UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 8K
CURRENT REPORT
PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
Date of Report: April 20, 1999
FARM FAMILY HOLDINGS, INC.
A Delaware Corporation Commission File No. 1-11941 IRS No. 14-1789227
344 Route 9W, Glenmont, New York 12077-2910
Registrant's telephone number: (518) 431-5000
<PAGE>
Index
-----
Item 2. Acquisition or Disposition of Assets
Item 5. Other Events
Item 7. Financial Statements and Exhibits
(a) Unaudited Consolidated Financial Statements of Farm Family
Life Insurance Company as of September 30, 1998, and for each
of the nine month periods ended September 30, 1998 and 1997
were filed with the Commission as Annex C to the Registrants
Proxy Statement dated February 17, 1999, and are incorporated
herein by reference and are being filed pursuant to General
Instruction F to Form 8-K.
The Audited Consolidated Financial Statements of Farm Family
Life Insurance Company as of December 31, 1998 and 1997, and
for each of the years ended December 31, 1998, 1997 and 1996
are being filed herewith on this Current Report on Form 8-K.
(b) Unaudited Pro Forma Consolidated Financial Statements of Farm
Family Holdings, Inc. and Subsidiaries as of September 30,
1998 and for the period ended September 30, 1998 and December
31, 1997 were filed with the Commission in the Registrants
Proxy Statement dated February 17, 1999 and are incorporated
herein by reference and are being filed pursuant to General
Instruction F to Form 8-K.
(c) Exhibits
Exhibit 99 - Press Release dated April 19, 1999
<PAGE>
ITEM 2. ACQUISITION OR DISPOSITION OF ASSETS
On April 6, 1999, Farm Family Holdings, Inc. (the "Company")
acquired all of the outstanding capital stock of Farm Family Life Insurance
Company ("Farm Family Life") pursuant to the terms of an Amended and Restated
Option Purchase Agreement, as amended (the "Option Purchase Agreement") among
the Company and the shareholders of Farm Family Life (the "Selling
Stockholders").
The Company paid an exercise price of $37.5 million to acquire
Farm Family Life and Farm Family Life's wholly owned subsidiary, United Farm
Family Insurance Company ("United Farm Family"), consisting of $31.5 million of
the Company's common stock and $6 million stated value of the Company's 6-1/8%
voting preferred stock, less certain expenses paid by Farm Family Life. Under
the terms of the Option Purchase Agreement, the price used to determine the
number of shares of common and voting preferred stock issued in the acquisition
was fixed at $35.72 per share. The Company issued 856,871 shares of common stock
and 163,214 shares of voting preferred stock to the Selling Stockholders in
payment of the exercise price.
After the acquisition, the Company's total number of common shares
outstanding increased to 6,110,684. As a result of the acquisition, Farm Family
Life became a wholly owned subsidiary of the Company.
The acquisition will be accounted for as a purchase.
Farm Family Life was established in 1953 to provide life insurance
products for Farm Bureau members principally in the Northeastern United States.
Farm Family Life principally sells individual whole life, term and universal
life products, in addition to single and flexible premium deferred annuities,
single premium immediate annuities and disability income insurance products.
Farm Family Life's wholly owned subsidiary, United Farm Family, is a stock
property and casualty insurance company formed in 1988. United Farm Family
writes direct property and casualty business in Pennsylvania and Maryland.
ITEM 5. OTHER EVENTS
On April 19, 1999, Farm Family Holdings, Inc. issued a press
release providing additional pro forma financial information regarding the
acquisition of Farm Family Life.
ITEM 7. FINANCIAL STATEMENTS AND EXHIBITS
(a) Audited Consolidated Financial Statements of Farm Family
Life Insurance Company as of December 31, 1998 and 1997, and
for each of the years ended December 31, 1998, 1997 and 1996
<PAGE>
INDEX TO HISTORICAL FINANCIAL STATEMENTS
FARM FAMILY LIFE INSURANCE COMPANY AND SUBSIDIARY
Page
----
Report of Independent Accountants...................................... F-2
Consolidated Balance Sheets at December 31, 1998 and 1997.............. F-3
Consolidated Statements of Income and Comprehensive Income
for the Years Ended December 31, 1998, 1997, and 1996............. F-4
Consolidated Statements of Stockholders' Equity for the Years
Ended December 31, 1998, 1997 and 1996............................ F-5
Consolidated Statements of Cash Flows for the Years Ended
December 31, 1998, 1997, and 1996................................. F-6
Notes to Consolidated Financial Statements............................. F-7
F-1
<PAGE>
Report of Independent Accountants
In our opinion, the accompanying consolidated balance sheets and the related
consolidated statements of income and comprehensive income, stockholders' equity
and cash flows present fairly, in all material respects, the financial position
of Farm Family Life Insurance Company and its subsidiary at December 31, 1998
and 1997, and the results of their operations and their cash flows for each of
the three years in the period ended December 31, 1998, in conformity with
generally accepted accounting principles. These financial statements are the
responsibility of the Company's management; our responsibility is to express an
opinion on these financial statements based on our audits. We conducted our
audits of these statements in accordance with generally accepted auditing
standards which require that we plan and perform the audit to obtain reasonable
assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements, assessing the
accounting principles used and significant estimates made by management, and
evaluating the overall financial statement presentation. We believe that our
audits provide a reasonable basis for the opinion expressed above.
/s/ PricewaterhouseCoopers L.L.P.
Albany, New York
March 29, 1999, except for Note 14,
as to which the date is April 6, 1999
F-2
<PAGE>
<TABLE>
FARM FAMILY LIFE INSURANCE COMPANY & SUBSIDIARY
CONSOLIDATED BALANCE SHEETS
<CAPTION>
December 31,
------------
($ in thousands) 1998 1997
- ----------------------------------------------------------------------------------------------------------------
Assets
Investments:
Fixed Maturities
Available for sale, at fair value
<S> <C> <C>
(Amortized cost: $660,465 in 1998 and $647,207 in 1997) $708,719 $693,433
Equity securities
Available for sale, at fair value
(Cost: $14,360 in 1998 and 1997) 42,295 37,636
Mortgage loans on real estate 18,558 15,151
Policy loans 30,499 28,937
Other invested assets 299 741
Short-term investments 7,344 4,864
- ----------------------------------------------------------------------------------------------------------------
Total investments 807,714 780,762
- ----------------------------------------------------------------------------------------------------------------
Cash 630 2,481
Reinsurance receivables 2,816 1,159
Deferred acquisition costs 28,641 31,046
Property and equipment, net 11,723 12,715
Accrued investment income 13,470 13,954
Other assets 2,655 1,782
- ----------------------------------------------------------------------------------------------------------------
Total Assets $867,649 $843,899
- ----------------------------------------------------------------------------------------------------------------
- ----------------------------------------------------------------------------------------------------------------
Liabilities:
Future policy and contract benefits $231,585 $211,212
Funds on deposit from policyholders 418,833 423,495
Accrued dividends to policyholders 5,089 5,268
Deferred income tax liability 37,671 33,824
Payable to affiliate (see Note 9) 16,744 17,888
Other liabilities 4,319 3,552
Participating policyholders' interest 111,454 109,557
- ----------------------------------------------------------------------------------------------------------------
Total liabilities 825,695 804,796
- ----------------------------------------------------------------------------------------------------------------
Commitments and Contingencies
Stockholders' equity:
Common Stock, $50 par value, 61,000 shares authorized
and 60,011 shares issued and outstanding 3,001 3,001
Accumulated other comprehensive income 1,850 1,595
Retained earnings 37,103 34,507
- ----------------------------------------------------------------------------------------------------------------
Total stockholders' equity 41,954 39,103
- ----------------------------------------------------------------------------------------------------------------
Total Liabilities and Stockholders' Equity $867,649 $843,899
- ----------------------------------------------------------------------------------------------------------------
- ----------------------------------------------------------------------------------------------------------------
See accompanying notes to Consolidated Financial Statements.
