UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K/A
(AMENDMENT NO. 1)
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
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 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>
The registrant hereby amends the following items, financial statements,
exhibits or other portions of its Annual Report on Form 10-K for the year ended
December 31, 1996, filed on March 31, 1997, as set forth in the pages attached
hereto:
Part IV: Item 14(a)3. Exhibits: Exhibit 13 - Farm Family Holdings, Inc.
1996 Annual Report
SIGNATURES
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.
Registrant
By: /s/ Philip P. Weber
-------------------------
Philip P. Weber, President
April 10, 1997
<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:
<S> <C> <C>
Fixed Maturities
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 1,882
------------------------------
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
------------------------------
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 -
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 110,741 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>
- ------------------------------------------------------------------------------------------------------------
For the Years Ended December 31, 1996 1995 1994
- ------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Common stock
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 $110,741 $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>
- -----------------------------------------------------------------------------------------------------------------------
For the Years Ended December 31, 1996 1995 1994
- -----------------------------------------------------------------------------------------------------------------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $6,924 $9,606 $3,526
--------------------------------------
<S> <C> <C> <C>
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, net (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, net (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 expenses (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 Offerings 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.
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 $1,371,000
plus accrued interest thereon.
Farm Family Holdings has entered into an Option Purchase Agreement,
dated February 14, 1996 (the "Option Purchase Agreement"), with the
shareholders of Farm Family Life pursuant to which Farm Family Holdings
has, for a two year period commencing on July 26, 1996, the option to
acquire Farm Family Life subject to certain conditions, which include
the approval of Farm Family Holdings' shareholders and applicable
regulatory authorities. Although Farm Family Holdings believes that the
acquisition of Farm Family Life would be desirable under appropriate
circumstances, Farm Family Holdings is not in a position at this time
to predict with any certainty whether the option to acquire Farm Family
Life will in fact be exercised. Farm Family Holdings' decision to
exercise the option will depend, among other things, on the exercise
price for the shares of Farm Family Life, an evaluation of the
financial statements prepared in accordance with generally accepted
accounting principles and prospects of Farm Family Life, the outcome of
a vote by the Farm Family Holdings' shareholders, and the receipt of
applicable regulatory approvals. Farm Family Life's financial
statements are prepared on the basis of statutory accounting practices
prescribed or permitted by insurance regulatory authorities. Financial
statements for Farm Family Life prepared in accordance with generally
accepted accounting principles do not currently exist.
<PAGE>
3. Investments
The amortized cost, fair value and gross unrealized gains and losses of
available for sale securities and held to maturity securities at
December 31, 1996 and 1995 are as follows:
<TABLE>
<CAPTION>
($ in thousands)
1996 Amortized Gross Unrealized Fair
Available for Sale Cost Gains Losses Value
------------------ ---- ----- ------ -----
<S> <C> <C> <C> <C>
Fixed maturities:
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 $13,100
------------------------------------------------
</TABLE>
<PAGE>
The table below presents the amortized cost and fair value of
fixed maturities at December 31, 1996, by contractual maturity.
Actual maturities may differ from contractual maturities as a
result of prepayments.
<TABLE>
<CAPTION>
($ in thousands) Available Held to
for Sale 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 $1,340
-----------------------------------
</TABLE>
4. Fair Value of Financial Instruments
The estimated fair value of financial instruments has been determined
using available market information and appropriate value methodologies.
The estimated fair value of financial instruments are not necessarily
indicative of the amounts the Company might pay or receive in actual
market transactions. Potential taxes and other transaction costs have
not been considered in estimating fair value. As a number of the
Company's significant assets (including deferred acquisition costs, and
deferred income taxes) and liabilities (including reserves for losses
and loss adjustment expenses) are not considered financial instruments,
the disclosures that follow do not reflect the fair value of the
Company as a whole.
<PAGE>
The following table presents the carrying value and fair value of the
Company's financial instruments at December 31, 1996 and 1995.
<TABLE>
<CAPTION>
December 31, 1996 December 31, 1995
----------------- -----------------
Carrying Fair Carrying Fair
($ 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.
