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, 1998
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 [X] No [ ]
The number of shares outstanding of the issuer's common stock as of
November 12, 1998 is 5,253,813.
1
<PAGE>
FARM FAMILY HOLDINGS, INC.
INDEX
Part I. Financial Information
Item 1. Financial Statements of Farm Family Holdings,Inc. (unaudited)
Consolidated Balance Sheets September 30, 1998 and December
31, 1997
Consolidated Statements of Income and Comprehensive Income
Three months ended September 30, 1998 and 1997 and the nine
months ended September 30, 1998 and 1997
Consolidated Statements of Cash Flow Nine months ended
September 30, 1998 and 1997
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
2
<PAGE>
<TABLE>
<CAPTION>
FARM FAMILY HOLDINGS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
($ in thousands)
(Unaudited)
September 30, 1998 December 31, 1997*
- --------------------------------------------------------------------------------------------------------------------
Assets
Investments:
Fixed Maturities
<S> <C> <C>
Available for sale, at fair value
(Amortized cost: $270,293 in 1998 and $248,984 in 1997 ) $286,143 $259,199
Held to maturity, at amortized cost
(Fair value: $8,770 in 1998 and $9,194 in 1997) 8,457 8,855
Equity securities
Available for sale, at fair value
(Cost: $3,363 in 1998 and 1997) 4,538 4,521
Mortgage loans 710 1,660
Other invested assets 416 553
Short-term investments 7,647 5,643
- ------------------------------------------------------------------------------------------------------------------
Total investments 307,911 280,431
- ------------------------------------------------------------------------------------------------------------------
Cash 5,711 5,841
Insurance receivables:
Reinsurance receivables 22,265 12,343
Premiums receivable, net 33,638 28,141
Deferred acquisition costs 14,095 12,613
Accrued investment income 5,035 5,408
Deferred income tax asset, net 1,200 4,422
Prepaid reinsurance premiums 358 2,044
Receivable from affiliates, net 17,339 17,786
Other assets 3,489 2,202
- ------------------------------------------------------------------------------------------------------------------
Total Assets $411,041 $371,231
- ------------------------------------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------------------------------
LIABILITIES AND STOCKHOLDERS' EQUITY
Liabilities:
Reserves for losses and loss adjustment expenses $176,966 $156,622
Unearned premium reserve 73,115 66,069
Reinsurance premiums payable 3,189 2,564
Accrued expenses and other liabilities 16,672 21,474
Debt - 1,268
- ------------------------------------------------------------------------------------------------------------------
Total liabilities 269,942 247,997
- ------------------------------------------------------------------------------------------------------------------
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 92,906 92,906
Retained earnings 37,074 22,883
Accumulated other comprehensive income 11,066 7,392
- ------------------------------------------------------------------------------------------------------------------
Total stockholders' equity 141,099 123,234
- ------------------------------------------------------------------------------------------------------------------
Total Liabilities and Stockholders' Equity $411,041 $371,231
- ------------------------------------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------------------------------
See accompanying notes to Consolidated Financial Statements.
*Amounts have been restated for certain items as more fully described in Note
2-Prior Period Adjustments.
3
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
FARM FAMILY HOLDINGS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME AND COMPREHENSIVE INCOME
($ in thousands, except per share data)
(Unaudited) (Unaudited)
Three Months Ended Nine Month Ended
September 30, September 30,
1998 1997* 1998 1997*
- ------------------------------------------------------------------------------------------------------------------------------------
Revenues:
<S> <C> <C> <C> <C>
Premiums $45,660 $38,457 $133,404 $109,191
Net investment income 4,815 4,603 14,333 3,529
Realized investment gains, net 192 187 534 5,649
Other income 269 234 752 719
- ------------------------------------------------------------------------------------------------------------------------------------
Total revenues 50,936 43,481 149,023 129,088
- ------------------------------------------------------------------------------------------------------------------------------------
Losses, Expenses and Other:
Losses and loss adjustment expenses 32,936 26,701 99,063 76,421
Underwriting expenses 11,538 10,985 35,129 31,961
Interest expense - 25 25 77
Dividends to policyholders 64 65 119 177
- ------------------------------------------------------------------------------------------------------------------------------------
Total losses and expenses 44,538 37,776 134,336 108,636
Gain on partial reduction of extended earnings liability (6,318) - (6,318) -
- ------------------------------------------------------------------------------------------------------------------------------------
Total losses, expenses and other 38,220 37,776 128,018 108,636
- ------------------------------------------------------------------------------------------------------------------------------------
Income before federal income tax expense 12,716 5,705 21,005 20,452
Federal income tax expense 4,258 1,877 6,814 6,858
- ------------------------------------------------------------------------------------------------------------------------------------
Net income 8,458 3,828 14,191 13,594
- ------------------------------------------------------------------------------------------------------------------------------------
Other comprehensive income (loss), net of tax:
Unrealized holding gain arising during the period
(net of deferred tax of ($1,879), ($111), ($2,186) and ($1,692) 3,489 206 4,060 3,142
respectively)
Reclassification adjustment for gains (losses) included in net income income
(net of tax expense (benefit) of $101, $255, $208 and $2,036 respectively) (188) (474) (386) (3,781)
- ------------------------------------------------------------------------------------------------------------------------------------
Other comprehensive income (loss) 3,301 (268) 3,674 (639)
- ------------------------------------------------------------------------------------------------------------------------------------
Comprehensive income $11,759 $3,560 $17,865 $12,955
- ------------------------------------------------------------------------------------------------------------------------------------
Per Common Share:
Basic earnings per common share $1.61 $0.73 $2.70 $2.59
- ------------------------------------------------------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------------------------------------------------
Diluted earnings per common share $ 1.59 $0.72 $2.67 $2.58
- ------------------------------------------------------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------------------------------------------------
Basic weighted average shares outstanding 5,253,813 5,253,813 5,253,813 5,253,813
- ------------------------------------------------------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------------------------------------------------
Diluted weighted average shares outstanding 5,303,707 5,286,348 5,306,257 5,264,658
- ------------------------------------------------------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------------------------------------------------
See accompanying notes to Consolidated Financial Statements.
*Amounts have been restated for certain items as more fully described in Note
2-Prior Period Adjustments.
</TABLE>
4
<PAGE>
<TABLE>
<CAPTION>
FARM FAMILY HOLDINGS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
($ in thousands)
(Unaudited)
For the Nine Months
Ended September
1998 1997*
- -------------------------------------------------------------------------------------------------------------------------
Cash Flows From Operating Activities
<S> <C> <C>
Net income $14,191 $13,594
- -------------------------------------------------------------------------------------------------------------------------
Adjustments to reconcile net income
to net cash provided by operating activities:
Realized investment gains (534) (5,649)
Amortization of bond discount 231 259
Deferred income taxes 1,048 (1,397)
Gain on partial reduction of extended earnings liability (6,318) -
Changes in:
Reinsurance receivables (9,922) (676)
Premiums receivable (5,497) (9,437)
Deferred acquisition costs (1,482) (2,064)
Accrued investment income 373 83
Prepaid reinsurance premiums 1,686 (272)
Receivable from affiliates 447 (499)
Other assets (1,287) (725)
Reserves for losses and loss adjustment expenses 20,344 9,077
Unearned premium reserve 7,046 12,584
Reinsurance premiums payable 625 2,273
Accrued expenses and other liabilities 1,712 3,405
- -------------------------------------------------------------------------------------------------------------------------
Total adjustments 8,472 6,962
- -------------------------------------------------------------------------------------------------------------------------
- -------------------------------------------------------------------------------------------------------------------------
Net cash provided by operating activities 22,663 20,556
- -------------------------------------------------------------------------------------------------------------------------
CASH FLOWS FROM INVESTiNG ACTIVITIES Proceeds from sales:
Fixed maturities available for sale 1,414 3,514
Equity securities - 6,257
Investment collections:
Fixed maturities available for sale 36,709 13,542
Fixed maturities held to maturity 376 582
Mortgage loans 950 62
Investment purchases:
Fixed maturities available for sale (59,047) (42,425)
Equity securities - (1,081)
Change in short-term investments, net (2,004) (1,302)
Change in other invested assets 77 (41)
- -------------------------------------------------------------------------------------------------------------------------
Net cash used in investing activities (21,525) (20,892)
- -------------------------------------------------------------------------------------------------------------------------
Cash Flows From Financing Activities
Principal payments on debt (1,268) (27)
- -------------------------------------------------------------------------------------------------------------------------
Net cash used in financing activities (1,268) (27)
- -------------------------------------------------------------------------------------------------------------------------
Net decrease in cash (130) (363)
Cash, beginning of period 5,841 4,110
- -------------------------------------------------------------------------------------------------------------------------
Cash, end of period $5,711 $3,747
- -------------------------------------------------------------------------------------------------------------------------
- -------------------------------------------------------------------------------------------------------------------------
See accompanying notes to Consolidated Financial Statements.
