall inure to the
benefit of, the Company and its successors and assigns, and the Participants and
their Designated Beneficiaries and the successors, heirs, executors,
administrators and beneficiaries thereof.
7.10 Notice: Any notice, consent or demand required or permitted to be
given under the Plan shall be in writing and shall be signed by the party giving
or making the same. If such notice, consent or demand is mailed to a party
hereto, it shall be sent by United States certified mail, postage prepaid, and
addressed to such party's last known address as shown on the records of the
Company. The date of such mailing shall be deemed the date of notice, consent or
demand. Any party hereto may change the address to which notice is to be sent by
giving notice of the change of address in the manner aforesaid.
7.11 Governing Law: The Plan and the rights of the parties hereunder shall
be governed by and be construed in accordance with the laws of the State of New
York.
7.12 Pronouns: Any masculine term used in the Plan shall include the
feminine and any singular term shall include the plural, unless the text
indicates otherwise.
IN WITNESS WHEREOF, the Company has hereby executed this Plan, as of the
date written below.
FARM FAMILY HOLDINGS, INC.
By: /s/Philip P. Weber
--- ------------------
Title: President & Chief Executive Officer
Date: November 1, 1996
<PAGE>
Exhibit 10.15
FARM FAMILY HOLDINGS, INC.
OFFICERS' DEFERRED COMPENSATION PLAN
<TABLE>
FARM FAMILY HOLDINGS, INC.
OFFICERS' DEFERRED COMPENSATION PLAN
TABLE OF CONTENTS
Page No.
<S> <C> <C>
ARTICLE 1 DEFINITIONS 1
1.01 Accrued Benefit 1
1.02 Agreement 1
1.03 Annual Deferral Amount 1
1.04 Board of Directors 1
1.05 Change in Control 1
1.06 Code 2
1.07 Company 2
1.08 Compensation 2
1.09 Committee 2
1.10 Deferred Amounts 2
1.11 Designated Beneficiary(ies) 2
1.12 Distribution Election 2
1.13 Earnings 2
1.14 Effective Date 3
1.15 Election of Deferral 3
1.16 Eligible Participant 3
1.17 Employee 3
1.18 ERISA 3
1.19 Notice of Discontinuance 3
1.20 Participant 3
1.21 Plan 3
1.22 Plan Year 3
1.23 Retirement Book Account 3
1.24 Secretary 3
1.25 Termination Date 3
1.26 Unforeseeable Emergency 3
ARTICLE 2 PARTICIPATION and ELIGIBILITY 4
2.01 Commencement of Participation 4
2.02 Cessation of Participation 4
2.03 Eligibility 4
2.04 Cessation of Eligibility 4
<PAGE>
ARTICLE 3 CONTRIBUTIONS 4
3.01 Election to Defer Compensation 4
3.02 Change of Election to Defer 4
3.03 Termination of Election to Defer 5
3.04 Deferral Amount 5
ARTICLE 4 ACCOUNTS AND ALLOCATIONS 5
4.01 Deferred Amounts 5
4.02 Earnings Credited to Retirement Book Account 5
4.03 Vested Interest 5
ARTICLE 5 DISTRIBUTIONS 5
5.01 Methods and Election of Distribution of Accrued Benefit 5
5.02 Time of Distribution 6
5.03 Distribution Upon Change in Control 6
5.04 Distribution in the Event of Unforeseeable Emergency 6
ARTICLE 6 ADMINISTRATION 6
6.01 Appointment of Committee 6
6.02 Compensation of Committee 6
6.03 Rules of Plan 6
6.04 Agents and Employees 6
6.05 Records 6
6.06 Delegation of Authority 7
6.07 Eligibility 7
6.08 Indemnification 7
ARTICLE 7 MISCELLANEOUS 7
7.01 No Trust Created 7
7.02 Benefits Payable Only From General Corporate Assets - Unsecured
General Creditor Status of Participant 7
7.03 No Contract of Retention 9
7.04 Benefits Not Transferable 9
7.05 Determination of Benefits 9
7.06 Amendment or Termination 10
7.07 Severability of Provisions 10
7.08 Headings 10
7.09 Inurement 10
7.10 Notice 10
7.11 Governing Law 11
7.12 Pronouns 11
</TABLE>
<PAGE>
FARM FAMILY HOLDINGS, INC.
OFFICERS' DEFERRED COMPENSATION PLAN
Farm Family Holdings, Inc. hereby establishes this Officers' Deferred
Compensation Plan (the "Plan") for certain key employees of the Company and its
affiliates who are selected for participation in the Plan. The Plan is comprised
of this Plan document and each valid, executed Officers' Deferred Compensation
Plan Agreement entered into by and between the Company and a Participant.
The Plan is not intended to be a qualified plan pursuant to the Code; the Plan
is intended to be unfunded and maintained to qualify for purposes of Sections
201(2), 301(a)(3), 401(a)(1) and 402(b)(6) of ERISA.
ARTICLE 1
DEFINITIONS
1.01 Accrued Benefit: The sum of all Deferred Amounts credited to the
Participant's Retirement Book Account and due and owing to the Participant or
Designated Beneficiary pursuant to the Plan and the applicable Agreement,
together with Earnings thereon, less any distributions made hereunder.
1.02 Agreement: The Officers' Deferred Compensation Plan Agreement entered
into by and between the Company and an Eligible Participant. The Agreement
includes an Eligible Participant's Election(s) of Deferral, Distribution
Election and Notice of Discontinuance.
1.03 Annual Deferral Amount: The amount selected for deferral by an
Eligible Participant pursuant to Article 3.
1.04 Board of Directors: The Board of Directors of the Company.
1.05 Change in Control: A change in control of the Company of a nature that
would be required to be reported in response to Item 6(e) of Schedule 14A of
Regulation 14A under the Securities Exchange Act of 1934, as amended (the
"Exchange Act"), whether or not the Company is subject to the Exchange Act at
such time; provided, however, that without limiting the generality of the
foregoing, a Change in Control will in any event be deemed to occur if and when:
(a) any person (as such term is used in paragraphs 13(d) and
14(d)(2) of the Exchange Act, hereinafter in this definition,
"Person"), other than the Company or a subsidiary or employee benefit
plan of the Company or subsidiary, becomes the beneficial owner (as
defined in Rule 13d-3 under the Exchange Act), directly or indirectly,
of securities of the Company representing more than twenty-five percent
(25%) of the combined voting power of the Company's then outstanding
securities;
(b) stockholders approve a merger, consolidation or other
business combination (a "Business Combination") other than a Business
Combination in which holders of common stock of the Company immediately
prior to the Business Combination have substantially the same
proportionate ownership of common stock of the surviving corporation
immediately after the Business Combination as immediately before;
(c) stockholders approve either (i) an agreement for the sale
or disposition of all or substantially all of the Company's assets to
any entity that is not a subsidiary of the Company, or (ii) a plan of
complete liquidation; or
(d) the persons who were members of the Board of Directors
immediately before a tender offer by any Person other than the Company
or a subsidiary, or before a merger, consolidation or contested
election, or before any combination of such transactions, cease to
constitute a majority of the Board of Directors as a result of such
transaction or transactions.
1.06 Code: The Internal Revenue Code of 1986, as amended.
1.07 Company: Farm Family Holdings, Inc., a Delaware corporation, and any
successor thereto.
1.08 Compensation: The base salary and/or bonus, as applicable, payable to
an Eligible Participant by the Company or an affiliate thereof on account of the
Eligible Participant's services therefor as an Employee.
1.09 Committee: The committee comprised of three (3) or more Directors
selected by the Board of Directors to administer the Plan.
1.10 Deferred Amounts: Amounts of Compensation deferred under the Plan and
credited to a Retirement Book Account.
1.11 Designated Beneficiary(ies): A person or persons designated by the
Participant to receive the Participant's Accrued Benefit in this Plan upon the
death of the Participant. If no such designation has been received by the
Committee prior to the Participant's death, the Participant's then living spouse
shall be treated as the Designated Beneficiary. If the Participant is not
survived by a spouse, the then living children of the Participant, if any, shall
be treated as the Designated Beneficiary. If the Participant is not survived by
any children, the estate of the Participant shall be treated as the Designated
Beneficiary.
1.12 Distribution Election: A written election filed by the Participant as
part of the Agreement with the Committee specifying the method of distribution
of the Participant's Accrued Benefit.
1.13 Earnings: Interest credited to the Participant's Retirement Book
Account for each month, at the rate equal to the "Prime Rate" as published in
the "Money Rates" section of the Wall Street Journal, on the first business day
of the calendar quarter containing such month.
1.14 Effective Date: January 1, 1997.
1.15 Election of Deferral: A written notice filed by an Eligible
Participant with the Committee pursuant to which the Participant elects to defer
receipt of Compensation under the Plan. The Election of Deferral is part of the
Agreement.
1.16 Eligible Participant: An Employee who is selected by the Board of
Directors as eligible to participate in the Plan.
1.17 Employee: An individual who is employed by the Company or an affiliate
thereof.
1.18 ERISA: The Employee Retirement Income Security Act of 1974, as
amended.
1.19 Notice of Discontinuance: A written notice filed by the Eligible
Participant with the Committee requesting the withdrawal and cancellation, on a
prospective basis, of the Eligible Participant's most recent Election of
Deferral. The Notice is part of the Agreement.
1.20 Participant: An Eligible Participant and/or an individual with an
Accrued Benefit credited to a Retirement Book Account.
1.21 Plan: This Plan document, together with each executed, valid
Agreement.
1.22 Plan Year: The calendar year. The first Plan Year begins January 1,
1997.
1.23 Retirement Book Account: An account maintained for a Participant on
the Company's accounting system reflecting such Participant's Deferred Amounts
and Earnings thereon; provided, however, that the existence of such book entries
and a Retirement Book Account shall not create and shall not be deemed to create
a trust of any kind, or a fiduciary relationship between the Company and (a) the
Participant, (b) a Designated Beneficiary or (c) other beneficiaries, under the
Agreement.
1.24 Secretary: The Corporate Secretary of the Company.
1.25 Termination Date: The effective date of a Participant's retirement or
other termination of service with the Company or an affiliate thereof, as
applicable.
1.26 Unforeseeable Emergency: An unanticipated emergency resulting from a
sudden and unexpected illness or accident of the Participant or the
Participant's dependents or the Designated Beneficiary or the Designated
Beneficiary's dependents, loss of the Participant's or the Designated
Beneficiary's property due to casualty, or other similar extraordinary and
unforeseeable circumstance(s) arising as a result of events beyond the control
of the Participant or the Designated Beneficiary that would result in severe
financial hardship to the Participant or Designated Beneficiary if early
distribution of the Participant's Accrued Benefit were not permitted.
ARTICLE 2
PARTICIPATION and ELIGIBILITY
2.01 Commencement of Participation: An Eligible Participant shall become a
Participant when such Eligible Participant has fully and accurately completed
and executed an Agreement. Each Eligible Participant who is not already a
Participant in the Plan will be provided a copy of the Plan and an Agreement.
2.02 Cessation of Participation: An Eligible Participant or other
individual will cease to be a Participant in this Plan on the day when all
amounts to the credit of the Eligible Participant's or other individual's entire
Retirement Book Account have been distributed to such Eligible Participant or to
such Eligible Participant's Designated Beneficiary.
2.03 Eligibility: Each Eligible Participant shall be permitted to make an
Election of Deferral for each respective Plan Year for which such Eligible
Participant is an Eligible Participant.
2.04 Cessation of Eligibility: An individual shall cease to be eligible to
make an Election of Deferral upon ceasing to be an Eligible Participant.
ARTICLE 3
CONTRIBUTIONS
3.01 Election to Defer Compensation: An Eligible Participant may elect
an Annual Deferral Amount hereunder by filing an Election of Deferral with the
Secretary. An Election of Deferral must be filed with the Secretary any time
prior to the end of the month preceding the beginning of the Plan Year to which
it will first pertain. The Election of Deferral shall be effective on the first
day of the Plan Year following the filing thereof, and may relate solely to
Compensation for services not yet performed as of the date of the election.
However, in the first Plan Year in which an individual is determined to be an
Eligible Participant, such Eligible Participant may make an Election of Deferral
with respect to Compensation for services as an Employee to be performed
subsequent to the election, within thirty (30) days after the date such
individual is determined to be an Eligible Participant.
3.02 Change of Election to Defer: The Eligible Participant's initial
Election of Deferral shall continue in effect pursuant to the terms of the
Election of Deferral, unless and until the Eligible Participant files with the
Secretary a subsequent Election of Deferral specifying that the Eligible
Participant no longer wishes to have Compensation deferred. Each Election of
Deferral filed subsequent to the initial Election of a Deferral shall similarly
continue in effect until the Eligible Participant files a new Election of
Deferral. Any new Election of Deferral, to be effective, must be filed at any
time prior to the end of the month preceding the beginning of the Plan Year to
which it will pertain. Such new Election of Deferral shall be effective on the
first day of the Plan Year following the filing thereof, and may relate only to
Compensation for services not yet performed as of the date of the election.
3.03 Termination of Election to Defer: The Eligible Participant's most
recent Election of Deferral shall continue in effect, pursuant to the terms of
such Election of Deferral, until the Eligible Participant files with the
Secretary a Notice of Discontinuance or until the individual ceases to be an
Eligible Participant. A Notice of Discontinuance shall be effective if filed at
any time prior to the end of the month preceding the beginning of the Plan Year
to which it will pertain. Such Notice of Discontinuance shall be effective on
the first day of the Plan Year following the filing thereof, and may relate only
to Compensation for services not yet performed as of the effective date of the
Notice of Discontinuance. Within the sole discretion of the Committee, an
Eligible Participant's Election of Deferral may be discontinued for the
remainder of a Plan Year if, during a Plan Year, the Participant receives a Plan
distribution in the event of an Unforeseeable Emergency.
3.04 Deferral Amount: Commencing on the Effective Date, and continuing
through the Eligible Participant's Termination Date or the date as of which the
individual ceases to be an Eligible Participant, whichever occurs first, the
Eligible Participant may elect to defer Compensation under the Plan.
ARTICLE 4
ACCOUNTS AND ALLOCATIONS
4.01 Deferred Amounts: Each Eligible Participant's Deferred Amounts shall
be credited to a Retirement Book Account established for such Eligible
Participant as soon as administratively practicable after such Deferred Amounts
are earned.
4.02 Earnings Credited to Retirement Book Account: Each Participant's
Retirement Book Account will be credited with Earnings as soon as
administratively practicable after the last day of each calendar quarter.
Earnings shall be based on each respective Participant's Retirement Book Account
balance at the beginning of each month, less any distributions from such
Retirement Book Account made during such month.
4.03 Vested Interest: Each Participant shall always be fully vested in such
Participant's entire Accrued Benefit.
ARTICLE 5
DISTRIBUTIONS
5.01 Methods and Election of Distribution of Accrued Benefit: A
Participant may elect to receive the Accrued Benefit thereof in a single lump
sum or in five (5), ten (10) or fifteen (15) equal annual installments.
Distributions will be made to the Participant or, if the Participant is
deceased, to the Participant's Designated Beneficiary. The method of
distribution must be elected when the Participant's initial Election of Deferral
is executed thereby. The Distribution Election must be made on a Distribution
Election Form. The Distribution Election is irrevocable by the Participant;
provided, however, that the Distribution Election may be changed by the
Committee in its sole discretion to another acceptable method under the Plan. If
no method is selected by the Participant, the distribution of the Participant's
Accrued Benefit shall be made in a single sum.
5.02 Time of Distribution: Except as provided in Sections 5.03 and
5.04, upon a Participant's Termination Date, the Company shall commence payment
of the Participant's entire Accrued Benefit as soon as administratively
practicable following the end of the month coincident with or in which the
Participant's Termination Date occurs, in accordance with the distribution
method elected by the Participant.
5.03 Distribution Upon Change in Control: If a Change in Control
occurs, each Participant, or if a Participant is deceased, such Participant's
Designated Beneficiary, shall receive the Participant's entire Accrued Benefit
in a single sum as soon as administratively practicable following the date of
the Change in Control.
5.04 Distribution in the Event of Unforeseeable Emergency: An early
distribution may be approved by the Committee in the event of an Unforeseeable
Emergency; provided, however, that such a distribution shall be permitted solely
to the extent reasonably necessary to meet the Participant's or the Designated
Beneficiary's financial needs with respect to the Unforeseeable Emergency.
