UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10Q/A
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE
SECURITIES EXCHANGE ACT OF 1934
For the Quarterly Period Ended June 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
August 13, 1998 is 5,253,813.
<PAGE>
FARM FAMILY HOLDINGS, INC.
INDEX
Part I. Financial Information
Item 1. Financial Statements of Farm Family Holdings, Inc. (unaudited)
Consolidated Balance Sheets
June 30, 1998 and December 31, 1997
Consolidated Statements of Income and Comprehensive Income
Three months ended June 30, 1998 and 1997 and the six
months ended June 30, 1998 and 1997
Consolidated Statements of Cash Flow
Six months ended June 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 4. Submission of Matters to a Vote of Security Holders
Item 5. Other Information
Item 6. Exhibits and Reports on Form 8-K
<PAGE>
<TABLE>
FARM FAMILY HOLDINGS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
($ in thousands)
(Unaudited)
June 30, 1998* December 31, 1997*
- ------------------------------------------------------------------------------------------------------------------
Assets
Investments:
Fixed Maturities
<S> <C> <C>
Available for sale, at fair value
(Amortized cost: $259,404 in 1998 and $248,984 in 1997 ) $269,825 $259,199
Held to maturity, at amortized cost
(Fair value: $8,949 in 1998 and $9,194 in 1997) 8,471 8,855
Equity securities
Available for sale, at fair value
(Cost: $3,363 in 1998 and 1997) 4,841 4,521
Mortgage loans 728 1,660
Other invested assets 458 553
Short-term investments 8,172 5,643
- ------------------------------------------------------------------------------------------------------------------
Total investments 292,495 280,431
- ------------------------------------------------------------------------------------------------------------------
Cash 5,523 5,841
Insurance receivables:
Reinsurance receivables 17,513 12,343
Premiums receivable, net 33,472 28,141
Deferred acquisition costs 13,437 12,613
Accrued investment income 5,351 5,408
Deferred income tax asset, net 4,992 4,422
Prepaid reinsurance premiums 505 2,044
Receivable from affiliates, net 17,690 17,786
Other assets 3,404 2,202
- ------------------------------------------------------------------------------------------------------------------
Total Assets $394,382 $371,231
- ------------------------------------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------------------------------
LIABILITIES aND STOCKHOLDERS' EQUITY
Liabilities:
Reserves for losses and loss adjustment expenses $168,411 $156,622
Unearned premium reserve 72,650 66,069
Reinsurance premiums payable 2,122 2,564
Accrued expenses and other liabilities 21,892 21,474
Debt - 1,268
- ------------------------------------------------------------------------------------------------------------------
Total liabilities 265,075 247,997
- ------------------------------------------------------------------------------------------------------------------
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 28,616 22,883
Accumulated other comprehensive income 7,732 7,392
- ------------------------------------------------------------------------------------------------------------------
Total stockholders' equity 129,307 123,234
- ------------------------------------------------------------------------------------------------------------------
Total Liabilities and Stockholders' Equity $394,382 $371,231
- ------------------------------------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------------------------------
See accompanying notes to Consolidated Financial Statements.
*Amounts have been restated for certain items as more fully
described in Note 2-Prior Period Adjustments.
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
FARM FAMILY HOLDINGS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME AND COMPREHENSIVE INCOME
($ in thousands, except per share data)
(Unaudited) (Unaudited)
Three Months Ended Six Months Ended
June 30, June 30,
1998* 1997* 1998* 1997*
- ------------------------------------------------------------------------------------------------------------------------------------
Revenues:
<S> <C> <C> <C> <C>
Premiums $44,929 $35,761 $87,744 $70,734
Net investment income 4,751 4,510 9,518 8,926
Realized investment gains, net 216 5,551 342 5,461
Other income 264 265 483 485
- ------------------------------------------------------------------------------------------------------------------------------------
Total revenues 50,160 46,087 98,087 85,606
- ------------------------------------------------------------------------------------------------------------------------------------
Losses and Expenses:
Losses and loss adjustment expenses 33,988 25,023 66,127 49,720
Underwriting expenses 12,117 10,486 23,591 20,976
Interest expense - 26 25 52
Dividends to policyholders 5 74 55 112
- ------------------------------------------------------------------------------------------------------------------------------------
Total losses and expenses 46,110 35,609 89,798 70,860
- ------------------------------------------------------------------------------------------------------------------------------------
Income before federal income tax expense 4,050 10,478 8,289 14,746
Federal income tax expense 1,339 3,506 2,556 4,980
- ------------------------------------------------------------------------------------------------------------------------------------
Net income 2,711 6,972 5,733 9,766
- ------------------------------------------------------------------------------------------------------------------------------------
Other comprehensive income, net of tax:
Unrealized holding gain (loss) arising during the period
(net of deferred tax of ($236), ($1,600), ($290) and $32 438 2,972 538 (59)
respectively)
Reclassification adjustment for gains (losses) included in net income
(net of tax expense (benefit) of $35, $1,800, $107 and $1,781 (65) (3,343) (198) (3,307)
respectively)
- ------------------------------------------------------------------------------------------------------------------------------------
Other comprehensive income 373 (371) 340 (3,366)
- ------------------------------------------------------------------------------------------------------------------------------------
Comprehensive income $3,084 $6,601 $6,073 $6,400
- ------------------------------------------------------------------------------------------------------------------------------------
Per Common Share:
Basic earnings per common share $ 0.52 $1.33 $1.09 $1.86
- ------------------------------------------------------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------------------------------------------------
Diluted earnings per common share $ 0.51 $1.33 $1.08 $1.86
- ------------------------------------------------------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------------------------------------------------
Basic weighted average shares outstanding 5,253,813 5,253,813 5,253,813 5,253,813
- ------------------------------------------------------------------------------------------------------------------------------------
Diluted weighted average shares outstanding 5,313,386 5,253,813 5,307,442 5,253,813
- ------------------------------------------------------------------------------------------------------------------------------------
See accompanying notes to Consolidated Financial Statements.