*Amounts have been restated for certain items as more fully described in Note
2-Prior Period Adjustments.
</TABLE>
5
<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
subsidiaries (collectively referred to as the "Company"). The primary
subsidiary of Farm Family Holdings is Farm Family Casualty Insurance
Company ("Farm Family Casualty"). 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").
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, 1998, and the consolidated
results of operations for the three months and the nine months ended
September 30, 1998 and 1997. 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. The year end balance sheet
data was derived from audited financial statements, but does not include
all disclosures required by generally accepted accounting principles.
Effective January 1, 1998, the Company adopted Statement of Financial
Accounting Standards No. 130 "Comprehensive Income", which established
standards for the reporting and disclosure of comprehensive income and its
components, and restated prior period financial statements to conform to
this reporting standard.
2. Prior Period Adjustments
Previously, the Company accounted for its extended earnings program
pursuant to Statement of Financial Accounting Standards No. 5. The
restatement of certain amounts within the Company's consolidated financial
statements relates to the Company's retroactive adoption effective January
1, 1994 of Statement of Financial Accounting Standards No. 112 "Employers'
Accounting for Postemployment Benefits" ("Statement 112") to account for
the Company's extended earnings program with its agents and agency managers
(collectively referred to hereafter as "agents"). Pursuant to agreements
between the Company and its agents, subject to certain conditions including
length of service, confidentiality, and non-competition, certain agents 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 by deductions from
the commissions earned by successor agents who have assumed the right to
service the books of business previously serviced by eligible former agents
subsequent to the termination of the former agent's association with the
Company.
6
<PAGE>
The Company has restated certain amounts within its consolidated financial
statements as of December 31, 1997 and for the three months and the nine
months ended September 30, 1997. The following table presents the restated
and previously reported amounts:
<TABLE>
<CAPTION>
(Dollars in thousands, except per share data)
December 31, 1997
Previously
Reported Restated
Balance Sheet:
<S> <C> <C>
Deferred income tax asset, net $1,469 $4,422
Total assets 368,278 371,231
Accrued expenses and other liabilities 11,828 21,474
Total liabilities 238,351 247,997
Stockholders' equity 129,927 123,234
Total liabilities and stockholders' equity 368,278 371,231
</TABLE>
<TABLE>
<CAPTION>
For the three months ended For the nine months ended
September 30, September 30,
1997 1997
---------- ----------
Previously Previously
Reported Restated Reported Restated
Statements of Income:
<S> <C> <C> <C> <C>
Underwriting expenses $10,605 $10,985 $30,803 $31,961
Federal income tax expense 2,009 1,877 7,257 6,858
Net income 4,077 3,828 14,353 13,594
Per share data:
Net income-Basic $0.77 $0.73 $2.73 $2.59
Net income-Diluted $0.77 $0.72 $2.70 $2.58
</TABLE>
As a result of changes in the agreements between the Company and its agents, a
significant portion of the Statement 112 liability was reduced during the third
quarter of 1998 (see Note 5).
3. Earnings Per Share
The following table presents a reconciliation of the numerators and
denominators of the basic and diluted earnings per share computations.
<TABLE>
<CAPTION>
Three months ended Nine months ended
September 30, September 30,
------------- -------------
1998 1997 1998 1997
------ ------- ------ ------
<S> <C> <C> <C> <C>
Net income available to common stockholders $8,458,000 $3,828,000 $14,191,000 $13,594,000
--------------------------------------------------------
Weighted average number of shares in basic earnings per share 5,253,813 5,253,813 5,253,813 5,253,813
Effect of stock options 49,894 32,535 52,444 10,845
--------------------------------------------------------
Weighted average number of shares in diluted earnings per share 5,303,707 5,286,348 5,306,257 5,264,658
--------------------------------------------------------
Basic net income per share $1.61 $0.73 $2.70 $2.59
--------------------------------------------------------
Diluted net income per share $1.59 $0.72 $2.67 $2.58
--------------------------------------------------------
</TABLE>
7
<PAGE>
4. Future Application of Accounting Standards
In June of 1997, the Financial Accounting Standards Board issued Statement
of Financial Accounting Statement No. 131, "Disclosures about Segments of
an Enterprise and Related Information," ("Statement 131") effective for
years beginning after December 15, 1997. The adoption of Statement 131 will
result in revised and additional disclosures but will have no effect on the
financial position, results of operations, or liquidity of the Company.
In February of 1998, the Financial Accounting Standards Board issued
Statement of Financial Accounting Statement No. 132, "Employers'
Disclosures about Pensions and Other Postretirement Benefits," ("Statement
132") effective for years beginning after December 15, 1997. Statement 132
revises the disclosure requirements but does not change the measurement or
recognition of pensions and other post retirement benefits. The adoption of
Statement 132 will result in revised and additional disclosures but will
have no effect on the financial position, results of operations, or
liquidity of the Company.
In June 1998, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 133, "Accounting for Derivative
Instruments and Hedging Activities" ("Statement 133"). This statement,
which is effective for the Company for the year beginning January 1, 2000,
establishes accounting and reporting standards for derivative instruments
and for hedging activities. Statement 133 requires a company to recognize
all derivatives as either assets or liabilities in the statement of
financial position and measure those instruments at fair value. Management
is evaluating the impact this statement may have on the Company's financial
statements.
5. Contingencies
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 the Company's 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. The Company is
subject to a concentration of risk within the Northeastern United States.
For the nine months ended September 30, 1998 and 1997, approximately 63% of
the Company's direct premiums were written in the states of New York and
New Jersey. 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, despite the Company's reinsurance program designed to mitigate the
impact of these factors.
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. The amount of future losses
or assessments from residual market mechanisms can not be predicted with
certainty, nor can future losses be predicted with certainty, and could
have a material adverse effect on the Company's future results of
operations.
Pursuant to agreements between the Company and its agents and agency
managers (collectively referred to hereafter as "agents"), subject to certain
conditions including length of service, confidentiality, and non-competition,
certain agents 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 by deductions
from the commissions earned by successor agents who have assumed the right to
service the books of business previously serviced by eligible former agents
subsequent to the termination of the former agent's association with the
Company. As of June 30, 1998, the Company has recorded a $10,157,000 liability
for the extended earnings program (the "Program") in accordance with Statement
of Financial Accounting Standards No. 112, "Employers' Accounting for
Postemployment Benefits" ("Statement 112") to account for the Program.
8
<PAGE>
During the third quarter of 1998, the Company modified the agreements with
its agents to include revised conditions under which eligible agents may
receive extended earnings payments. In addition to the conditions described
previously, extended earnings will be paid only if a successor agent(s)
assumes the right to service the book of business of the eligible former
agent and agrees to become primarily responsible for making the extended
earnings payments. In the event that no successor agent(s) assumes the
right to service the book of business of an eligible former agent, the
Company has no obligation to make the extended earnings payments. The
Company has no intention to waive this provision of its agreements with its
agents. As a result, the successor agent(s), not the Company, will be the
primary obligor responsible for extended earnings payments. Since the
inception of the Program in 1986, the Company has always been able to
identify successor agents willing to assume the rights to service such
books of business. The Company will act as guarantor of the amounts payable
to eligible former agents who have terminated their association with the
Company by successor agents who agree to make the extended earnings
payments. The Company expects to enforce the terms of the guarantee in the
event of default by a successor agent. During the third quarter of 1998,
when the Company's modified agreements with its agents became effective,
$6,318,000 of the Company's Statement 112 liability was reduced and the
Company recorded a net gain on this reduction of $4,107,000 ($6,318,000
less taxes of $2,211,000). The Company is primary liable for its remaining
Statement 112 liability which is $3,643,000 and represents the aggregate
amount owed by the Company to eligible former agents who have terminated
their association with the Company and are currently receiving extended
earnings payments. The Company's remaining Statement 112 liability is being
funded by deductions from the commissions earned by successor agents who
have assumed the right to service the books of business previously serviced
by eligible former agents who have terminated their association with the
Company pursuant to agreements with such agents. Funding from successor
agents is subject to the ability of the successor agents to generate
sufficient commissions to satisfy the liability.