ARTICLE 6
ADMINISTRATION
6.01 Appointment of Committee: The general administration of the Plan
and the responsibility for carrying out its provisions shall be placed with the
Committee which shall be appointed from time to time by the Board of Directors.
6.02 Compensation of Committee: The members of the Committee shall not
receive compensation for their services as such, other than regular meeting
fees, and, except as required by law, no bond or other security need be required
of them in such capacity in any jurisdiction.
6.03 Rules of Plan: Subject to the limitations of the Plan, the
Committee may, from time to time, establish policies for the administration of
the Plan and the transaction of its business. The Committee may correct errors,
however arising, and, as far as possible, adjust any benefit payments
accordingly. The determination of the Committee as to the interpretation of the
provisions of the Plan or any disputed question with respect to the Plan shall
be conclusive upon all interested parties.
6.04 Agents and Employees: The Committee may authorize one or more
agents to execute or deliver any instrument. The Committee may appoint or employ
such agents, counsel, auditors, physicians, clerical help and actuaries as in
the Committee's judgment shall be reasonable or necessary for the proper
administration of the Plan.
6.05 Records: The Committee shall maintain accounts showing the
transactions of the Plan. The Committee shall prepare and submit annually to the
Board of Directors a report setting forth the amounts credited to the Retirement
Book Accounts and the related corporate liability equal to the total Accrued
Benefit of all Participants. The report to the Board of Directors shall also
include a brief account of the operation of the Plan for the Plan Year.
6.06 Delegation of Authority: With the consent of the Board of
Directors, the Committee may, by resolution, delegate to any person or persons
any or all of its rights and duties hereunder. Any such delegation shall be
valid and binding on all persons, and the person or persons to whom any such
authority has been delegated shall, upon written acceptance of such authority,
have full power to act in all matters so delegated until the authority expires
by its terms or is revoked by the Committee.
6.07 Eligibility: The members of the Committee shall not be precluded
from becoming Participants or Eligible Participants in the Plan; provided,
however, that no member of the Committee who is a Participant or an Eligible
Participant shall have any authority with respect to his own participation in
the Plan.
6.08 Indemnification: The Company shall indemnify each member of the
Committee for all expenses and liabilities (including reasonable attorneys'
fees) arising out of the administration of the Plan, other than any expenses or
liabilities resulting from the Committee's own gross negligence or willful
misconduct. The foregoing right of indemnification shall be in addition to any
other rights to which the members of the Committee shall be entitled as a matter
of law.
ARTICLE 7
MISCELLANEOUS
7.01 No Trust Created: Nothing contained in the Plan, and no action
taken pursuant to the Plan by the Company or any Participant shall create, or be
construed to create, a trust of any kind, or a fiduciary relationship between
the Company and the Participant, the spouse of any Participant, a Designated
Beneficiary or any other person. Any trust created by the Company and any assets
held by any such trust to assist the Company in meeting its obligations under
the Plan shall conform to the terms of the model trust described in Internal
Revenue Procedure 92-64 and as subsequently modified.
7.02 Benefits Payable Only From General Corporate Assets - Unsecured
General Creditor Status of Participant: Payments to any Participant, to any
Participant's spouse or to any Designated Beneficiary shall be made from assets
which shall continue, for all purposes, to be a part of the general,
unrestricted assets of the Company. Title to and beneficial ownership of any
assets, whether cash or investments which the Company may earmark to pay Accrued
Benefits hereunder, shall at all times remain in the Company and no Participant
or Designated Beneficiary shall have any property interest whatsoever in any
specific asset of the Company. No person shall have any interest in any such
assets by virtue of the provisions of this Plan. The Company's obligation
hereunder shall be unfunded, for tax purposes and for purposes of Title I of
ERISA, and an unsecured promise to pay money in the future. To the extent that
any person acquires a right to receive payments from the Company under the Plan,
such right shall be no greater than the right of any unsecured general creditor
of the Company, and no such person shall have nor acquire any legal or equitable
right, interest or claim in or to any property or asset of the Company.
In the event that, in its discretion, the Company purchases an insurance policy
or policies insuring the life of a Participant or any other property to allow
the Company to recover the cost of providing benefits, in whole or in part,
hereunder, neither the Participant, the Participant's Designated Beneficiary nor
any other person shall have any rights whatsoever to the proceeds therefrom. The
Company shall be the sole owner and beneficiary of any such insurance policy and
shall possess and may exercise all incidents of ownership therein. No such
policy, policies or other property shall be held in any trust for the
Participant or any other person nor as collateral security for any obligation of
the Company hereunder.
There is no obligation on the part of the Company to fund for any liability
which accrues as a result of the Plan.
<PAGE>
7.03 No Contract of Retention: Nothing contained herein shall be
construed to be a contract of employment as an Employee for any term of years,
nor as conferring upon any Participant the right to continue to be employed as
an Employee in the Participant's present capacity, or in any capacity. It is
expressly understood that the Plan relates merely to the promise of payment of
deferred compensation for the Participant's services as an Employee, payable
after the Participant's Termination Date.
7.04 Benefits Not Transferable: Neither the Participant, a Designated
Beneficiary nor any other beneficiary under the Plan shall have any power or
right to transfer, assign, anticipate, hypothecate or otherwise encumber any
part or all of the amounts payable hereunder. A Participant's or Designated
Beneficiary's rights to benefit payments under the Plan are not subject in any
manner to anticipation, alienation, sale, transfer, assignment, pledge,
encumbrance, attachment or garnishment by creditors of the Participant or of the
Designated Beneficiary, and no such amounts shall be subject to seizure by any
creditor of any Participant or Designated Beneficiary, by a proceeding at law or
in equity, nor shall such amounts be transferable by operation of law in the
event of bankruptcy, insolvency or death of the Participant or Designated
Beneficiary, or any other beneficiary hereunder. Any such attempted assignment
or transfer shall be void.
7.05 Determination of Benefits: A Participant who believes that such
Participant is being denied a benefit to which the Participant is entitled under
the Plan (hereinafter referred to as a "Claimant") may file a written request
for such benefit with the Committee, setting forth the Participant's claim. The
request must be addressed to the Secretary at the principal place of business of
the Company.
Upon receipt of a claim, the Secretary shall advise the Claimant that a reply
will be forthcoming within ninety (90) days and shall, in fact, deliver such
reply within such period. The Committee may, however, extend the reply period
for an additional ninety (90) days for reasonable cause.
If the claim is denied in whole or in part, the Committee shall render a written
opinion, using language calculated to be understood by the Claimant, setting
forth:
(a) The specific reason or reasons for such denial;
(b) The specific reference to pertinent provisions of the Plan upon
which such denial is based;
(c) A description of any additional material or information necessary
for the Claimant to perfect his claim and an explanation why such material or
such information is necessary; and
(d) Appropriate information as to the steps to be taken if the Claimant
wishes to submit the claim for review and the time period within which such
review must be requested.
Within sixty (60) days after the receipt by the Claimant of the written opinion
described above, the Claimant may request in writing that the Board of Directors
review the determination of the Committee. Such request must be addressed to the
Board of Directors at the principal place of business of the Company. The
Claimant or the Claimant's duly authorized representative may, but need not,
review the pertinent documents and submit issues and comments in writing for
consideration by the Board of Directors. If the Claimant does not request a
review of the Committee's determination by the Board of Directors within such
sixty (60) day period, the Claimant shall be barred and estopped from
challenging the Committee's determination.
Within sixty (60) days after the Board of Directors' receipt of a request for
review from a Claimant, the Board of Directors shall review the Committee's
determination. If the Claimant is a member of the Board of Directors, the
Claimant shall be precluded from participating in the Board of Directors' review
of the Claimant's claim. After considering all material presented by the
Claimant, the Board of Directors shall render a written opinion, written in a
manner calculated to be understood by the Claimant, setting forth the specific
reasons for the decision and containing specific references to the pertinent
provisions of the Plan upon which the decision is based. If special
circumstances require that the sixty (60) day time period be extended, the Board
of Directors shall so notify the Claimant and will render the decision as soon
as possible, but not later than one hundred twenty (120) days after receipt of
the request for review from the Claimant.
7.06 Amendment or Termination: The Board of Directors, without the
consent of any Participant or Designated Beneficiary, may amend or terminate the
Plan at any time; provided, however, that no amendment shall be made or act of
termination taken which divests any Participant or Designated Beneficiary of the
unsecured right to receive payments under the Plan with respect to amounts
theretofore credited to the applicable Participant's Retirement Book Account.
7.07 Severability of Provisions: If any provision of the Plan is held
invalid or unenforceable, such invalidity or unenforceability shall not affect
any other provision of the Plan, and the Plan shall be construed and enforced as
if such invalid or unenforceable provision had not been included in the Plan.
7.08 Headings: Headings used throughout the Plan are for convenience
only and shall not be given legal significance.
7.09 Inurement: The Plan shall be binding upon and shall inure to the
benefit of, the Company and its successors and assigns, and the Participants and
their Designated Beneficiaries and the successors, heirs, executors,
administrators and beneficiaries thereof.
7.10 Notice: Any notice, consent or demand required or permitted to be
given under the Plan shall be in writing and shall be signed by the party giving
or making the same. If such notice, consent or demand is mailed to a party
hereto, it shall be sent by United States certified mail, postage prepaid, and
addressed to such party's last known address as shown on the records of the
Company. The date of such mailing shall be deemed the date of notice, consent or
demand. Any party hereto may change the address to which notice is to be sent by
giving notice of the change of address in the manner aforesaid.
7.11 Governing Law: The Plan and the rights of the parties hereunder
shall be governed by and be construed in accordance with the laws of the State
of New York.
7.12 Pronouns: Any masculine term used in the Plan shall include the
feminine and any singular term shall include the plural, unless the text
indicates otherwise.
IN WITNESS WHEREOF, the Company has hereby executed this Plan, as of
the date written below.
FARM FAMILY HOLDINGS, INC.
By: /s/Philip P. Weber
--- ------------------------------
Title: President & Chief Exec. Officer
Date: November 1, 1996
<PAGE>
Exhibit 10.16
FARM FAMILY HOLDINGS, INC.
ANNUAL INCENTIVE PLAN
Farm Family Holdings, Inc. hereby establishes this Annual Incentive Plan (the
"Plan") for certain key employees of the Company and its affiliates who are
selected for participation in the Plan. The Plan is comprised of this Plan
document and each valid, executed Annual Incentive Plan Notice for a
Participant.
ARTICLE 1
DEFINITIONS
1.01 Board of Directors: The Board of Directors of the Company.
1.02 Cause: A felony conviction of a participant or the failure of a
participant to contest prosecution for a felony, or a participant's willful
miscount or dishonesty, any of which is directly and materially harmful to the
business or reputation of the Company or any Subsidiary or Affiliate.
(a) theft, participation by Employee in any fraudulent conduct, or
other acts involving misappropriation of property;
(b) habitual drunkenness or habitual drug abuse;
(c) breach by Employee of this duty of trust to the Company, unethical
business conduct, or material and willful disclosure of any
confidential information in violation of this Agreement;
(d) conviction of a felony or a job-related crime;
(e) unlawful discrimination and/or unlawful sexual harassment by
Employee;
(f) insubordination or other serious breach of the Company's policies;
or
(g) continuing inattention to, continuing neglect of, or continuing
inadequate performance of the duties to be performed by Employee,
which inattention, neglect or inadequacy is not the result of
illness or accident.
<PAGE>
1.03 Change in Control: A change in control of the Company of a nature that
would be required to be reported in response to Item 6(e) of Schedule 14A of
Regulation 14A under the Securities Exchange Act of 1934, as amended (the
"Exchange Act"), whether or not the Company is subject to the Exchange Act at
such time; provided, however, that without limiting the generality of the
foregoing, a Change in Control will in any event be deemed to occur if and when:
(a) any person (as such term is used in paragraphs 13(d) and 14(d)(2)
of the Exchange Act, hereinafter in this definition, "Person"),
other than the Company or a subsidiary or employee benefit plan of
the Company or subsidiary, becomes the beneficial owner (as
defined in Rule 13d-3 under the Exchange Act), directly or
indirectly of securities of the Company representing more than
twenty-five percent (25%) of the combined voting power of the
Company's then outstanding securities;
(b) stockholders approve a merger, consolidation or other business
combination (a "Business Combination") other than a Business
Combination in which holders of common stock of the Company
immediately prior to the Business Combination have substantially
the same proportionate ownership of common stock of the surviving
corporation immediately after the Business Combination as
immediately before;
(c) stockholders approve either (i) an agreement for the sale or
disposition of all or substantially all of the Company's assets to
any entity that is not a subsidiary of the Company, or (ii) a plan
of complete liquidation; or
(d) the persons who were members of the Board of Directors immediately
before a tender offer by any Person other than the Company or a
subsidiary, or before a merger, consolidation or contested
election, or before any combination of such transactions, cease to
constitute a majority of the Board of Directors as a result of
such transaction or transactions.
1.04 Company: Farm Family Holdings, Inc., a Delaware corporation, and any
successor thereto.
1.05 Committee: The Compensation Committee of the Board of Directors of the
Company or such other committee appointed by the Board. If at any time there is
no Committee, then the functions of the Committee specified in the Plan shall be
exercised by the Board.
1.06 Disability: The total and permanent disability as determined under the
Company's long term disability program.
1.07 Earned Award: The amount of incentive award to be paid to a Participant
calculated pursuant to Section 6.01 hereof.
1.08 Effective Date: January 1, 1997.
1.09 Employee: An individual who is employed by the Company or an affiliate
thereof.
110 ERISA: The Employee Retirement Income Security Act of 1974, as amended.
1.11 Notice: The Annual Incentive Plan Notice for a Participant for a Plan
Year.
1.12 Participant: An employee who is selected by the Committee as eligible
to participate in the Plan for a Plan Year.
1.13 Plan: This Plan document, together with each executed, valid Notice.
1.14 Plan Year: The calendar year. The first Plan Year begins January 1,
1997.
1.15 Retirement: The Normal or Early Retirement as those terms are defined
in the Farm Family Employee Savings Plus (401(k)) Plan.
1.16 Secretary: The Corporate Secretary of the Company.
ARTICLE 2
OBJECTIVES
2.01 Objectives: The objectives of the Annual Incentive Plan are to:
(a) provide incentives and financial rewards to the employees of the
Company and its affiliates for their contribution to improving the profitability
of the Company and its affiliates;
(b) enable the Company to pay a fully-competitive total cash compensation
package; and
(c) facilitate the attraction and retention of executives.
ARTICLE 3
ELIGIBILITY
3.01 Eligibility: Officers and other key employees of the Company, its
subsidiaries and its affiliates (but excluding members of the Committee and any
person who serves only as a director) who are responsible for or contribute to
the management, growth and/or profitability of the business of the Company, or
its subsidiaries, may be designated as Participants.
<PAGE>
3.02 Part-year Participants: An employee who is employed after January 1 but
prior to September 1 may be designated a Participant for the Plan Year in which
he commenced employment. An employee who is employed on or after September 1 may
not be designated a Participant for the Plan Year in which he commenced
employment.
3.03 Cessation of Eligibility: An individual shall cease to be a Participant
for any Plan Year in which the individual's employment with the Company or its
affiliates is terminated voluntarily by the individual or involuntarily for
Cause.
ARTICLE 4
AWARD OPPORTUNITIES AND PERFORMANCE FACTORS
4.01 Levels of Award Opportunities: Award Opportunities have the following
levels:
(a) Threshold Award Opportunity: 50% of the amount which will be paid for Target
Performance.
(b) Target Award Opportunity: The amount paid for Target Performance.
(c) Outstanding Award Opportunity: 150% of the amount paid for Target
Performance.
4.02 Performance Factors: Each level of performance shall have the following
Performance Factors:
(a) Below Threshold Performance: will have a Performance Factor of 0.
(b) Threshold Performance: will have a Performance Factor of 0.5.
(c) Target Performance: will have a Performance Factor of 1.0.
(d) Outstanding Performance: will have a Performance Factor of 1.5.
(e) Above Outstanding Performance: will have a Performance Factor of 1.5.
4.03 Interpolation of Performance Factors: The Performance Factors for
performance between Threshold and Outstanding Performance levels will be
interpolated.
4.04 Limitations on Award Opportunities: No award will be paid for below
Threshold Performance. No award will exceed the amount payable for Outstanding
Performance.
<PAGE>
ARTICLE 5
PERFORMANCE MEASUREMENT
5.01 Performance Measures: The performance of each Participant will be assessed
according to the achievement of predefined goals derived from the Company's and
its affiliates' strategic plans and budgets. These goals will be chosen each
year and identified as Performance Measures on the Participant's Notice,
weighted according to the Participant's relative responsibilities to the Company
and its affiliates and according to their relative importance.