</TABLE>
F-3
<PAGE>
<TABLE>
FARM FAMILY LIFE INSURANCE COMPANY & SUBSIDIARY
CONSOLIDATED STATEMENTS OF INCOME AND COMPREHENSIVE INCOME
<CAPTION>
For the Year
Ended December 31,
------------------
($ in thousands) 1998 1997 1996
- --------------------------------------------------------------------------------------------------------------
Revenues:
<S> <C> <C> <C>
Premiums from life and health operations $31,054 $30,505 $30,322
Premiums from property/casualty operations 157 9,020 9,440
Net investment income 55,993 54,964 55,728
Realized investment gains, net 3,253 2,914 284
Policy and contract charges 4,840 5,041 4,960
Other income (see Note 9) 1,036 1,153 920
- --------------------------------------------------------------------------------------------------------------
Total revenues 96,333 103,597 101,654
- --------------------------------------------------------------------------------------------------------------
Benefits and expenses:
Benefits to policyholders 34,108 26,843 27,031
Losses and loss adjustment expenses
on property/casualty operations (see Note 9) 1,703 9,975 7,756
Operating expenses (see Note 9) 7,080 7,748 8,768
Non-recurring expenses 269 707 914
Interest credited to policyholders 24,487 24,813 24,629
Amortization of deferred acquisition costs 8,956 6,852 6,910
Participating policyholders' interest 15,543 21,617 21,159
- --------------------------------------------------------------------------------------------------------------
Total 92,146 98,555 97,167
- --------------------------------------------------------------------------------------------------------------
Income before income taxes 4,187 5,042 4,487
Income tax expense 1,111 1,702 1,536
- --------------------------------------------------------------------------------------------------------------
Net income attributable to common stockholders $3,076 $3,340 $2,951
- --------------------------------------------------------------------------------------------------------------
Other comprehensive income, net of tax
Unrealized holding gain arising during the year
(net of deferred tax expense (benefit) of $181, $488 and ($152), 336 906 (282)
respectively)
Reclassification adjustment for gains included in net income
(net of tax expense of $44, $33 and $16, respectively) (81) (51) (61)
- --------------------------------------------------------------------------------------------------------------
255 855 (343)
- --------------------------------------------------------------------------------------------------------------
Other Comprehensive Income $3,331 $4,195 $2,608
- --------------------------------------------------------------------------------------------------------------
- --------------------------------------------------------------------------------------------------------------
See accompanying notes to Consolidated Financial Statements.
</TABLE>
F-4
<PAGE>
<TABLE>
FARM FAMILY LIFE INSURANCE COMPANY & SUBSIDIARY
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
<CAPTION>
December 31,
------------
($ in thousands) 1998 1997 1996
- --------------------------------------------------------------------------------------------------------------
Common Stock
<S> <C> <C> <C>
Beginning of year $3,001 $3,001 $3,001
- --------------------------------------------------------------------------------------------------------------
End of year 3,001 3,001 3,001
- --------------------------------------------------------------------------------------------------------------
Accumulated other comprehensive income
Beginning of year 1,595 740 1,083
Unrealized holding gain arising during the year
(net of deferred tax expense (benefit)) 336 906 (282)
Reclassification adjustment for gains included in net income
(net of tax) (81) (51) (61)
- --------------------------------------------------------------------------------------------------------------
End of year 1,850 1,595 740
- --------------------------------------------------------------------------------------------------------------
Retained earnings
Beginning of year 34,507 31,647 29,176
Dividends to stockholders (480) (480) (480)
Net income 3,076 3,340 2,951
- --------------------------------------------------------------------------------------------------------------
End of year 37,103 34,507 31,647
- --------------------------------------------------------------------------------------------------------------
Total Stockholders' Equity $41,954 $39,103 $35,388
- --------------------------------------------------------------------------------------------------------------
- --------------------------------------------------------------------------------------------------------------
See accompanying notes to Consolidated Financial Statements.
</TABLE>
F-5
<PAGE>
<TABLE>
FARM FAMILY LIFE INSURANCE COMPANY & SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
<CAPTION>
For the year
ended December 31,
------------------
($ in thousands) 1998 1997 1996
- --------------------------------------------------------------------------------------------------------------
Operating Activities
<S> <C> <C> <C>
Net income $3,076 $3,340 $2,951
Adjustments to reconcile net income to net cash provided by
operating activities:
Amortization of discount (premium) 586 906 (234)
Interest credited to policyholders 24,487 24,813 24,629
Deferred income taxes (3,524) (4,091) (2,831)
Participating policyholders interest 15,626 21,617 21,159
Dividends to policyholders (10,051) (10,067) (9,787)
Realized investment gains, net (3,253) (2,914) (284)
Amortization of deferred acquisition costs 8,956 6,852 6,910
Capitalization of deferred acquisition costs (9,204) (9,729) (9,682)
Depreciation expense 2,673 2,686 2,556
Gain on sale of property and equipment (51) (23) (15)
Changes in:
Accrued investment income 484 (117) (861)
Reinsurance receivable (1,657) 33 (733)
Other assets (873) (662) (783)
Future policy and contract benefits 20,373 14,162 12,081
Payable to affiliate (see Note 9) (1,144) 1,755 2,275
Other liabilities 588 (1,251) 899
- --------------------------------------------------------------------------------------------------------------
Net cash provided by operating activities 47,092 47,310 48,250
- --------------------------------------------------------------------------------------------------------------
Investing Activities
Proceeds from sales:
Fixed maturities available for sale 13,470 48,913 18,184
Equity securities 1,093 5,074 1,678
Investment collections:
Fixed maturities available for sale 74,860 49,028 51,004
Mortgage loans on real estate 3,637 1,154 7,454
Equity securities - 254 -
Investment purchases:
Fixed maturities available for sale (99,874) (127,320) (104,167)
Mortgage loans on real estate (7,044) (2,386) -
Equity securities - (2,748) (4,152)
Policy loans issued, net (1,562) (96) 1,725
Sales of other invested assets, net 215 509 1,050
Sales of short-term investments, net (2,480) 5,678 271
Purchases of property and equipment (1,719) (1,511) (1,944)
Proceeds from sale of property and equipment 90 47 163
- --------------------------------------------------------------------------------------------------------------
Net cash used by investing activities (19,314) (23,404) (28,734)
- --------------------------------------------------------------------------------------------------------------
Financing Activities
Contractholder fund deposits 31,067 32,951 36,638
Contractholder fund withdrawals (60,216) (55,496) (55,242)
Dividends on common stock (480) (480) (480)
- --------------------------------------------------------------------------------------------------------------
Net cash used in financing activities (29,629) (23,025) (19,084)
- --------------------------------------------------------------------------------------------------------------
Increase (decrease) in cash (1,851) 881 432
Cash at beginning of year 2,481 1,600 1,168
- --------------------------------------------------------------------------------------------------------------
Cash at end of year $630 $2,481 $1,600
- --------------------------------------------------------------------------------------------------------------
- --------------------------------------------------------------------------------------------------------------
See accompanying notes to Consolidated Financial Statements.