Many computer programs and other computer systems upon which the Company relies
were created using only two digits to identify a year in the date field. If not
corrected, many of these computer applications could fail or produce erroneous
results by or at the beginning of the year 2000. In 1996, management began
considering Year 2000 issues as they affect the Company and began to develop a
Year 2000 plan. The Company's overall plan for dealing with the Year 2000
problem covers Information Technology ("IT") systems, non-IT systems, and
third-party providers. The Company has established a Year 2000 team to lead the
Company's activities relating to its Year 2000 issues. The Company's Year 2000
team works with the Company's senior management, legal and business units on
Year 2000 issues. Despite the Company's efforts to address its Year 2000 issues,
there can be no assurances that Year 2000 related failures of the Company's IT
systems, or that Year 2000 related failures by third parties with which the
Company interacts, will not have a material adverse effect on the Company's
results of operations, liquidity and financial condition.
In addition to its own computer systems and third-party providers, the Company
may also have exposure in its property/casualty operations to Year 2000 claims
asserted under certain insurance policies it has sold to customers. There can be
no assurances that Year 2000 related claims will not emerge and that such claims
will not have a material adverse effect on the Company's results of operations,
liquidity and financial condition.
6. Acquisition of Farm Family Life
Farm Family Holdings entered into an Option Purchase Agreement with the
shareholders of Farm Family Life pursuant to which Farm Family Holdings
had, for a two-year period commencing on July 26, 1996, the option to
acquire Farm Family Life subject to certain conditions. On February 26,
1998, the Board of Directors of Farm Family Holdings approved the exercise
of the option to acquire Farm Family Life and its wholly owned subsidiary
United Farm Family. Under the terms of the Option Purchase Agreement, Farm
Family Holdings will pay an exercise price of $37.5 million to acquire Farm
Family Life, consisting of $31.5 million of common stock of Farm Family
Holdings, and $6 million stated value of 6-1/8% voting preferred stock of
Farm Family Holdings, less certain expenses to be paid by Farm Family Life
in the acquisition on behalf of the Shareholders of Farm Family Life. The
number of shares of common and preferred stock to be issued will depend
upon the average closing price of the Company's common stock during the 20
trading days prior to the third business day preceding the closing of the
acquisition. The proposed acquisition of Farm Family Life is subject to the
approval of the shareholders of Farm Family Holdings and the satisfaction
of certain closing conditions. A special meeting of stockholders has been
called for December 2, 1998 at which the Company's stockholders will vote
on a proposal to approve the proposed acquisition. If the stockholders
approve the transaction, the Company expects to close the acquisition of
Farm Family Life in December 1998.
9
<PAGE>
The following unaudited pro forma consolidated financial information
reflects the acquisition by the Company of Farm Family Life under the
purchase method of accounting. The pro forma consolidated balance sheet
combines balance sheets of the Company and Farm Family Life as of September
30, 1998, as if the acquisition had occurred as of September 30, 1998. The
pro forma consolidated statements of income combines the operations of the
Company and Farm Family Life for the nine months ended September 30, 1998
and for the year ended December 31, 1997 as if the acquisition had occurred
on January 1, 1997.
The pro forma adjustment and pro forma combined amounts are provided for
informational purposes only and are not necessarily indicative of the
actual financial position or results of operations that would have been
achieved had the acquisition been consummated at the dates indicated or of
future results. The pro forma financial statements should be read in
conjunction with the historical financial statements of the Company and
Farm Family Life.
The pro forma financial statements are based upon available information and
certain assumptions that the Company believes are reasonable in the
circumstances. The Company's preliminary allocation of purchase price was
based upon the estimated fair value of assets acquired and liabilities
assumed. The actual allocation will be based upon valuations as of the
closing date of the acquisition and, accordingly, the final allocations
will be different from the amounts herein.
10
<PAGE>
<TABLE>
<CAPTION>
Farm Family Holdings, Inc.
Unaudited Pro Forma Consolidated Balance Sheet
September 30, 1998
($ in thousands)
Pro Forma
Farm Family Farm Family Adjustments
Holdings Life Dr. Cr. Pro Forma
ASSETS
Investments
Fixed maturities
<S> <C> <C> <C> <C> <C>
Available for sale $286,143 $719,898 $ $ $1,006,041
Held to maturity, at amortized cost 8,457 8,457
Equity securities 4,538 36,321 40,859
Mortgage loans 710 15,164 15,874
Policy loans 30,321
30,321
Other invested assets 416 639 1,055
Short-term investments 7,647 4,938 12,585
-----------------------------------------------------------------------------
Total investments 307,911 807,281 1,115,192
-----------------------------------------------------------------------------
Cash 5,711 2,985 8,696
Insurance receivables:
Reinsurance receivables 22,265 1,130 23,395
Premiums receivable 33,638 (D) 99 33,539
Deferred acquisition costs 14,095 25,395 (B) 25,395 14,095
Present value of future profits (B) 16,421 16,421
Accrued investment income 5,035 12,061 17,096
Property and equipment, net 12,718 (B) 4,095 16,813
Deferred income tax asset, net 1,200 1,200
Prepaid reinsurance premiums 358
358
Receivable from affiliates, net 17,339 (D) 17,339 0
Other assets 3,489 1,911 (E) 211 (A) 1,400 4,211
-----------------------------------------------------------------------------
Total Assets $411,041 $863,481 $20,727 $44,233 $1,251,016
-----------------------------------------------------------------------------
-----------------------------------------------------------------------------
LIABILITIES AND STOCKHOLDERS' EQUITY
Liabilities:
Reserves for losses and loss adjustment expenses $176,966 $ $ $ $176,966
Future policy and contract benefits 221,054 221,054
Funds on deposit from policyholders 419,208 (B) 77 419,131
Unearned premium reserve 73,115 73,115
Accrued dividends to policyholders 5,585 5,585
Reinsurance premiums payable 3,189 3,189
Deferred income tax liability 38,426 (B) 1,667 36,759
Payable to affiliate 17,438 (D) 17,438 0
Accrued expenses and other liabilities 16,672 4,263 (B)(E) 311 21,246
Debt
Participating policyholders' interest 116,332 116,332
-----------------------------------------------------------------------------
Total liabilities 269,942 822,306 19,182 311 1,073,377
-----------------------------------------------------------------------------
Commitments and contingencies
Mandatory redeemable preferred stock (A) 5,846 5,846
Stockholders' equity:
Common stock 53 3,001 (C) 3,001 (A) 10 63
Additional Paid in Capital 92,906 (A) 30,684 123,590
Retained earnings 37,074 36,256 (C) 36,256 37,074
Accumulated other comprehensive income 11,066 1,918 (C) 1,918 11,066
-----------------------------------------------------------------------------
Total stockholders' equity 141,099 41,175 41,175 30,694 171,793
-----------------------------------------------------------------------------
Total Liabilities and Stockholders' Equity $411,041 $863,481 $60,357 $36,851 $1,251,016
-----------------------------------------------------------------------------
-----------------------------------------------------------------------------
See accompanying notes to unaudited pro forma consolidated balance sheet.
</TABLE>
11
<PAGE>
Farm Family Holdings, Inc.
Notes to Unaudited Pro Forma
Consolidated Balance Sheet
September 30, 1998
($ in thousands)
(A) The following pro forma adjustments reflect the funding of
the acquisition and consideration given ($37,500 less
certain expenses currently estimated to be equal to
approximately $960 to be paid by Farm Family Life in the
acquisition on behalf of the selling stockholders)
Series A Preferred stock ($5,846)
Unregistered common stock issued (1,032,794 shares issued,
$.01 par value) in the acquisition assuming an average
closing price of $29 23/32 if the closing had occurred on
October 16, 1998. The actual average closing price and the
actual number of shares of Common Stock that will be issued
to the selling stockholders may vary significantly from
these amounts. (10)
Paid in capital (30,684)
Expenses relating to acquisition 1,400
(B) The following pro forma adjustments result from the
allocation of the purchase price for the acquisition based
on the fair value of the underlying net assets acquired.
Assets
Adjustment of carrying amount of properties occupied by Farm
Family Life based on a current appraisal of the estimated
fair market value of the building. In addition, based on
information contained in the current appraisal and an
evaluation of the current condition of the building, the
estimated useful life has been changed to 20 years $4,095
Elimination of historical deferred acquisition costs (25,395)
Adjustment to record present value of future profits
calculated based on a discount rate equal to each year's
earned rate for traditional insurance products, which range
from 8% to 9%, and each year's credited rate for annuities
and universal life products, which range from 6% to 7%, less
the excess of net assets acquired over the purchase price.