5.02 Levels of Performance: Performance Measures will be stated in terms of the
following levels of performance: ---------------------
(a) Threshold Performance: which will be defined to be 90% achievement of budget
or a similar level of any performance measure which is not budget-related;
(b) Target Performance: which will generally be defined to be 100% achievement
of budget or a similar level of any performance measure which is not
budget-related; or
(c) Outstanding Performance: which will generally be defined to be 110%
achievement of budget or a similar level of any performance measure which is not
budget-related.
5.03 Performance Measurement: The Performance Measures and weights for each
Participant will be set forth in a Notice for each Plan Year.
ARTICLE 6
PAYMENT OF AWARDS
6.01 Calculation of Earned Awards: The Earned Award for each Participant for a
Plan Year shall be calculated as follows:
(a) The Performance Factor will be calculated for each Performance Measure based
on the Participant's actual performance
(b) The Adjusted Performance Factor for each Performance Measure will be
calculated by multiplying the weight for each Performance Measure by the
Performance Factor.
(c) The Total Adjusted Performance Factor will be the sum of all Adjusted
Performance Factors for the Participant.
(d) The Earned Award will be equal to the Target Award Opportunity multiplied by
the Total Adjusted Performance Factor.
An example of the Earned Award calculation is set forth in Exhibit A attached
hereto.
<PAGE>
6.02 Determination of Awards: The Earned Award for each Participant for a Plan
Year will be based solely on the Company's and its affiliates' records. The
Earned Award for each Participant for a Plan Year will be determined within a
reasonable time period after the end of the Plan Year.
6.03 Payment of Awards: Payment of Earned Awards will be made within a
reasonable time period after the end of the Plan Year but in no event later than
90 days after close of the Company's books for the Plan Year. Participants may
elect to defer receipt of their Earned Awards pursuant to the Company's
Officers' Deferred Compensation Plan. The Company will deduct from all payments
due a Participant, taxes required by law to be withheld with respect to such
payments.
6.04 Change of Control: In the event of a Change of Control, each Participant
will receive payment of the greater of his actual Earned Award or his Target
Award Opportunity for the Plan Year in which the Change of Control occurs
regardless of achievement of Target Performance.
6.05 Change in Employment Status: The effect of a change in the employment
status of an Participant during a Plan Year shall be determined as follows:
(a) New Hire or Promotion During the Plan Year: The Participant will
be paid the Earned Award prorated for the number of days of the
Plan Year that the Participant was employed in the eligible
position.
(b) Death, Retirement or Disability During the Plan Year: The
Participant will be paid the Earned Award prorated for the number
of days of the Plan Year that the Participant was employed in the
eligible position.
(c) Voluntary Termination: The Participant will forfeit any Earned
Award for the Plan Year in which he voluntarily terminates
employment with the Company or its affiliates.
(d) Involuntary Termination other than for Cause: The Participant will
be paid the Earned Award prorated for the number of days of the
Plan Year that the Participant was employed by the Company or its
affiliates.
(e) Involuntary Termination for Cause: The Participant will forfeit
any Award for the Plan Year in which he is terminated for Cause.
6.06. Amendment or Termination of Plan: In the event of an amendment or
termination of the Plan, each Participant will receive payment for the Plan Year
in which the amendment or termination is effective of the greater of his actual
Earned Award calculated under the Plan, as amended, or his Target Award
Opportunity for the Plan Year without giving any effect to such amendment or
termination.
<PAGE>
ARTICLE 7
ADMINISTRATION
7.01 Appointment of Committee: The general administration of the Plan and the
responsibility for carrying out its provisions shall be placed with the
Committee which shall be appointed from time to time by the Board of Directors.
7.02 Compensation of Committee: The members of the Committee shall not receive
compensation for their services as such, other than regular meeting fees, and,
except as required by law, no bond or other security need be required of them in
such capacity in any jurisdiction.
7.03 Rules of Plan: Subject to the limitations of the Plan, the Committee may,
from time to time, establish policies for the administration of the Plan and the
transaction of its business. The Committee may correct errors, however arising,
and, as far as possible, adjust any award payments accordingly. The
determination of the Committee as to the interpretation of the provisions of the
Plan or any disputed question with respect to the Plan shall be conclusive upon
all interested parties.
7.04 Agents and Employees: The Committee may authorize one or more agents to
execute or deliver any instrument. The Committee may appoint or employ such
agents, counsel, auditors, physicians, clerical help and actuaries as in the
Committee's judgment shall be reasonable or necessary for the proper
administration of the Plan.
7.05 Records: The Committee shall maintain accounts showing the transactions of
the Plan. The Committee shall prepare and submit annually to the Board of
Directors a report setting forth the amounts paid to Participants for the Plan
Year. The report to the Board of Directors shall also include a brief account of
the operation of the Plan for the Plan Year.
7.06 Delegation of Authority: With the consent of the Board of Directors, the
Committee may, by resolution, delegate to any person or persons any or all of
its rights and duties hereunder. Any such delegation shall be valid and binding
on all persons, and the person or persons to whom any such authority has been
delegated shall, upon written acceptance of such authority, have full power to
act in all matters so delegated until the authority expires by its terms or is
revoked by the Committee.
7.07 Indemnification: The Company shall indemnify each member of the Committee
for all expenses and liabilities (including reasonable attorneys' fees) arising
out of the administration of the Plan, other than any expenses or liabilities
resulting from the Committee's own gross negligence or willful misconduct. The
foregoing right of indemnification shall be in addition to any other rights to
which the members of the Committee shall be entitled as a matter of law.
<PAGE>
ARTICLE 8
MISCELLANEOUS
8.01 No Trust Created: Nothing contained in the Plan, and no action taken
pursuant to the Plan by the Company or any Participant shall create, or be
construed to create, a trust of any kind, or a fiduciary relationship between
the Company and the Participant, or any other person
8.02 Benefits Payable Only From General Corporate Assets - Unsecured General
Creditor Status of Participant: Payments to any Participant shall be made from
assets which shall continue, for all purposes, to be a part of the general,
unrestricted assets of the Company. Title to and beneficial ownership of any
assets, whether cash or investments which the Company may earmark to pay Awards
hereunder, shall at all times remain in the Company and no Participant shall
have any property interest whatsoever in any specific asset of the Company. No
person shall have any interest in any such assets by virtue of the provisions of
this Plan. The Company's obligation hereunder shall be unfunded, for tax
purposes and for purposes of Title I of ERISA, and an unsecured promise to pay
money in the future. To the extent that any person acquires a right to receive
payments from the Company under the Plan, such right shall be no greater than
the right of any unsecured general creditor of the Company, and no such person
shall have nor acquire any legal or equitable right, interest or claim in or to
any property or asset of the Company.
There is no obligation on the part of the Company to fund for any liability
which accrues as a result of the Plan.
8.03 No Contract of Retention: Nothing contained herein shall be construed to
be a contract of employment as an Employee for any term of years, nor as
conferring upon any Participant the right to continue to be employed as an
Employee in the Participant's present capacity, or in any capacity. It is
expressly understood that the Plan relates merely to the promise of payment of
annual incentive compensation for the Participant's services as an Employee.
8.04 Benefits Not Transferable: The Participant shall not have any power or
right to transfer, assign, anticipate, hypothecate or otherwise encumber any
part or all of the amounts payable hereunder. A Participant's rights to payments
under the Plan are not subject in any manner to anticipation, alienation, sale,
transfer, assignment, pledge, encumbrance, attachment or garnishment by
creditors of the Participant, and no such amounts shall be subject to seizure by
any creditor of any Participant, by a proceeding at law or in equity, nor shall
such amounts be transferable by operation of law in the event of bankruptcy,
insolvency or death of the Participant. Any such attempted assignment or
transfer shall be void.
<PAGE>
8.05 Determination of Benefits: A Participant who believes that such
Participant is being denied a benefit to which the Participant is entitled under
the Plan (hereinafter referred to as a "Claimant") may file a written request
for such benefit with the Committee, setting forth the Participant's claim. The
request must be addressed to the Secretary at the principal place of business of
the Company.
Upon receipt of a claim, the Secretary shall advise the Claimant that a reply
will be forthcoming within ninety (90) days and shall, in fact, deliver such
reply within such period. The Committee may, however, extend the reply period
for an additional ninety (90) days for reasonable cause.
If the claim is denied in whole or in part, the Committee shall render a written
opinion, using language calculated to be understood by the Claimant, setting
forth:
(a) The specific reason or reasons for such denial;
(b) The specific reference to pertinent provisions of the Plan upon
which such denial is based;
(c) A description of any additional material or information necessary
for the Claimant to perfect his claim and an explanation why such
material or such information is necessary; and
(d) Appropriate information as to the steps to be taken if the
Claimant wishes to submit the claim for review and the time period
within which such review must be requested.
Within sixty (60) days after the receipt by the Claimant of the written opinion
described above, the Claimant may request in writing that the Board of Directors
review the determination of the Committee. Such request must be addressed to the
Board of Directors at the principal place of business of the Company. The
Claimant or the Claimant's duly authorized representative may, but need not,
review the pertinent documents and submit issues and comments in writing for
consideration by the Board of Directors. If the Claimant does not request a
review of the Committee's determination by the Board of Directors within such
sixty (60) day period, the Claimant shall be barred and estopped from
challenging the Committee's determination.
Within sixty (60) days after the Board of Directors' receipt of a request for
review from a Claimant, the Board of Directors shall review the Committee's
determination. If the Claimant is a member of the Board of Directors, the
Claimant shall be precluded from participating in the Board of Directors' review
of the Claimant's claim. After considering all material presented by the
Claimant, the Board of Directors shall render a written opinion, written in a
manner calculated to be understood by the Claimant, setting forth the specific
reasons for the decision and containing specific references to the pertinent
provisions of the Plan upon which the decision is based. If special
circumstances require that the sixty (60) day time period be extended, the Board
of
<PAGE>
Directors shall so notify the Claimant and will render the decision as soon as
possible, but not later than one hundred twenty (120) days after receipt of the
request for review from the Claimant.
8.06 Amendment or Termination: The Board of Directors, without the consent of
any Participant, may amend or terminate the Plan at any time provided, however,
that the Participants shall be entitled to the payment set forth in Section 6.06
hereof for the Plan Year in which the amendment or termination is effective.
8.07 Severability of Provisions: If any provision of the Plan is held invalid
or unenforceable, such invalidity or unenforceability shall not affect any other
provision of the Plan, and the Plan shall be construed and enforced as if such
invalid or unenforceable provision had not been included in the Plan.
8.08 Headings: Headings used throughout the Plan are for convenience only and
shall not be given legal significance.
8.09 Inurement: The Plan shall be binding upon and shall inure to the benefit
of, the Company and its successors and assigns, and the Participants and their
Designated Beneficiaries and the successors, heirs, executors, administrators
and beneficiaries thereof.
8.10 Notice: Any notice, consent or demand required or permitted to be given
under the Plan shall be in writing and shall be signed by the party giving or
making the same. If such notice, consent or demand is mailed to a party hereto,
it shall be sent by United States certified mail, postage prepaid, and addressed
to such party's last known address as shown on the records of the Company. The
date of such mailing shall be deemed the date of notice, consent or demand. Any
party hereto may change the address to which notice is to be sent by giving
notice of the change of address in the manner aforesaid.
8.11 Governing Law: The Plan and the rights of the parties hereunder shall be
governed by and be construed in accordance with the laws of the State of New
York.
8.12 Pronouns: Any masculine term used in the Plan shall include the feminine
and any singular term shall include the plural, unless the text indicates
otherwise.
IN WITNESS WHEREOF, the Company has hereby executed this Plan, as of the date
written below.
FARM FAMILY HOLDINGS, INC.
By: /s/Philip P. Weber
--------------------------
Philip P. Weber
Title: President & Chief Exec. Officer
Date: December 31, 1996
<PAGE>
Exibit 10.17
FARM FAMILY
SUPPLEMENTAL SAVINGS AND PROFIT SHARING PLAN
Section 1. Establishment of Plan. Farm Family Life Insurance Company
and Farm Family Casualty Insurance Company (the "Principal Employers") hereby
establish this Farm Family Supplemental Savings and Profit Sharing Plan (the
"Plan"), effective as of January 1, 1997 (the "Effective Date"), to cover the
eligible employees of the Principal Employers as well as the eligible employees
of Farm Family Holdings, Inc. and United Farm Family Insurance Company
(collectively with the Principal Employers, the "Employers").
Section 2. Definitions. Except as otherwise specifically provided
herein, each capitalized term used herein which is defined in the Qualified Plan
shall, for purposes of the Plan, have the same meaning assigned to such term in
the Farm Family Savings and Profit Sharing Plan (the "Qualified Plan").
Section 3. Eligible Employees. Each employee of the Employers whose
Compensation from the Employers (but without reduction for deferred compensation
which would otherwise be excluded from the definition of "Compensation" under
the Qualified Plan) earned for any Plan Year on or after the Effective Date
exceeds the compensation limit of Section 401(a)(17) of the Internal Revenue
Code of 1986, as amended (the "Code") or any successor provisions, shall
automatically become a participant in the Plan (each, a "Participant").
Section 4. Purpose of Plan. The purpose of the Plan is to provide an
additional retirement benefit to each Participant to the extent the
Participant's Accrued Benefit under the Qualified Plan has been limited for any
Plan Year of the Qualified Plan occurring on or after the Effective Date, by
application of (a) the requirements of Sections 401(a)(17) , 401(k)(3), 401(m),
402(g) and/or 415 of the Code or any successor provisions, and (b) the exclusion
of deferred compensation from the definition of "Compensation" under the
Qualified Plan pursuant to Sections 1.08 and 7.03(a) thereof (the requirements
and exclusion referred to in clauses (a) and (b) of this sentence collectively,
the "Qualified Limitations"). For purposes of Sections 201(2),
<PAGE>
301(a)(3), 401(a)(1) and 4021(b)(6) of the Employee Retirement Income Security
Act of 1974, as amended or any successor provisions, the Plan is intended and
shall at all times be administered and interpreted in such a manner so as to
constitute a plan maintained primarily for the purpose of providing deferred
compensation for a select group of management or highly compensated employees.
Section 5. Plan Benefit. Within thirty (30) days after the end of each
Plan Year, the Employers shall credit to bookkeeping accounts maintained for
each Participant (each, a "Plan Account"), an amount ("Plan Contributions")
equal to the difference between clauses (a) and (b) below:
(a) the sum of -
(i) the Company Matching Contributions that would be required
to be made by the Employers to the Participant's Company
Regular Account under the Qualified Plan for the
immediately preceding Plan Year without taking the
Qualified Limitations into account and assuming that the
Participant made the maximum Savings/Deferral Contribution
permissible under the Plan without taking the Qualified
Limitations into account,
(ii) the Company Regular Contributions that would be required to
be made by the Employers to the Participant's Company
Regular Account under the Qualified Plan for the
immediately preceding Plan Year without taking the
Qualified Limitations into account, and
(iii)any other contributions that would be required to be made by
the Employers to the Qualified Plan on behalf of the
Participant for the immediately preceding Plan Year without
taking the Qualified Limitations into account; and
(b) the sum of -
(i) the Company Matching Contributions credited to the
Participant's Company Matching Account under the Qualified
Plan for the immediately preceding Plan Year,
(ii) the Company Regular Contributions credited to the
Participant's Company Regular Account under the Qualified
Plan for the immediately preceding Plan Year, and
(iii)any other contributions made by the Employers to the
Qualified Plan on behalf of the Participant for the
immediately preceding Plan Year.
The Employers shall also credit interest ("Plan Earnings") to each Plan
Account for each calendar quarter at the rate equal to the "Prime Rate" as
published in the "Money Rates" section of the Wall Street Journal, on the first
business day of each such calendar quarter. The balance of all Plan
Contributions plus Plan Earnings allocated to a Participant's Plan Account
shall, as of any particular date, constitute such Participant's then benefit
under the Plan (the "Plan Benefit").
Section 6. Vesting of Plan Benefit. Each Participant's Plan Benefit
shall be vested to the identical extent as that of the Participant's benefit
under the Qualified Plan.
Section 7. Payment of Plan Benefit.
Section 7.1 Timing, Amounts, Recipients and Form of Payments. Each
Participant's Plan Benefit shall be paid at the same times, in the same manner,
to the same person(s) (including beneficiaries) and in the same payment form as
the Participant's benefit shall be paid under the Qualified Plan.
