UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE
SECURITIES EXCHANGE ACT OF 1934
For the Quarterly Period Ended September 30, 1997
Commission File No. 1-11941
FARM FAMILY HOLDINGS, INC.
A Delaware Corporation IRS No. 14-1789227
344 Route 9W, Glenmont, New York 12077-2910
Registrant's telephone number: (518) 431-5000
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 No
The number of shares outstanding of the issuer's common stock as of November 12,
1997 is 5,253,813.
<PAGE>
FARM FAMILY HOLDINGS, INC. & SUBSIDIARIES
INDEX
Part I. Financial Information
Item 1. Financial Statements of Farm Family Holdings, Inc. &
Subsidiaries (unaudited)
Consolidated Balance Sheets -
September 30, 1997 and December 31, 1996
Consolidated Statements of Income Three months ended
September 30, 1997 and 1996 and the nine months ended
September 30, 1997 and 1996
Consolidated Statements of Cash Flow Nine months ended
September 30, 1997 and 1996
Notes to Consolidated Financial Statements
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations
Part II. Other Information
Item 6. Exhibits and Reports on Form 8-K
<PAGE>
<TABLE>
FARM FAMILY HOLDINGS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
($ in thousands)
<CAPTION>
(Unaudited)
September 30, 1997 December 31, 1996
- ---------------------------------------------------------------------------------------------------------------
Assets
Investments:
<S> <C> <C>
Fixed Maturities
Available for sale, at fair value
(Amortized cost: $239,393 in 1997 and $214,226 in 1996 ) $247,807 $219,188
Held to maturity, at amortized cost
(Fair value: $9,456 in 1997 and $9,973 in 1996) 9,181 9,782
Equity securities
Available for sale, at fair value
(Cost: $3,149 in 1997 and $2,546 in 1996) 4,077 7,908
Mortgage loans 1,682 1,745
Other invested assets 620 748
Short-term investments 6,635 5,333
- ---------------------------------------------------------------------------------------------------------------
Total investments 270,002 244,704
- ---------------------------------------------------------------------------------------------------------------
Cash 3,747 4,110
Insurance receivables:
Reinsurance receivables 11,419 10,743
Premiums receivable, net 32,100 22,663
Deferred acquisition costs 12,746 10,682
Accrued investment income 4,778 4,861
Deferred income tax asset, net 2,863 1,520
Prepaid reinsurance premiums 2,216 1,944
Receivable from affiliates, net 16,632 16,133
Other assets 2,777 2,052
- ---------------------------------------------------------------------------------------------------------------
Total Assets $359,280 $319,412
- ---------------------------------------------------------------------------------------------------------------
- ---------------------------------------------------------------------------------------------------------------
LIABILITIES aND STOCKHOLDERS' EQUITY
Liabilities:
Reserves for losses and loss adjustment expenses $150,297 $141,220
Unearned premium reserve 68,529 55,945
Reinsurance premiums payable 2,914 641
Accrued expenses and other liabilities 11,808 9,561
Debt 1,277 1,304
- ---------------------------------------------------------------------------------------------------------------
Total liabilities 234,825 208,671
- ---------------------------------------------------------------------------------------------------------------
Commitments and contingencies
Stockholders' equity:
Preferred stock $.01 par value 1,000,000 shares authorized
and no shares issued and outstanding - -
Common stock $.01 par value 10,000,000 shares authorized
and 5,253,813 shares issued and outstanding 53 53
Additional Paid in Capital 98,140 98,140
Retained earnings 20,191 5,838
Net unrealized investment gains 6,071 6,710
- ---------------------------------------------------------------------------------------------------------------
Total stockholders' equity 124,455 110,741
- ---------------------------------------------------------------------------------------------------------------
Total Liabilities and Stockholders' Equity $359,280 $319,412
- ---------------------------------------------------------------------------------------------------------------
- ---------------------------------------------------------------------------------------------------------------
See accompanying notes to Consolidated Financial Statements.
</TABLE>
<PAGE>
<TABLE>
FARM FAMILY HOLDINGS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
($ in thousands, except per share data)
<CAPTION>
(Unaudited) (Unaudited)
Three Months Ended Nine Months Ended
September 30, September 30,
1997 1996 1997 1996
- ---------------------------------------------------------------------------------------------------------------
Revenues:
<S> <C> <C> <C> <C>
Premiums $38,457 $33,015 $109,191 $96,881
Net investment income 4,603 4,132 13,529 11,635
Realized investment gains (losses), net 188 (102) 5,649 (25)
Other income 234 219 719 689
- ---------------------------------------------------------------------------------------------------------------
Total revenues 43,482 37,264 129,088 109,180
- ---------------------------------------------------------------------------------------------------------------
Losses and Expenses:
Losses and loss adjustment expenses 26,701 23,089 76,421 71,842
Underwriting expenses 10,605 9,120 30,803 27,087
Interest expense 25 33 77 141
Dividends to policyholders 65 43 177 156
- ---------------------------------------------------------------------------------------------------------------
Total losses and expenses 37,396 32,285 107,478 99,226
- ---------------------------------------------------------------------------------------------------------------
Income before federal income tax expense and extraordinary item 6,086 4,979 21,610 9,954
Federal income tax expense 2,009 1,517 7,257 3,136
- ---------------------------------------------------------------------------------------------------------------
Income before extraordinary item 4,077 3,462 14,353 6,818
Extraordinary item - demutualization expenses - 126 - 1,543
- ---------------------------------------------------------------------------------------------------------------
Net income $4,077 $3,336 $14,353 $5,275
- ---------------------------------------------------------------------------------------------------------------
- ---------------------------------------------------------------------------------------------------------------
Net income before extraordinary item per share-primary $0.77 $0.75 $2.73 $1.92
- ---------------------------------------------------------------------------------------------------------------
Net income before extraordinary item per share-fully diluted $0.77 $0.75 $2.70 $1.92
- ---------------------------------------------------------------------------------------------------------------
Net income per share-primary $0.77 $0.72 $2.73 $1.48
- ---------------------------------------------------------------------------------------------------------------
Net income per share-fully diluted $0.77 $0.72 $2.70 $1.48
- ---------------------------------------------------------------------------------------------------------------
Weighted average shares outstanding-primary 5,286,348 4,641,411 5,264,658 3,553,150
- ---------------------------------------------------------------------------------------------------------------
Weighted average shares outstanding-fully diluted 5,317,828 4,641,411 5,317,828 3,553,150
- ---------------------------------------------------------------------------------------------------------------
See accompanying notes to Consolidated Financial Statements.