The earned rate for traditional life insurance products and
the credited rate for annuities and universal life products
is the rate used by Farm Family Life to credit interest to
policyholders' funds held by these products. The amount of
interest accrued on the unamortized present value of future
profits balance during the year was $0.4 million. The
interest accrual rate was 6.5% for universal life products,
6.3% for annuities, and 9.0% for traditional life products.
For traditional insurance products, the present value of
future profits is amortized, with interest in proportion to
the ratio of estimated annual revenues over the contract
period. For universal life contracts and annuity contracts,
the present value of future profits is amortized at a
constant rate based upon the amount expected to be realized
over the life of the contracts, which is reevaluated
annually. For most life insurance, a 15-year to 40-year
amortization period is used, and a 20-year period is used
for annuities. Approximately $2.1 million is expected to be
amortized during each of the years ended December 31, 1998,
1999, 2000, 2001 and 2002. 16,421
12
<PAGE>
Farm Family Holdings, Inc.
Notes to Unaudited Pro Forma Consolidated Balance Sheet
September 30, 1998
($ in thousands)
Liabilities
Adjustment to reflect the net deferred tax benefit of purchase
accounting adjustments using a statutory rate of 34% 1,667
Adjustment to record liability for Guaranty Funds (100)
Adjustment of carrying amount of funds on deposit from
policyholders based on fair market value. Policyholder funds held
at variable rates are carried at their account value which
approximates fair value. The fair value of policyholder funds
held at fixed rates is the present value of the funds calculated
using current market rates. 77
(C) Adjustment to eliminate Farm Family Life's stockholder's
equity
(D) Adjustment to eliminate intercompany balances
(E) Adjustment to accrue additional costs relating to the
acquisition expected to be incurred (211)
13
<PAGE>
<TABLE>
<CAPTION>
Farm Family Holdings, Inc.
Unaudited Pro Forma Consolidated Statement of Income
For the nine months ended September 30, 1998
($ in thousands, except per share data)
Pro Forma
Farm Family Farm Family Adjustments
Holdings Life Dr. Cr. Pro Forma
Revenues:
<S> <C> <C> <C> <C> <C>
Premiums from property/casualty operations $133,404 $39 $ $ $133,443
Premiums from life and health operations 23,002 23,002
Net investment income 14,333 41,445 55,778
Realized investment gains (losses), net 534 3,184 3,718
Policy and contract charges 4,342 4,342
Other income 752 703 (c) 650 805
--------------------------------------------------------------------------
Total revenues 149,023 72,715 650 221,088
--------------------------------------------------------------------------
Losses, Benefits, Expenses and Other:
Losses and loss adjustment expenses 99,063 1,481 100,544
Benefits to policyholders 22,788 22,788
Underwriting & operating expenses 35,129 6,710 (a) 105 (c) 650 41,294
Non-recurring charges 203 203
Interest credited to policyholders 16,564 16,564
Amortization of policy acquisition costs 5,300 (a) 5,300 (0)
Amortization of present value of future profits (a) 1,215 1,215
Interest expense 25 25
Dividends to policyholders 119 119
Participating policyholders' interest 16,317 (a) 4,710 (a) 1,044 19,983
--------------------------------------------------------------------------
Total losses, benefits and expenses 134,336 69,363 6,030 6,994 202,735
Gain on partial reduction of extended earnings liability (6,318) - (6,318)
--------------------------------------------------------------------------
Total losses, benefits, expenses and other 128,018 69,363 6,030 6,994 196,417
--------------------------------------------------------------------------
Income before federal income tax expense 21,005 3,352 6,680 6,994 24,671
Federal income tax expense 6,814 1,123 (b) 107 8,044
--------------------------------------------------------------------------
Net Income before preferred stock dividends 14,191 2,229 6,787 6,994 16,627
Preferred stock dividends (a) 269 269
--------------------------------------------------------------------------
Net Income applicable to common shareholders $14,191 $2,229 $7,055 $6,994 $16,358
--------------------------------------------------------------------------
Net Income per Common Share - Basic $2.70 $2.60
-------------- --------------
Net Income per Common Share - Diluted $2.67 $2.58
-------------- --------------
Weighted average shares - Basic 5,253,813 (d) 1,032,794 6,286,607
-------------- --------------
Weighted average shares - Diluted 5,306,257 (d) 1,032,794 6,339,051
-------------- --------------
See accompanying notes to unaudited pro forma consolidated statements of income.
</TABLE>
14
<PAGE>
Farm Family Holdings, Inc.
Notes to Unaudited Pro Forma Consolidated Statements of Income
For the nine months ended
September 30, 1998
($ in thousands, except per share data)
(a) Adjustment resulting from the allocation of the purchase
price for the acquisition based on the estimated fair value of
the underlying net assets are as follows:
Additional depreciation expense incurred due to an adjustment of
the fair market value of the building based on a current
appraisal and a change in the estimated useful life of the
building to 20 years based on information contained in the
current appraisal and an evaluation of the current condition of
the building. $105
Adjustment to reverse amortization of deferred acquisition costs (5,300)
Participating policyholders' share of amortization of deferred
acquisition costs 4,710
Adjustment to record amortization of present value of future
profits 1,215
Participating policyholders' share of amortization of present
value of future profits (1,044)
Series A Preferred stock dividends on estimated fair value of
$5,846 of preferred stock at a rate of 6 1/8% per annum 269
(b) Adjustment to reflect the federal income tax effect of item
(a) above using statutory rate of 34% 107
(c) Adjustment to eliminate intercompany balances 650
(d) Adjustment to reflect estimated additional shares of common
stock issued in the acquisition assuming an average closing price
of $29 23/32 if the closing had occurred on October 16, 1998. The
actual average closing price and the actual number of shares of
common stock that will be issued to the selling stockholders may
vary significantly from these amounts. 1,032,794
15
<PAGE>
<TABLE>
<CAPTION>
Farm Family Holdings, Inc.
Unaudited Pro Forma Consolidated Statement of Income
For the year ended December 31, 1997
($ in thousands, except per share data)
Pro Forma
Farm Family Farm Family Adjustments
Holdings Life Dr. Cr. Pro Forma
Revenues:
<S> <C> <C> <C> <C> <C>
Premiums from property/casualty operations $149,220 $9,020 $ $ $158,240
Premiums from life and health operations 30,505 30,505
Net investment income 18,077 54,964 73,041
Realized investment gains (losses), net 5,406 2,914 8,320
Policy and contract charges 5,041 5,041
Other income 1,020 1,153 (c) 808 1,365
------------------------------------------------------------------------
Total revenues 173,723 103,597 808 276,512
------------------------------------------------------------------------
Losses, Benefits and Expenses:
Losses and loss adjustment expenses 103,301 9,975 113,276
Benefits to policyholders 26,843 26,843
Underwriting & operating expenses 43,320 7,748 (a) 158 (c) 808 50,418
Non-recurring charges 707 707
Interest credited to policyholders 24,813 24,813
Amortization of policy acquisition costs 6,852 (a) 6,852 0
Amortization of present value of future profits (a) 2,233 2,233
Interest expense 102 102
Dividends to policyholders 282 282
Participating policyholders' interest 21,617 (a) 5,994 (a) 1,929 25,682
------------------------------------------------------------------------
Total losses and expenses 147,005 98,555 8,385 9,589 244,356
------------------------------------------------------------------------
Income before federal income tax expense 26,718 5,042 9,193 9,589 32,156
Federal income tax expense 9,218 1,702 (b) 135 11,055
------------------------------------------------------------------------
Net Income before preferred stock dividends 17,500 3,340 9,328 9,589 21,101
Series A Preferred stock dividends (a) 358 358
------------------------------------------------------------------------
Net Income applicable to common shareholders $17,500 $3,340 $9,686 $9,589 $20,743
------------------------------------------------------------------------
Net Income per Common Share - Basic $3.33 $3.30
--------------- --------------
Net Income per Common Share - Diluted $3.32 $3.29
--------------- --------------
Weighted average shares - Basic 5,253,813 (d)1,032,794 6,286,607
--------------- --------------
Weighted average shares - Diluted 5,270,947 (d)1,032,794 6,303,741
--------------- --------------
</TABLE>
16
<PAGE>
Farm Family Holdings, Inc.