</TABLE>
F-6
<PAGE>
Notes to Consolidated Financial Statements
1. Summary of Significant Accounting Policies
Basis of Presentation:
The accompanying consolidated financial statements have been prepared
in conformity with generally accepted accounting principles and include
the accounts of Farm Family Life Insurance Company ("Farm Family Life")
and its wholly owned subsidiary, United Farm Family Insurance Company
("United Farm Family") (collectively referred to as the "Company"). All
significant intercompany balances and transactions have been
eliminated. The preparation of financial statements in accordance with
generally accepted accounting principles requires management to make
estimates and assumptions that affect the reported amounts of assets
and liabilities and disclosures of contingent assets and liabilities at
the date of the financial statements and the reported amounts of
revenues, benefits and expenses during the reporting period. Actual
results could differ from those estimates.
Farm Family Life provides life, annuity, and accident & health
insurance coverages principally 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 not a prerequisite for insurance coverage. Farm Family
Life is a stock life insurance company owned by the state Farm Bureau
organizations of the ten states in which the Company operates.
The operations of Farm Family Life are closely related with those of
its subsidiary, United Farm Family, and its affiliate, Farm Family
Casualty Insurance Company. ("Farm Family Casualty") (see Note 9).
United Farm Family is a property and casualty insurance company that
began writing direct insurance coverages in Pennsylvania and Maryland
during 1998. Prior to January 1, 1998, United Farm Family's business
consisted primarily of reinsurance assumed from Farm Family Casualty.
Farm Family Casualty is a wholly owned subsidiary of Farm Family
Holdings, Inc. ("Farm Family Holdings"), a publicly traded company. The
Company and Farm Family Casualty are affiliated by common management,
shared agents and employees and similar Boards of Directors.
Certain reclassifications have been made to prior years' financial
statements to conform to the current year's presentation.
F-7
<PAGE>
Investments:
Fixed maturities include bonds, redeemable preferred stocks and
mortgage-backed securities. Fixed maturities which may be sold prior to
their contractual maturity and are classified as available for sale and
carried at fair value on the Company's consolidated balance sheets. The
difference between amortized cost and fair value of fixed maturities
classified as available for sale, net of deferred income taxes and
amortization of deferred acquisition costs, is reflected as a component
of stockholders' equity.
Equity securities include common and non-redeemable preferred stocks
which are carried at fair value. The difference between cost and fair
value of equity securities, less deferred income taxes and amortization
of deferred acquisition costs, is reflected as a component of
stockholders' equity.
Mortgage loans on real estate are carried at amortized cost less an
allowance for estimated uncollectible amounts. At December 31, 1998 and
1997, no mortgage loans were considered uncollectible. Other invested
assets, which consist primarily of investments in real estate, are
carried at cost which approximates fair value.
Policy loans are carried at their unpaid principal balance.
Cash and short-term investments consist of demand deposits, repurchase
agreements and money market investments whose maturities are three
months or less from the date of purchase. Short-term investments are
carried at cost which approximates fair value.
The carrying values of all investments are reviewed on an ongoing
basis. If this review indicates a decline in fair value below cost is
other than temporary, the Company's carrying value in the investment is
reduced to its estimated realizable value and a specific writedown is
taken. Such writedowns are included in realized investment gains and
losses.
Investment income consists primarily of interest and dividends.
Interest is recognized on an accrual basis and dividends are recorded
on the ex-dividend date. Interest income on mortgage-backed securities
is determined on the effective yield method based on estimated
principal repayments. Realized investment gains and losses are
determined on a specific identification basis.
Premium Revenue and Benefits to Policyholders:
RECOGNITION OF TRADITIONAL LIFE, GROUP AND ANNUITY PREMIUM REVENUE AND
BENEFITS TO POLICYHOLDERS Traditional life insurance products include
those products with fixed and guaranteed premiums and benefits, and
consist principally of whole life insurance policies and certain
annuities with life contingencies (immediate annuities). Life insurance
premiums and immediate annuity premiums are recognized as premium
revenue when due. Group insurance premiums are recognized as premium
revenue over the time period to which the premiums relate. Benefits and
expenses are associated with earned premiums so as to result in the
recognition of profits over the life of the contracts. This association
is accomplished by means of the provision for liabilities for future
policy benefits and the amortization of deferred acquisition costs.
F-8
<PAGE>
RECOGNITION OF UNIVERSAL LIFE-TYPE CONTRACTS REVENUE AND BENEFITS TO
POLICYHOLDERS Universal life-type policies are insurance contracts with
terms that are not fixed and guaranteed. The terms that may be changed
could include one or more of the amounts assessed to the policyholder,
premiums paid by the policyholder or interest credited to policyholder
balances. Amounts received as payments for such contracts are not
reported as premium revenues. Payments received are considered deposits
and are classified as funds on deposit from policyholders. Account
balances are increased by interest credited and reduced by withdrawals,
mortality charges and administrative expenses charged to policyholders.
For the years ended December 31, 1998, 1997 and 1996, interest rates
credited to policyholder funds ranged from 6% to 7% per annum.
Revenues for universal life-type policies consist of charges assessed
against policy account values for the cost of insurance and policy
administration. Policy benefits and claims that are charged to expense
include interest credited to contracts and benefit claims incurred in
the period in excess of related policy account balances.
RECOGNITION OF INVESTMENT CONTRACT REVENUE AND BENEFITS TO
POLICYHOLDERS Contracts that do not subject the Company to risks
arising from policyholder mortality or morbidity are referred to as
investment contracts. Certain annuity contracts are considered
investment contracts. Amounts received as payments for such contracts
are not reported as premium revenues. Payments received are considered
deposits and are classified as funds on deposit from policyholders.