</TABLE>
<PAGE>
<TABLE>
FARM FAMILY HOLDINGS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
($ in thousands)
(Unaudited)
<CAPTION>
For the Nine Months
Ended September 30,
1997 1996
- -----------------------------------------------------------------------------------------------------------------
Cash Flows From Operating Activities:
<S> <C> <C>
Net income $14,353 $5,275
- -----------------------------------------------------------------------------------------------------------------
Adjustments to reconcile net income
to net cash provided by operating activities:
Realized investment (gains) losses (5,649) 25
Amortization of bond discount 258 99
Deferred income taxes (997) (291)
Extraordinary item - demutualization expenses - 1,543
Changes in:
Reinsurance receivables (676) 3,459
Premiums receivable (9,437) (3,643)
Deferred acquisition costs (2,064) (772)
Accrued investment income 83 36
Prepaid reinsurance premiums (272) (243)
Receivable from affiliates (499) (775)
Other assets (725) 113
Reserves for losses and loss adjustment expenses 9,077 112
Unearned premium reserve 12,584 5,652
Reinsurance premiums payable 2,273 (1,660)
Accrued expenses and other liabilities 2,247 (5)
- -----------------------------------------------------------------------------------------------------------------
Total adjustments 6,203 3,650
- -----------------------------------------------------------------------------------------------------------------
- -----------------------------------------------------------------------------------------------------------------
Net cash provided by operating activities before extraordinary item 20,556 8,925
Extraordinary item - demutualization expenses - (1,543)
- -----------------------------------------------------------------------------------------------------------------
Net cash provided by operating activities 20,556 7,382
- -----------------------------------------------------------------------------------------------------------------
CASH FLOWS FROM INVESTiNG ACTIVITIES Proceeds from sales:
Fixed maturities available for sale 3,514 5,450
Other invested assets (169) 144
Equity securities 6,257 -
Investment collections:
Fixed maturities available for sale 13,542 7,238
Fixed maturities held to maturity 582 2,289
Mortgage loans 62 56
Investment purchases:
Fixed maturities available for sale (42,425) (44,304)
Fixed maturities held to maturity - (1,903)
Equity securities (1,081) -
Change in short-term investments, net (1,302) (6,148)
Change in other invested assets 128 259
- -----------------------------------------------------------------------------------------------------------------
Net cash used in investing activities (20,892) (36,919)
- -----------------------------------------------------------------------------------------------------------------
Cash Flows From Financing Activities
Principal payments on debt (27) (26)
Proceeds from IPO and Subscription Offerings - 44,880
Demutualization payments to Policyholders and Noteholders - (12,842)
IPO Expenses paid - (941)
- -----------------------------------------------------------------------------------------------------------------
Net ash provided by (used in) financing activities (27) 31,071
- -----------------------------------------------------------------------------------------------------------------
Net increase (decrease) in cash (363) 1,534
Cash, beginning of period 4,110 2,410
- -----------------------------------------------------------------------------------------------------------------
Cash, end of period $3,747 $3,944
- -----------------------------------------------------------------------------------------------------------------
- -----------------------------------------------------------------------------------------------------------------
See accompanying notes to Consolidated Financial Statements.
</TABLE>
<PAGE>
Notes to Consolidated Financial Statements
1. Summary of Significant Accounting Policies
The accompanying consolidated financial statements include the accounts of
Farm Family Holdings, Inc. ("Farm Family Holdings") and its wholly owned
subsidiary, Farm Family Casualty Insurance Company ("Farm Family
Casualty"), (collectively referred to as the "Company"). Farm Family
Holdings was incorporated under Delaware law on February 12, 1996 for the
purpose of becoming the parent holding company of Farm Family Casualty
under a Plan of Reorganization and Conversion (the "Plan"). On July 26,
1996, Farm Family Holdings completed its initial public offering of
2,470,000 shares of its common stock. Concurrent with the consummation of
Farm Family Holdings' initial public offering, Farm Family Mutual Insurance
Company 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 the Plan. Also,
Farm Family Mutual Insurance Company was renamed Farm Family Casualty
Insurance Company. In addition to the 2,470,000 shares sold in the initial
public offering and the 315,826 shares sold in the underwriters'
over-allotment, Farm Family Holdings distributed 2,253,813 shares to
policyholders and surplus note holders, and sold 214,174 shares in a
subscription offering. As a result, Farm Family Holdings had 5,253,813
shares outstanding as of July 26, 1996.
The per share information presented on the accompanying consolidated
statements of income gives effect in the three month and nine month periods
ended September 30, 1996 to the allocation of 3,000,000 shares of common
stock to eligible policyholders on July 26, 1996 pursuant to the Plan.