*Amounts have been restated for certain items as more fully described in Note
2-Prior Period Adjustments.
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
FARM FAMILY HOLDINGS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
($ in thousands)
(Unaudited)
For the Six Months
Ended June 30,
1998* 1997*
- -------------------------------------------------------------------------------------------------------------------------
Cash Flows From Operating Activities
<S> <C> <C>
Net income $5,733 $9,766
- -------------------------------------------------------------------------------------------------------------------------
Adjustments to reconcile net income
to net cash provided by operating activities:
Realized investment gains (342) (5,461)
Amortization of bond discount 145 95
Deferred income taxes (753) (776)
Changes in:
Reinsurance receivables (5,170) (860)
Premiums receivable (5,331) (7,527)
Deferred acquisition costs (824) (1,192)
Accrued investment income 57 (391)
Prepaid reinsurance premiums 1,539 (417)
Receivable from affiliates 96 205
Other assets (1,202) (512)
Reserves for losses and loss adjustment expenses 11,789 5,019
Unearned premium reserve 6,581 9,364
Reinsurance premiums payable (442) 1,557
Accrued expenses and other liabilities 417 3,150
- -------------------------------------------------------------------------------------------------------------------------
Total adjustments 6,560 2,254
- -------------------------------------------------------------------------------------------------------------------------
- -------------------------------------------------------------------------------------------------------------------------
Net cash provided by operating activities 12,293 12,020
- -------------------------------------------------------------------------------------------------------------------------
Cash flows from investing activities
Proceeds from sales:
Fixed maturities available for sale 408 3,514
Equity securities - 5,954
Investment collections:
Fixed maturities available for sale 22,925 7,334
Fixed maturities held to maturity 367 569
Mortgage loans 932 41
Investment purchases:
Fixed maturities available for sale (33,541) (26,880)
Equity securities - (1,038)
Change in short-term investments, net (2,529) (121)
Change in other invested assets 95 (62)
- -------------------------------------------------------------------------------------------------------------------------
Net cash used in investing activities (11,343) (10,689)
- -------------------------------------------------------------------------------------------------------------------------
Cash Flows From Financing Activities
Principal payments on debt (1,268) (19)
- -------------------------------------------------------------------------------------------------------------------------
- -------------------------------------------------------------------------------------------------------------------------
Net cash used in financing activities (1,268) (19)
- -------------------------------------------------------------------------------------------------------------------------
Net decrease in cash (318) 1,312
Cash, beginning of period 5,841 4,110
- -------------------------------------------------------------------------------------------------------------------------
Cash, end of period $5,523 $5,422
- -------------------------------------------------------------------------------------------------------------------------
- -------------------------------------------------------------------------------------------------------------------------
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>
<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 June 30, 1998, and the consolidated
results of operations for the three months and the six months ended June
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. 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.
<PAGE>
The Company has restated certain amounts within its consolidated financial
statements as of June 30, 1998 and December 31, 1997 and for the three
months and the six months ended June 30, 1998 and 1997. The following table
presents the restated and previously reported amounts:
<TABLE>
(Dollars in thousands, except per share data)
<CAPTION>
June 30, 1998 December 31, 1997
Previously Previously
Reported Restated Reported Restated
Balance Sheet:
<S> <C> <C> <C> <C>
Deferred income tax asset, net $1,881 $4,992 $1,469 $4,422
Total assets 391,271 394,382 368,278 371,231
Accrued expenses and other liabilities 11,735 21,892 11,828 21,474
Total liabilities 254,918 265,075 238,351 247,997
Stockholders' equity 136,353 129,307 129,927 123,234
Total liabilities and stockholders' equity 391,271 394,382 368,278 371,231
</TABLE>
<TABLE>
<CAPTION>
For the three months ended June 30, For the six months ended June 30,
1998 1997 1998 1997
----- ----- ----- ----
Previously Previously Previously Previously
Reported Restated Reported Restated Reported Restated Reported Restated
Statements of Income:
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Underwriting expenses $11,868 $12,117 $10,107 $10,486 $23,081 $23,591 $20,197 $20,976
Federal income tax expense 1,421 1,339 3,637 3,506 2,713 2,556 5,249 4,980
Net income 2,878 2,711 7,220 6,972 6,086 5,733 10,276 9,766
Per share data:
Net income-Basic $0.55 $0.52 $1.37 $1.33 $1.16 $1.09 $1.96 $1.86
Net income-Diluted $0.54 $0.51 $1.37 $1.33 $1.15 $1.08 $1.96 $1.86
</TABLE>
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 Six months
ended June 30, ended June 30,
1998 1997 1998 1997
---- ---- ---- ----
<S> <C> <C> <C> <C>
Net income available to common stockholders $2,711,000 $6,972,000 $5,733,000 $9,766,000
--------------------------------------------------------
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 59,573 --- 53,629 ---
--------------------------------------------------------
Weighted average number of shares in diluted earnings per share 5,313,386 5,253,813 5,307,442 5,253,813
--------------------------------------------------------
Basic net income per share $0.52 $1.33 $1.09 $1.86
--------------------------------------------------------
Diluted net income per share $0.51 $1.33 $1.08 $1.86
--------------------------------------------------------
</TABLE>
<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." This statement, which is effective 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 its consolidated financial
condition.