Account balances are increased by interest credited and reduced by
withdrawals. For the years ended December 31, 1998, 1997 and 1996,
interest rates credited to policyholder funds ranged from 4% to 8% per
annum.
Revenues for investment contracts consist of investment income and
policy administration charges. Contract benefits that are charged to
expense include benefit claims incurred in the period in excess of
related contract balances, and interest credited to contract balances.
Interest crediting rates for universal life type contracts and
investment contracts are set annually by the Board of Directors and are
based on current market conditions.
Deferred Acquisition Costs:
Those costs of acquiring new business, which vary with and are
primarily related to the production of new business, have been deferred
to the extent that such costs are deemed recoverable from future
premiums. Such costs include commissions, certain costs of policy
issuance and underwriting, and certain variable agency expenses.
For traditional insurance products, these costs are amortized, with
interest, in proportion to the ratio of estimated annual revenues to
the estimated total revenues over the contract period. For most life
insurance, a 15-year to 40-year amortization period is used, and a
20-year period is used for annuities.
F-9
<PAGE>
Deferred acquisition costs for universal life contracts and certain
annuity contracts are amortized at a constant rate based upon the
present value of estimated gross profits expected to be realized over
the life of the contracts, which is reevaluated annually.
Future Policy and Contract Benefits:
Liabilities for future policy benefits for term life contracts are
calculated using the net level premium method and assumptions as to
investment yields, mortality and withdrawals. These assumptions are
based on projections and past experience and include provisions for
possible unfavorable deviation.
These assumptions are made at the time the contract is issued.
Liabilities for future policy benefits for traditional whole life
contracts are calculated using the net level premium method and
statutory assumptions as to interest and mortality. Traditional whole
life is written on a participating basis with a provision for dividends
to policyholders (see Participating Policyholders' Interest).
Liabilities for future policy and contract benefits on universal
life-type and investment-type contracts are based on the policy account
balance.
The liabilities for future policy and contract benefits for long-term
disability income contracts are based upon interest rate assumptions
and morbidity and termination rates from published tables. In 1995, the
Company completed its withdrawal from the group accident and health
line of business. The Company continues to write individual accident
and health coverages, primarily disability income policies.
F-10
<PAGE>
Income Taxes:
The income tax provision is calculated under the liability method.
Deferred income tax assets and liabilities are recorded based on the
difference between the financial statement and tax bases of assets and
liabilities and the enacted tax rates. The principal assets and
liabilities giving rise to such differences are future policy and
contract benefits and funds on deposit from policyholders,
participating policyholders interest and deferred acquisition costs.
Deferred income taxes also arise from unrealized investment gains or
losses on equity securities and fixed maturities classified as
available for sale.
Property-Liability Insurance Accounting:
Premiums are deferred and earned on a pro rata basis over the terms of
the respective policies. Amounts paid for ceded reinsurance premiums
are reported as prepaid reinsurance premiums and amortized over the
remaining contract period in proportion to premium. Premiums receivable
are reduced for an allowance for doubtful accounts.
Policy acquisition costs that vary with and are primarily related to
the production of business have been deferred. Deferred acquisition
costs primarily consist of agents' compensation, premium taxes, and
certain other underwriting expenses. Such deferred acquisition costs
are amortized as premium revenue is recognized. Deferred acquisition
costs are limited to their estimated realizable value, which gives
effect to the premium to be earned, related investment income, and
losses and loss adjustment expenses expected to be incurred as the
premium is earned.
Reserves for losses and loss adjustment expenses represent estimates of
the ultimate amounts necessary to settle reported losses and a
provision for incurred but not reported claims of insured losses. The
reserve estimates are based on known facts and circumstances, including
the Company's experience with similar cases and historical trends
involving reserving patterns, loss payments, pending levels of unpaid
claims and product mix, as well as other factors including court
decisions, economic conditions and public attitudes. The reserves for
losses and loss adjustment expenses include case basis estimates of
reported losses, estimates of incurred but not reported losses based
upon prior experience adjusted for current trends, and estimates of
losses to be paid under assumed reinsurance contracts. Estimated
amounts of recoverable salvage and subrogation are deducted from the
reserves for losses and loss adjustment expenses. The establishment of
appropriate reserves, as well as related amounts recoverable under
reinsurance contracts is an inherently uncertain process. Reserve
estimates are regularly reviewed and updated, using the most current
information available. Any resulting adjustments, which may be
material, are reflected in current operations. Reserves for losses and
loss adjustment expenses for direct business are included in other
liabilities on the accompanying consolidated balance sheets. Reserves
for losses and loss adjustment expenses for assumed reinsurance
business from Farm Family Casualty are included in receivable from
affiliates on the accompanying consolidated balance sheets.
F-11
<PAGE>
Participating Policyholders' Interest:
The majority of the Company's insurance policies are written on a
"participating" basis, as defined in the New York State insurance law.
Profits earned on participating business are reserved for the payment
of dividends to policyholders except for the stockholders' share of
profits on participating policies, which is limited to the greater of
10% of the statutory profit on participating business, or 50 cents per
thousand dollars of the face amount of participating life insurance in
force. Participating policyholders' interest includes the accumulated
net income from participating policies reserved for payment to such
policyholders in the form of dividends (less net income allocated to
stockholders as indicated above) as well as a pro rata portion of
unrealized investment gains (losses), net of tax.
Dividends to policyholders are approved by the Board of Directors.
In addition to the greater of 10% of the statutory profit on
participating business or 50 cents per thousand dollars of the face
amount of participating life insurance in force, earnings available to
common stockholders consists of earnings on non-participating business
and a pro rata share of net investment income and realized investment
gains (losses).
The change in participating policyholders' interest for the years ended
December 31, 1998, 1997 and 1996 is as follows:
<TABLE>
<CAPTION>
1998 1997 1996
------------------------------------
<S> <C> <C> <C>
Participating policyholders' interest, beginning of year $ 109,557 $ 94,911 $ 97,489
Net income attributable to participating
policyholders interest 10,157 14,318 13,914
Change in unrealized gains (losses), net of effect of
deferred income taxes and amortization of deferred
acquisition costs attributable to participating
policyholders interest 2,369 10,392 (6,641)
Dividends to policyholders and other (10,629) (10,064) (9,848)
------------------------------------
Participating policyholders' interest, end of year $ 111,454 $ 109,557 $ 94,911
------------------------------------
------------------------------------
</TABLE>
2. Acquisition of Farm Family Life
Farm Family Life entered into an Option Purchase Agreement with the
shareholders of Farm Family Holdings pursuant to which Farm Family
Holdings was granted an option to acquire all of the outstanding
capital stock of Farm Family Life, exercisable for a two year period
which commenced on July 26, 1996. 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. Farm Family Life is owned by the Farm Bureau organizations
and their affiliates in New York, New Jersey, Delaware, West Virginia
and all of the New England states. Under 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 connection with the acquisition on behalf
of the shareholders of Farm Family Life.