<PAGE>
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 $82,680
---------------------------------------
</TABLE>
<PAGE>
6. Income Taxes
The components of the deferred income tax assets and liabilities at
December 31, 1996 and 1995 are as follows:
<TABLE>
<CAPTION>
($ 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 $2,209,000 in 1996,
1995 and 1994 respectively.
<PAGE>
A reconciliation of the differences between the Company's effective
rates of tax and the United States federal income tax rates follows:
<TABLE>
<CAPTION>
Year Ended December 31,
-----------------------
($ 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 rates $4,147 34.18% $5,006 34.31% $1,691 34.00%
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)
Reserves for losses and loss adjustment
<S> <C> <C> <C>
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 $155,000 in 1996, 1995 and 1994, respectively.
<PAGE>
Postretirement Benefits Other Than Pensions:
The Company and Farm Family Life provide life insurance benefits for
retired employees meeting certain age and length of service
requirements. The Company's postretirement benefit plan is currently
unfunded and noncontributory. Benefits under the postretirement benefit
plan are provided by a group term life insurance policy.
Effective January 1, 1995, the Company adopted SFAS No. 106,
"Employers' Accounting for Postretirement Benefits Other than
Pensions", which changed the accounting for the Company's
postretirement benefit plan from a cash basis by requiring accrual of
the expected cost of providing benefits under the plan during the years
that the employee renders the necessary service to the Company.
Net periodic postretirement benefit expense for the plan included the
following:
<TABLE>
<CAPTION>
Year Ended December 31,
($ 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) $(115)
-----------------------------
</TABLE>
The discount rate used to determine the accumulated postretirement
benefit obligation was 7.0% at December 31, 1996 and 6.4% at December
31, 1995.
<PAGE>
10. Related Party Transactions
The operations of the Company are closely related with those of Farm
Family Life and Farm Family Life's wholly owned subsidiary, United Farm
Family. The affiliated Companies operate under similar Boards of
Directors and have similar senior management. The affiliated Companies
share home office premises, branch office facilities, data processing
equipment, certain personnel and other operational expenses. Expenses
are shared based on each Company's estimated level of usage. The gross
shared expenses and the Company's share of such expenses is summarized
below:
<TABLE>
<CAPTION>
($ in thousands) Company's Share
---------------
Gross Shared
Expenses Amount Percentage
-------- ------ ----------
Year Ended December 31,
<S> <C> <C> <C> <C>
1996 $30,689 $19,912 65%
1995 26,650 16,182 61
1994 23,833 14,402 60
</TABLE>
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 ($39,000) during the
years ended December 31, 1996, 1995 and 1994, respectively. A summary
of the effect of the reinsurance agreements with United Farm Family on
premiums written and earned is described in Note 5.
Receivable from affiliates represents amounts due from United Farm
Family pursuant to a reinsurance agreement and amounts due from Farm
Family Life and United Farm Family for shared expenses.
Currently, Farm Family Life and its wholly owned subsidiary, United
Farm Family, prepare their financial statements in accordance with
statutory accounting practices. Such practices vary significantly from
generally accepted accounting practices. The following financial
information was derived from the statutory basis financial statements
for Farm Family Life and United Farm Family as of and for the year
ended December 31, 1996:
<TABLE>
<CAPTION>
($ in thousands) Total Statutory Net
Assets Surplus Income
------ ------- ------
<S> <C> <C> <C>
Farm Family Life $721,129 $74,081 $8,111
United Farm Family 31,378 13,571 2,134
</TABLE>
<PAGE>
11. Dividends From Subsidiaries and Statutory Financial Information
Farm Family Casualty is restricted by law as to the amount of dividends
it can pay without the approval of regulatory authorities.
Net income and Surplus of Farm Family Casualty, as determined in
accordance with statutory accounting practices are as follows:
<TABLE>
<CAPTION>
($ in thousands) 1996 1995 1994
---- ---- ----
<S> <C> <C> <C>
Net income $7,221 $6,735 $3,196
Surplus 83,194 55,916 42,870
</TABLE>
The National Association of Insurance 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.
<PAGE>
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>