The accompanying unaudited consolidated financial statements have been
prepared in accordance with the instructions to Form 10-Q. In the opinion
of management, these statements contain all adjustments including normal
recurring accruals, which are necessary for a fair presentation of the
consolidated financial position at September 30, 1997, and the consolidated
results of operations for the three month and nine month periods ended
September 30, 1997 and 1996. These consolidated financial statements shuld
be read in conjunction with the consolidated financial statements and
related notes contained in the Company's Annual Report to stockholders. The
results of the Company's operations for any interim period are not
necessarily indicative of the results of the Company's operations for a
full fiscal year.
2. Future Application of Accounting Standards
Statement of Financial Accounting Standards Statement No. 128 - "Earnings
Per Share" is effective for financial statements issued for periods ending
after December 15, 1997. This statement simplifies the computation of
earnings per share (EPS) by replacing the "primary" EPS requirements with a
"basic" EPS computation based upon weighted-average shares outstanding.
This new standard requires a reconciliation of the numerator and
denominator of the diluted EPS computation. The Company currently uses the
treasury stock method in determining weighted average shares outstanding
for primary and fully diluted EPS.
<PAGE>
The following represents the basic and dilutive earnings per share amounts
had the Company been required to adopt this statement for the periods ended
September 30, 1997 and 1996:
<TABLE>
Three months ended Nine months ended
September 30, September 30,
1997 1996 1997 1996
-----------------------------------------------------------
<S> <C> <C> <C> <C>
Net Income $4,077,000 $3,336,000 $14,353,000 $5,275,000
-----------------------------------------------------------
Weighted average shares for basic EPS 5,253,813 4,641,411 5,253,813 3,553,150
Effect of dilutive stock options 32,535 - 10,845 -
-----------------------------------------------------------
Weighted average shares and assumed exercise
of stock options for dilutive EPS 5,286,348 4,641,411 5,264,658 3,553,150
-----------------------------------------------------------
Basic EPS $0.78 $0.72 $2.73 $1.48
-----------------------------------------------------------
Dilutive EPS $0.77 $0.72 $2.73 $1.48
-----------------------------------------------------------
</TABLE>
3. Omnibus Securities Plan
At the Annual Meeting of Stockholders held on April 22, 1997, the Company
adopted the Omnibus Securities Plan (the "Plan") under which up to 500,000
shares of common stock are available for award. Stock options granted under
the Plan may be either incentive stock options ("ISOs") or non-qualified
stock options ("NQSOs"). For ISOs, the option price may be no less than the
fair market value on the date of grant. For NQSOs, the option price may be
no less than 85% of the fair market value on the date of grant. On April
22, 1997, 215,000 NQSOs were granted. These NQSOs may be exercised no
earlier than July 26, 1999 and no later than the tenth anniversary of the
date of the Company's 1997 Annual Meeting of Stockholders. These NQSOs vest
in equal amounts over a three year period and have an exercise price of
$22.56 per share. The following table summarizes option information:
Shares
Outstanding as of January 1, 1997 -
Granted 215,000
Exercised -
Canceled 5,000
-----------
Outstanding at end of period 210,000
-----------
Options exercisable at end of period -
Options available for future grant 290,000
Financial Accounting Standards Board Statement No. 123 "Accounting for
Stock-Based Compensation Plans" is effective for fiscal years beginning
after December 15, 1995. The Company has elected to apply Accounting
Principles Board Opinion No. 25 in accounting for its stock-based
compensation arrangements.
<PAGE>
Management's Discussion and Analysis of Financial Condition and Results of
Operations.
General
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") (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").
Farm Family Casualty is a specialized property and casualty insurer of farms,
other generally related businesses and residents of rural and suburban
communities primarily 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).
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. In all such states, residual market premium
rates are subject to the approval of the state insurance department and have
generally been inadequate. The amount of future losses or assessments from
residual market mechanisms cannot be predicted with certainty and could have a
material adverse effect on the Company's results of operations.
For the nine month periods ended September 30, 1997 and 1996, 36.6% and 38.7%,
respectively, of the Company's direct written premiums were derived from
policies written in New York and, for the same periods, 25.7% and 22.4%,
respectively, were derived from policies written in New Jersey. For these same
periods, no other state accounted for more than 10.0% of the Company's direct
written premiums. As a result, 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
generally.
"Safe Harbor" Statement Under the Private Securities Litigation Reform Act of
1995
Certain statements made herein or elsewhere by or on behalf of the Company that
are not historical facts are intended to be forward-looking statements within
the meaning of the safe harbor provisions of the Private Securities Litigation
Reform Act of 1995. Examples of forward-looking statements include, but are not
limited to: (i) projections of revenue, earnings, capital structure and other
financial items, (ii) statements of the plans and objectives of the Company or
its management, (iii) statements of future economic performance and (iv)
assumptions underlying statements regarding the Company or its business. Readers
are hereby cautioned that certain events or circumstances could cause actual
results to differ materially from those estimated, projected, or predicted. Such
risks and uncertainties include, but are not limited to, the following: exposure
to catastrophic loss, geographic concentration of loss exposure, 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 included in this Report on Form 10-Q and other risk factors listed
from time to time in the Company's Securities and Exchange Commission Filings.
In addition, forward-looking statements are based on management's knowledge and
judgment as of the date that such statements are made. The Company undertakes no
obligation to publicly release the result of any revisions to these
forward-looking statements that may be made to reflect events or circumstances
after the date hereof or to reflect the occurrence of unanticipated events.