F-12
<PAGE>
The Option Purchase Agreement was originally approved by the
shareholders of Farm Family Holdings on December 2, 1998. The closing
of the acquisition was scheduled to occur on December 7, 1998, but was
delayed when it was determined that in order for certain shareholders
of Farm Family Life to provide unqualified opinions of counsel required
by the Option Purchase Agreement as a condition to closing, such
shareholders of Farm Family Life or their respective parent entities
would need to obtain approval of the acquisition from their members.
As a result of this delay, the Option Purchase Agreement was amended by
Amendment No. 2 dated as of January 14, 1999 ("Amendment No. 2") to,
among other things, fix the price used to determine the number of
shares of common and preferred stock to be issued, subject to a collar
mechanism, at $35.72, which was the average closing price that would
have been used if the closing had occurred on December 7, 1998. Under
the collar mechanism, if the price per share of Farm Family Holdings'
common stock on the last trading day prior to the closing (the "Closing
Price") is greater than $42.86 or equal to or less than $25.00, the
price used to determine the number of shares of Farm Family Holdings'
common stock to be issued in the acquisition will equal $35.72 divided
by a factor. The factor will be equal to 1.2 (if the Closing Price is
greater than $42.86) or 0.7 (if the Closing Price is equal to or less
than $25.00) multiplied by $35.72 divided by the Closing Price. If the
Closing Price is $25.00 or less, Farm Family Holdings will also have
the option to terminate the Option Purchase Agreement. In addition,
Amendment No. 2 extended the date on which Farm Family Holdings, or the
shareholders of Farm Family Life may terminate the Option Purchase
Agreement, if the closing has not occurred, to April 30, 1999.
The Option Purchase Agreement is subject to the approval of the members
of certain shareholders of Farm Family Life or their respective parent
entities. Farm Family Holdings resolicited the approval of its
shareholders for the revised terms of the acquisition. On March 25,
1999, the Option Purchase Agreement, as amended by Amendment No. 2, and
the acquisition of Farm Family Life were approved by Farm Family
Holdings' shareholders. Under the terms of Amendment No. 2, the
shareholders of Farm Family Life have agreed to reimburse Farm Family
Holdings for half of the expenses of resolicitation, up to $200,000.
The acquisition of Farm Family Life is subject to certain closing
conditions including the receipt of all required government approvals,
among other things. The acquisition is expected to close in the second
quarter of 1999 (see Note 14).
F-13
<PAGE>
3. Investments
The amortized cost, gross unrealized gains and losses and fair value of
available for sale securities at December 31, 1998 and 1997 are as
follows:
<TABLE>
<CAPTION>
Amortized Gross Unrealized Fair
Cost Gains Losses Value
---- ----- ------ -----
($ in thousands)
1998
----
Fixed maturities:
<S> <C> <C> <C> <C>
U.S. Government & Agencies $ 14,834 $ 1,574 $ ----- $ 16,408
States, Municipalities & Political 85,456 8,352 (115) 93,693
Subdivisions
Corporate 440,054 35,918 (1,111) 474,861
Mortgage-backed Securities 112,869 2,463 (36) 115,296
Redeemable Preferred Stock 7,252 1,213 (4) 8,461
-----------------------------------------------
660,465 49,520 (1,266) 708,719
Equity securities 14,360 28,137 (202) 42,295
-----------------------------------------------
Total available for sale $ 674,825 $ 77,657 $ (1,468) $ 751,014
-----------------------------------------------
-----------------------------------------------
Cost/
Amortized Gross Unrealized Fair
1997 Cost Gains Losses Value
---- ---- ----- ------ -----
Fixed maturities:
U.S. Government & Agencies $ 15,009 $ 1,164 $ --- $ 16,173
States, Municipalities & Political 91,897 7,830 (40) 99,687
Subdivisions
Corporate 459,318 33,510 (256) 492,572
Mortgage-backed Securities 70,640 2,101 --- 72,741
Redeemable Preferred Stock 10,343 1,923 (6) 12,260
-----------------------------------------------
647,207 46,528 (302) 693,433
Equity securities 14,360 23,368 (92) 37,636
-----------------------------------------------
Total available for sale $ 661,567 $ 69,896 $ (394) $ 731,069
-----------------------------------------------
-----------------------------------------------
</TABLE>
F-14
<PAGE>
The table below presents the amortized cost and fair value of fixed
maturities at December 31, 1998, by contractual maturity. Actual
maturities may differ from contractual maturities as a result of
prepayments.
<TABLE>
<CAPTION>
($ in thousands)
Amortized Fair
Cost Value
---- -----
<S> <C> <C>
Due in one year or less $ 6,100 $ 6,181
Due after one year through five years 49,994 52,908
Due after five years through ten years 84,390 88,404
Due after ten years 407,112 445,930
--------------- ------------
547,596 593,423
Mortgage-backed securities 112,869 115,296
--------------- ------------
$ 660,465 $ 708,719
--------------- --------------
</TABLE>
Unrealized investment gains and losses on fixed maturities classified
as available for sale and equity securities included in stockholders'
equity and participating policyholders' interest at December 31, 1998
are as follows:
<TABLE>
<CAPTION>
($ in thousands) Net
Amortized Fair Gross Unrealized Unrealized
Cost Value Gains (Losses) Gains
---- ----- ----- -------- -----
<S> <C> <C> <C> <C> <C>
Fixed maturities available for sale $ 660,465 $708,719 $49,520 $(1,266) $ 48,254
Equity securities 14,360 42,295 28,137 (202) 27,935
---------------------------------------------------------
Total $ 674,825 751,014 77,657 (1,468) 76,189
-------------------------------------------
Adjustment for assumed changes in
amortization of deferred acquisition costs (33,612)
--------------
Total gross unrealized gain 42,577
Provision for deferred income taxes (14,888)
--------------
Total net unrealized gain 27,689
Net unrealized gain attributable to participating policyholders' interest (25,839)
--------------
Net unrealized gain attributable to common stockholders $ 1,850
--------------
--------------
</TABLE>
F-15
<PAGE>
The change in unrealized appreciation (depreciation) of investments
included in stockholders' equity and participating policyholders'
interest for the years ended December 31, 1998, 1997 and 1996 are as
follows:
<TABLE>
($ in thousands) 1998 1997 1996
---------------- ---- ---- ----
<S> <C> <C> <C>
Fixed maturities available for sale $ 2,028 $ 24,342 $ (23,784)
Equity securities 4,660 5,972 5,361
------------------------------------
6,688 30,314 (18,423)
Adjustment for assumed changes
in amortization of
deferred acquisition costs (2,654) (13,020) 7,664
------------------------------------
4,034 17,294 (10,759)
Provision for deferred income taxes (1,410) (6,047) 3,775
------------------------------------
Total change in unrealized appreciation
(depreciation) 2,624 11,247 (6,984)
Change in unrealized appreciation
(depreciation) of investments attributable to
participating policyholders' interest (2,369) (10,392) 6,641
------------------------------------
Change in unrealized appreciation
(depreciation) of investments
attributable to common stockholders $ 255 $ 855 $ (343)
------------------------------------
------------------------------------
</TABLE>
The components of net investment income are as follows:
<TABLE>
<CAPTION>
($ in thousands) 1998 1997 1996
---- ---- ----
<S> <C> <C> <C>
Interest on fixed maturities $ 52,491 $ 52,130 $ 51,262
Dividends from equity securities 1,027 937 860
Interest on mortgage loans 1,247 1,232 1,865
Interest on short-term investments 465 432 393
Interest on policy loans 1,727 1,664 1,638
Real estate 23 23 23
Other, net 7 333 1,065
----------------------------------------
Total investment income 56,987 56,751 57,106