Catastrophes are an inherent risk in the property and casualty insurance
industry and could produce significant adverse fluctuations in the
Company's results of operations and financial condition. The Company is
subject to a concentration of risk within the Northeastern United States.
For the six months ended June 30, 1998 and 1997, approximately 62% 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 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
described in note 2 - Prior Period Adjustments, 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.
During the third quarter of 1998, the Company intends to modify 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. When the Company's
modified agreements with its agents become effective, which the Company
expects to be during the third or fourth quarter of 1998, approximately
$6,319,000 of the Company's Statement 112 liability will be extinguished
and the Company expects to record a net gain on this extinguishment of
approximately $4,171,000 ($6,319,000 less taxes of $2,148,000). The Company
is primary liable for its remaining Statement 112 liability which will be
approximately $3,838,000 and represents the aggregate amount owed by the
Company to eligible former agents that 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 upon which the Company relies were created using
only two digits to identify a year in the date field. These programs were
designed and developed without considering the impact of the upcoming
change in the century. If not corrected, many of these computer
applications could fail or produce erroneous results by or at the beginning
of the year 2000. 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 dedicated Year 2000
team to lead the Company's activities relating to its Year 2000 issues. The
Company's current state of readiness with respect to each of these elements
is discussed below.
All IT systems that the Company considers to be critical at this time have
been evaluated for Year 2000 problems. Management of the Company believes
that these systems will have been diagnosed, modified and tested by the end
of 1998. 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
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, copiers, fax machines, 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 uses a variety of third party providers in the normal course of
conducting its day to day operations. Year 2000 problems may result in a
loss of service from these providers. The Company believes loss of electric
power, 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 to
determine if the provider is Year 2000 compliant. If a provider is not
currently Year 2000 compliant, and its plans to become Year 2000 compliant
are uncertain, then the Company intends to seek other providers.
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
six months ended June 30, 1998, and are not expected to have a material
impact in the remainder of 1998 or 1999.
The work of finding, correcting and testing the Company's software for Year
2000 issues has been done primarily by the Company's existing IT staff.
Correction of Year 2000 issues is a high priority project and other 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 financial condition or results of operations in 1997 or during
the six months ended June 30, 1998. The Company's IT staff has continued to
work on other high priority projects concurrent with the Year 2000 project.
The Company believes that its most reasonably likely worst case Year 2000
scenario will include these elements: (1) one or more of the Company's
third party providers will be unable to provide the services expected, and
(2) one or more parts of the Company's processing software will operate
incorrectly. 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.
Because of the progress which has been made toward achieving Year 2000
compliance, the Company has not made specific contingency plans. If adverse
development of the Company's plans or knowledge of outside providers'
non-compliance becomes evident, the Company will develop and implement
contingency plans as required. 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 software, or that Year 2000 related failures by
third parties with which the Company interacts, will not have a material
adverse effect on the Company.
<PAGE>
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
proposed acquisition of Farm Family Life is subject to the approval of the
shareholders of Farm Family Holdings and receipt of all required
governmental approvals. Management expects that the acquisition of Farm
Family Life will be brought to the shareholders of Farm Family Holdings for
their approval in 1998.
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 June 30,
1998, as if the acquisition had occurred as of June 30, 1998. The pro forma
consolidated statements of income combines the operations of the Company
and Farm Family Life for the six months ended June 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 (see Note 1).
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.
<PAGE>
<TABLE>
Farm Family Holdings, Inc.