Notes to Unaudited Pro Forma Consolidated Statements of Income
For the year ended December 31, 1997
($ in thousands, except per share data)
(a) Adjustment resulting from the allocation of the purchase
price for the Acquisition based on the estimated fair value of
the underlying net assets are as follows:
Additional depreciation expense incurred due to an adjustment of
the fair market value of the building based on a current
appraisal and a change in the estimated useful life of the
building to 20 years based on information contained in the
current appraisal and an evaluation of the current condition of
the building. $158
Adjustment to reverse amortization of deferred acquisition costs (6,852)
Participating policyholders' share of amortization of deferred
acquisition costs, 5,994
Adjustment to record amortization of present value of future
profits 2,233
Participating policyholders' share of amortization of present
value of future profits (1,929)
Series A Preferred stock dividends on estimated fair value of
$5,856 of preferred stock at a rate of 6 1/8% per annum 358
(b) Adjustment to reflect the federal income tax effect of item
(a) above using statutory rate of 34% 135
(c) Adjustment to eliminate intercompany balances 808
(d) Adjustment to reflect estimated additional shares of Common
Stock issued in the acquisition assuming an average closing price
of $29 23/32 if the closing had occurred on October 16, 1998. The
actual average closing price and the actual number of shares of
common Stock that will be issued to the selling stockholders may
vary significantly from these amounts. 1,032,794
17
<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 subsidiaries (collectively
referred to as the "Company"). The primary subsidiary of Farm Family Holdings is
Farm Family Casualty Insurance Company ("Farm Family Casualty"). 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").
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, 1998 and 1997, 34.5% and 36.6%,
respectively, of the Company's direct written premiums were derived from
policies written in New York and, for the same periods, 28.4% and 25.7%,
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.
As described in Note 2 to the Company's Notes to Consolidated Financial
Statements, the Company has implemented the guidance of Statement of Financial
Accounting Standards No. 112 ("Statement 112") to account for its extended
earnings program with its agents and agency managers. As a result, the Company
has restated certain amounts within the Company's consolidated financial
statements relating to the retroactive adoption of Statement 112.
18
<PAGE>
Year 2000
- ---------
Many computer programs and other computer systems upon which the Company relies
were created using only two digits to identify a year in the date field. If not
corrected, many of these computer applications could fail or produce erroneous
results by or at the beginning of the year 2000. In 1996, management began
considering Year 2000 issues as they affect the Company and began to develop a
Year 2000 plan. The Company's overall plan for dealing with the Year 2000
problem covers Information Technology ("IT") systems, non-IT systems, and
third-party providers. The Company has established a Year 2000 team to lead the
Company's activities relating to its Year 2000 issues. The Company's Year 2000
team works with the Company's senior management, legal and business units on
Year 2000 issues. The Company's current state of readiness with respect to each
of its IT systems, non-IT systems and third-party providers is discussed below.
The Company uses a process consisting of the following five phases to approach
Year 2000 compliance of its IT systems: (1) Inventory (cataloging the systems
portfolio); (2) Assessment (identifying possible Year 2000 related failures and
developing strategies to remediate them); (3) Remediation (creating or acquiring
corrections to deficiencies); (4) Testing (confirming whether remediation is
successful); and (5) Implementation (installing solutions).
Critical IT systems include product administration systems, key financial
systems and core IT infrastructure. The inventory and assessment phases have
been completed for all critical IT systems. The phases of remediation and
testing of critical IT systems have been 95% completed as of September 30, 1998.
Management of the Company believes that the phases of remediation, testing and
implementation for critical IT systems will be completed by the end of 1998.
Noncritical IT systems include certain other business applications which the
Company does not believe to be critical. The inventory phase has been completed
for the Company's noncritical IT systems as of September 30, 1998. The
assessment, remediation, testing and implementation phases for the Company's
noncritical IT systems are ongoing and are expected to be completed by the end
of 1999.
The Company is currently testing the operation of IT systems working together in
an integrated test environment that replicates the Company's live environment.
This test exercises software and hardware using dates advanced to Year 2000 and
beyond. There can be no assurances that the integrated testing will discover all
potential Year 2000 problems or that it will not reveal additional material
problems that will have to be resolved.
Non-IT systems typically include embedded technology such as microcontrollers.
The Company's non-IT systems include machinery and equipment in its buildings,
such as elevators, telephone equipment, HVAC, security and alarm systems and
print shop/mail room equipment. The Company is reviewing these systems for Year
2000 compliance with the third-party providers the Company uses to service and
maintain this equipment.
The Company's Year 2000 effort also includes a systematic assessment of the Year
2000 compliance status of third-party providers. The Company believes loss of
public utilities, phone, banking, mail or certain outsourced processing services
could have an immediate and critical adverse material impact on the Company's
operations. The Company is contacting each of its third-party providers, through
letters, questionnaires and/or interviews depending upon the nature of the
product or service supplied, to determine if the provider is Year 2000
compliant. As of September 30, 1998, the Company had received responses from
approximately 85 percent of such third-parties. Many of the responses indicate
that the products or services provided are expected to be Year 2000 compliant.
However, few providers have provided written assurances that they are currently
Year 2000 compliant. The Company continues to track the status of third-party
providers' Year 2000 compliance progress and a follow-up program is under way
with providers that have not responded. Management believes that the process of
evaluating the Year 2000 compliance status of the Company's third-party
providers who provide mission critical services and products will be completed
by June 30, 1999.
The Company's incremental costs to address the Year 2000 issues did not have a
material impact on the Company's operations in 1997 or during the nine months
ended September 30, 1998, and are not expected to have a material impact in the
remainder of 1998 or 1999. These costs are being funded through operating cash
flows.
19
<PAGE>
The phases of inventory, assessment, remediation, testing and implementation of
the Company's software for Year 2000 issues have been done primarily by the
Company's existing IT staff. Correction of Year 2000 issues is a high priority
project and certain other less critical IT projects have been deferred due to
Year 2000 efforts; however, the Company does not believe the deferral of other
IT projects has had a material effect on the Company's financial condition or
results of operations in 1997 or during the nine months ended September 30,
1998. The Company's IT staff has continued to work on other high priority
projects concurrent with the Year 2000 project.
The Company has not conducted a comprehensive analysis of the operational
problems and costs that would be reasonably likely to result from the failure to
achieve Year 2000 compliance on a timely basis. The Company believes that its
most reasonably likely worst case Year 2000 scenarios may include these
elements: (1) one or more parts of the Company's IT systems will operate
incorrectly, thereby resulting in a temporary shutdown or miscalculation in a
system which may have an adverse effect on the Company's operations and (2) one
or more of the Company's third-party providers will be unable to provide the
products or services expected which may have an adverse effect on the Company's
operations. Because of the progress which has been made toward achieving Year
2000 compliance with the Company's IT systems, an IT system contingency plan has
not been developed. The Company believes that its testing of its critical
hardware and software will reveal any significant Year 2000 problems, that such
problems will be capable of remediation, and that the Company's software and
hardware will perform substantially as planned when Year 2000 processing begins.
If testing reveals material problems that cannot be remediated, then the Company
intends to develop such contingency plans as are practical based on the
alternatives available. A contingency plan has not been developed for dealing
with the scenario where one or more of the Company's third-party providers will
be unable to provide the services expected. If management believes that a
third-party provider is not Year 2000 compliant, or that a third-party
provider's Year 2000 compliance status is uncertain, then the Company intends to
seek other providers or develop such contingency plans as are practical based on
the alternatives available.
Despite the Company's efforts to address its Year 2000 issues, there can be no
assurances that Year 2000 related failures of the Company's IT systems, or that
Year 2000 related failures by third parties with which the Company interacts,
will not have a material adverse effect on the Company's results of operations,
liquidity and financial condition.
In addition to its own computer systems and third-party providers, the Company
may also have exposure in its property/casualty operations to Year 2000 claims
asserted under certain insurance policies it has sold to customers. Although the
Company generally does not issue insurance policies intended to cover risks
related to the Year 2000 issue, there can be no certainty regarding future
judicial or legislative interpretations of coverage. There can be no assurances
that Year 2000 related claims will not emerge and that such claims will not have
a material adverse effect on the Company's results of operations, liquidity and
financial condition.