Results of Operations
The Three Months Ended September 30, 1997 Compared to the Three Months Ended
September 30, 1996
Premiums
- --------
Premium revenue increased $5.5 million or 16.5%, during the three months ended
September 30, 1997 to $38.5 million from $33.0 million for the same period in
1996. The increase in premium revenue in 1997 resulted from an increase of $5.0
million in earned premiums on additional business directly written by the
Company, as well as an increase of $1.7 million in earned premiums assumed which
was offset by an increase of $1.2 million in earned premiums ceded to reinsurers
and not retained by the Company. The $5.0 million increase in earned premiums on
additional business directly written by the Company was primarily attributable
to an increase of $4.3 million, or 14.0%, in earned premiums from the Company's
primary products (personal and commercial automobile products other than
assigned risk automobile business, the Special Farm Package, businessowners
products, homeowners products, and Special Home Package).
Net written premiums increased 25.5% to $41.8 million for the three months ended
September 30, 1997 compared to $33.3 million for the same period in 1996. The
increase in net written premiums is primarily attributable to the growth in
direct writings to customers of $6.3 million and, to a lesser extent, an
increase in the Company's voluntary assumed reinsurance business.
Geographically, the increase in the Company's direct writings came from New
Jersey, New York, Massachusetts, West Virginia, Connecticut, Delaware, Rhode
Island, Maine and Vermont. Direct writings for the third quarter of 1997
increased primarily as a result of an increase in writings of all of the
Company's primary products and to a lesser extent as a result of an increase of
$0.5 million in involuntary assigned risk automobile business in New Jersey and
the Company's re-entry into the Massachusetts workers' compensation market which
added an additional $0.5 million.
Net Investment Income
- ---------------------
Net investment income increased $0.5 million or 11.4% to $4.6 million for the
three months ended September 30, 1997 from $4.1 million for the same period in
1996. The increase in net investment income was primarily the result of an
increase in average cash and invested assets (at amortized cost) of
approximately $39.3 million, or 18.1% for the three months ended September 30,
1997 compared to the three months ended September 30, 1996. The increase in
average cash and invested assets was primarily attributable to available cash
flow from operations. The return realized on the Company's cash and investments
was 7.2% for the three months ended September 30, 1997 and 7.6% for the same
period in 1996. The decrease in the return realized on the Company's cash and
invested assets was primarily attributable to an increase in investments in tax
exempt securities. In addition, the return on the Company's cash and investments
decreased during the three months ended September 30, 1997 compared to the same
period in 1996 as a result of the Company's investment in fixed maturities with
a slightly lower rate of return due to a reduction in interest rates.
Losses and Loss Adjustment Expenses
- -----------------------------------
Losses and loss adjustment expenses increased $3.6 million, or 15.6%, to $26.7
million for the three months ended September 30, 1997 from $23.1 million for the
same period in 1996. Loss and loss adjustment expenses were 69.4% of premium
revenue for the three months ended September 30, 1997 compared to 69.9% of
premium revenue for the same period in 1996. The decrease in loss and loss
adjustment expenses as a percent of premium revenue was primarily attributable
to a greater relative increase in earned premiums than in loss and loss
adjustment expenses. Losses believed to be weather related aggregated $1.2
million in the three months ended September 30, 1997 compared to $0.7 million
for the same period in 1996.
Underwriting Expenses
- ---------------------
Underwriting expenses increased $1.5 million, or 16.3%, to $10.6 million for the
three months ended September 30, 1997 from $9.1 million for the same period in
1996. For the three months ended September 30, 1997 and September 30, 1996
underwriting expenses were 27.6% of premium revenue.
Federal Income Tax Expense
- --------------------------
Federal income tax expense increased $0.5 million to $2.0 million in 1997 from
$1.5 million in 1996. Federal income tax expense was 33.0% of income before
federal income tax expense and extraordinary item for the three months ended
September 30, 1997 compared to 30.5% for the same period in 1996. The increase
in federal income tax as a percentage of income before federal income tax
expense was primarily attributable to an increase in taxable income.
Net Income
- ----------
Net income increased $0.8 million to $4.1 million for the three months ended
September 30, 1997 from $3.3 million for the same period in 1996 primarily as a
result of the foregoing factors.
The Nine Months Ended September 30, 1997 Compared to the Nine Months Ended
September 30, 1996
Premiums
- --------
Premium revenue increased $12.3 million or 12.7%, during the nine months ended
September 30, 1997 to $109.2 million from $96.9 million for the same period in
1996. The increase in premium revenue in 1997 resulted from an increase of $12.5
million in earned premiums on additional business directly written by the
Company, and an increase of $2.5 million in earned premiums assumed which was
offset by an increase of $2.7 million in earned premiums ceded to reinsurers and
not retained by the Company. The $12.5 million increase in earned premiums on
additional business directly written by the Company was primarily attributable
to an increase of $11.2 million, or 12.9%, in earned premiums from the Company's
primary products (personal and commercial automobile products other than
assigned risk business, the Special Farm Package, businessowners products,
homeowners products, and Special Home Package) The number of policies in force
related to the Company's primary products increased by 11.4% to approximately
124,100 as of September 30, 1997 from approximately 111,400 as of September 30,
1996 and the average premium earned for each such policy increased by 1.3%
during the nine months ended September 30, 1997 compared to the same period in
1996.
Net written premiums increased 18.8% to $121.5 million for the nine months ended
September 30, 1997 compared to $102.3 million for the same period in 1996. The
increase in net written premiums is primarily attributable to the growth in
direct writings to customers of $16.1 million and, to a lesser extent, an
increase in the Company's voluntary assumed reinsurance business.