Unaudited Pro Forma Consolidated Balance Sheet
June 30, 1998
($ in thousands)
<CAPTION>
Pro Forma
Farm Family Farm Family Adjustments
Holdings Life Dr. Cr. Pro Forma
ASSETS
Investments
Fixed maturities
<CAPTION>
<S> <C> <C> <C> <C> <C>
Available for sale $269,825 $707,719 $ $ $977,544
Held to maturity, at amortized cost 8,471 8,471
Equity securities 4,841 41,121 45,962
Mortgage loans 728 13,259 13,987
Policy loans 29,842 29,842
Other invested assets 458 624 1,082
Short-term investments 8,172 5,082 13,254
-----------------------------------------------------------------------------
Total investments 292,495 797,647 1,090,142
-----------------------------------------------------------------------------
Cash 5,523 525 6,048
Insurance receivables:
Reinsurance receivables 17,513 810 18,323
Premiums receivable 33,472 (D) 102 33,370
Deferred acquisition costs 13,437 28,375 (B) 28,375 13,437
Present value of future profits (B)18,229 18,229
Accrued investment income 5,351 13,491 18,842
Property and equipment, net 12,262 (B) 4,281 16,543
Deferred income tax asset, net 4,992 4,992
Prepaid reinsurance premiums 505 505
Receivable from affiliates, net 17,690 (D) 17,690 0
Other assets 3,404 2,189 (E) 247 (A) 1,400 4,440
-----------------------------------------------------------------------------
Total Assets $394,382 $855,299 $22,757 $47,567 $1,224,871
-----------------------------------------------------------------------------
LIABILITIES AND STOCKHOLDERS' EQUITY
Liabilities:
Reserves for losses and loss adjustment expenses $168,411 $ $ $ $168,411
Future policy and contract benefits 215,978 215,978
Funds on deposit from policyholders 420,579 (B) 2,209 418,370
Unearned premium reserve 72,650 72,650
Accrued dividends to policyholders 5,683 5,683
Reinsurance premiums payable 2,122 2,122
Deferred income tax liability 36,755 (B) 1,276 35,479
Payable to affiliate 17,792 (D) 17,792 0
Accrued expenses and other liabilities 21,892 4,234 (B)(E) 347 26,473
Debt
Participating policyholders' interest 113,858 113,858
-----------------------------------------------------------------------------
Total liabilities 265,075 814,879 21,277 347 1,059,024
-----------------------------------------------------------------------------
Commitments and contingencies
Mandatory redeemable preferred stock (A) 5,846 5,846
Stockholders' equity:
Common stock 53 3,001 (C) 3,001 (A) 8 61
Additional Paid in Capital 92,906 (A) 30,686 123,592
Retained earnings 28,616 35,585 (C) 35,585 28,616
Accumulated other comprehensive income 7,732 1,834 (C) 1,834 7,732
-----------------------------------------------------------------------------
Total stockholders' equity 129,307 40,420 40,420 30,694 160,001
-----------------------------------------------------------------------------
Total Liabilities and Stockholders' Equity $394,382 $855,299 $61,697 $36,887 $1,224,871
-----------------------------------------------------------------------------
See accompanying notes to unaudited pro forma consolidated balance sheet.
</TABLE>
<PAGE>
Farm Family Holdings, Inc.
Notes to Unaudited Pro Forma Consolidated Balance Sheet
June 30, 1998
($ 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 (772,166 shares issued,
$.01 par value) in the acquisition assuming an average
closing price of $39 3/4 if the closing had occurred on
August 10, 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. (8)
Paid in capital (30,686)
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 $4,281
Elimination of historical deferred acquisition costs (28,375)
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 $2.1 million is expected to be
amortized during each 18,229 of the years ended December 31,
1998, 1998, 2000, 2001 and 2002. 18,229
<PAGE>
Farm Family Holdings, Inc.
Notes to Unaudited Pro Forma Consolidated Balance Sheet
June 30, 1998
($ in thousands)
Liabilities
Adjustment to reflect the net deferred tax benefit of
purchase accounting adjustments using a statutory rate of
34% 1,276
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. 2,209
(C) Adjustment to eliminate Farm Family Life's stockholder's
equity
(D) Adjustment to eliminate intercompany balances
(E) Adjustment to accrue additional expenses relating to the
acquisition expected to be incurred 247
<PAGE>
<TABLE>
Farm Family Holdings, Inc.
Unaudited Pro Forma Consolidated Statement of Income
For the six months ended June 30, 1998
($ in thousands, except per share data)
<CAPTION>
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 $87,744 $3 $ $ $87,747
Premiums from life and health operations 15,531 15,531
Net investment income 9,518 27,798 37,316
Realized investment gains (losses), net 342 1,707 2,049
Policy and contract charges 2,406 2,406
Other income 483 493 (c) 434 542
------------------------------------------------------------------------
Total revenues 98,087 47,938 434 145,591
------------------------------------------------------------------------
Losses, Benefits and Expenses:
Losses and loss adjustment expenses 66,127 900 67,027
Benefits to policyholders 13,292 13,292
Underwriting & operating expenses 23,591 4,070 (a) 72 (c) 434 27,299
Non-recurring charges 176 176
Interest credited to policyholders 11,312 11,312
Amortization of policy acquisition costs 3,583 (a) 3,583 0
Amortization of present value of future profits (a) 899 899
Interest expense 25 25
Dividends to policyholders 55 55
Participating policyholders' interest 12,261 (a) 3,168 (a) 773 14,656
------------------------------------------------------------------------
Total losses and expenses 89,798 45,594 4,139 4,790 134,741
------------------------------------------------------------------------
Income before federal income tax expense 8,289 2,344 4,573 4,790 10,850
Federal income tax expense 2,556 786 (b) 73 3,415
------------------------------------------------------------------------
Net Income before preferred stock dividends 5,733 1,558 4,646 4,790 7,435
Preferred stock dividends (a) 184 184
------------------------------------------------------------------------
Net Income applicable to common shareholders $5,733 $1,558 $4,830 $4,790 $7,251
------------------------------------------------------------------------
Net Income per Common Share - Basic $1.09 $1.20
-------------- --------------
Net Income per Common Share - Diluted $1.08 $1.19
-------------- --------------
Weighted average shares - Basic 5,253,813 (d) 772,166 6,025,979
-------------- --------------
Weighted average shares - Diluted 5,307,442 (d) 772,166 6,079,608
-------------- --------------
See accompanying notes to unaudited pro forma consolidated statements of
income.