Safe Harbor Statement under The Private Securities Litigation Reform Act of
- ---------------------------------------------------------------------------
1995:
- -----
With exception of historical information, the matters discussed or
incorporated by reference in this Report on Form 10-Q contain forward-looking
statements within the meaning of the Private Securities Litigation Reform Act of
1995 that are based on management's current knowledge, expectations, estimates,
beliefs and assumptions. The forward-looking statements in this Form 10-Q
include, but are not limited to, statements with respect to the Company's
potential acquisition of Farm Family Life, the impact of the potential
acquisition of Farm Family Life on the earnings and shareholder value of the
Company, statements regarding the Company's ability to successfully address its
Year 2000 issues and the estimated impact thereof on the Company's future
financial condition and results of operations, projections of revenue, earnings,
capital structure and other financial items, statements of the plans and
objectives of the Company or its management, and statements of future economic
performance and 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. The forward-looking statements in this Form 10-Q are not
guarantees of future performance and are subject to a number of important risks
and uncertainties, many of which are outside the Company's control, that could
cause actual results to differ materially. These risks and uncertainties
include, but are not limited to, the results of operations of the Company and
Farm Family Life, fluctuations in the market value of shares of the Company's
common stock, the satisfaction of the closing conditions set forth in the
Amended and Restated Option Purchase Agreement (which conditions include, but
are not limited to, the approval of the Company's shareholders, and receipt of
all required governmental approvals), 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
20
<PAGE>
and the Company's reserving policy, the adequacy of the Company's reinsurance
programs, developments in the securities markets and the impact thereof on the
Company's investment portfolio, factors relating to the Company's ability to
successfully address its Year 2000 issues and other risks listed from time to
time in the Company's Securities and Exchange Commission filings, including the
Form 10-K/A filed for the fiscal year ended December 31, 1997 and the Prospectus
dated July 22, 1996. Accordingly, there can be no assurance that actual results
will conform to the forward-looking statements in this Form 10-Q.
Results of Operations
The Three Months Ended September 30, 1998 Compared to the Three Months Ended
September 30, 1997
Premiums
- --------
Premium revenue increased $7.2 million or 18.7%, during the three months ended
September 30, 1998 to $45.7 million from $38.5 million for the same period in
1997. The increase in premium revenue in 1998 resulted from an increase of $4.7
million in earned premiums on additional business directly written by the
Company, an increase of $0.3 million in earned premiums from assumed reinsurance
business and a decrease of $2.2 million in earned premiums ceded to reinsurers
and not retained by the Company. The $4.7 million increase in earned premiums on
additional business directly written by the Company was primarily attributable
to an increase of $4.6 million, or 13.4%, 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), as well as an increase
of $0.3 million in earned premiums from the Company's workers' compensation
business. As of September 30, 1998, the Company had a total of approximately
164,900 policies in force. The number of policies in force related to the
Company's primary products increased by 10.0% to approximately 136,450 as of
September 30, 1998 from approximately 124,100 as of September 30, 1997 and the
average premium earned for each such policy increased by 4.2% during the three
months ended September 30, 1998 compared to the same period in 1997.
Net written premiums increased 10.6% to $46.3 million for the three months ended
September 30, 1998 compared to $41.8 million for the same period in 1997. The
increase in net written premiums is primarily attributable to the growth in
direct writings to customers, a decrease in written premium ceded to reinsurers
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 primarily from New Jersey, New York, Massachusetts, Connecticut,
Delaware, West Virginia, Vermont, New Hampshire and Rhode Island. In addition,
direct writings of all the Company's primary products, particularly personal
automobile, increased during the third quarter of 1998. During the three months
ended September 30, 1998, premiums from the Company's direct writings (excluding
assigned risk automobile business premiums received by the Company) increased
$3.9 million compared to the same period in 1997. Direct writings in New Jersey
accounted for $2.2 million ($1.6 million of which represents increased personal
automobile business) of the Company's $3.9 million increase in direct writings
during the three months ended September 30, 1998 compared to the same period in
1997.
Net Investment Income
- ---------------------
Net investment income increased $0.2 million or 4.6% to $4.8 million for the
three months ended September 30, 1998 from $4.6 million for the same period in
1997. The increase in net investment income was primarily the result of an
increase in average cash and invested assets (at amortized cost) of
approximately $32.2 million, or 12.0% as of September 30, 1998 compared to
September 30, 1997. The taxable equivalent yield on the Company's investment
portfolio was 7.1% and 7.2% for the three months ended September 30, 1998 and
1997, respectively.
21
<PAGE>
Realized Investment Gains
- -------------------------
Realized investment gains were $0.2 million for the three months ended September
30, 1998 and 1997.
Losses and Loss Adjustment Expenses
- -----------------------------------
Losses and loss adjustment expenses increased $6.2 million, or 23.4%, to $32.9
million for the three months ended September 30, 1998 from $26.7 million for the
same period in 1997. Loss and loss adjustment expenses were 72.1% of premium
revenue for the three months ended September 30, 1998 compared to 69.4% of
premium revenue for the same period in 1997. The increase in loss and loss
adjustment expenses as a percent of premium revenue was primarily attributable
to the increase in weather related losses during the third quarter of 1998.
Losses believed to be weather related incurred on the Company's direct written
business in the northeast aggregated $3.3 million in the three months ended
September 30, 1998 compared to $1.2 million for the same period in 1997. The
impact of the weather related losses incurred by the Company during the three
months ended September 30, 1998 was largely offset by the Company's aggregate
stop loss reinsurance program.
Underwriting Expenses
- ---------------------
Underwriting expenses increased $0.5 million, or 5.0%, to $11.5 million for the
three months ended September 30, 1998 from $11.0 million for the same period in
1997. For the three months ended September 30, 1998, underwriting expenses were
25.3% of premium revenue compared to 28.6% for the same period in 1997. 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 and the Company's continued expense management initiatives which
began in 1998.
Gain on Partial Reduction of Extended Earnings Liability
- -------------------------------------------------------
The Company recorded a gain on the partial reduction of its extended earnings
liability of $6.3 million during the three months ended September 30, 1998,
which was the result of modifications made to the agreements with the Company's
agents and agency managers that relieved the Company of the primary obligation
to make extended earnings payments. The Company is primarily liable for its
remaining Statement 112 liability which represents the aggregate amount owed by
the Company to eligible former agents who have terminated their association with
the Company and are currently receiving extended earnings payments.
Federal Income Tax Expense
- --------------------------
Federal income tax expense increased $2.4 million to $4.3 million in 1998 from
$1.9 million in 1997. The increase in federal income tax expense was primarily
attributable to the foregoing factors as well as the gain on partial reduction
of extended earnings liability of $6.3 million. Federal income tax expense was
33.5% of income before federal income tax expense for the three months ended
September 30, 1998 compared to 32.9% for the same period in 1997.
Net Income
- ----------
Net income increased $4.7 million to $8.5 million for the three months ended
September 30, 1998 from $3.8 million for the same period in 1997 primarily as a
result of the foregoing factors, including the gain on partial reduction of
extended earnings liability of $6.3 million.
The Nine Months Ended September 30, 1998 Compared to the Nine Months Ended
September 30, 1997
Premiums
- --------
Premium revenue increased $24.2 million or 22.2%, during the nine months ended
September 30, 1998 to $133.4 million from $109.2 million for the same period in
1997. The increase in premium revenue in 1998 resulted from an increase of $16.1
million in earned premiums on additional business directly written by the
Company, an increase of $2.7 million in earned premiums from assumed reinsurance
business and a decrease of $5.4 million in earned premiums ceded to reinsurers
and not retained by the Company. The $16.1 million increase in earned premiums
on additional business directly written by the Company was primarily
attributable to an increase of $14.3 million, or 14.5%, in earned premiums from
22
<PAGE>
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), as well
as an increase of $1.6 million in earned premiums from the Company's workers'
compensation business and an increase of $0.2 million in earned premiums from
the Company's other products. As of September 30, 1998, the Company had a total
of approximately 164,500 policies in force. The number of policies in force
related to the Company's primary products increased by 10.0% to approximately
136,450 as of September 30, 1998 from approximately 124,100 as of September 30,
1997 and the average premium earned for each such policy increased by 4.2%
during the nine months ended September 30, 1998 compared to the same period in
1997.