Section 7.2 Withholding. The Employers shall withhold all required
amounts for tax withholding purposes as shall be required by applicable federal,
state and local income tax laws.
Section 7.3 Source of Payments. Except to the extent otherwise provided
in Section 13, all payments made pursuant to the Plan shall be paid in cash from
the general assets of the Employers.
Section 8. Administration. The Compensation Committee (the "Committee")
of the Board of Directors of Farm Family Casualty Insurance Company (the
"Board") shall have full and final power and authority, subject to the
provisions of the Plan, to interpret the provisions of the Plan, to supervise
the administration of the Plan and to take all actions in connection with or
relating to the Plan as it deems necessary. Any determination or action of the
Committee shall be final, conclusive and binding upon the Participant and the
Participant's beneficiaries, if applicable.
Section 9. Claims Procedure. A Participant who believes that such
Participant is being denied a benefit to which the Participant is entitled under
the Plan (hereinafter referred to as a "Claimant") may file a written request
for such benefit with the Committee, setting forth the Participant's claim. The
request must be addressed to the Secretary of Farm Family Casualty Insurance
Company (the "Secretary") at the principal place of business of Farm Family
Casualty Insurance Company.
Upon receipt of a claim, the Secretary shall advise the Claimant that a
reply will be forthcoming within ninety (90) days and shall, in fact, deliver
such reply within such period. The Committee may, however, extend the reply
period for an additional ninety (90) days for reasonable cause.
If the claim is denied, in whole or in part, the Committee shall render
a written opinion, using language calculated to be understood by the Claimant,
setting forth:
(a) The specific reason or reasons for such denial;
(b) The specific reference to pertinent provisions of the Plan upon
which such denial is based;
(c) A description of any additional material or information necessary
for the Claimant to perfect his or her claim and an explanation
why such material or such information is necessary; and
(d) Appropriate information as to the steps to be taken if the
Claimant wishes to submit the claim for review of the Committee's
decision by the Board and the time period within which such
review must be requested.
Within sixty (60) days after the receipt by the Claimant of the written
opinion described above, the Claimant may request in writing that the Board
review the determination of the Committee. Such request must be addressed to the
Board at the principal place of business of Farm Family Casualty Insurance
Company. The Claimant or the Claimant's duly authorized representative may, but
need not, review the pertinent documents and submit issues and comments in
writing for consideration by the Board. If the Claimant does not request a
review of the Committee's determination by the Board within such sixty (60) day
period, the Claimant shall be barred and estopped from challenging the
Committee's determination.
Within sixty (60) days after the Board's receipt of a request for
review from a Claimant, the Board shall review the Committee's determination. If
the Claimant is a member of the Board, the Claimant shall be precluded from
participating in the Board's review of the Claimant's claim. After considering
all material presented by the Claimant, the Board shall render a written
opinion, written in a manner calculated to be understood by the Claimant,
setting forth the specific reasons for its decision and containing specific
references to the pertinent provisions of the Plan upon which its decision is
based. If special circumstances require that the sixty (60) day time period be
extended, the Board shall so notify the Claimant and will render the decision as
soon as possible, but not later than one hundred twenty (120) days after receipt
of the request for review from the Claimant.
Section 10. Amendment of Plan. The Principal Employers, in their sole
discretion and at any time, may together adopt such written amendments or
modifications of the Plan as they may deem advisable; provided, however, that no
such amendment or modification shall deprive any Participant of any right or
benefit to which such Participant had previously become entitled under the Plan.
Section 11. Termination of Plan. The Principal Employers, in their sole
discretion and at any time, may together terminate the Plan; provided, however,
that no such termination shall deprive any Participant of any right or benefit
to which such Participant had previously become entitled under the Plan. In
addition, notwithstanding the provisions of Section 6, upon the Plan's
termination, all Plan Benefits shall become fully vested and nonforfeitable.
Section 12. No Rights Created. Nothing herein is intended or shall be
interpreted to give any Participant the right to be employed, reemployed or to
continue to be employed by any Employer, and nothing herein shall confer any
right or benefit or any entitlement to any benefit to any Participant unless and
until an amount is actually paid over to such Participant pursuant to the
foregoing provisions of the Plan.
Section 13. No Trust Required. Neither the provisions of the Plan nor
any action taken by any Employer or the Board pursuant to the provisions of the
Plan shall be deemed to create any trust, express or implied, or any fiduciary
relationship between and among the Employers, the Board, any member of the Board
or any Participant.
Section 14. Non-Alienation of Benefits. No right or benefit under the
Plan shall be subject to anticipation, transfer, sale, assignment, pledge,
encumbrance, charge, levy, attachment or execution of a judgment of any kind. No
right or benefit under the Plan shall in any manner be liable for or subject to
the debts, contract liabilities or torts of any Participant.
Section 15. Receipt and Release. Before making any payment to a
Participant, former Participant or Beneficiary, the Employers may require the
payee to execute a receipt and release for such payment, in a form satisfactory
to the Employers.
Section 16. Governing Law. The Plan shall be construed, administered
and enforced according to the laws of the State of New York.
Section 17. Captions. The captions to the Sections of the Plan are for
convenience only and shall not control or affect the meaning or construction of
any of the Plan's provisions.
IN WITNESS WHEREOF, Farm Family Life Insurance Company and Farm Family
Casualty Insurance Company have caused this Farm Family Supplemental Savings and
Profit Sharing Plan to be adopted pursuant to execution by their duly authorized
officers this 31st day of December, 1996.
ATTEST: FARM FAMILY LIFE INSURANCE COMPANY
By: /s/Victoria M. Stanton By: /s/Philip P. Weber
- -------------------------- -----------------------
Secretary Philip P. Weber
Title: President & Chief Executive Officer
ATTEST: FARM FAMILY CASUALTY INSURANCE COMPANY
By: /s/Victoria M. Stanton By: /s/Philip P. Weber
- -------------------------- -----------------------
Secretary Philip P. Weber
Title: President & Chief Executive Officer
<PAGE>
The following employers hereby agree to become Employers (as such term
is defined in the Farm Family Supplemental Savings and Profit Sharing Plan),
effective January 1, 1997, under the Farm Family Supplemental Savings and Profit
Sharing Plan, pursuant to execution by their duly authorized officers this day
of December, 1996.
ATTEST: FARM FAMILY HOLDINGS, INC.
By: /s/Victoria M. Stanton By: /s/Philip P. Weber
- -------------------------- -----------------------
Secretary Philip P. Weber
Title: President & Chief Executive Officer
ATTEST: UNITED FARM FAMILY INSURANCE COMPANY
By: /s/Victoria M. Stanton By: /s/Philip P. Weber
- -------------------------- -----------------------
Secretary Philip P. Weber
Title: President & Chief Executive Officer
<PAGE>
Exhibit 10.18
TAX PAYMENT ALLOCATION AGREEMENT
FARM FAMILY HOLDINGS, INC. & SUBSIDIARY
Taxable Years Beginning January 1, 1996
THIS AGREEMENT is made with reference to the following facts:
A. Farm Family Holdings, Inc. ("Parent"), and Farm Family Casualty
Insurance Company ("Subsidiary"), are members of an affiliated group as that
term is defined in Section 1504 of the Internal Revenue Code of 1954.
B. The affiliated group has exercised the privilege granted to it by
Section 1501 of the Internal Revenue Code to file consolidated Federal income
tax returns.
C. Parent and Subsidiary each desire that there be fair compensation to the
member responsible for any reduction in income taxes for any taxable year (after
1995) realized by the affiliated group through the filing of a consolidated
return.
NOW, THEREFORE, in consideration of the premises and of the mutual
agreements and convenants herein contained, Parent and Subsidiary do hereby
enter into this Agreement and do hereby agree as follows:
1.Preparation of Consolidated Return - Parent agrees to prepare or
cause to be prepared and to file annually on behalf of the affiliated group a
consolidated return for all taxable years of the affiliated group ending after
December 31, 1995, until such time as it may determine that the best interests
of the affiliated group are no longer served thereby, subject to receiving the
required consent of the Commissioner of Internal Revenue to discontinue filing
consolidated returns, and Subsidiary agrees to cooperate with Parent in the
preparation and filing of each such consolidated return.
2. Allocation of Consolidated Tax Liability - The tax charge or tax
refund to Subsidiary shall be the amount that the Subsidiary would have paid or
received if it had filed on a separate return basis with the Internal Revenue
Service.
For purposes of determining the tax on a separate return basis,
Subsidiary's separate company taxable income shall include net capital gains,
charitable contributions, net capital losses, dividends received from companies
included in the consolidated return and any dividends received deduction.
Carryovers or carrybacks attributable to net operating losses, capital losses or
charitable contributions shall be taken into account.
To help assure Subsidiary's enforceable right to recoup federal
income taxes in the event of future net losses an escrow account consisting of
assets eligible as an investment for Subsidiary shall be established and
maintained by Parent in an amount equal to the excess of the amount paid by
Subsidiary to the Parent for federal income taxes over the actual payment made
by Parent to the Internal Revenue Service.
Escrow assets may be released to Parent from the escrow account at
such time as the permissible period for loss carrybacks has elapsed.
3. All settlements under this Agreement shall be made within 30 days of
the filing of the applicable estimated or actual consolidated federal corporate
income tax return with the Internal Revenue Service, except where a refund is
due Parent, in which case, it may defer payment to Subsidiary to within 30 days
of receipt of such refund. All settlements shall be in cash or securities
eligible as investments for Subsidiary, at market value.
4. If taxable income, special deductions or credits reported in a
consolidated federal income tax return are revised by the Internal Revenue
Service or other appropriate authority, a recalculation of the tax liability for
all parties to this Agreement shall be made.
5. Termination -
The Agreement may be terminated if:
a) The parties agree in writing to such termination;
b) Membership in the affiliated group ceases or is terminated for
any reason whatsoever;
c) The affiliated group fails to file a consolidated return for
any taxable year.
PROVIDED, HOWEVER, that notwithstanding the termination of this
Agreement, the obligations of Parent and Subsidiary hereunder shall remain in
effect with respect to any period of time during the tax year in which
termination occurs for which the income of the terminating party must be
included in the consolidated return.
6. Assignment or Transfer - This Agreement shall not be assignable or
transferable by either party hereto without the prior written consent of the
other.
7. Arbitration of Disputes - Should any dispute arise between the
parties to this Agreement concerning any of the rights or obligations hereunder
of either of the parties hereto, such dispute shall be referred to a Board of
Arbitrators to consist of three members to be chosen as follows: Each party
shall select one Arbitrator and the two Arbitrators so chosen shall select a
third. If either party shall fail to appoint its Arbitrator within twenty (20)
days after the party desiring arbitration has appointed its Arbitrator and given
notice in writing to the other of such appointment and the matter proposed to be
arbitrated, or if the two Arbitrators chosen shall be unable to agree upon a
third Arbitrator within twenty (20) days after the appointment of the second
Arbitrator, then such Arbitrator(s) shall be appointed in accordance with the
provisions of the Civil Practice Laws and Rules. Any Arbitrator appointed under
this provision shall be knowledgeable in the federal taxation of insurance
companies. Said Board so appointed shall hear and decide the matter or matters
in dispute. The decision of said Arbitrators or a majority of them shall be
final and conclusive upon the parties hereto with respect to all matters
referred to the Arbitrators for decision.
8. Notwithstanding the termination of this Agreement, all material
including, but not limited to, returns, supporting schedules, workpapers,
correspondence and other documents relating to the consolidated returns shall be
made available to any party to this Agreement during regular business hours.
PARENT:
FARM FAMILY HOLDINGS, INC.
Date: December 20, 1996 By: /s/Timothy A. Walsh
------------------------ -------------------
Timothy A. Walsh
Treasurer
SUBSIDIARY:
FARM FAMILY CASUALTY INSURANCE COMPANY
Date: December 24, 1996 By: /s/Philip P. Weber
---------------------- ------------------
Philip P. Weber
President and C.E.O.
<TABLE>
FARM FAMILY HOLDINGS, INC. AND SUBSIDIARIES
EXHIBIT 11
COMPUTATION OF EARNINGS PER SHARE
<CAPTION>
Twelve months
($ in thousands except per share data) ended
December 31,
1996 1995 1994
-------------------------------------------------------
<S> <C> <C> <C>
Net income available to common shareholders $6,294 $9,606 $3,526
Weighted average shares outstanding (1) 3,979 3,000 3,000
-------------------------------------------------------
Net income per share $1.74 $3.20 $1.18
-------------------------------------------------------
Net income before extraordinary item available to
common shareholders $8,467 $9,606 $3,526
Weighted average shares outstanding(1) 3,979 3,000 3,000
-------------------------------------------------------
Net income before extraordinary item per share $2.13 $3.20 $1.18
-------------------------------------------------------
(1) Gives effect to the allocation of 3,000,000 shares to eligible
policyholders on July 26, 1996 pursuant to Farm Family Casualty's conversion
from a mutual company to a stockholder owned company.
</TABLE>
<PAGE>
Exhibit 13
Management's Discussion and Analysis of Financial Condition and Results of
Operations
GENERAL
Corporate Profile
The following discussion and analysis of financial condition and results of
operations includes the operations of Farm Family Holdings, Inc. ("Farm Family
Holdings") and its wholly owned subsidiary, Farm Family Casualty Insurance
Company ("Farm Family Casualty") and Farm Family Casualty's wholly owned
subsidiary, Rural Agency and Brokerage, Inc. (collectively referred to as the
"Company"). The operations of the Company are also closely related with those of
its affiliates, Farm Family Life Insurance Company and Farm Family Life
Insurance Company's wholly owned subsidiary, United Farm Family Insurance
Company.
Conversion and Initial Public Offering
On July 26, 1996, Farm Family Mutual Insurance Company ("Farm Family Mutual")
converted from a mutual property and casualty insurance company to a stockholder
owned property and casualty insurance company and became a wholly owned
subsidiary of Farm Family Holdings pursuant to a Plan of Reorganization and
Conversion (the "Plan of Conversion"). In addition, Farm Family Mutual was
renamed Farm Family Casualty Insurance Company. As part of the Plan of
Conversion, Farm Family Holdings was formed and the Farm Family Mutual
policyholders received 2,237,000 shares of Farm Family Holding's common stock
and $11,735,000 in cash in exchange for their membership interest in Farm Family
Mutual.
On July 23, 1996, Farm Family Holdings made an initial public offering of its
common stock at a price of $16 per share. Farm Family Holdings received net
proceeds of $41,453,000 for 2,786,000 shares sold in the initial public
offering. In addition, Farm Family Holdings received $3,427,000 for 214,000
shares purchased by policyholders of Farm Family Mutual in a subscription
offering. In addition, pursuant to the Plan of Conversion, holders of Farm
Family Mutual debt could elect to exchange their debt instruments for shares of
common stock or cash. As a result, there were 17,000 common shares and
$1,107,000 in cash exchanged for debt with an outstanding principal amount of
$1,371,000.
Farm Family
Farm Family Casualty is a specialized property and casualty insurer of farms,
other generally related businesses and residents of rural and suburban
communities principally in the Northeastern United States. Farm Family Casualty
provides property and casualty insurance coverages to members of the state Farm
Bureau(R) organizations in New York, New Jersey, Delaware, West Virginia and all
of the New England states. Membership in a state Farm Bureau organization is a
prerequisite for voluntary insurance coverage (except for employees of the
Company and its affiliates). Associate Farm Bureau memberships are generally
available to persons not engaged in agricultural businesses.
Operating Environment
The operating results of companies in the property and casualty insurance
industry have historically been subject to fluctuations due to competition,
economic conditions, weather and various other factors. Factors affecting the
results of operations of the property and casualty industry include price
competition and aggressive marketing which historically have resulted in higher
combined loss and expense ratios. The Company's premium revenue is a function of
changes in average premiums per policy and the growth in the number of policies.
Premium rates are regulated by the state insurance departments in the states in
which the Company operates. Because of the nature of the property and casualty
insurance industry, it is difficult to predict future trends in the industry's
overall combined losses and profitability.
The Company's operating results are subject to significant fluctuations from
period to period depending upon, among other factors, the frequency and severity
of losses from weather related and other catastrophic events, the effect of
competition and regulation on the pricing of products, changes in interest
rates, general economic conditions, tax laws and the regulatory environment. As
a condition of its license to do business in various states, the Company is
required to participate in a variety of mandatory residual market mechanisms
(including mandatory pools) which provide certain insurance (most notably
automobile insurance) to consumers who are otherwise unable to obtain such
coverages from private insurers. Residual market premium rates for automobile
insurance have generally been inadequate. The amount of future losses or
assessments from residual market mechanisms can not be predicted with certainty
and could have a material adverse effect on the Company's results of operations.