</TABLE>
<PAGE>
Farm Family Holdings, Inc.
Notes to Unaudited Pro Forma Consolidated Statements of Income
For the six months ended June 30, 1998
($ 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. $72
Adjustment to reverse amortization of deferred acquisition
costs (3,583)
Participating policyholders' share of amortization of
deferred acquisition costs 3,168
Adjustment to record amortization of present value of future
profits 899
Participating policyholders' share of amortization of
present value of future profits (773)
Series A Preferred stock dividends on estimated fair value
of $5,846 of preferred stock at a rate of 6 1/8% per annum
184
(b) Adjustment to reflect the federal income tax effect of item
(a) above using statutory rate of 34% 73
(c) Adjustment to eliminate intercompany balances 434
(d) Adjustment to reflect estimated additional shares of common
stock issued in the acquisition assuming an average closing
price of $39 3/4 if the closing had occurred on August 10,
1998. The actual average closing price and the actual number
of shares of common stock that will be issued to the selling
stockholders may vary significantly from these amounts.
772,166
<PAGE>
<TABLE>
<CAPTION>
Farm Family Holdings, Inc.
Unaudited Pro Forma Consolidated Statement of Income
For the year ended December 31, 1997
($ 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 7,747 (a) 158 (c) 808 50,417
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 21,616 (a) 5,994 (a) 1,929 25,681
------------------------------------------------------------------------
Total losses and expenses 147,005 98,553 8,385 9,589 244,354
------------------------------------------------------------------------
Income before federal income tax expense 26,718 5,044 9,193 9,589 32,158
Federal income tax expense 9,218 1,704 (b) 135 11,057
------------------------------------------------------------------------
Net Income before preferred stock dividends 17,500 3,340 9,328 9,589 21,101
Series A Preferred stock dividends (a) 359 359
------------------------------------------------------------------------
Net Income applicable to common shareholders $17,500 $3,340 $9,687 $9,589 $20,742
------------------------------------------------------------------------
Net Income per Common Share - Basic $3.33 $3.44
--------------- --------------
Net Income per Common Share - Diluted $3.32 $3.43
--------------- --------------
Weighted average shares - Basic 5,253,813 (d) 773,434 6,027,247
--------------- --------------
Weighted average shares - Diluted 5,270,947 (d) 773,434 6,044,381
--------------- --------------
</TABLE>
<PAGE>
Farm Family Holdings, Inc.
Notes to Unaudited Pro Forma Consolidated Statements of Income
For the year ended December 31, 1997
($ 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 359
(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 $39 3/4 if the closing had occurred on August 10,
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. 773,434
<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 six month periods ended June 30, 1998 and 1997, 34.2% and 36.5%,
respectively, of the Company's direct written premiums were derived from
policies written in New York and, for the same periods, 27.8% and 25.2%,
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.
Many computer programs upon which the Company relies were created using only two
digits to identify a year in the date field. These programs were designed and
developed without considering the impact of the upcoming change in the century.
If not corrected, many of these computer applications could fail or produce
erroneous results by or at the beginning of the year 2000. 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 dedicated Year 2000 team to lead the Company's activities relating to its Year
2000 issues. See Note 5 to the accompanying consolidated financial statements
for further discussion on Year 2000.
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.
<PAGE>
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 adoption of the
guidance provided in Statement 112 and estimates of the potential impact of the
restatement of the Company's financial statements, 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 finalization of the Company's
calculation of its liability pursuant to Statement 112 and the resulting impact
thereof on the Company's financial statements, 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 government 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
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 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 June 30, 1998 Compared to the Three Months Ended June 30,
1997
Premiums
- --------
Premium revenue increased $9.2 million or 25.6%, during the three months ended
June 30, 1998 to $44.9 million from $35.8 million for the same period in 1997.
The increase in premium revenue in 1998 resulted from an increase of $5.5
million in earned premiums on additional business directly written by the
Company, an increase of $2.3 million in earned premiums from assumed reinsurance
business and a decrease of $1.4 million in earned premiums ceded to reinsurers
and not retained by the Company. The $5.5 million increase in earned premiums on
additional business directly written by the Company was primarily attributable
to an increase of $4.9 million, or 14.8%, 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 $0.6 million in earned premiums from the Company's workers' compensation
business. As of June 30, 1998, the Company had a total of approximately 161,500
policies in force. The number of policies in force related to the Company's
primary products increased by 11.3% to approximately 133,600 as of June 30, 1998
from approximately 120,000 as of June 30, 1997 and the average premium earned
for each such policy increased by 3.5% during the three months ended June 30,
1998 compared to the same period in 1997. Net written premiums increased 13.1%
to $48.6 million for the three months ended June 30, 1998 compared to $43.0
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 second quarter of 1998. During the
three months ended June 30, 1998, premiums from the Company's direct writings
(excluding assigned risk automobile business premiums received by the Company)
increased $5.5 million compared to the same period in 1997. Direct writings in
New Jersey accounted for $2.2 million ($1.7 million of which represents
increased personal automobile business) of the Company's $5.5 million increase
in direct writings during the three months ended June 30, 1998 compared to the
same period in 1997.