Net written premiums increased 17.1% to $142.2 million for the nine months ended
September 30, 1998 compared to $121.5 million for the same period in 1997. The
increase in net written premiums is primarily attributable to the growth in
direct writings to customers, a decrease in written premium ceded to reinsurers
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 primarily from New Jersey, New York, Massachusetts, Connecticut,
Delaware, West Virginia, and Rhode Island. In addition, direct writings of all
the Company's primary products, particularly personal automobile, increased
during the nine months ended September 30, 1998. During the nine months ended
September 30, 1998, premiums from the Company's direct writings (excluding
assigned risk automobile business premiums received by the Company) increased
$15.4 million compared to the same period in 1997. Direct writings in New Jersey
accounted for $7.7 million ($5.6 million of which represents increased personal
automobile business) of the Company's $15.4 million increase in direct writings
during the nine months ended September 30, 1998 compared to the same period in
1997.
Net Investment Income
- ---------------------
Net investment income increased $0.8 million or 5.9% to $14.3 million for the
nine months ended September 30, 1998 from $13.5 million for the same period in
1997. The increase in net investment income was primarily the result of an
increase in average cash and invested assets (at amortized cost) of
approximately $32.2 million, or 12.2% as of September 30, 1998 compared to
September 30, 1997. The taxable equivalent yield on the Company's investment
portfolio was 7.1% and 7.3% for the nine months ended September 30, 1998 and
1997.
Realized Investment Gains
- -------------------------
Realized investment gains decreased $5.1 million to $0.5 million for the nine
months ended September 30, 1998 as compared to $5.6 million for the same period
in 1997. Realized investment gains in the nine months ended September 30, 1997
were primarily attributable to a realized gain on the sale of a common stock
investment.
Losses and Loss Adjustment Expenses
- -----------------------------------
Losses and loss adjustment expenses increased $22.7 million, or 29.6%, to $99.1
million for the nine months ended September 30, 1998 from $76.4 million for the
same period in 1997. Loss and loss adjustment expenses were 74.3% of premium
revenue for the nine months ended September 30, 1998 compared to 70.0% of
premium revenue for the same period in 1997. The increase in loss and loss
adjustment expenses as a percent of premium revenue was primarily attributable
to the increase in weather related losses during the nine months ended September
30, 1998 compared to the same period in 1997. Losses believed to be weather
related incurred on the Company's direct written business in the northeast
aggregated $10.0 million in the nine months ended September 30, 1998 compared to
$4.4 million for the same period in 1997. In addition, the Company incurred
losses of approximately $500,000 as a result of severe weather which impacted
certain midwestern risks which the Company reinsures. The increase in weather
related losses was primarily attributable to severe ice storms during the first
three months of 1998 which impacted the upstate New York and Maine territories
in which the Company writes business, and tornadoes and severe thunder storms
during the second quarter of 1998, which impacted direct insures in the
northeast. The impact of the weather related losses incurred by the Company
during the nine months ended September 30, 1998 was partially offset by the
Company's aggregate stop loss reinsurance program.
23
<PAGE>
Underwriting Expenses
- ---------------------
Underwriting expenses increased $3.1 million, or 9.9%, to $35.1 million for the
nine months ended September 30, 1998 from $32.0 million for the same period in
1997. For the nine months ended September 30, 1998, underwriting expenses were
26.3% of premium revenue compared to 29.3% for the same period in 1997. 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 and the Company's continued expense management initiatives which
began in 1998.
Gain on Partial Reduction of Extended Earnings Liability
- --------------------------------------------------------
The Company recorded a gain on the partial reduction of its extended earnings
liability of $6.3 million during the nine months ended September 30, 1998, which
was the result of modifications made to the agreements with the Company's agents
and agency managers that relieved the Company of the primary obligation to make
extended earnings payments. The Company is primarily liable for its remaining
Statement 112 liability which represents the aggregate amount owed by the
Company to eligible former agents who have terminated their association with the
Company and are currently receiving extended earnings payments.
Federal Income Tax Expense
- --------------------------
Federal income tax expense decreased $0.1 million to $6.8 million in 1998 from
$6.9 million in 1997. Federal income tax expense was 32.4% of income before
federal income tax expense for the nine months ended September 30, 1998 compared
to 33.5% for the same period in 1997. The decrease in the Company's federal
income tax expense as a percentage of income before federal income tax expense
for the nine months ended September 30, 1998 as compared to the same period in
1997 was primarily attributable to an increase in tax exempt interest income
earned on the Company's investments reflecting the Company's increased
investment in tax exempt fixed maturities.
Net Income
- ----------
Net income increased $0.6 million to $14.2 million for the nine months ended
September 30, 1998 from $13.6 million for the same period in 1997 primarily as a
result of the foregoing factors, including the gain on partial reduction of
extended earnings liability of $6.3 million.
Liquidity and Capital Resources
- -------------------------------
Net cash provided by operating activities was $22.7 million and $20.6 million
during the nine month periods ended September 30, 1998 and 1997, respectively.
The increase in net cash provided by operating activities was primarily
attributable to an increase in reserves for losses and loss adjustment expenses
and reserves for unearned premiums which was partially offset by an increase in
reinsurance receivables and premium receivables.
Net cash used in investing activities was $21.5 million during the nine months
ending September 30, 1998 compared to $20.9 million for the same period in 1997
primarily as a result of an increase in investment purchases from fixed
maturities, and an increase in short-term investments, which were partially
offset by an increase in investment purchases by the Company.
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, 1998, no amounts were
outstanding on the lines of credit, each of which has an annual interest rate
equal to each bank's respective prime rate. On April 1, 1998, Farm Family
Casualty redeemed $1.3 million principal amount of surplus notes bearing
interest at a rate of eight percent per annum.
24
<PAGE>
Future Application of Accounting Standards
- ------------------------------------------
In June of 1997, the Financial Accounting Standards Board issued Statement of
Financial Accounting Statement No. 131, "Disclosures about Segments of an
Enterprise and Related Information," ("Statement 131") effective for years
beginning after December 15, 1997. The adoption of Statement 131 will result in
revised and additional disclosures but will have no effect on the financial
position, results of operations, or liquidity of the Company.
In February of 1998, the Financial Accounting Standards Board issued Statement
of Financial Accounting Statement No. 132, "Employers' Disclosures about
Pensions and Other Postretirement Benefits," ("Statement 132") effective for
years beginning after December 15, 1997. Statement 132 revises the disclosure
requirements but does not change the measurement or recognition of pensions and
other post retirement benefits. The adoption of Statement 132 will result in
revised and additional disclosures but will have no effect on the financial
position, results of operations, or liquidity of the Company.
In June 1998, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 133, "Accounting for Derivative Instruments
and Hedging Activities" ("Statement 133"). This statement, which is effective
for the Company for the year beginning January 1, 2000, establishes accounting
and reporting standards for derivative instruments and for hedging activities.
Statement 133 requires a company to recognize all derivatives as either assets
or liabilities in the statement of financial position and measure those
instruments at fair value. Management is evaluating the impact this statement
may have on the Company's financial statements.
25
<PAGE>
Item 6: Exhibits and Reports on Form 8-K
EXHIBIT INDEX
FARM FAMILY HOLDINGS, INC. FORM 10-Q
FOR THE QUARTER ENDED SEPTEMBER 30, 1998
Exhibit Number Document Description
*2.1 Plan of Reorganization and Conversion dated February 14,
1996 as amended by Amendment No. 1, dated April 23, 1996
*3.1 Certificate of Incorporation of Farm Family Holdings, Inc.
*3.2 Bylaws of Farm Family Holdings, Inc.
4.1 Rights agreement, dated as of July 29, 1997, between the
Company and The Bank of New York (incorporated by reference
to Exhibit 4.1 to the Company's Current Report on Form 8-K
filed with the Securities and Exchange Commission on July
30, 1997)
10.1 Farm Family Life Insurance Company, Farm Family Casualty
Insurance Company, Farm Family Holdings, Inc. Officer
Severance Pay Plan Effective August 1, 1994, as amended July
29, 1997, and as further amended July 28, 1998
*Incorporated by reference to Registration Statement No. 333-4446
Reports on Form 8-K
A report on Form 8-K was filed on August 7, 1998 reporting a press
release issued announcing the Company's operating results for the quarter ended
June 30, 1998.
No financial statements were filed with the Form 8-K.
26
<PAGE>
SUMMARY PLAN DESCRIPTION
FARM FAMILY LIFE INSURANCE COMPANY
FARM FAMILY CASUALTY INSURANCE COMPANY
FARM FAMILY HOLDINGS, INC.
OFFICER SEVERANCE PAY PLAN
Effective July 28, 1998
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, amended July 29, 1997 and further
amended July 28, 1998, the purpose of which is to provide financial benefits to
officers of Life, Casualty or Holdings who lose their positions 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.