For the years ended December 31, 1996, 1995, and 1994, 38.6%, 39.1% and 38.5%,
respectively, of the Company's direct written premiums were derived from
policies written in New York and 22.6%, 20.8%, and 19.6%, respectively, were
derived from policies written in New Jersey. For these periods, no other state
accounted for more than 10.0% of the Company's direct written premiums. As a
result of the concentration of the Company's business in the states of New York
and New Jersey and more generally in the Northeastern United States, the
Company's results of operations may be significantly affected by weather
conditions, catastrophic events and regulatory developments in these two states
and in the Northeastern United States.
Products
The Special Farm Package is a flexible, multi-line package of insurance
coverages which the Company regards as its "flagship" product. For the year
ended December 31, 1996, 24.5% of the Company's total direct written premiums
were derived from the Special Farm Package product.
The Company concentrates on its primary products: personal and commercial
automobile, the Special Farm Package, businessowners, and homeowners policies.
The Company underwrites its commercial and personal lines risks by evaluating
historical loss experience, current prevailing market conditions, and product
profitability with consistently applied standards. The adequacy of premium rates
is affected mainly by the severity and frequency of claims and changes in the
competitive, legal and regulatory environment in which the Company operates.
Expense Management
During the fourth quarter of 1996, the Company announced the implementation of a
voluntary early retirement program and other changes to the Company's benefit
plans as part of its continuous expense management program. The Company recorded
a nonrecurring charge, net of an income tax benefit of $412,000,of $765,000 for
the Company's share of the costs of this voluntary early retirement program.
Eligibility for the program was based on age and years of service. In addition,
effective January 1, 1997, the Company froze benefits available through its
defined benefit plan and enhanced its defined contribution plan. As a result,
the Company's contributions to the defined contribution plan will vary to a
greater extent based upon the Company's profitability than the contributions
previously required to fund its defined benefit plan. The Board of Directors
also approved a stock option plan, subject to shareholder approval, and an
annual incentive plan for officers.
RESULTS OF OPERATIONS
The Year Ended December 31, 1996 Compared to the Year Ended December 31, 1995
Premiums
Premium revenue increased $13.9 million or 11.8%, during the year ended December
31, 1996 to $130.8 million from $116.9 million in 1995. The increase in premium
revenue in 1996 resulted from an increase of $11.1 million in earned premiums on
additional business directly written by the Company (principally in New York and
New Jersey) and an increase of $2.4 million in earned premiums retained by the
Company and not ceded to reinsurers, in addition to an increase of $0.4 million
in earned premiums assumed. The $11.1 million increase in earned premiums on
additional business directly written by the Company was primarily attributable
to an increase of $9.9 million, or 9.2%, in earned premiums from the Company's
primary products (personal and commercial automobile policies other than
assigned risk business, the Special Farm Package, businessowners policies,
homeowners policies, and Special Home Package) and to an increase of $0.7
million in earned premiums on workers' compensation business. The number of
policies in force related to the Company's primary products increased by 8.6% to
approximately 114,000 in 1996 from approximately 105,000 in 1995 and the average
premium earned for each such policy increased by 0.6% in 1996. The $2.4 million
increase in earned premiums retained by the Company was primarily the result of
a change in the terms of certain of the Company's reinsurance agreements
pursuant to which the earned premiums ceded by the Company were reduced.
Net Investment Income
Net investment income increased $1.6 million or 11.3% to $15.9 million for the
year ended December 31, 1996 from $14.3 million in 1995. The increase in net
investment income was primarily the result of an increase in cash and invested
assets (at amortized cost) of approximately $34.7 million, or 17.7%. The
increase in average cash and invested assets was primarily attributable to the
net proceeds of $31.0 million from the initial public offering and subscription
offering received in July 1996. The return realized on the Company's cash and
invested assets was 7.5% in 1996 and 7.6% in 1995.
Net Realized Investment Gains (Losses)
Net realized investment losses were $0.6 million for the year ended December 31,
1996 compared to a gain of $0.9 million in 1995.
Losses and Loss Adjustment Expenses
Losses and loss adjustment expenses increased $11.8 million, or 14.2%, to $95.0
million for the year ended December 31, 1996 from $83.2 million in 1995. The
increase in losses and loss adjustment expenses was primarily attributable to
the overall growth in the Company's business, as well as the frequency of
weather related losses in the Northeastern United States during the three months
ended March 31, 1996. Loss and loss adjustment expenses were 72.6% of premium
revenue in 1996 compared to 71.1% of premium revenue in 1995. Losses believed to
be weather related aggregated $10.6 million in 1996 compared to $5.2 million in
1995.
Underwriting Expenses
Underwriting expenses increased $3.3 million, or 9.3%, to $38.2 million for the
year ended December 31, 1996 from $34.9 million for the same period in 1995. For
the year ended December 31, 1996, underwriting expenses were 29.2% of premium
revenue compared to 29.8% in 1995. The reduction in the Company's underwriting
expense ratio was primarily attributable to a smaller relative increase in
overhead expenses than in premium revenue for the period.
Federal Income Tax Expense
Federal income tax expense decreased $1.3 million to $3.7 million in 1996 from
$5.0 million in 1995. Federal income tax expense was 30.3% of income before
federal income taxes in 1996 compared to 34.2% in 1995. The decrease in the
Company's effective federal income tax rate was primarily attributable to an
increase in tax exempt interest income in 1996.
Net Income
Net income decreased $2.7 million to $6.9 million in 1996 from $9.6 million in
1995 primarily as a result of the foregoing factors and the impact of $1.5
million of expenses related to the Plan of Conversion which the Company has
identified as an extraordinary item. In addition, the Company implemented a
voluntary early retirement program which resulted in a one time charge to
earnings, net of an income tax benefit of $0.4 million, of $0.8 million in the
last quarter of 1996.
The Year Ended December 31, 1995 Compared to the Year Ended December 31, 1994
Premiums
Premium revenue increased $15.5 million or 15.2%, during the year ended December
31, 1995 to $116.9 million from $101.5 million in 1994. The increase in premium
revenue in 1995 resulted from an increase of $14.3 million in earned premiums on
additional business directly written by the Company (principally in New York and
New Jersey) and an increase of $2.3 million in earned premiums retained by the
Company and not ceded to reinsurers, which were partially offset by a decrease
of $1.1 million in earned premiums assumed. The $14.3 million increase in earned
premiums on additional business directly written by the Company was primarily
attributable to an increase of $10.8 million, or 11.1%, in earned premiums from
the Company's primary products (personal and commercial automobile policies
other than assigned risk business, the Special Farm Package, businessowners
policies, homeowners policies, and Special Home Package) and to an increase of
$1.8 million in earned premiums on assigned risk business. The number of
policies in force related to the Company's primary products increased by 8.4% to
approximately 105,000 in 1995 from approximately 97,000 in 1994 and the average
premium earned for each such policy increased by 2.5% in 1995. The $2.3 million
increase in earned premiums retained by the Company was primarily the result of
a change in the terms of certain of the Company's reinsurance agreements
pursuant to which both the amount of earned premiums ceded by the Company and
the ceding commissions received by the Company were reduced. The $1.1 million
decrease in earned premiums assumed was attributable to a reduction in premiums
assumed from mandatory pools as a result of the depopulation of such pools.
Net Investment Income
Net investment income increased $1.1 million or 8.6% to $14.3 million for the
year ended December 31, 1995 from $13.2 million in 1994. The increase in net
investment income was primarily the result of an increase in cash and invested
assets (at amortized cost) of approximately $17.2 million, or 9.6%. The return
realized on the Company's cash and invested assets was 7.6% in 1995 and 1994.
Net Realized Investment Gains
Net realized investment gains were $0.9 million for the year ended December 31,
1995 compared to $1.3 million in 1994.
Losses and Loss Adjustment Expenses
Losses and loss adjustment expenses increased $0.5 million, or 0.6%, to $83.2
million for the year ended December 31, 1995 from $82.7 million in 1994. The
increase in losses and loss adjustment expenses was primarily attributable to
the overall growth in the Company's business and was significantly offset by a
reduction in the loss and loss adjustment expense ratio. Loss and loss
adjustment expenses were 71.1% of premium revenue in 1995 compared to 81.5% of
premium revenue in 1994. The decrease in the loss and loss adjustment expense
ratio was primarily attributable to improved loss ratios on the Company's
personal and commercial automobile lines and to a decline in the frequency and
severity of weather related property losses in 1995 as compared with 1994.
Losses believed to be weather related aggregated $5.2 million in 1995 compared
to $7.9 million in 1994. To a much lesser extent, the decrease in the loss and
loss adjustment expense ratio on assumed reinsurance also contributed to the
decrease in the Company's overall loss and loss adjustment expense ratio during
1995.
Underwriting Expenses
Underwriting expenses increased $6.1 million, or 21%, to $34.9 million for the
year ended December 31, 1995 from $28.8 million for the same period in 1994. For
the year ended December 31, 1995, underwriting expenses were 29.8% of premium
revenue compared to 28.4% in 1994. A reduction in 1994 of $2.2 million in
amounts accrued for the Company's share of the deficit of the New Jersey Market
Transition Facility had a favorable impact on the Company's underwriting expense
ratio in that year. Without taking into account the effect of this reduction,
underwriting expenses in 1994 would have been 30.5% of premium revenue
Federal Income Tax Expense
Federal income tax expense increased $3.6 million to $5.0 million in 1995 from $
1.4 million in 1994. Federal income tax expense was 34.2% of income before
federal income tax expense in 1995 compared to 29.1% in 1994. The increase in
the Company's effective federal income tax rate was primarily attributable to
the increase in income before federal income tax expense, certain expenses
related to the Plan of Conversion , and reductions in tax exempt interest income
in 1995.
Net Income
Net income increased $6.1 million to $9.6 million in 1995 from $3.5 million in
1994 primarily as a result of the foregoing factors.
LIQUIDITY AND CAPITAL RESOURCES
Historically, the principal sources of the Company's cash flow have been
premiums, investment income, maturing investments, and proceeds from sales of
invested assets. In addition to the need for cash flow to meet operating
expenses, the liquidity requirements of the Company relate primarily to the
payment of losses and loss adjustment expenses. The liquidity requirements of
the Company vary because of the uncertainties regarding the settlement dates for
liabilities for unpaid claims and because of the potential for large losses,
either individually or in the aggregate.
During 1996, the Company continued to reduce its holdings of non-investment
grade fixed maturities to improve the overall quality of its investment
portfolio. The aggregate carrying value of fixed maturity securities rated as
non-investment grade by the NAIC was reduced to $6.9 million, or 3.2% of its
fixed maturity portfolio, at December 31, 1996 from $10.8 million, or 5.6% of
its fixed maturity portfolio, at December 31, 1995. High yield corporate bonds
constituted most of the non-investment grade securities held by the Company as
of December 31, 1996. As a result of the reduction in holdings of certain
non-investment grade securities, the Company anticipates that future investment
yields may be lower than they otherwise would be. Approximately 4% of the
Company's investment portfolio consists of investments in mortgage-backed
securities. The mortgage-backed securities held by the Company as of December
31, 1996 were primarily GNMA, FNMA, and Federal Home Loan Mortgage Corp.
pass-through securities. The Company currently has no investments in such
derivative financial instruments as futures, forward, swap, or option contracts,
or other financial instruments with similar characteristics. The market value of
the Company's fixed maturity investments is subject to fluctuations directly
attributable to prevailing rates of interest as well as other factors. As of
December 31, 1996, the aggregate market value of the Company's fixed maturity
investments exceeded the aggregate amortized cost of such investments by $5.1
million. As of December 31, 1995, the aggregate market value of the Company's
fixed maturity investments exceeded the aggregate amortized cost of such
investments by $10.2 million The Company has in place an unsecured line of
credit with Key Bank, NA under which it may borrow up to $2.0 million and,
effective January 1997, a $7.0 million unsecured line of credit with Fleet
National Bank. At December 31, 1996, no amounts were outstanding on either line
of credit, each of which has an annual interest rate equal to such bank's prime
rate. In addition, the Company had notes payable outstanding consisting of $0.3
million of debentures and $1.0 million of subordinated surplus certificates
(collectively "the Surplus Notes"). The Surplus Notes bear interest at the rate
of 8% per annum, have no maturity date, and principal and interest are repayable
only with the approval of the Insurance Department of the State of New York.
Net cash provided by operating activities was $11.8 million, $16.4 million, and
$8.6 million during the years ended December 31, 1996, 1995, and 1994,
respectively. The decrease in cash provided by operating activities in 1996 was
primarily attributable to the decrease in net income which included the impact
of $1.5 million of expenses related to the Plan of Conversion which the Company
has identified as an extraordinary item during 1996 compared to 1995. The
increase in net cash provided by operating activities in 1995 was primarily
attributable to the increase in net income and a decrease in payments for losses
and loss adjustment expenses during 1995 compared to 1994.
Net cash used in investing activities was $41.1 million, $18.5 million, and $7.7
million during the years ended December 31, 1996, 1995, and 1994, respectively.
The increase in net cash used in investing activities in 1996 resulted primarily
from a reduction in proceeds on the maturities and sales of fixed maturities and
the investment of the net proceeds from the Company's initial public offering.
The increase in net cash used in investing activities in 1995 resulted from the
net increase in cash available from the Company's operations during 1995 and a
corresponding increase in investments in short-term investments and fixed
maturities.
Net cash provided by financing activities for the year ended December 31, 1996
of $30.9 million was the result of the Company's initial public offering of its
common stock on July 23, 1996. The Company received net proceeds of $41.5
million for 2,786,000 shares sold in the initial public offering as well as $3.4
million for 214,000 shares sold in a subscription offering to policyholders. The
Company made payments of $11.7 million to policyholders in exchange for their
membership interest in Farm Family Mutual and $1.1 million to holders of Farm
Family Mutual debt pursuant to the Plan of Conversion. In addition, the net
proceeds were utilized to pay certain expenses associated with the initial
public offering of $1.1 million. Subsequent to the initial public offering, Farm
Family Holdings made an $18.0 million capital contribution to Farm Family
Casualty.
The Company purchases reinsurance in part to mitigate the impact of large or
unusual losses and loss expenses on its liquidity. As a condition of writing
business in certain states, the Company participates in a number of mandatory
pools and the Company may be required to pay assessments to the extent such
pools require the funding of deficits in the future.
The principal source of liquidity for Farm Family Holdings will be derived from
dividend payments received from the Farm Family Casualty. The New York Insurance
Law regulates the distribution of dividends and other payments to Farm Family
Holdings by Farm Family Casualty. Such restrictions or any subsequently imposed
restrictions may in the future affect Farm Family Holdings' liquidity.
<PAGE>
<TABLE>
FARM FAMILY HOLDINGS, INC. AND SUBSIDIARIES
Consolidated Statements of Income
($ in thousands)
<CAPTION>
- --------------------------------------------------------------------------------------------------------------------
For the Years Ended December 31, 1996 1995 1994
---- ---- ----
- --------------------------------------------------------------------------------------------------------------------
Revenues:
<S> <C> <C> <C>
Premiums $130,780 $116,936 $101,466
Net investment income 15,952 14,326 13,190
Realized investment gains (losses), net (640) 912 1,340
Other income 905 840 696
------------------------------------------
Total revenues 146,997 133,014 116,692
------------------------------------------
Losses and Expenses:
Losses and loss adjustment expenses 94,977 83,184 82,680
Underwriting expenses 38,160 34,902 28,768
Early retirement program expense 1,177 - -
Interest expense 167 216 220
Dividends to policyholders 373 122 51
------------------------------------------
Total losses and expenses 134,854 118,424 111,719
------------------------------------------
Income before federal income tax expense and extraordinary item 12,143 14,590 4,973
Federal income tax expense 3,676 4,984 1,447
------------------------------------------
Income before extraordinary item 8,467 9,606 3,526
Extraordinary item - demutualization expenses 1,543 - -
------------------------------------------
Net income $6,924 $9,606 $3,526
------------------------------------------
Per Common Share:
Income before extraordinary item $2.13 $3.20 $1.18
------------------------------------------
Net income $1.74 $3.20 $1.18
------------------------------------------
See accompanying notes to Consolidated Financial Statements.