Net Investment Income
- ---------------------
Net investment income increased $0.3 million or 5.3% to $4.8 million for the
three months ended June 30, 1998 from $4.5 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 $37.7
million, or 15.2% from June 30, 1998 compared to June 30, 1997. The return
realized on the Company's cash and investments was 6.7% for the three months
ended June 30, 1998 and 7.3% for the same period in 1997. The reduction in the
return realized on the Company's cash and invested assets is primarily
attributable to an increase in investment in tax-exempt bonds which provide for
a greater after tax return. The taxable equivalent yield on the Company's
investment portfolio was 7.1% and 7.5% for the three months ended June 30, 1998
and 1997, respectively.
Realized Investment Gains
- -------------------------
Realized investment gains decreased $5.3 million to $0.3 million for the three
months ended June 30, 1998 as compared to $5.6 million for the same period in
1997. Realized investment gains in the second quarter of 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 $9.0 million, or 35.8%, to $34.0
million for the three months ended June 30, 1998 from $25.0 million for the same
period in 1997. Loss and loss adjustment expenses were 75.6% of premium revenue
for the three months ended June 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 second quarter of 1998. Losses believed to be
weather related incurred on the Company's direct written business in the
northeast aggregated $2.7 million in the three months ended June 30, 1998
compared to $1.1 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.
Underwriting Expenses
- ---------------------
Underwriting expenses increased $1.6 million, or 15.6%, to $12.1 million for the
three months ended June 30, 1998 from $10.5 million for the same period in 1997.
For the three months ended June 30, 1998, underwriting expenses were 27.0% 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.
<PAGE>
Federal Income Tax Expense
- --------------------------
Federal income tax expense decreased $2.2 million to $1.3 million in 1998 from
$3.5 million in 1997. Federal income tax expense was 33.1% of income before
federal income tax expense for the three months ended June 30, 1998 compared to
33.5% for the same period in 1997.
Net Income
- ----------
Net income decreased $4.3 million to $2.7 million for the three months ended
June 30, 1998 from $7.0 million for the same period in 1997 primarily as a
result of the foregoing factors.
The Six Months Ended June 30, 1998 Compared to the Six Months Ended June 30,
1997
Premiums
- --------
Premium revenue increased $17.0 million or 24.0%, during the six months ended
June 30, 1998 to $87.7 million from $70.7 million for the same period in 1997.
The increase in premium revenue in 1998 resulted from an increase of $11.4
million in earned premiums on additional business directly written by the
Company, an increase of $2.4 million in earned premiums from assumed reinsurance
business and a decrease of $3.2 million in earned premiums ceded to reinsurers
and not retained by the Company. The $11.4 million increase in earned premiums
on additional business directly written by the Company was primarily
attributable to an increase of $9.7 million, or 15.2%, 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 $1.3 million in earned premiums from the Company's workers'
compensation business and an increase of $0.4 million in earned premiums from
the Company's other products. As of June 30, 1998, the Company had a total of
approximately 161,500 policies in force. The number of policies in force related
to the Company's primary products increased by 11.3% to approximately 133,600 as
of June 30, 1998 from approximately 120,000 as of June 30, 1997 and the average
premium earned for each such policy increased by 3.5% during the six months
ended June 30, 1998 compared to the same period in 1997. Net written premiums
increased 20.4% to $96.0 million for the six months ended June 30, 1998 compared
to $79.7 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 six months
ended June 30, 1998. During the six months ended June 30, 1998, premiums from
the Company's direct writings (excluding assigned risk automobile business
premiums received by the Company) increased $11.5 million compared to the same
period in 1997. Direct writings in New Jersey accounted for $5.3 million ($4.0
million of which represents increased personal automobile business) of the
Company's $5.5 million increase in direct writings during the six months ended
June 30, 1998 compared to the same period in 1997.
Net Investment Income
- ---------------------
Net investment income increased $0.6 million or 6.6% to $9.5 million for the six
months ended June 30, 1998 from $8.9 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 $37.7
million, or 15.2% from June 30, 1998 compared to June 30, 1997. The return
realized on the Company's cash and investments was 6.8% for the six months ended
June 30, 1998 and 7.4% for the same period in 1997. The reduction in the return
realized on the Company's cash and invested assets is primarily attributable to
an increase in investment in tax-exempt bonds which provide for a larger after
tax return. The taxable equivalent yield on the Company's investment portfolio
was 7.1% and 7.4% for the six months ended June 30, 1998 and 1997.
<PAGE>
Realized Investment Gains
- -------------------------
Realized investment gains decreased $5.2 million to $0.3 million for the six
months ended June 30, 1998 as compared to $5.5 million for the same period in
1997. Realized investment gains in the six months ended June 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 $16.4 million, or 33.0%, to $66.1
million for the six months ended June 30, 1998 from $49.7 million for the same
period in 1997. Loss and loss adjustment expenses were 75.4% of premium revenue
for the six months ended June 30, 1998 compared to 70.3% 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 six months ended June 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 $6.8 million in the six
months ended June 30, 1998 compared to $3.2 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.