Geographically, the increase in the Company's direct writings come from New
Jersey, New York, Massachusetts, Connecticut, West Virginia, Delaware, Rhode
Island and Vermont. In addition, direct writings of all the Company's primary
products, particularly personal automobile, increased during the first nine
months of 1997. During the nine months ended September 30, 1997, the Company
wrote approximately $1.4 million of assigned risk automobile business in New
Jersey and $1.4 million in workers compensation business in Massachusetts.
Net Investment Income
- ---------------------
Net investment income increased $1.9 million or 16.3% to $13.5 million for the
nine months ended September 30, 1997 from $11.6 million for the same period in
1996. The increase in net investment income was primarily the result of an
increase in average cash and invested assets (at amortized cost) of
approximately $34.0 million, or 15.8% for the nine months ended September 30,
1997 compared to the nine months ended September 30, 1996. The increase in
average cash and invested assets was primarily attributable to available cash
flow from operations. The return realized on the Company's cash and investments
was 7.2% for the nine months ended September 30, 1997 and September 30, 1996.
Losses and Loss Adjustment Expenses
- -----------------------------------
Losses and loss adjustment expenses increased $4.6 million, or 6.4%, to $76.4
million for the nine months ended September 30, 1997 from $71.8 million for the
same period in 1996. Loss and loss adjustment expenses were 70.0% of premium
revenue for the nine months ended September 30, 1997 compared to 74.2% of
premium revenue for the same period in 1996. The decrease in loss and loss
adjustment expenses as a percent of premium revenue was primarily attributable
to the reduction in weather related losses. Losses believed to be weather
related aggregated $4.4 million in the nine months ended September 30, 1997
compared to $9.4 million for the same period in 1996.
Underwriting Expenses
- ---------------------
Underwriting expenses increased $3.7 million, or 13.7%, to $30.8 million for the
nine months ended September 30, 1997 from $27.1 million for the same period in
1996. For the nine months ended September 30, 1997, underwriting expenses were
28.2% of premium revenue compared to 28.0% for the same period in 1996. The
underwriting expense ratio of 28.2% for the nine months ended September 30, 1997
was less than the underwriting expense ratio of 29.2% for the year ended
December 31, 1996.
Federal Income Tax Expense
- --------------------------
Federal income tax expense increased $4.1 million to $7.2 million in 1997 from
$3.1 million in 1996. Federal income tax expense was 33.6% of income before
federal income tax expense and extraordinary item for the nine months ended
September 30, 1997 compared to 31.5% for the same period in 1996.
<PAGE>
Realized Investment Gains
- -------------------------
Realized investment gains increased to $5.6 million for the nine months ended
September 30, 1997. The increase in realized investment gains was primarily
attributable to the sale of a common stock investment.
Net Income
- ----------
Net income increased $9.1 million to $14.4 million for the nine months ended
September 30, 1997 from $5.3 million for the same period in 1996 primarily as a
result of the foregoing factors and the impact of $1.5 million of expenses in
the first quarter of 1996 related to the demutualization of Farm Family Casualty
which the Company has identified as an extraordinary item.
Liquidity and Capital Resources
- -------------------------------
Net cash provided by operating activities was $20.6 million and $7.4 million
during the nine month periods ended September 30, 1997 and 1996, respectively.
The increase in net cash provided by operating activities during the nine months
ended September 30, 1997 was primarily attributable to the increase in net
income and a decrease in payments for losses and loss adjustment expenses.
Net cash used in investing activities was $20.9 million during the nine months
ended September 30, 1997 compared to net cash used in investing activities of
$36.9 million for the same period in 1996 primarily as a result of an increase
in proceeds from sales as well as collections from investments that matured
during the nine month period ended September 30, 1997.
The Company has in place unsecured lines of credit with two banks under which it
may borrow up to $12.0 million. At September 30, 1997, no amounts were
outstanding on these lines of credit. In addition, at September 30, 1997, Farm
Family Casualty had $1.3 million principal amount of surplus notes outstanding.
The surplus notes bear interest at the rate of eight percent per annum and have
no maturity date. The principal and interest on the surplus notes are repayable
only with the approval of the Superintendent of Insurance of New York State.
<PAGE>
Future Application of Accounting Standards
Financial Accounting Standards Board Statement No. 128 - "Earnings Per Share."
is effective for financial statements issued for periods ending after December
15, 1997 and simplifies the computation of earnings per share (EPS) by replacing
the "primary" EPS requirements with a "basic" EPS computation based upon
weighted-average shares outstanding. This new standard requires a reconciliation
of the numerator and denominator of the diluted EPS computation.
The following represents the basic and dilutive earnings per share amounts had
the Company been required to adopt this statement for the periods ended
September 30, 1997 and 1996:
<TABLE>
<CAPTION>
Three months ended Nine months ended
September 30, September 30,
1997 1996 1997 1996
---- ---- ---- ----
<S> <C> <C> <C> <C>
Net Income $4,077,000 $3,336,000 $14,353,000 $5,275,000
Weighted average shares for basic EPS 5,253,813 4,641,411 5,253,813 3,553,150
Effect of dilutive stock options 32,535 - 10,845 -
-----------------------------------------------------------
Weighted average shares and assumed exercise
of stock options for dilutive EPS 5,286,348 4,641,411 5,264,658 3,553,150
-----------------------------------------------------------
Basic EPS $0.78 $0.72 $2.73 $1.48
-----------------------------------------------------------
Dilutive EPS $0.77 $0.72 $2.73 $1.48
-----------------------------------------------------------
</TABLE>
Financial Accounting Standards Board Statement No. 123 "Accounting for
Stock-Based Compensation Plans" is effective for fiscal years beginning after
December 15, 1995. The Company has elected to apply Accounting Principles
Bulletin Opinion No. 25 in accounting for its stock-based compensation
arrangements.