</TABLE>
<PAGE>
<TABLE>
FARM FAMILY HOLDINGS, INC. AND SUBSIDIARIES
THE COMPANY MUTUAL INSURANCE COMPANY
Consolidated Balance Sheets
($ in thousands)
<CAPTION>
As of December 31, 1995
1996
ASSETS
Investments:
Fixed Maturities
<S> <C> <C>
Available for sale, at fair value
(Amortized cost: $214,226 in 1996 and $171,694 in 1995 ) $219,188 $181,189
Held to maturity, at amortized cost
(Fair value: $9,973 in 1996 and $13,100 in 1995) 9,782 12,386
Equity securities
Available for sale, at fair value (Cost: $2,546 in 1996 and $334 in 1995) 7,908 4,746
Mortgage loans 1,745 1,822
Other invested assets 748 1,246
Short-term investments 5,333 6,532
------------------------------
Total investments 244,704 207,921
------------------------------
Cash 4,110 2,410
Insurance receivables:
Reinsurance receivables 10,743 13,773
Premiums receivable 22,663 21,791
Deferred acquisition costs 10,682 10,527
Accrued investment income 4,861 4,260
Deferred income tax asset, net 1,520 -
Prepaid reinsurance premiums 1,944 1,864
Receivable from affiliates, net 16,133 13,860
Other assets 2,052 1,434
------------------------------
Total Assets $319,412 $278,288
------------------------------
LIABILITIES AND STOCKHOLDERS' EQUITY
Liabilities:
Reserves for losses and loss adjustment expenses $141,220 $137,978
Unearned premium reserve 55,945 52,799
Reinsurance premiums payable 641 2,635
Accrued expenses and other liabilities 9,561 7,788
Debt 1,304 2,707
Deferred income tax liability, net - 217
------------------------------
Total liabilities 208,671 204,124
------------------------------
Stockholders' equity:
Common Stock $1.60 par value 1,000,000 shares authorized
and no shares issued and outstanding - -
Common Stock $1.60 par value 3,200,000 shares authorized
and 5,253,813 shares issued and outstanding 53 -
Additional paid in capital 98,140 -
Retained earnings 5,838 65,284
Net unrealized investment gains 6,710 8,998
Minimum pension liability adjustment - (118)
------------------------------
Total stockholders' equity 100,741 74,164
------------------------------
Total Liabilities and Stockholders' Equity $319,412 $278,288
------------------------------
See accompanying notes to Consolidated Financial Statements.
</TABLE>
<PAGE>
<TABLE>
FARM FAMILY HOLDINGS, INC. AND SUBSIDIARIES
Consolidated Statements of Stockholders' Equity
($ in thousands)
<CAPTION>
- ------------------------------------------------------------------------------------------------------------
Year Ended December 31 1996 1995 1994
- ------------------------------------------------------------------------------------------------------------
Common stock
<S> <C> <C> <C>
Balance, beginning of year $ - $ - $ -
Common stock issued 53 - -
------------------------------------
Balance, end of year 53 - -
------------------------------------
Additional paid in capital
Balance, beginning of year - - -
Initial public offering and subscription offering, net 43,715 - -
Payments to policyholders (12,210) - -
Conversion of debt to common stock 265 - -
Demutualization of Farm Family Mutual 66,370 - -
------------------------------------
Balance, end of year 98,140 - -
------------------------------------
Retained earnings
Balance, beginning of year 65,284 55,678 52,152
Net income 6,924 9,606 3,526
Demutualization of Farm Family Mutual (66,370) - -
------------------------------------
Balance, end of year 5,838 65,284 55,678
------------------------------------
Net unrealized appreciation (depreciation) of investments
Balance, beginning of year 8,998 (2,701) 8,360
Change in unrealized appreciation (depreciation), net (2,288) 11,699 (11,061)
------------------------------------
Balance, end of year 6,710 8,998 (2,701)
------------------------------------
Minimum pension liability adjustment
Balance, beginning of year (118) - -
Minimum pension liability adjustment 118 (118) -
------------------------------------
Balance, end of year - (118) -
------------------------------------
Total Stockholders' Equity $100,741 $74,164 $52,977
------------------------------------
See accompanying notes to Consolidated Financial Statements.
</TABLE>
<PAGE>
<TABLE>
FARM FAMILY HOLDINGS, INC. AND SUBSIDIARIES
Statements of Consolidated Cash Flows
($ in thousands)
<CAPTION>
- -----------------------------------------------------------------------------------------------------------------------
Year ended December 31 1996 1995 1994
---- ---- ----
- -----------------------------------------------------------------------------------------------------------------------
CASH FLOWS FROM OPERATING ACTIVITIES:
<S> <C> <C> <C>
Net income $6,924 $9,606 $3,526
--------------------------------------
Adjustments to reconcile net income to net cash provided by operating
activities:
Realized investment (gains) losses 640 (912) (1,340)
Amortization of bond discount 130 62 77
Deferred income taxes (505) 581 596
Extraordinary item - demutualization expense 1,543 - -
Changes in:
Reinsurance receivables 3,030 1,254 1,910
Premiums receivable (872) (3,062) (2,732)
Deferred acquisition costs (155) (1,856) (39)
Accrued investment income (601) (213) (426)
Prepaid reinsurance premiums (80) (58) (367)
Receivable from affiliates (2,273) (3,293) 1,699
Other assets (283) 742 (803)
Reserves for losses and loss adjustment expenses 3,242 10,024 4,477
Unearned premium reserve 3,146 3,956 4,541
Reinsurance premiums payable (1,994) (1,394) 4
Accrued expenses and other liabilities 1,497 1,001 (2,030)
Income taxes payable - - (459)
--------------------------------------
Total adjustments 6,465 6,832 5,108
--------------------------------------
Net cash provided by operating activities before extraordinary item 13,389 16,438 8,634
Extraordinary item - demutualization expense (1,543) - -
--------------------------------------
Net cash provided by operating activities 11,846 16,438 8,634
--------------------------------------
CASH FLOWS FROM INVESTING ACTIVITIES
Proceeds from sales:
Fixed maturities available for sale 5,670 28,466 26,102
Other invested assets 144 - 732
Investment collections:
Fixed maturities available for sale 9,405 15,435 16,025
Fixed maturities held to maturity 2,561 514 418
Mortgage loans 77 68 58
Investment purchases:
Fixed maturities available for sale (58,430) (58,339) (54,010)
Fixed maturities held to maturity - (1,598) (1,040)
Equity securities (2,042) - -
Change in short-term investments, net 1,199 (3,519) 90
Change in other invested assets 344 480 3,186
Proceeds from sale of property and equipment - - 711
--------------------------------------
Net cash used in investing activities (41,072) (18,493) (7,728)
--------------------------------------
CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds from IPO and Subscription Offering 44,880 - -
subscription
Demutualization payments to Policyholders and Noteholders (12,842) - -
IPO Expenses paid (1,080) - -
Principal payments on debt (32) (42) (34)
--------------------------------------
Net cash provided by (used in) financing activities 30,926 (42) (34)
--------------------------------------
Net increase (decrease) in cash 1,700 (2,097) 872
Cash, beginning of year 2,410 4,507 3,635
--------------------------------------
Cash, end of year $4,110 $2,410 $4,507
--------------------------------------
See accompanying notes to Consolidated Financial Statements.
</TABLE>
<PAGE>
1. Summary of Significant Accounting Policies
Basis of Presentation:
The accompanying consolidated financial statements have been prepared
in conformity with generally accepted accounting principles and include
the accounts of Farm Family Holdings, Inc. ("Farm Family Holdings") and
its wholly owned subsidiary, Farm Family Casualty Insurance Company
("Farm Family Casualty") and its wholly owned subsidiary, Rural Agency
and Brokerage, Inc., ("RAB") (collectively referred to as the
"Company"). All significant intercompany balances and transactions have
been eliminated. The preparation of financial statements in accordance
with generally accepted accounting principles requires management to
make estimates and assumptions that affect the reported amounts of
assets and liabilities and disclosures of contingent assets and
liabilities at the date of the financial statements and the reported
amounts of revenues and expenses during the reporting period. Actual
results could differ from those estimates.
The Company provides property and casualty insurance coverages to
members of the state Farm Bureau organizations in New York, New Jersey,
Delaware, West Virginia and all of the New England states. Membership
in the state Farm Bureau organizations is a prerequisite for voluntary
insurance coverage, except for employees of the Company and its
affiliates.
The operations of the Company are closely related with those of its
affiliates, Farm Family Life Insurance Company ("Farm Family Life") and
Farm Family Life's wholly owned subsidiary, United Farm Family
Insurance Company ("United Farm Family"). (see Note 10.) Farm Family
Life is a stock life insurance company owned by the state Farm Bureau
organizations of the ten states in which the Company operates. The
Company and Farm Family Life are affiliated by common management,
shared agents and employees and similar Boards of Directors.
Investments:
Fixed maturities include bonds, redeemable preferred stocks and
mortgage-backed securities. Investments in fixed maturities which the
Company has both the ability and positive intent to hold to maturity
are classified as held to maturity and carried at amortized cost. Fixed
maturities which may be sold prior to their contractual maturity are
classified as available for sale and are carried at fair value. The
difference between amortized cost and fair value of fixed maturities
classified as available for sale, net of deferred income taxes, is
reflected as a component of stockholders' equity.
Equity securities include common and non-redeemable preferred stocks
which are carried at fair value. The difference between cost and fair
value of equity securities, less deferred income taxes, is reflected as
a component of stockholders' equity.
Mortgage loans are carried at their outstanding principal balance.
The carrying values of all investments are reviewed on an ongoing
basis. If this review indicates a decline in fair value below cost is
other than temporary, the Company's carrying value in the investment is
reduced to its estimated realizable value and a specific write-down is
taken. Such write-downs are included in realized investment gains and
losses.
Short-term investments are carried at cost which approximates fair
value.
Investment income consists primarily of interest and dividends.
Interest is recognized on an accrual basis and dividends are recorded
on the ex-dividend date. Interest income on mortgage-backed securities
is determined on the effective yield method based on estimated
principal repayments. Realized investment gains and losses are
determined on a specific identification basis.
Income Taxes:
The income tax provision is calculated under the liability method.
Deferred income tax assets and liabilities are recorded based on the
difference between the financial statement and tax bases of assets and
liabilities and the enacted tax rates. The principal assets and
liabilities giving rise to such differences are reserves for losses and
loss adjustment expenses, unearned premiums, and deferred acquisition
costs. Deferred income taxes also arise from unrealized investment
gains or losses on equity securities and fixed maturities classified as
available for sale.
Property-Liability Insurance Accounting:
Premiums are deferred and earned on a pro rata basis over the terms of
the respective policies. Amounts paid for ceded reinsurance premiums
are reported as prepaid reinsurance premiums and amortized over the
remaining contract period in proportion to premium. Premiums receivable
are recorded at cost less an allowance for doubtful accounts.
Policy acquisition costs that vary with and are primarily related to
the production of business have been deferred. Deferred acquisition
costs primarily consist of agents' compensation, premium taxes, and
certain other underwriting expenses. Such deferred acquisition costs
are amortized as premium revenue is recognized. Deferred acquisition
costs are limited to their estimated realizable value, which gives
effect to the premium to be earned, related investment income, and
losses and loss adjustment expenses expected to be incurred as the
premium is earned.
Reserves for losses and loss adjustment expenses represent estimates of
the ultimate amounts necessary to settle reported losses and a
provision for incurred but not reported claims of insured losses. The
reserve estimates are based on known facts and circumstances, including
the Company's experience with similar cases and historical trends
involving reserving patterns, loss payments, pending levels of unpaid
claims and product mix, as well as other factors including court
decisions, economic conditions and public attitudes. The reserves for
losses and loss adjustment expenses include case basis estimates of
reported losses, estimates of incurred but not reported losses based
upon prior experience adjusted for current trends, and estimates of
losses to be paid under assumed reinsurance contracts. Estimated
amounts of recoverable salvage and subrogation are deducted from the
reserves for losses and loss adjustment expenses. The establishment of
appropriate reserves, as well as related amounts recoverable under
reinsurance contracts is an inherently uncertain process. Reserve
estimates are regularly reviewed and updated, using the most current
information available. Any resulting adjustments, which may be
material, are reflected in current operations (see Note 7).
Net Income Per Share:
The weighted average shares of common stock used in the computation of
net income per share and income per share before extraordinary item
were 3,979,115 in 1996 and 3,000,000 in 1995 and 1994. The weighted
average shares of common stock in all periods give effect to the
allocation of 3,000,000 shares of common stock to eligible
policyholders on July 26, 1996 pursuant to Farm Family Casualty's
conversion from a mutual company to a stockholder owned company.
<PAGE>
2. Plan of Reorganization and Conversion
On July 26, 1996, Farm Family Mutual Insurance Company ("Farm Family
Mutual") converted from a mutual property and casualty insurance
company to a stockholder owned property and casualty insurance company
and changed its name to Farm Family Casualty Insurance Company. The
conversion was made pursuant to a Plan of Reorganization and Conversion
("the Plan"). As part of the Plan, Farm Family Holdings was formed and
the policyholders received 2,237,000 shares of Farm Family Holdings
common stock and $11,735,000 in cash in exchange for their membership
interest in Farm Family Mutual.
On July 23, 1996 Farm Family Holdings made an initial public offering
of its common stock at a price of $16 per share. Farm Family Holdings
received net proceeds of $41,453,000 for 2,786,000 shares sold in the
initial public offering. In addition, Farm Family Holdings received
$3,427,000 for 214,000 shares purchased by policyholders of Farm Family
Mutual in a subscription offering.
As part of the Plan, holders of Farm Family Mutual debt (see Note 8)
could elect to exchange their debt instruments for shares of stock or
cash. As a result, there were 17,000 shares and $1,107,000 in cash
exchanged for debt with an outstanding principal amount of $1,371,000
plus accrued interest thereon.
Farm Family Holdings has entered into an Option Purchase Agreement,
dated February 14, 1996 (the "Option Purchase Agreement"), with the
shareholders of Farm Family Life pursuant to which Farm Family Holdings
has, for a two year period commencing on July 26, 1996, the option to
acquire Farm Family Life subject to certain conditions, which include
the approval of Farm Family Holdings' shareholders and applicable
regulatory authorities. Although Farm Family Holdings believes that the
acquisition of Farm Family Life would be desirable under apppropriate
circumstances, Farm Family Holdings is not in a position at this time
to predict with any certainty whether the option to acquire Farm Family
Life will in fact be exercised. Farm Family Holdings' decision to
exercise the option will depend, among other things, on the exercise
price for the shares of Farm Family Life, an evaluation of the
financial statements prepared in accordance with generally accepted
accounting principles and prospects of Farm Family Life, the outcome of
a vote by the Farm Family Holdings' shareholders, and the receipt of
applicable regulatory approvals. Farm Family Life's financial
statements are prepared on the basis of statutory accounting practices
prescribed or permitted by insurance regulatory authorities. Financial
statements for Farm Family Life prepared in accordance with generally
accepted accounting principles do not currently exist.
<PAGE>
3. Investments
The amortized cost, fair value and gross unrealized gains and losses of
available for sale securities and held to maturity securities at
December 31, 1996 and 1995 are as follows:
<TABLE>
<CAPTION>
($ in thousands)
1996
---- Gross
Available for Sale Amortized Unrealized Fair
Cost Gains Losses Value
Fixed maturities:
<S> <C> <C> <C> <C>
U.S. Government & Agencies $18,401 $421 $79 $18,743
States, Municipalities & Political Subdivisions 42,568 1,500 118 43,950
Corporate 135,485 3,918 1,527 137,876
Mortgage-backed Securities 9,676 666 ---- 10,342
Redeemable Preferred Stock 8,096 276 95 8,277
------------------------------------------------
Total fixed maturities 214,226 6,781 1,819 219,188
Equity securities 2,546 5,431 69 7,908
------------------------------------------------
Total Available for Sale $216,772 $12,212 $1,888 $227,096
------------------------------------------------
Held to Maturity
Fixed maturities:
States, Municipalities & Political Subdivisions $5,423 $93 $34 $5,482
Corporate 4,359 186 54 4,491
------------------------------------------------
Total Held to Maturity $9,782 $279 $88 $9,973
------------------------------------------------
1995
Available for Sale
Fixed maturities:
U.S. Government & Agencies $12,797 $596 $ ---- $13,393
States, Municipalities & Political Subdivisions 21,871 1,675 66 23,480
Corporate 119,319 7,040 987 125,372
Mortgage-backed Securities 10,985 995 ---- 11,980
Redeemable Preferred Stock 6,722 322 80 6,964
------------------------------------------------
Total fixed maturities 171,694 10,628 1,133 181,189
Equity securities 334 4,440 28 4,746
------------------------------------------------
Total Available for Sale $172,028 $15,068 $1,161 $185,935
------------------------------------------------
Held to Maturity
Fixed maturities:
States, Municipalities & Political Subdivisions $5,925 $373 $ ---- $6,298
Corporate 6,461 354 13 6,802
------------------------------------------------
Total Held to Maturity $12,386 $727 $13 $13,100
------------------------------------------------
</TABLE>
<PAGE>
The table below presents the amortized cost and fair value of fixed
maturities at December 31, 1996, by contractual maturity. Actual maturities may
differ from contractual maturities as a result of prepayments.