Investment expenses (994) (1,787) (1,378)
----------------------------------------
Net investment income $ 55,993 $ 54,964 $ 55,728
----------------------------------------
----------------------------------------
</TABLE>
F-16
<PAGE>
A summary of realized investment gains (losses), net, for the years
ended December 31, 1998, 1997 and 1996 is as follows:
<TABLE>
<CAPTION>
($ in thousands) 1998 1997 1996
---- ---- ----
<S> <C> <C> <C>
Fixed maturities $ 3,141 $ (606) $ 593
Equity securities 85 3,520 (309)
Mortgage loans 27 --- ---
----------------------------------------
Total $ 3,253 $ 2,914 $ 284
----------------------------------------
</TABLE>
4. Fair Value of Financial Instruments
The following table presents the carrying amounts and estimated fair
values of financial instruments held by the Company at December 31,
1998 and 1997. The fair value of a financial instrument is the amount
at which the instrument could be exchanged in a current transaction
between willing parties. The table excludes cash and cash equivalents,
accrued investment income and other assets, other liabilities, accrued
dividends to policyholders, participating policyholders' interest and
payables to affiliates, all of which had fair values approximating
carrying values. As a number of Farm Family Life's significant assets
(including deferred acquisition costs, and deferred income taxes) and
liabilities (including future policy and contract benefits) are not
considered financial instruments, the disclosures that follow do not
reflect the fair value of the Company as a whole.
<TABLE>
<CAPTION>
($ in thousands) December 31, 1998 December 31, 1997
---------------- ----------------- -----------------
Carrying Fair Carrying Fair
Value Value Value Value
----- ----- ----- -----
Assets
<S> <C> <C> <C> <C>
Fixed maturities available for sale $ 708,719 $ 708,719 $ 693,433 $ 693,433
Equity securities 42,295 42,295 37,636 37,636
Mortgage loans on real estate 18,558 18,558 15,151 15,151
Policy loans 30,499 30,499 28,937 28,937
Other invested assets 299 299 741 741
Funds on deposit from policyholders 418,833 418,771 423,495 420,918
</TABLE>
F-17
<PAGE>
The following methods and assumptions were used in estimating the fair
value disclosures for the financial instruments:
Fixed maturities, equity securities and other invested assets -- The
fair value is based upon quoted market prices where available or
from independent pricing services.
Mortgage loans on real estate -- The fair value is based on
discounted cash flows using discount rates at which similar loans
would be made to borrowers with similar characteristics.
Policy loans -- Future cash flows of policy loans are uncertain and
difficult to predict. Therefore management believes that the fair
value of policy loans approximates the unpaid principal balance.
Funds on deposit from policyholders -- Deposit funds include
investment contracts that earn interest at either fixed or variable
rates. Interest rates are adjusted monthly to market rates for those
investment contracts with a variable rate. The carrying value is the
fair value for these liabilities. Other investment contracts earn
interest at a fixed rate for one, three or five-year terms. Fair
value for these liabilities is set by discounting future cash flows
to present value at current market rates.
5. Property and Equipment
Property and equipment are carried at cost, net of accumulated
depreciation. The Company depreciates property using the straight line
method over the estimated useful lives ranging from 18 to 30 years. The
Company depreciates equipment using the straight line method over the
estimated useful lives ranging from 3 to 7 years. Depreciation expense
was $2,673,000, $2,686,000, and $2,556,000 for 1998, 1997, and 1996,
respectively. Affiliates of the Company rent a portion of the Company's
property and equipment (see Note 9). The Company received depreciation
expense recoveries of $2,274,000, $2,242,000 and $2,134,000 in 1998,
1997, and 1996 from affiliates for the rental of property and
equipment.
The carrying value of the Company's property and equipment at December
31 is as follows:
<TABLE>
<CAPTION>
($ in thousands) 1998 1997
---------------- ---- ----
<S> <C> <C>
Home office building and grounds $10,360 $9,914
Furniture and equipment 16,197 15,550
Automobiles 876 832
------------------------
27,433 26,296
Accumulated depreciation (15,710) (13,581)
------------------------
Property and equipment, net $11,723 $12,715
------------------------
------------------------
</TABLE>
F-18
<PAGE>
6. Reinsurance
Life and Accident & Health Insurance:
The Company cedes life insurance and disability income business to
several unaffiliated reinsurers. Reinsurance contracts do not relieve
the Company from its obligations to policyholders as the primary
insurer. The Company evaluates the financial condition of its
reinsurers to minimize its exposure to significant losses from
reinsurer insolvencies. Amounts recoverable are regularly evaluated by
the Company and an allowance for uncollectible reinsurance is provided
when collection is in doubt. At December 31, 1998 and 1997, the Company
determined it was not necessary to provide an allowance for
uncollectible reinsurance.
The Company's retention limit is $400,000 per life for individual
coverage, with lower retentions applicable to group and substandard
risks. Level term life insurance is written on a 50% quota share basis.
As of December 31, 1998, $29,453,000 of life insurance inforce was
ceded to other companies.
The effect of reinsurance on life and accident & health premiums and
recoveries is as follows:
<TABLE>
<CAPTION>
($ in thousands) Year Ended December 31,
---------------- -----------------------
1998 1997 1996
--------------------------------------------
<S> <C> <C> <C>
Direct Premiums $32,280 $31,479 $31,151
Reinsurance Ceded (1,226) (974) (829)
--------------------------------------------
Net Premiums $31,054 $30,505 $30,322
--------------------------------------------
--------------------------------------------
Reinsurance Recoveries $2,171 $785 $416
--------------------------------------------
--------------------------------------------
</TABLE>
F-19
<PAGE>
Property and Casualty:
United Farm Family began writing property and casualty insurance
coverages in Pennsylvania and Maryland during 1998. Prior to January 1,
1998, United Farm Family assumed all of its property and casualty
business from its affiliate, Farm Family Casualty (See Note 9). The
effects of reinsurance on property and casualty premiums written and
earned, and losses and loss adjustment expenses, for the years
indicated were as follows:
<TABLE>
<CAPTION>
Year Ended December 31,
-----------------------
($ in thousands) 1998 1997 1996
---- ---- ----
Premiums written
<S> <C> <C> <C>
Direct $ 364 $ 39 $ 115
Assumed from Farm Family Casualty --- 8,959 9,336
Ceded to Farm Family Casualty --- (3) (6)
Ceded to non-affiliates (100) (1) (4)
--------------------------------------
Premiums written, net of reinsurance $ 264 $ 8,994 $ 9,441
--------------------------------------
Premiums earned
Direct $ 167 $ 64 $ 116
Assumed from Farm Family Casualty --- 8,960 9,334
Ceded to Farm Family Casualty --- (3) (6)
Ceded to non-affiliates (10) (1) (4)
--------------------------------------
Premiums earned, net of reinsurance $ 157 $ 9,020 $ 9,440
--------------------------------------
Losses and loss adjustment expenses
Direct $ 653 $ 270 $ 479
Assumed from Farm Family Casualty 1,050 9,705 7,277
--------------------------------------
Losses and loss adjustment expenses,
net of reinsurance $ 1,703 $ 9,975 $ 7,756
--------------------------------------
</TABLE>
Effective December 31, 1997, the reinsurance agreement between United
Farm Family and its affiliate, Farm Family Casualty, was terminated.