<PAGE>
Item 6: Exhibits and Reports on Form 8-K
<TABLE>
EXHIBIT INDEX
FARM FAMILY HOLDINGS, INC. FORM 10-Q
FOR THE QUARTER ENDED SEPTEMBER 30, 1997
Exhibit Number Document Description
<S> <C>
*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.
10.12 Farm Family Life Insurance Company, Farm Family Casualty Insurance Company,
Farm Family Holdings, Inc. Officer Severance Pay Plan Effective July 29, 1997
11 Computation of Earnings per Share
*Incorporated by reference to Registration Statement No. 333-4446
</TABLE>
<PAGE>
Exhibit 11. Statement re computation of per share earnings
<TABLE>
FARM FAMILY HOLDINGS, INC.
COMPUTATION OF EARNINGS PER SHARE
<CAPTION>
Three months Nine months
ended ended
September 30, September 30,
1997 1996 1997 1996
-------------------------------------------------
Primary
<S> <C> <C> <C> <C>
Average shares outstanding 5,253,813 4,641,411 5,253,813 3,553,150
Net effect of dilutive stock options based on the treasury
stock method using average market price 32,535 - 10,845 -
-------------------------------------------------
Weighted average shares outstanding-primary 5,286,348 4,641,411 5,264,658 3,553,150
-------------------------------------------------
Net income available to common shareholders (In thousands) $4,077 $3,336 $14,353 $5,275
-------------------------------------------------
Net income per share-primary $0.77 $0.72 $2.73 $1.48
-------------------------------------------------
Fully Diluted
Average shares outstanding 5,253,813 4,641,411 5,253,813 3,553,150
Net effect of dilutive stock options based on the treasury
stock method using stock price at end of period 64,015 - 64,015 -
-------------------------------------------------
Weighted average shares outstanding-fully diluted 5,317,828 4,641,411 5,317,828 3,553,150
-------------------------------------------------
Net income available to common shareholders (In thousands) $4,077 $3,336 $14,353 $5,275
-------------------------------------------------
Net income per share-fully diluted $0.77 $0.72 $2.70 $1.48
-------------------------------------------------
</TABLE>
Reports on Form 8-K
A report on Form 8-K was filed on July 30, 1997 reporting a press
release issued announcing the Company's operating results for the three months
and the nine months ended September 30, 1997.
No financial statements were filed with the Form 8-K.
<PAGE>
Pursuant to the requirements 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.
(Registrant)
November 13, 1997 By:/s/ Philip P. Weber
- ------------------------- --------------------------------------------------
(Date) Philip P. Weber, President & Chief Executive Officer
(Principal Executive Officer)
November 13, 1997 By:/s/ Timothy A. Walsh
- ------------------------- ----------------------------------------------------
(Date) Timothy A. Walsh, Executive Vice President
- Finance & Treasurer
(Principal Financial & Accounting Officer)
<PAGE>
Exhibit 10.12
SUMMARY PLAN DESCRIPTION
FARM FAMILY LIFE INSURANCE COMPANY
FARM FAMILY CASUALTY INSURANCE COMPANY
FARM FAMILY HOLDINGS, INC.
OFFICER SEVERANCE PAY PLAN
Effective July 29, 1997
Purpose
Farm Family Life Insurance Company (hereinafter referred to as "Life"), Farm
Family Casualty Insurance Company (hereinafter referred to as "Casualty") and
Farm Family Holdings, Inc. (hereinafter referred to as "Holdings") have adopted
a severance pay plan effective August 1, 1994 and amended July 29, 1997, the
purpose of which is to provide financial benefits to officers of Life, Casualty
or Holdings who lose their positions involuntarily under Severance Qualifying
Conditions.
Eligible Officers
All officers of Life, Casualty and Holdings (hereinafter collectively referred
to as the Companies) are eligible for severance benefits under this plan.
Definitions
1. Cause: An officer's:
(a) felony conviction or the failure of an officer to contest prosecution
for a felony;
(b) willful misconduct or dishonesty, any of which is directly and
materially harmful to the business or reputation of Life, Casualty or
Holdings;
(c) theft, participation in any material fraudulent conduct, or other acts
involving material misappropriation of property;
(d) habitual drunkenness or habitual drug abuse;
(e) material and willful disclosure of any confidential information;
(f) unlawful discrimination and/or unlawful sexual harassment by an
officer;
(g) serious breach of Life's, Casualty's or Holding's policies; or
(h) continuing inattention to or continuing neglect of the duties to be
performed by an officer which inattention or neglect is not the result
of illness or accident.
2. Change in Control: A change in control of Life, Casualty or Holdings 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 Life, Casualty or Holdings 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
Life, Casualty or Holdings, or a subsidiary of Life, Casualty or
Holdings or employee benefit plan of Life, Casualty or Holdings,
becomes the beneficial owner (as defined in Rule 13d-3 under the
Exchange Act), directly or indirectly of securities of Life, Casualty
or Holdings representing more than twenty-five percent (25%) of the
combined voting power of Life's, Casualty's, or Holding'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 Life, Casualty or
Holdings 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 Life's, Casualty's, or
Holding's assets to any entity that is not a subsidiary of one of said
Companies, 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 Life, Casualty or
Holdings or a subsidiary of Life, Casualty or Holdings, 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.