<TABLE>
($ in thousands)
<CAPTION>
Available for Sale Held to Maturity
------------------ ----------------
Amortized Fair Amortized Fair
Cost Value Cost Value
<S> <C> <C> <C> <C>
Due in one year or less $771 $746 $350 $358
Due after one year through five years 28,061 28,756 917 923
Due after five years through ten years 100,668 102,102 3,186 3,173
Due after ten years 75,050 77,242 5,329 5,519
-------------------------- -------------------------
204,550 208,846 9,782 9,973
Mortgage-backed securities 9,676 10,342 ---- ----
-------------------------- -------------------------
Total $214,226 $219,188 $9,782 $9,973
-------------------------- -------------------------
</TABLE>
Unrealized investment gains and losses on fixed maturities classified as
available for sale and equity securities included in stockholders' equity at
December 31, 1996 are as follows:
<TABLE>
<CAPTION>
($ in thousands) Cost/ Net
Amortized Fair Gross Unrealized Unrealized
Cost Value Gains Losses Gains
---- ----- ----- ------ -----
<S> <C> <C> <C> <C> <C>
Fixed maturities available for sale $214,226 $219,188 $6,781 $1,819 $4,962
Equity securities 2,546 7,908 5,431 69 5,362
-------------------------------------------------------------
Total $216,772 $227,096 $12,212 $1,888 10,324
------------------------------------------------
Deferred income taxes 3,614
-------------
Total $6,710
-------------
</TABLE>
The change in unrealized appreciation (depreciation) of investments
included in stockholders' equity for the years ended December 31, 1996,
1995 and 1994 was as follows:
<TABLE>
<CAPTION>
($ in thousands) 1996 1995 1994
---- ---- ----
<S> <C> <C> <C>
Fixed maturities available for sale $(4,532) $17,197 $(17,236)
Equity securities 950 802 477
Other invested assets 63 (63) ----
----------------------------------------
(3,519) 17,936 (16,759)
Deferred income taxes 1,231 (6,237) 5,698
----------------------------------------
Total $(2,288) $11,699 $(11,061)
----------------------------------------
</TABLE>
<PAGE>
The components of net investment income are as follows:
<TABLE>
<CAPTION>
($ in thousands)
1996 1995 1994
---- ---- ----
<S> <C> <C> <C>
Interest on fixed maturities $15,612 $14,561 $13,546
Dividends from equity securities 53 19 23
Interest on mortgage loans 169 180 182
Interest on short-term investments 585 315 145
Other, net ---- (406) (381)
-----------------------------------
Gross investment income 16,419 14,669 13,515
Investment expense (467) (343) (325)
-----------------------------------
Net investment income $15,952 $14,326 $13,190
-----------------------------------
</TABLE>
A summary of realized investment gains (losses), net, as follows:
<TABLE>
<CAPTION>
($ in thousands)
1996 1995 1994
---- ---- ----
<S> <C> <C> <C>
Fixed maturities $(567) $912 $1,241
Equity securities ---- ---- 99
Other invested assets (73) ---- ----
-----------------------------------
Total $(640) $912 $1,340
-----------------------------------
</TABLE>
4. Fair Value of Financial Instruments
The estimated fair value of financial instruments has been determined
using available market information and appropriate value methodologies.
The estimated fair value of financial instruments are not necessarily
indicative of the amounts the Company might pay or receive in actual
market transactions. Potential taxes and other transaction costs have
not been considered in estimating fair value. As a number of the
Company's significant assets (including deferred acquisition costs, and
deferred income taxes) and liabilities (including reserves for losses
and loss adjustment expenses) are not considered financial instruments,
the disclosures that follow do not reflect the fair value of the
Company as a whole.
<PAGE>
The following table presents the carrying value and fair value of the
Company's financial instruments at December 31, 1996 and 1995.
<TABLE>
<CAPTION>
December December
31, 1996 31, 1995
------------- ------------
Carrying Fair Carrying Fair
($ in thousands) Value Value Value Value
---------------- ----- ----- ----- -----
Assets
<S> <C> <C> <C> <C>
Fixed maturities $228,970 $229,161 $193,575 $194,289
Equity securities 7,908 7,908 4,746 4,746
Mortgage loans 1,745 1,745 1,822 1,822
Cash and short-term investments 9,443 9,443 8,942 8,942
Premiums receivable, net 22,663 22,663 21,791 21,791
Receivable from affiliates, net 16,133 16,133 13,860 13,860
Accrued investment income and other assets 7,137 7,137 6,940 6,940
Liabilities
Accrued expenses and other liabilities 9,561 9,561 7,788 7,788
Debt 1,304 1,304 2,707 2,707
</TABLE>
The following methods and assumptions were used in estimating the fair value
disclosures for the financial instruments:
Fixed maturities and equity securities -- The fair value is based upon quoted
market prices where available or from independent pricing services.
Mortgage loans -- The fair value is based on discounted cash flows using
discount rates at which similar loans would be made to borrowers with similar
characteristics.
Cash and Short-term Investments -- Due to their short-term, highly liquid
nature, their carrying value approximates fair value.
Premiums Receivable, net; Accrued Investment Income and Other Assets; Receivable
from Affiliates, net; and Accrued Expenses and Other Liabilities -- Due to their
short-term nature, their carrying value approximates fair value.
Debt -- The fair value is based on discounted cash flows using current borrowing
rates for similar debt arrangements.
5. Reinsurance
The Company assumes and cedes insurance to participate in the
reinsurance market, limit maximum losses and minimize exposure on large
risks. Reinsurance contracts do not relieve the Company from its
obligations to policyholders as the primary insurer. The Company
evaluates the financial condition of its reinsurers and monitors
concentrations of credit risk arising from similar geographic regions,
activities and economic characteristics of the reinsurers to minimize
its exposure to significant losses from reinsurer insolvencies. Amounts
recoverable are regularly evaluated by the Company and an allowance for
uncollectible reinsurance is provided when collection is in doubt. At
December 31, 1996 and 1995, the Company determined it was not necessary
to provide an allowance for uncollectible reinsurance.
The Company's reinsurance program also includes reinsurance agreements
with United Farm Family. (see Note 10.) The effects of reinsurance on
premiums written and earned, and losses and loss adjustment expenses
incurred, for the years indicated were as follows:
<TABLE>
<CAPTION>
Year Ended December 31,
($ in thousands) 1996 1995 1994
---- ---- ----
Premiums written
<S> <C> <C> <C>
Direct $146,408 $135,963 $122,039
Assumed 6,462 6,261 7,577
Ceded to United Farm Family (9,336) (9,237) (9,776)
Ceded to non-affiliates (9,690) (12,153) (14,226)
---------------------------------------
Premiums written, net of reinsurance $133,844 $120,834 $105,614
---------------------------------------
Premiums earned
Direct $142,794 $131,717 $117,384
Assumed 6,931 6,552 7,690
Ceded to United Farm Family (9,334) (9,238) (9,750)
Ceded to non-affiliates (9,611) (12,095) (13,858)
---------------------------------------
Premiums earned, net of reinsurance $130,780 $116,936 $101,466
---------------------------------------
Losses and loss adjustment expenses incurred
Direct $99,954 $91,176 $91,467
Assumed 4,630 4,658 4,513
Ceded to United Farm Family (7,277) (6,604) (7,378)
Ceded to non-affiliates (2,330) (6,046) (5,922)
---------------------------------------
Losses and loss adjustment expenses incurred,
net of reinsurance $94,977 $83,184 $82,680
---------------------------------------
</TABLE>
6. Income Taxes
The components of the deferred income tax assets and liabilities at
December 31, 1996 and 1995 are as follows:
<TABLE>
<CAPTION>
($ in thousands)
Deferred Income Tax Assets 1996 1995
-------------------------- ---- ----
<S> <C> <C>
Reserves for losses and loss adjustment expenses $4,423 $4,444
Unearned premium reserve 3,774 3,559
Accrued expenses and other liabilities 797 474
Investments 148 68
---------------------------------
Total deferred income tax assets 9,142 8,545
---------------------------------
Deferred Income Tax Liabilities
Deferred acquisition costs 3,739 3,685
Unrealized investment gains, net 3,614 4,846
Other assets 269 231
---------------------------------
Total deferred income tax liabilities 7,622 8,762
---------------------------------
Net deferred income tax asset (liability) $1,520 $(217)
---------------------------------
</TABLE>
There was no valuation allowance for deferred income tax assets as of
December 31, 1996 or 1995. In assessing the realization of deferred tax
assets, management considers whether it is more likely than not that
the deferred tax assets will be realized. Management primarily
considered the existence of taxable income in the carryback period in
making this assessment and believes the benefits of the deductible
differences recognized as of December 31, 1996 and 1995 will ultimately
be realized.
The components of income tax expense (benefit) are as follows:
<TABLE>
<CAPTION>
($ in thousands) Year Ended December 31,
---------------- -----------------------
1996 1995 1994
---- ---- ----
<S> <C> <C> <C>
Current $4,181 $4,403 $851
Deferred (505) 581 596
---------------------------------------
Total income tax expense $3,676 $4,984 $1,447
---------------------------------------
</TABLE>
The Company paid income taxes of $4,592,000, $3,952,000 and $2,209,000
in 1996, 1995 and 1994 respectively.
A reconciliation of the differences between the Company's effective
rates of tax and the United States federal income tax rates follows:
<TABLE>
<CAPTION>
Year Ended December 31,
-----------------------
($ in thousands) % of % of % of
Pretax Pretax Pretax
1996 Income 1995 Income 1994 Income
---- ------ ---- ------ ---- ------
<S> <C> <C> <C> <C> <C> <C>
Income tax provision at prevailing $4,147 34.18% $5,006 34.31% $1,691 34.00%
rates
Tax effect of:
Tax exempt interest income (107) (.88) (11) (.08) (67) (1.35)
Dividends received deduction (156) (1.29) (148) (1.01) (140) (2.81)
Other, net (208) (1.71) 137 .94 (37) (.74)
-----------------------------------------------------------
Federal income tax expense $3,676 30.30% $4,984 34.16% $1,447 29.10%
-----------------------------------------------------------
</TABLE>
7. Reserves for Losses and Loss Adjustment Expenses
As described in Note 1, the Company establishes reserves for losses and
loss adjustment expenses on reported and incurred but not reported
claims of insured losses. The establishment of appropriate reserves for
losses and loss adjustment expenses is an inherently uncertain process
and the ultimate cost may vary materially from the recorded amounts.
Reserve estimates are regularly reviewed and updated, using the most
current information. Any resulting adjustments, which may be material,
are reflected in current operations.
<PAGE>
The following table provides a reconciliation of beginning and ending
liability balances for reserves for losses and loss adjustment expenses
for the years ended December 31, 1996, 1995 and 1994.
<TABLE>
<CAPTION>
Year Ended December 31,
-----------------------
1996 1995 1994
---- ---- ----
($ in thousands)
<S> <C> <C> <C>
Reserves for losses and loss adjustment
expenses at beginning of year $137,978 $127,954 $123,477
Less reinsurance recoverables and receivables 28,655 28,230 28,761
-------------------------------------
Net reserves for losses and loss adjustment
expenses at beginning of year 109,323 99,724 94,716
-------------------------------------
Incurred losses and loss adjustment expenses:
Provision for insured events of current year 100,418 88,366 86,370
Decrease in provision for
insured events of prior years (5,441) (5,182) (3,690)
-------------------------------------
Total incurred losses and loss adjustment expenses 94,977 83,184 82,680
-------------------------------------
Payments:
Losses and loss adjustment expenses
attributable to insured events of current year 50,122 40,519 43,232
Losses and loss adjustment expenses
attributable to insured events of prior years 39,795 33,066 34,440
-------------------------------------
Total Payments: 89,917 73,585 77,672
-------------------------------------
Net reserves for losses and loss
adjustment expenses at end of year 114,383 109,323 99,724
Plus reinsurance recoverables and receivables 26,837 28,655 28,230
-------------------------------------
Reserves for losses and loss adjustment
expenses at end of year $141,220 $137,978 $127,954
-------------------------------------
</TABLE>
The Company does not discount reserves for losses and loss adjustment
expenses except for certain lifetime workers' compensation indemnity
reserves it assumes from mandatory pools. The amount of such discounted
reserves was $4,184,000 (net of a discount of $1,185,000), $4,754,000
(net of a discount of $1,192,000), and $4,876,000 (net of a discount of
$1,217,000) for December 31, 1996, 1995 and 1994, respectively.
8. Debt
At December 31, 1996, debt consists of $301,000 of debentures and
$1,003,000 of subordinated surplus certificates. The debentures and
subordinated surplus certificates bear interest at the rate of 8% per
annum, have no maturity date, and principal and interest are repayable
only with the approval of the Insurance Department of the State of New
York. No single holder holds more than 5% of the outstanding debentures
or subordinated surplus certificates. The Company paid interest of
$279,000, $217,000 and $220,000 for the years ended December 31, 1996,
1995 and 1994, respectively.
At December 31, 1996, the Company had an available line of credit with
a bank for $2,000,000. There were no amounts outstanding on this line
of credit at December 31, 1996.
<PAGE>
9. Benefits Plans
Pension Plan:
The Company and Farm Family Life sponsor a qualified multi-employer
noncontributory defined benefit pension plan covering substantially all
of the Company's and Farm Family Life's full-time employees who meet
the eligibility requirements. Benefits under the pension plan are
primarily based upon the employee's length of service and the
employee's average compensation for certain periods during the last
years of employment. The Company's funding policy for its defined
benefit pension plan is to make annual contributions in accordance with
accepted actuarial cost methods subject to regulatory funding
limitations. Effective January 1, 1997, the Company and Farm Family
Life froze benefits available through the defined benefit plan. In
addition, the Company implemented a voluntary early retirement program
in the fourth quarter of 1996. (See note 14).
The net pension expense for the plan is as follows:
<TABLE>
<CAPTION>
Year Ended December 31,
($ in thousands) 1996 1995 1994
---- ---- ----
<S> <C> <C> <C>
Service cost $869 $708 $777
Interest cost on projected benefit obligation 1,411 1,384 1,225
Actual return on plan assets (854) (1,844) (401)
Net amortization (deferral) (447) 632 (756)
Voluntary early retirement program 2,069 ---- ----
---------------------------------------
Total pension expense $3,048 $880 $845
---------------------------------------
</TABLE>
The Company's portion of net periodic pension expense, excluding the
expense of the voluntary early retirement program, for the years ended
December 31, 1996, 1995 and 1994 was $617,000, $537,000 and $516,000,
respectively. In addition, the Company's portion of the expense related
to the voluntary early retirement program was $1,155,000 for 1996.