F-20
<PAGE>
7. Income Taxes
The components of the deferred income tax assets and liabilities at
December 31, 1998 and 1997 are as follows:
<TABLE>
<CAPTION>
($ in thousands) 1998 1997
---------------- ---- ----
Deferred Income Tax Assets
Future policy and contract benefits and funds
<S> <C> <C>
on deposit from policyholders $ 14,217 $ 11,749
Reserves for losses and loss adjustment expenses 1,122 1,305
Unearned premium reserve 13 6
Unearned investment income 255 236
Other 2,066 2,288
-------------- -------------
Total deferred income tax assets 17,673 15,584
-------------- -------------
Deferred Income Tax Liabilities
Deferred acquisition costs 18,896 18,972
Unrealized investment gains, net 14,888 13,479
Participating policyholder dividends paid 18,501 14,980
Other 3,059 2,496
-------------- -------------
Total deferred income tax liabilities 55,344 49,927
-------------- -------------
Net deferred income tax liability $ (37,671) $ (33,824)
-------------- -------------
-------------- -------------
</TABLE>
There was no valuation allowance for deferred income tax assets as of
December 31, 1998 or 1997. In assessing the realization of deferred tax
assets, management considers whether it is more likely than not that
the deferred tax assets will be realized. Management primarily
considered the existence of taxable income in the carry back period in
making this assessment and believes the benefits of the deductible
differences recognized as of December 31, 1998 and 1997 will ultimately
be realized.
The components of income tax expense (benefit) are as follows:
<TABLE>
<CAPTION>
($ in thousands) Year Ended December 31,
---------------- -----------------------
1998 1997 1996
---- ---- ----
<S> <C> <C> <C>
Current $ 4,635 $ 5,793 $ 4,367
Deferred (3,524) (4,091) (2,831)
-------------- ------------- --------------
Total income tax expense $ 1,111 $ 1,702 $ 1,536
-------------- ------------- --------------
</TABLE>
The Company paid income taxes of $5,463,000, $6,398,000 and $4,484,000
in 1998, 1997 and 1996, respectively.
F-21
<PAGE>
A reconciliation of the differences between the Company's effective
rates of tax and the United States federal income tax rates follows:
<TABLE>
<CAPTION>
Year Ended December 31,
-----------------------
% of % of % of
($ in thousands) Pretax Pretax Pretax
1998 Income 1997 Income 1996 Income
---- ------ ---- ------ ---- ------
<S> <C> <C> <C> <C> <C> <C>
Income tax provision at prevailing $ 1,449 34.61% $ 1,745 34.61% $ 1,553 34.61%
rates
Tax effect of:
Tax exempt interest income (25) (0.60) (24) (0.47) (87) (1.94)
Dividends received deduction (87) (2.08) (86) (1.71) (24) (0.52)
Other, net (226) (5.40) 67 1.33 94 2.09
---- ----- -- ---- -- ----
Federal income tax expense $ 1,111 26.53% $ 1,702 33.76% $ 1,536 34.24%
=========== ===== ========= ===== ======== =====
</TABLE>
8. Benefits Plans
Pension and Other Postretirement Benefit Plans:
The Company and Farm Family Casualty sponsor a qualified
noncontributory defined benefit pension plan covering substantially all
of the Company's and Farm Family Casualty's full time employees hired
prior to January 1, 1997. Effective January 1, 1997, the Company and
Farm Family Casualty froze benefits available through the defined
benefit plan. In addition, the Company implemented a voluntary early
retirement program in the fourth quarter of 1996 (see Note 12). The
Company and Farm Family Casualty also provide life insurance benefits
through a postretirement benefit plan for retired employees meeting
certain age and length of service requirements. These benefits are
shown as "Other Benefits" in the tables below. Benefits under the
postretirement benefit plan are provided by a group term life insurance
policy issued by the Company.
The change in benefit obligation for the plans for the years ended
December 31, 1998, 1997 and 1996 is as follows:
<TABLE>
<CAPTION>
Pension Benefits Other Benefits
---------------- --------------
($ in thousands) 1998 1997 1996 1998 1997 1996
---- ---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C> <C>
Benefit obligation at beginning of year $20,785 $21,075 $21,443 $989 $962 $1,246
Service Cost --- --- 869 26 26 27
Interest cost 1 ,416 1,429 1,411 62 65 63
Actuarial (gain) / loss 50 (62) 571 (88) (10) (333)
Benefits paid (1,328) (1,657) (834) (28) (54) (41)
Changes in assumptions 1,401 --- (1,455) 170 --- ---
Curtailment --- --- (2,999) --- --- ---
Voluntary early retirement program --- --- 2,069 --- --- ---
------------------------------------------------------
Benefit obligation at end of year $22,324 $20,785 $21,075 $1,131 $989 $962
------------------------------------------------------
</TABLE>
F-22
<PAGE>
The change in plan assets for the years ended December 31, 1998, 1997
and 1996 is as follows:
<TABLE>
<CAPTION>
Pension Benefits Other Benefits
---------------- --------------
($ in thousands) 1998 1997 1996 1998 1997 1996
---- ----- ----- ----- ----- ----
Fair value of plan assets at
<S> <C> <C> <C> <C> <C> <C>
beginning of year $19,026 $18,881 $17,111 $ --- $ --- $ ---
Actual return on plan assets 2,944 1,502 854 --- --- ---
Service cost --- --- --- --- ---
(72)
Employer contribution 200 300 1,750 28 54 41
Benefits paid (1,328) (1,657) (834) (28) (54) (41)
-------------------------------------------------------------
Fair value of plan assets at
end of year $20,770 $19,026 $18,881 $ --- $--- $ ---
-------------------------------------------------------------
</TABLE>
Pension plan assets include an unallocated group annuity contract
issued by Farm Family Life. The fair value of the contract was
$870,000, $1,486,000 and $4,032,000 at December 31, 1998, 1997, and
1996, respectively.