3. Salary: The highest rate of wages, salaries and fees for professional
services, and other amounts received by an officer for personal services
actually rendered in the course of employment with the Companies within the last
2 years, on an annualized basis. Salary does include taxable reimbursements or
other expense allowances, fringe benefits (cash and non cash), and moving
expenses. Salary does not include:
(a) any bonus paid to the officer whether paid pursuant to an annual
incentive plan or otherwise;
(b) any distribution from a plan of deferred compensation;
(c)amounts, realized from the exercise of a non qualified stock option, or
when restricted stock (or property) held by an officer either becomes
freely transferable or is no longer subject to substantial risk of
forfeiture; and
(d) amounts realized from the sale, exchange or other disposition of stock
acquired under a qualified stock option.
Severance Qualifying Conditions
An Eligible Officer whose employment with Life, Casualty or Holdings is
terminated, is eligible for severance benefits, if his or her employment is
terminated under the following conditions ("Severance Qualifying Conditions"):
The officer's employment with Life, Casualty or Holdings is involuntarily
terminated due to (i) the officer not satisfactorily performing the duties of
his or her position with such Company; (ii) the elimination of the officer's
position and the officer is not offered another position of comparable
responsibility and compensation with Life, Casualty or Holdings; or (iii) the
result of a Change in Control of Life, Casualty or Holdings and the officer is
not offered a position of comparable responsibility and compensation by the
acquiring or resulting company; AND
The officer executes a release of all claims against Life, Casualty and Holdings
acceptable to Life, Casualty and Holdings.
The termination of an officer's employment with Life, Casualty or Holdings, for
any of the following reasons shall not be treated as a Severance Qualifying
Condition:
1. If an officer resigns, abandons his or her job, fails to return from an
approved leave of absence or initiates termination on any similar basis; or
2. If an officer is terminated for Cause.
The decision of whether an officer's termination is a Severance Qualifying
Condition shall be determined solely at the Companies' discretion.
Policy
The Companies will pay severance pay equal to the greater of:
1. one week's Salary for each Year of Service or
2. (i) 36 months Salary in the case of the Chief Executive Officer;
(ii) 24 months Salary in the case of an Executive Vice President;
(iii) 12 months Salary in the case of a Senior Vice President; and
(iv) 6 months Salary in the case of any officer other than the Chief
Executive Officer, Executive Vice Presidents, and Senior Vice
Presidents
to an Eligible Officer who meets the Severance Qualifying Conditions set forth
above. Any bonuses or performance or merit reviews that are pending or in
process shall not affect the amount of any officer's severance benefits.
In the event an officer becomes eligible for severance benefits due to a
Severance Qualifying Event with respect to Life, Casualty or Holdings or any
combination of the Companies less than all three of the Companies, then Salary
shall include only the amount of Salary which would be allocated to the company
for which there is a Severance Qualifying Event for the Eligible Officer
pursuant to the Amended and Restated Expense Sharing Agreement dated February
14, 1996 or any successor agreement thereto.
Year of Service shall mean a period of 12 months during which the individual is
an officer and/or employee of Life, Casualty or Holdings and does not include
any service as:
A leased employee;
An independent contractor; or
An employee or agent of the Company compensated pursuant to an
agent's training allowance program, agent's, independent agent's,
regional manager's contract or other contract of the same general
character.
The decision of how benefits will be paid will be made by the Companies in their
sole discretion. The Companies will pay all benefits under this plan from their
general assets.
Review of Denial of Benefits/Appeal Process
If an officer does not receive benefits to which the officer thinks he or she is
entitled, the officer may file a claim for those benefits. The Vice
President-Human Resources will rule on the claims within 60 days of receipt of
the claim. In the case of claims made by the Vice President-Human Resources, the
Chief Executive Officer of the Companies shall make such review and
determination. If claims are denied, in whole or in part, the officer will be
notified in writing. A copy of the ruling and a statement supporting the
decision will be given to the officer. The notice will indicate why the claims
were denied, and either describe any additional information necessary to grant a
claim or instruct the officer on how to appeal the denial.
After an officer receives notice of denial of his or her claims, the officer may
appeal to the Plan Administrator, in writing within 60 days. If the officer does
not make an appeal within 60 days, the original decision will become final. The
officer may include in the written appeal any reasons for appeal and any
information to support the officer's rights to benefits. The Plan Administrator
will then reexamine all the facts and come to a final decision. The officer will
be notified of this decision within 60 days of the time that the officer submits
the written appeal, unless there are special circumstances, such as a hearing.
The officer will be notified if an extension is required. However, in no case
will the officer receive the Plan Administrator's decision later than 120 days
after the appeal is submitted. The notice of final decision will include
specific reasons for the decision and identify the plan provisions relied upon.
Amendment or Termination of the Plan
The Companies reserve the right to amend or terminate the plan at any time, with
or without advance notice, by action of the Board of Directors. Provided,
however, that no amendment or termination of the plan will reduce the amount the
Companies agree to pay officers covered by the Plan at the time of the amendment
or termination, in the event of a Severance Qualifying Condition below the
following amounts:
(i) 36 months Salary in the case of the Chief Executive Officer; (ii) 24
months Salary in the case of an Executive Vice President; (iii)12 months
Salary in the case of a Senior Vice President; and
(iv) 6 months Salary in the case of an officer other than the Chief
Executive Officer, Executive Vice Presidents and Senior Vice
Presidents.
Further, it is provided, that no amendment or termination of the plan adversely
affecting the right of any officer to severance pay hereunder due to a Change in
Control of Life, Casualty or Holdings, shall be effective if made after the
Board of Directors has approved such Change in Control.