27
<PAGE>
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 Holdings' 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 the 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
28
<PAGE>
(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 (i) involuntarily
terminated due to the officer not satisfactorily performing the duties of his or
her position with such Company; (ii) terminated due to 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 ("Elimination of
Position Termination"); or (iii) terminated due to 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 ("Change
in Control Termination"); 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
other than pursuant to Elimination of Position Termination or Change in
Control Termination; 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.
29
<PAGE>
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:
1. A leased employee;
2. An independent contractor; or
3. 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.
Certain Additional Payments by the Companies
- --------------------------------------------
In the event it shall be determined that any payment, award, benefit or
distribution (or any acceleration of any payment, award, benefit or
distribution) by the Companies (or any of their affiliated entities) or any
entity which effectuates a Change in Control (or any of its affiliated entities)
to or for the benefit of an Eligible Officer (whether pursuant to the terms of
this Officer Severance Pay Plan or otherwise, but determined without regard to
any additional payments required under this Section) (the "Payments") would be
subject to the excise tax imposed by Section 4999 of the Internal Revenue Code
of 1986, as amended (the "Code") (or any similar tax that may hereafter be
imposed), or any interest or penalties are incurred by the Eligible Officer with
respect to such excise tax (such excise tax, together with any such interest and
penalties, are hereinafter collectively referred to as the "Excise Tax"), then
the Companies shall pay to the Eligible Officer an additional payment (a "Gross
Up Payment") in an amount such that after payment by the Eligible Officer of all
taxes (including any Excise Tax) imposed upon the Gross Up Payment, the Eligible
Officer retains an amount of the Gross Up Payment equal to the sum of (x) the
Excise Tax imposed upon the Payments and (y) the product of any deductions
disallowed for federal, state or local income tax purposes because of the
inclusion of the Gross Up Payment in the Eligible Officer's adjusted gross
income and the highest applicable marginal rate of federal, state or local
income taxation, respectively, for the calendar year in which the Gross Up
Payment is to be made. For purposes of determining the amount of the Gross Up
Payment, the Eligible Officer shall be deemed to (i) pay federal income taxes at
the highest marginal rates of federal income taxation for the calendar year in
which the Gross Up Payment is to be made, (ii) pay applicable state and local
income taxes at the highest marginal rate of taxation for the calendar year in
which the Gross Up Payment is to be made, net of the maximum reduction in
federal income taxes which could be obtained from deduction of such state and
local taxes and (iii) have otherwise allowable deductions for federal, state and
local income tax purposes at least equal to those disallowed because of the
inclusion of the Gross Up Payment in the Eligible Officer's adjusted gross
income.
30
<PAGE>
Subject to the provisions of this Section, all determinations required to be
made under this Section, including whether and when a Gross Up Payment is
required and the amount of such Gross Up Payment, and the assumptions to be
utilized in arriving at such determinations, shall be made by tax counsel,
compensation consultants or auditors of nationally recognized standing (the
"Independent Advisors") selected by the Companies and reasonably acceptable to
the Eligible Officer which shall provide detailed supporting calculations both
to the Companies and the Eligible Officer within fifteen (15) business days of
the receipt of notice from the Companies or the Eligible Officer that there has
been a Payment, or such earlier time as is requested by the Companies
(collectively, the "Determination"). All fees and expenses of the Independent
Advisors shall be borne solely by the Companies. The Gross Up Payment under this
Section with respect to any Payments shall be made no later than thirty (30)
days following such Payment. If the Independent Advisors determine that no
Excise Tax is payable by the Eligible Officer, it shall furnish the Eligible
Officer with a written opinion to such effect, and to the effect that failure to
report the Excise Tax, if any, on the Eligible Officer's applicable federal
income tax return will not result in the imposition of a negligence or similar
penalty. The Determination by the Independent Advisors shall be binding upon the
Companies and the Eligible Officer. In the event that the Excise Tax is
subsequently determined to be less than the amount taken into account hereunder
at the time the Gross Up Payment is made, the Eligible Officer shall repay to
the Companies at the time that the amount of such reduction in Excise Tax is
finally determined (but, if previously paid to the taxing authorities, not prior
to the time the amount of such reduction is refunded to the Eligible Officer or
otherwise realized as a benefit by the Eligible Officer) the portion of the
Gross Up Payment that would not have been paid if such Excise Tax had been
applied in initially calculating the Gross Up Payment, plus interest on the
amount of such repayment at the rate provided in Section 1274(b)(2)(B) of the
Code. In the event that the Excise Tax is determined to exceed the amount taken
into account hereunder at the time the Gross Up Payment is made (including by
reason of any payment the existence or amount of which cannot be determined at
the time of the Gross Up Payment), the Companies shall make an additional Gross
Up Payment and shall indemnify and hold the Eligible Officer harmless in respect
of such excess (plus any interest and penalties payable with respect to such
excess) at the time that the amount of such excess is finally determined. The
Eligible Officer shall cooperate, to the extent his or her expenses are
reimbursed by the Companies, with any reasonable requests by the Companies in
connection with any contests or disputes with the Internal Revenue Service in
connection with the Excise Tax.
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.
31
<PAGE>
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.
32
<PAGE>
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:
33
<PAGE>
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
34
<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, 1998 By:/s/ Philip P. Weber
- ----------------- -----------------------------------------------------------
(Date) Philip P. Weber, President & Chief Executive Officer
(Principal Executive Officer)
November 13, 1998 By:/s/ Timothy A. Walsh
- ----------------- -----------------------------------------------------------
(Date) Timothy A. Walsh, Executive Vice President - Finance &
Treasurer
(Principal Financial & Accounting Officer)
35
<TABLE> <S> <C>
<ARTICLE> 7
<CIK> 0001013564
<NAME> Farm Family Holdings, INc.
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> Dec-31-1998
<PERIOD-END> SEP-30-1998
<DEBT-HELD-FOR-SALE> 286,143
<DEBT-CARRYING-VALUE> 8,457
<DEBT-MARKET-VALUE> 8,770
<EQUITIES> 4,538
<MORTGAGE> 710
<REAL-ESTATE> 0
<TOTAL-INVEST> 307,911
<CASH> 5,711
<RECOVER-REINSURE> 22,265
<DEFERRED-ACQUISITION> 14,095
<TOTAL-ASSETS> 411,041
<POLICY-LOSSES> 176,966
<UNEARNED-PREMIUMS> 73,115
<POLICY-OTHER> 16,672
<POLICY-HOLDER-FUNDS> 0
<NOTES-PAYABLE> 0
0
0
<COMMON> 53
<OTHER-SE> 11,066
<TOTAL-LIABILITY-AND-EQUITY> 411,041
133,404
<INVESTMENT-INCOME> 14,333
<INVESTMENT-GAINS> 534
<OTHER-INCOME> 752
<BENEFITS> 99,063
<UNDERWRITING-AMORTIZATION> 35,129
<UNDERWRITING-OTHER> 0
<INCOME-PRETAX> 21,005
<INCOME-TAX> 6,814
<INCOME-CONTINUING> 14,191
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 14,191
<EPS-PRIMARY> 2.70
<EPS-DILUTED> 2.67
<RESERVE-OPEN> 127,568
<PROVISION-CURRENT> 102,596
<PROVISION-PRIOR> (3,531)
<PAYMENTS-CURRENT> 44,793
<PAYMENTS-PRIOR> 41,482
<RESERVE-CLOSE> 140,358
<CUMULATIVE-DEFICIENCY> 0
</TABLE>
<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> 362,104
<POLICY-LOSSES> 150,297
<UNEARNED-PREMIUMS> 68,529
<POLICY-OTHER> 21,080
<POLICY-HOLDER-FUNDS> 118,007
<NOTES-PAYABLE> 1,277
0
0
<COMMON> 53
<OTHER-SE> 6,071
<TOTAL-LIABILITY-AND-EQUITY> 362,104
109,191
<INVESTMENT-INCOME> 13,529
<INVESTMENT-GAINS> 5,649
<OTHER-INCOME> 719
<BENEFITS> 76,421
<UNDERWRITING-AMORTIZATION> 31,961
<UNDERWRITING-OTHER> 0
<INCOME-PRETAX> 20,452
<INCOME-TAX> 6,858
<INCOME-CONTINUING> 13,594
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 13,594
<EPS-PRIMARY> 2.59
<EPS-DILUTED> 2.58
<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>