Assumptions used in the determination of pension obligations and assets
were:
<TABLE>
<CAPTION>
Year Ended December 31,
1996 1995 1994
---- ---- ----
<S> <C> <C> <C>
Weighted-average discount rate 7.00% 6.40% 7.90%
Rate of increase in compensation levels 4.00% 3.40% 4.90%
Expected long-term rate of return on plan assets 8.00% 8.00% 8.00%
</TABLE>
<PAGE>
The following table summarizes the funded status of the pension plan:
<TABLE>
<CAPTION>
Year Ended December 31,
1996 1995
---- ----
($ in thousands)
Actuarial present value of benefit obligations:
<S> <C> <C>
Vested $21,075 $17,901
Nonvested --- 338
--------------------------------
Accumulated benefit obligation 21,075 18,239
Effect of projected future salary increases on past service --- 3,204
--------------------------------
Projected benefit obligation 21,075 21,443
Plan assets at fair value 18,881 17,112
--------------------------------
Projected benefit obligation in excess of plan assets $(2,194) $(4,331)
--------------------------------
</TABLE>
The accrued pension liability of the plan was as follows:
<TABLE>
<CAPTION>
Year Ended December 31,
1996 1995
---- ----
($ in thousands)
<S> <C> <C>
Projected benefit obligation in excess of plan assets $(2,194) $(4,331)
Unrecognized prior service asset --- 114
Unrecognized net gain from past
experience different from that assumed --- 3,880
Unrecognized net asset at transition --- (558)
Minimum liability adjustment --- (232)
-------------------------------
Accrued pension liability $(2,194) $(1,127)
-------------------------------
</TABLE>
Incentive Savings Plan:
The Company and Farm Family Life sponsor an employee incentive savings
plan which is qualified under Section 401(k) of the Internal Revenue
Code. Under the provisions of this plan, employees may contribute 1% to
16% of their eligible compensation, with up to 6% being eligible for
matching contributions from the Company. In addition, the Company
contributed 1% of eligible compensation up to $240 to the plan for all
eligible employees in 1996, 1995, and 1994. Effective January 1, 1997,
the Company will contribute to the plan a regular contribution of 3% of
eligible compensation and a matching contribution of 25% of the first
6% of eligible compensation deferred by each eligible employee. Also,
Company may elect to make additional discretionary contributions to the
plan. The Company's expense associated with the plan was $182,000,
$138,000 and $155,000 in 1996, 1995 and 1994, respectively.
Postretirement Benefits Other Than Pensions:
The Company and Farm Family Life provide life insurance benefits for
retired employees meeting certain age and length of service
requirements. The Company's postretirement benefit plan is currently
unfunded and noncontributory. Benefits under the postretirement benefit
plan are provided by a group term life insurance policy.
Effective January 1, 1995, the Company adopted SFAS No. 106,
"Employers' Accounting for Postretirement Benefits Other than
Pensions", which changed the accounting for the Company's
postretirement benefit plan from a cash basis by requiring accrual of
the expected cost of providing benefits under the plan during the years
that the employee renders the necessary service to the Company.
Net periodic postretirement benefit expense for the plan included the
following:
<TABLE>
<CAPTION>
Year Ended December 31,
-----------------------
($ in thousands) 1996 1995
---------------- ---- ----
<S> <C> <C>
Service cost $27 $37
Interest cost 63 73
Return on assets --- ---
Amortization of transition obligation 47 47
Voluntary early retirement program 41 ---
----------------------------
Total $178 $157
----------------------------
</TABLE>
The Company incurred postretirement benefit expense on a cash basis of
$6,000 for the year ended December 31, 1994. The Company's portion of
net periodic postretirement benefit expense, excluding the expense
related to the voluntary early retirement program, for each of the
years ended December 31, 1996 and 1995 was $66,000. In addition, the
Company's portion of the expense related to the voluntary early
retirement program was $22,000 for 1996.
The plan's postretirement benefit obligation reconciled with the plan's
funded status and the amount recognized in the Company's consolidated
balance sheets was as follows:
<TABLE>
<CAPTION>
Year Ended December 31,
($ in thousands) 1996 1995
Accumulated postretirement benefit obligation:
<S> <C> <C>
Retirees $(487) $(534)
Other fully eligible plan participants (182) (260)
Other active plan participants (293) (452)
-----------------------------
Obligation at year-end (962) (1,246)
Plan assets --- ---
-----------------------------
Funded status (962) (1,246)
Unrecognized transition obligation 805 893
Unrecognized net loss (95) 238
-----------------------------
Accrued postretirement benefit liability at year-end $(252) $(115)
-----------------------------
</TABLE>
The discount rate used to determine the accumulated postretirement
benefit obligation was 7.0% at December 31, 1996 and 6.4% at December
31, 1995.
<PAGE>
10. Related Party Transactions
The operations of the Company are closely related with those of Farm
Family Life and Farm Family Life's wholly owned subsidiary, United Farm
Family. The affiliated Companies operate under similar Boards of
Directors and have similar senior management. The affiliated Companies
share home office premises, branch office facilities, data processing
equipment, certain personnel and other operational expenses. Expenses
are shared based on each Company's estimated level of usage. The gross
shared expenses and the Company's share of such expenses is summarized
below:
($ in thousands) Company's Share
---------------
Gross Shared
Expenses Amount Percentage
Year Ended December 31,
1996 $30,689 $19,912 65%
1995 26,650 16,182 61
1994 23,833 14,402 60
Farm Family Life held $813,000 of the Company's debentures in 1994 and
1995. In July 1996 the Company repurchased the debentures owned by Farm
Family Life for the principal amount of $813,000 plus accrued interest
of $37,000. The Company incurred interest expense of $37,000 in 1996
and $65,000 in 1995 and 1994 on the debentures held by Farm Family
Life. During 1994, the Company sold its data processing equipment to
Farm Family Life at net book value.
The Company's reinsurance program includes reinsurance agreements with
United Farm Family. In accordance with the provisions of these
reinsurance agreements, the Company recognized commission income
(expenses) of approximately $191,000, $2,000, and ($39,000) during the
years ended December 31, 1996, 1995 and 1994, respectively. A summary
of the effect of the reinsurance agreements with United Farm Family on
premiums written and earned is described in Note 5.
Receivable from affiliates represents amounts due from United Farm
Family pursuant to a reinsurance agreement and amounts due from Farm
Family Life and United Farm Family for shared expenses.
Currently, Farm Family Life and its wholly owned subsidiary, United
Farm Family, prepare their financial statements in accordance with
statutory accounting practices. Such practices vary significantly from
generally accepted accounting practices. The following financial
information was derived from the statutory basis financial statements
for Farm Family Life and United Farm Family as of and for the year
ended December 31, 1996:
($ in thousands) Total Statutory Net
Assets Surplus Income
Farm Family Life $721,129 $74,081 $8,111
United Farm Family 31,378 13,571 2,134
<PAGE>
11. Dividends From Subsidiaries and Statutory Financial Information
Farm Family Casualty is restricted by law as to the amount of dividends
it can pay without the approval of regulatory authorities.
Net income and Surplus of Farm Family Casualty, as determined in
accordance with statutory accounting practices are as follows:
($ in thousands) 1996 1995 1994
---- ---- ----
Net income $7,221 $6,735 $3,196
Surplus 83,194 55,916 42,870
rance Commissioners ("NAIC") has adopted risk based capital ("RBC")
requirements that require insurance companies to calculate and report
information under a risk-based formula which measures statutory capital
and surplus needs based on a regulatory definition of risk in a
company's mix of products and its balance sheet. The implementation of
RBC is not expected to affect the operations of Farm Family Casualty
since its Total Adjusted Capital exceeds the threshold level of
regulatory action, as defined by the NAIC.
12. Commitments, Contingencies and Uncertainties
The Company is party to numerous legal actions arising in the normal
course of business. Management believes that resolution of these legal
actions will not have a material adverse effect on its consolidated
financial condition.
Catastrophes are an inherent risk in the property and casualty
insurance industry and could produce significant adverse fluctuations
in the Company's results of operations and financial condition. Since
the Company operates primarily within the Northeastern U.S., it is
subject to a concentration of risk within this geographic region. For
the years ended December 31, 1996, 1995 and 1994, approximately 61%,
60% and 58%, respectively, of the Company's direct written premiums
were derived from policies written in the states of New York and New
Jersey. The Company uses its reinsurance program to mitigate the impact
on net income of large or unusual losses and loss adjustment expense
activity. However, the Company is required by law to participate in a
number of involuntary reinsurance pools and such pools may from time to
time experience deficits which could result in losses to the Company.
The Company is a party to Membership List Purchase Agreements with each
of the state Farm Bureaus in the ten states in which it conducts
business. The Membership List Purchase Agreements are for six years
commencing on January 1, 1996. For the year ended December 31, 1996,
the Company paid a total of $571,000 to the Farm Bureaus pursuant to
the Membership List Purchase Agreements. For the years ended December
31, 1995 and 1994, the Company paid $547,000 and $516,000,
respectively, to the Farm Bureaus under substantially similar
Membership List Purchase Agreements in effect for such periods.
Pursuant to an agreement between the Company and its agents and agency
managers, subject to certain conditions including length of service and
profitability, certain agents and agency managers are eligible to
receive monthly extended earnings payments for a period of up to eight
years subsequent to the termination of their association with the
Company. Historically, such payments have been funded from commissions
earned on the agent's or agency manager's book of business subsequent
to the termination of the agent's association with the Company in
accordance with the Company's agreement with the successor agents and
agency managers. In the event that such commissions are insufficient to
fund the extended earnings payments, the Company would be responsible
for such payments. The aggregate outstanding amount of the extended
earnings payments which former agents and agency managers are entitled
to receive for a period of up to eight years subsequent to December 31,
1996 is $3,341,000.
13. Unaudited Interim Financial Information
<TABLE>
<CAPTION>
Quarter Ended
($ in thousands except per share data) March 31 June 30 September 30 December 31
-------- ------- ------------ -----------
1996
<S> <C> <C> <C> <C>
Revenues $35,810 $36,106 $37,264 $37,817
Net income before extraordinary item 823 2,533 3,462 1,649
Net income 302 1,637 3,336 1,649
Per share:
Net income before extraordinary item $0.27 $0.84 $0.75 $0.31
Net income 0.55 0.72 0.31
0.10
1995
Revenues $31,585 $32,770 $34,145 $34,514
Net income before extraordinary item 2,922 2,106 3,173 1,405
Net income 2,922 2,106 3,173 1,405
Per share:
Net income before extraordinary item $0.97 $0.70 $1.06 $0.47
Net income 0.97 0.70 1.06 0.47
</TABLE>
14. Extraordinary Item and Non-Recurring Expenses
During 1996, the Company incurred expenses of $1,543,000 related to the
demutualization of Farm Family Mutual which the Company has identified
as an extraordinary item. These expenses consisted primarily of
printing, postage, and legal costs.
Pursuant to the Statement of Financial Accounting Standards No. 87,
"Employers' Accounting for Pensions", the Company recorded a
non-recurring expense, net of an income tax benefit of $412,000, of
$765,000, for the Company's share of the costs of a voluntary early
retirement program offered to certain eligible employees in 1996.
Eligibility for the program was based on age and years of service.
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
To the Shareholders and Board of Directors of
Farm Family Holdings, Inc.
We have audited the accompanying consolidated balance sheets of Farm Family
Holdings, Inc. and Subsidiaries as of December 31, 1996 and 1995, and the
related consolidated statements of income, stockholders' equity and cash flows
for each of the three years in the period ended December 31, 1996. These
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these consolidated financial
statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of Farm Family
Holdings, Inc. and Subsidiaries as of December 31, 1996 and 1995, and the
results of their operations and their cash flows for each of the three years in
the period ended December 31, 1996 in conformity with generally accepted
accounting principles.
COOPERS & LYBRAND L.L.P.
Albany, New York
February 13, 1997
<PAGE>
FARM FAMILY HOLDINGS, INC.
EXHIBIT 21
SUBSIDIARIES OF THE REGISTRANT
Subsidiaries State
- ------------ -----
Farm Family Casualty Insurance Company ("FFCIC")is a wholly
owned subsidiary of Farm Family Holdings, Inc. NY
Rural Agency and Brokerage, Inc. ("RAB") is a wholly owned
subsidiary of FFCIC. NY
Rural Insurance Agency and Brokerage of Massachusetts, Inc.
is a wholly owned subsidiary of RAB. MA
R.A.A.B of W. Va., Inc. is a wholly owned subsidiary of RAB. WV
<PAGE>
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, the Registrant has duly caused this report to be signed on its
behalf by the undersigned, thereunto duly authorized.
FARM FAMILY HOLDINGS, INC.
By: /s/ Philip P. Weber
-----------------------------
Philip P. Weber, President
March 21, 1997
<PAGE>
SIGNATURES
Pursuant to the requirements of Securities Exchange Act of 1934, this report has
been signed below by the following persons on behalf of the Registrant and in
the capacities and on the dates indicated.
<TABLE>
<S> <C> <C> <C>
President and CEO
/s/ Philip P. Weber (Principal Executive Officer) /s/ Daniel R. LaPointe Director
- ---------------------------------- ---------------------------
Philip P. Weber March 6, 1997 Daniel R. LaPointe March 6, 1997
Executive Vice President - Finance &
Treasurer
/s/ Timothy A. Walsh (Principal Financial & Accounting /s/ John W. Lincoln Director
Officer)
- ---------------------------------- ---------------------------
Timothy A. Walsh March 6, 1997 John W. Lincoln March 6, 1997
/s/ Robert L. Baker Director /s/ Wayne A. Mann Director
- ---------------------------------- ---------------------------
Robert L. Baker March 6, 1997 Wayne A. Mann March 6, 1997
/s/ Randolph C. Blackmer, Jr. Director Director
- ---------------------------------- ---------------------------
Randolph C. Blackmer, Jr. March 6, 1997 John P. Moskos March 6, 1997
/s/ Fred G. Butler, Sr. Director /s/ Norma R. O'Leary Director
- ---------------------------------- ---------------------------
Fred G. Butler, Sr. March 6, 1997 Norma R. O'Leary March 6, 1997
/s/ Joseph E. Calhoun Director Director
- ---------------------------------- ---------------------------
Joseph E. Calhoun March 6, 1997 John I. Rigolizzo, Jr. March 6, 1997
/s/ James V. Crane Director /s/ Harvey T. Smith Director
- ---------------------------------- ---------------------------
James V. Crane March 6, 1997 Harvey T. Smith March 6, 1997
/s/ Stephen J. George Director Director
- ---------------------------------- ---------------------------
Stephen J. George March 6, 1997 Howard T. Sprow March 6, 1997
Director /s/ William M. Stamp, Jr. Director
- ---------------------------------- ---------------------------
Gordon H. Gowen March 6, 1997 William M. Stamp, Jr. March 6, 1997
/s/ Jon R. Greenwood Director /s/ Richard D. Tryon Director
- ---------------------------------- ---------------------------
Jon R. Greenwood March 6, 1997 Richard D. Tryon March 6, 1997
/s/ Clark W. Hinsdale III Director /s/ Charles A. Wilfong Director
- ---------------------------------- ---------------------------
Clark W. Hinsdale III March 6, 1997 Charles A. Wilfong March 6, 1997
/s/ Richard A. Jerome Director /s/ Tyler P. Young Director
- ---------------------------------- ---------------------------
Richard A. Jerome March 6, 1997 Tyler P. Young March 6, 1997
/s/ Arthur D. Keown, Jr. Director
- ----------------------------------
Arthur D. Keown, Jr. March 6, 1997
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 7
<CIK> 0001013564
<NAME> hv@eq8er
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 12-mos
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-END> DEC-31-1996
<DEBT-HELD-FOR-SALE> 219,188
<DEBT-CARRYING-VALUE> 9,782
<DEBT-MARKET-VALUE> 9,973
<EQUITIES> 7,908
<MORTGAGE> 1,745
<REAL-ESTATE> 0
<TOTAL-INVEST> 244,704
<CASH> 4,110
<RECOVER-REINSURE> 10,743
<DEFERRED-ACQUISITION> 10,682
<TOTAL-ASSETS> 319,412
<POLICY-LOSSES> 141,220
<UNEARNED-PREMIUMS> 55,945
<POLICY-OTHER> 9,561
<POLICY-HOLDER-FUNDS> 5,838
<NOTES-PAYABLE> 1,304
0
0
<COMMON> 53
<OTHER-SE> 104,850
<TOTAL-LIABILITY-AND-EQUITY> 319,412
130,780
<INVESTMENT-INCOME> 15,952
<INVESTMENT-GAINS> (640)
<OTHER-INCOME> 905
<BENEFITS> 94,977
<UNDERWRITING-AMORTIZATION> 38,160
<UNDERWRITING-OTHER> 0
<INCOME-PRETAX> 12,143
<INCOME-TAX> 3,676
<INCOME-CONTINUING> 8467
<DISCONTINUED> 0
<EXTRAORDINARY> 1,543
<CHANGES> 0
<NET-INCOME> 6,924
<EPS-PRIMARY> 1.74
<EPS-DILUTED> 1.74
<RESERVE-OPEN> 137,978
<PROVISION-CURRENT> 100,418
<PROVISION-PRIOR> (5,441)
<PAYMENTS-CURRENT> 50,122
<PAYMENTS-PRIOR> 39,795
<RESERVE-CLOSE> 141,220
<CUMULATIVE-DEFICIENCY> 5,441
</TABLE>