Employee rights under ERISA
As a participant in this plan, officers are entitled to certain rights and
protection under ERISA. ERISA provides that all plan participants shall be
entitled to:
Examine, free of charge, at the administrative office in their geographic
area, all plan documents and copies of all documents filed by the plan with the
U.S. Department of Labor.
Obtain copies of all plan documents and other plan information upon
written request to the plan administrator. The plan administrator may make a
reasonable charge for the copies.
In addition to creating rights for the plan participants, ERISA imposes
obligations on the people who are responsible for the operation of the plan. The
people who operate the plan, called "fiduciaries" of the plan, have a duty to do
so prudently and in the interest of all plan participants and beneficiaries.
No one, including the Companies or any other person, may discriminate against
employees to prevent them from obtaining a benefit or exercising their rights
under ERISA.
If a claim for a benefit is denied in whole or in part, an employee must receive
a written explanation of the reason for the denial. Employees also have the
right to have the plan administrator review and reconsider any claim.
Under ERISA, there are steps employees can take to enforce the above rights. For
instance, if a participant in the plan requests materials from the plan
administrator and does not receive them within thirty days, the participant may
file suit in a federal court. In such a case, the court may require the plan
administrator to provide the materials and pay up to $100 a day until the
participant receives the materials, unless the materials were not sent because
of reasons beyond the control of the plan administrator. If a claim for benefits
is denied or ignored, in whole or in part, the participant may file suit in a
state or federal court.
If any employee is discriminated against for asserting that person's rights,
assistance may be sought from the U.S. Department of Labor or the participant
may file suit in a federal court. The court will decide who should pay court
costs and legal fees. If the participant is successful, the court may order the
person sued to pay these costs and fees. If the participant loses, the court may
order that person to pay these costs and fees, for example, if it finds a claim
is frivolous.
If a participant has any questions about the plan, the participant should
contact the Human Resources Department of the Companies. If a participant has
any questions about this statement or about his or her rights under ERISA, the
nearest area office of the Labor-Management Services Administration, U.S.
Department of Labor, should be contacted.
General Information. Officers should note the following information about the
severance plan:
Plan Sponsor. The Plan is sponsored by:
Farm Family Life Insurance Company
Farm Family Casualty Insurance Company
Farm Family Holdings, Inc.
P.O. Box 656
Albany, New York 12201-0656
Telephone Number (518) 431-5000
Plan Administrator: Farm Family Life Insurance Company is the plan
administrator. The plan administrator makes the rules and regulations necessary
to administer the plan. The plan administrator shall have the responsibility and
discretionary authority to interpret the terms of this plan, to determine
eligibility for benefits and to determine the amount of the benefits. The
interpretations and determinations of the plan administrator shall be final and
binding.
Agent for legal process: The Vice President-Human Resources of Life and
Casualty shall be the agent for service of legal process for all of the
Companies. Any communications should be sent to the following address:
Vice President-Human Resources
Farm Family Life Insurance Company
Farm Family Casualty Insurance Company
Route 9W
Glenmont, NY 12077
Mailing Address:
P.O. Box 656
Albany, NY 12201-0656
Legal process may also be served on the plan administrator at the following
address:
Farm Family Life Insurance Company
Attn.: Human Resources Department
Route 9W
Glenmont, NY 12077
Mailing Address:
P.O. Box 656
Albany, NY 12201-0656
Plan year: The records of the plan are kept on a calendar year basis.
Identification number: If an officer needs to discuss the plan with a
federal government agency, he or she should reference the plan number 510. The
Company's employer identification numbers are:
Farm Family Life Insurance Company 14-1400831
Farm Family Casualty Insurance Company 14-1415410
Farm Family Holdings, Inc. 14-1789227
<TABLE> <S> <C>
<ARTICLE> 7
<CIK> 0001013564
<NAME> Farm Family Holdings, Inc.
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<PERIOD-END> Sep-30-1997
<FISCAL-YEAR-END> Dec-31-1997
<DEBT-HELD-FOR-SALE> 247,807
<DEBT-CARRYING-VALUE> 9,181
<DEBT-MARKET-VALUE> 9,456
<EQUITIES> 4,077
<MORTGAGE> 1,682
<REAL-ESTATE> 0
<TOTAL-INVEST> 270,002
<CASH> 3,747
<RECOVER-REINSURE> 11,419
<DEFERRED-ACQUISITION> 32,100
<TOTAL-ASSETS> 359,280
<POLICY-LOSSES> 150,297
<UNEARNED-PREMIUMS> 68,529
<POLICY-OTHER> 11,808
<POLICY-HOLDER-FUNDS> 124,455
<NOTES-PAYABLE> 1,277
0
0
<COMMON> 53
<OTHER-SE> 6,071
<TOTAL-LIABILITY-AND-EQUITY> 359,280
109,191
<INVESTMENT-INCOME> 13,529
<INVESTMENT-GAINS> 5,649
<OTHER-INCOME> 719
<BENEFITS> 76,421
<UNDERWRITING-AMORTIZATION> 30,803
<UNDERWRITING-OTHER> 0
<INCOME-PRETAX> 21,610
<INCOME-TAX> 7,257
<INCOME-CONTINUING> 14,353
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 14,353
<EPS-PRIMARY> 2.73
<EPS-DILUTED> 2.70
<RESERVE-OPEN> 114,383
<PROVISION-CURRENT> 76,622
<PROVISION-PRIOR> (198)
<PAYMENTS-CURRENT> 30,470
<PAYMENTS-PRIOR> 36,175
<RESERVE-CLOSE> 124,158
<CUMULATIVE-DEFICIENCY> 0
</TABLE>