Underwriting Expenses
- ---------------------
Underwriting expenses increased $2.6 million, or 12.5%, to $23.6 million for the
six months ended June 30, 1998 from $21.0 million for the same period in 1997.
For the six months ended June 30, 1998, underwriting expenses were 26.9% of
premium revenue compared to 29.7% 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.
Federal Income Tax Expense
- --------------------------
Federal income tax expense decreased $2.4 million to $2.6 million in 1998 from
$5.0 million in 1997. Federal income tax expense was 30.8% of income before
federal income tax expense for the six months ended June 30, 1998 compared to
33.8% 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
six months ended June 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 decreased $4.1 million to $5.7 million for the six months
ended June 30, 1998 from $9.8 million for the same period in 1997 primarily as a
result of the foregoing factors.
Liquidity and Capital Resources
Net cash provided by operating activities was $12.3 million and $12.0 million
during the six month periods ended June 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 which was
partially offset by an increase in reinsurance receivables, as well as a
decrease in reserves for unearned premiums.
Net cash used in investing activities was $11.3 million during the six months
ending June 30, 1998 compared to $10.7 million for the same period in 1997
primarily as a result of an increase in investment collections from fixed
maturities, which was partially offset by an increase in investment purchases,
as well as an increase in short-term investments 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 June 30, 1998, no amounts were outstanding on
the lines of credit, each of which has an annual interest rate equal to such
bank's 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.
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." This statement, which is effective 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.
Item 4. Submission of Matters to a Vote of Security Holders.
Farm Family Holdings' annual meeting of Stockholders was held on April 28, 1998.
At the meeting, (i) eight persons were elected as directors of Farm Family
Holdings, and (ii) the appointment of Coopers & Lybrand L.L.P. as Farm Family
Holdings' independent auditors for the year 1998 was ratified. The number of
votes cast for, against or withheld, and the number of abstentions with respect
to each such matter is set forth below.
<TABLE>
<CAPTION>
For Against/Withheld Abstained
Election of Directors:
Nominee
<S> <C> <C> <C>
Wayne R. Bissonette 3,684,702 15,378
Joseph E. Calhoun 3,685,460 14,620
Gordon H. Gowen 3,684,297 15,783
Jon R. Greenwood 3,685,817 14,263
Frank W. Matheson 3,685,426 14,654
John P. Moskos 3,682,676 17,404
Norma R. O'Leary 3,685,921 14,159
John I. Rigolizzo, Jr. 3,684,711 15,369
Ratification of Auditors: 3,666,725 4,267 29,088
</TABLE>
<PAGE>
Item 5. Other information
Rule 14a-4 of the Securities and Exchange Commission's proxy rules allows the
Company to use discretionary voting authority to vote on matters coming before
an annual meeting of stockholders, if the Company does not have notice of the
matter at least 45 days before the date corresponding to the date on which the
Company first mailed its proxy materials for the prior year's annual meeting of
stockholders or the date specified by an overriding advance notice provision in
the Company's by-laws. The Company's by-laws contain such an advance notice
provision.
The Company's by-laws provide, in general, that a proposal for action to be
presented by a stockholder at an annual meeting shall be out of order unless the
proposal is specified in the notice of meeting given by or at the direction of
the Board of Directors or unless the proposal shall have been submitted in
writing (in the form specified in the by-laws) to the Secretary of the Company
and received at the principal executive offices of the Company not less than 60
days nor more than 90 days prior to the anniversary date of the immediately
preceding annual meeting. In addition to any other applicable requirements, the
Company's by-laws also provide, in general, that if a stockholder intends to
make a nomination for the election of directors at an annual meeting, the
Secretary of the Company must receive written notice (in the form specified in
the by-laws) of such intention not less than 60 days nor more than 90 days prior
to the anniversary date of the immediately preceding annual meeting. For the
Company's Annual Meeting of Stockholders expected to be held on April 27, 1999,
stockholders must submit such written notice to the Secretary of the Company not
earlier than January 28, 1999 or later than February 27, 1999.
The foregoing is only a summary of the detailed provisions of the by-laws and is
qualified by reference to the text thereof. Stockholders wishing to submit a
proposal should review the by-law requirements regarding proposals by
stockholders and should communicate with the Secretary of Farm Family Holdings,
Inc., P.O. Box 656, Albany, New York, 12201-0656, if sent by mail, or 344 Route
9W, Glenmont, New York 12077, if by hand, express mail or overnight courier, for
further information.
This requirement is separate and apart from the Securities and Exchange
Commission's requirements that a stockholder must meet in order to have a
stockholder proposal included in the Company's proxy statement under Rule 14a-8.
For the Company's Annual Meeting of Stockholders expected to be held on April
27, 1999, any stockholder who wishes to submit a proposal for inclusion in the
Company's proxy materials pursuant to Rule 14a-8 must submit such proposal to
the Secretary of the Company on or before November 20, 1998.
<PAGE>
Item 6: Exhibits and Reports on Form 8-K
EXHIBIT INDEX
FARM FAMILY HOLDINGS, INC. FORM 10-Q
FOR THE QUARTER ENDED JUNE 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 Amendment No.1 to Amended and Restated Option Purchase Agreement dated as
of April 28, 1998 (incorporated by reference to Exhibit 10.1 to the
Company's Current Report on Form 8-K filed with the Securities and Exchange
Commission on April 29, 1998)
*Incorporated by reference to Registration Statement No. 333-4446
Reports on Form 8-K
- -------------------
A report on Form 8-K was filed on April 6, 1998 reporting a press
release issued announcing that its wholly owned subsidiary, Farm Family Casualty
Insurance Company, exercised its right to redeem all outstanding debt as of
April 1, 1998.
A report on Form 8-K was filed on April 29, 1998 reporting a press
release issued announcing the Company's operating results for the quarter
ended March 31, 1998.
A report on Form 8-K was filed on May 5, 1998 reporting a press release
regarding the Company's decision to exercise its option to acquire Farm Family
Life Insurance Company.
A report on Form 8-K was filed on June 26, 1998 reporting a press
release announcing that it estimated catastrophic losses from tornadoes and
severe thunder storms of approximately $2.0 million pre-tax for the second
quarter of 1998.
No financial statements were filed with these Form 8-K's.
<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)
October 20, 1998 By: /s/ Philip P. Weber
- --------------- ----------------------------------------------------------------
(Date) Philip P. Weber, President & Chief Executive Officer
Principal Executive Officer)
October 20, 1998 By: /s/ Timothy A. Walsh
- --------------- ----------------------------------------------------------------
(Date) Timothy A. Walsh, Executive Vice President - Finance & Treasurer
(Principal Financial & Accounting Officer)
<TABLE> <S> <C>
<ARTICLE> 7
<CIK> 0001013564
<NAME> Farm Family Holdings, Inc.
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> JUN-30-1998
<DEBT-HELD-FOR-SALE> 269,825
<DEBT-CARRYING-VALUE> 8,471
<DEBT-MARKET-VALUE> 8,949
<EQUITIES> 4,841
<MORTGAGE> 728
<REAL-ESTATE> 0
<TOTAL-INVEST> 292,495
<CASH> 5,523
<RECOVER-REINSURE> 17,513
<DEFERRED-ACQUISITION> 13,437
<TOTAL-ASSETS> 394,382
<POLICY-LOSSES> 168,411
<UNEARNED-PREMIUMS> 72,650
<POLICY-OTHER> 21,892
<POLICY-HOLDER-FUNDS> 0
<NOTES-PAYABLE> 0
0
0
<COMMON> 53
<OTHER-SE> 7,732
<TOTAL-LIABILITY-AND-EQUITY> 394,382
87,744
<INVESTMENT-INCOME> 9,518
<INVESTMENT-GAINS> 342
<OTHER-INCOME> 483
<BENEFITS> 66,127
<UNDERWRITING-AMORTIZATION> 23,591
<UNDERWRITING-OTHER> 0
<INCOME-PRETAX> 8,289
<INCOME-TAX> 2,556
<INCOME-CONTINUING> 5,733
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 5,733
<EPS-PRIMARY> 1.09
<EPS-DILUTED> 1.08
<RESERVE-OPEN> 127,568
<PROVISION-CURRENT> 67,946
<PROVISION-PRIOR> (1,817)
<PAYMENTS-CURRENT> 23,964
<PAYMENTS-PRIOR> 33,238
<RESERVE-CLOSE> 136,495
<CUMULATIVE-DEFICIENCY> 0
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 7
<CIK> 0001013564
<NAME> Farm Family Holdings, INc.
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> Dec-31-1997
<PERIOD-END> JUN-30-1997
<DEBT-HELD-FOR-SALE> 234,654
<DEBT-CARRYING-VALUE> 9,197
<DEBT-MARKET-VALUE> 9,431
<EQUITIES> 3,874
<MORTGAGE> 1,704
<REAL-ESTATE> 0
<TOTAL-INVEST> 255,580
<CASH> 5,422
<RECOVER-REINSURE> 11,603
<DEFERRED-ACQUISITION> 30,190
<TOTAL-ASSETS> 347,307
<POLICY-LOSSES> 146,239
<UNEARNED-PREMIUMS> 65,309
<POLICY-OTHER> 20,824
<POLICY-HOLDER-FUNDS> 0
<NOTES-PAYABLE> 1,285
0
0
<COMMON> 53
<OTHER-SE> 3,344
<TOTAL-LIABILITY-AND-EQUITY> 347,307
70,734
<INVESTMENT-INCOME> 8,926
<INVESTMENT-GAINS> 5,461
<OTHER-INCOME> 486
<BENEFITS> 49,720
<UNDERWRITING-AMORTIZATION> 20,976
<UNDERWRITING-OTHER> 0
<INCOME-PRETAX> 14,746
<INCOME-TAX> 4,980
<INCOME-CONTINUING> 9,766
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 9,766
<EPS-PRIMARY> 1.86
<EPS-DILUTED> 1.86
<RESERVE-OPEN> 114,383
<PROVISION-CURRENT> 51,053
<PROVISION-PRIOR> (1,334)
<PAYMENTS-CURRENT> 15,974
<PAYMENTS-PRIOR> 28,108
<RESERVE-CLOSE> 120,020
<CUMULATIVE-DEFICIENCY> 0
</TABLE>