The components of the plans' accrued benefit cost as of December 31,
1998, 1997 and 1996 are as follows:
<TABLE>
<CAPTION>
Pension Benefits Other Benefits
---------------- --------------
($ in thousands) 1998 1997 1996 1998 1997 1996
---- ---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C> <C>
Funded status $(1,554) $(1,759) $(2,194) $(1,131) $(989) $(962)
Unrecognized net actuarial gain (121) (135) --- --- --- ---
Unrecognized net gain --- --- --- (15) --- ---
Unrecognized transition obligation --- --- --- 712 759 805
Unrecognized prior service cost --- --- --- --- (105) (95)
----------------------------------------------------------
Accrued benefit cost $(1,675) $(1,894) $(2,194) $(434) $(335) $(252)
----------------------------------------------------------
</TABLE>
Weighted-average assumptions as of December 31, 1998, 1997 and 1996
are as follows:
<TABLE>
<CAPTION>
Pension Benefits Other Benefits
---------------- --------------
1998 1997 1996 1998 1997 1996
---- ---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C> <C>
Discount rate 6.5% 7.0% 7.0% 6.0% 7.0% 7.0%
Expected return on plan assets 8.0% 8.0% 8.0% 0.0% 0.0% 0.0%
Rate of compensation increase 0.0% 0.0% 4.0% 4.0% 4.0% 4.0%
</TABLE>
The rate of compensation increase assumptions are zero for 1998 and
1997 because the benefits under the pension plan were frozen as of
January 1, 1997.
F-23
<PAGE>
The components of net periodic expense (benefit) and the net periodic
other benefit expense for the plans for the years ended December 31,
1998, 1997 and 1996 are as follows:
<TABLE>
<CAPTION>
Pension Benefits Other Benefits
---------------- --------------
($ in thousands) 1998 1997 1996 1998 1997 1996
---- ---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C> <C>
Service cost $72 $--- $869 $26 $26 $27
Interest cost 1,416 1,429 1,411 62 65 63
Expected return on plan assets (1,473) (1,463) (1,368) --- --- ---
Amortization of prior service cost --- --- 29 --- --- ---
Amortization of unrecognized
net (gain) loss (34) 34 94 (7) --- ---
Amortization of unrecognized
transition (asset) obligation --- --- (56) 47 47 47
Voluntary early retirement program
--- --- 2,069 --- --- 41
------------------------------------------------------------
Net periodic expense (benefit) $(19) $--- $3,048 $128 $138 $178
------------------------------------------------------------
</TABLE>
The Company's portion of net periodic pension expense (benefit),
excluding the expense of the voluntary early retirement program, for
the years ended December 31, 1998, 1997 and 1996 were $(7,000), $0, and
$461,000, respectively. In addition, in 1996, the Company incurred
expenses of $914,000 related to it's voluntary early retirement
program.
The Company's portion of net periodic other benefits expense excluding
the expense of the voluntary early retirement program, for the years
ended December 31, 1998, 1997 and 1996 was $42,000, $40,000 and
$67,000. The Company's portion of the voluntary early retirement
program expense in 1996 was $18,000.
Incentive Savings Plans:
The Company sponsors incentive savings plans for the benefit of its
employees. For years 1998 and 1997, a portion of the contributions made
by the Company were discretionary, based on the profits earned by the
Company. The Company's expense associated with the plans was $566,000,
$575,000 and $112,000 in 1998, 1997 and 1996, respectively.
Agents Pension Plan:
Farm Family Life sponsors a defined contribution pension plan for the
benefit of its agents. Farm Family Life makes an annual contribution to
the plan based on each agent's gross earnings. The Company's expense
for the plan was $347,000, $248,000 and $518,000 in 1998, 1997 and
1996, respectively.
F-24
<PAGE>
9. Related Party Transactions
The operations of the Company are closely related with those of Farm
Family Casualty and Farm Family Casualty's parent company, Farm Family
Holdings. The affiliated Companies operate under similar Boards of
Directors and have similar senior management. The affiliated Companies
share home office premises, branch office facilities, data processing
equipment, certain personnel and other operational expenses. Expenses
are shared based on each Company's estimated level of usage. The gross
shared expenses and the Company's share of such expenses for the years
ended December 31, 1998, 1997 and 1996 is summarized below:
The gross shared expenses and the Company's share of such expenses is
summarized below:
<TABLE>
<CAPTION>
($ in thousands)
Year Ended December 31,
-----------------------
1998 1997 1996
---- ---- ----
<S> <C> <C> <C>
Gross Shared Expenses $29,252 $29,364 $30,689
Company's Share:
Amount $9,411 $9,685 $10,777
Percentage 32% 33% 35%
</TABLE>
The Company held $813,000 of debentures issued by Farm Family Casualty
at January 1, 1996. In July 1996, Farm Family Casualty repurchased the
debentures owned by the Company for the principal amount of $813,000
plus accrued interest of $37,000. The Company received interest income
of $37,000 in 1996 on the debentures issued by Farm Family Casualty.
Prior to January 1, 1998, United Farm Family's reinsurance program
included reinsurance agreements with Farm Family Casualty. In
accordance with the provisions of these reinsurance agreements, the
Company recognized commission expenses of approximately $63,000 and
$191,000 during the years ended December 31, 1997 and 1996,
respectively. Effective December 31, 1997, United Farm Family
terminated all reinsurance agreements with Farm Family Casualty. A
summary of the effect of the reinsurance agreements with Farm Family
Casualty on premiums written and earned is described in Note 6.
Amounts payable to affiliate consist of amounts due to Farm Family
Casualty pursuant to a reinsurance agreement, amounts due to Farm
Family Casualty for shared expenses, and the Company's portion of the
accrued pension liability (see Note 8).
Rental income received from affiliates for leased home office space is
recorded as other income on the accompanying consolidated statements of
income and comprehensive income. Rental income received from affiliates
for use of other property and equipment is recorded as a reduction to
operating expenses on the accompanying consolidated statements of
income and comprehensive income.
F-25
<PAGE>
Reserves for Losses and Loss Adjustment Expenses
As described in Note 1, the Company establishes reserves for losses and
loss adjustment expenses on reported and incurred but not reported
claims of insured losses. The establishment of appropriate reserves for
losses and loss adjustment expenses is an inherently uncertain process
and the ultimate cost may vary materially from the recorded amounts.
Reserve estimates are regularly reviewed and updated, using the most
current information. Any resulting adjustments, which may be material,
are reflected in current operations.
Reserves for losses and loss adjustment expenses on business assumed
from Farm Family Casualty are included in payable to affiliate on the
accompanying consolidated balance sheets pursuant to a reinsurance
agreement between United Farm Family and the Company's affiliate, Farm
Family Casualty. Reserves for losses and loss adjustment expenses on
direct business are included in other liabilities on the accompanying
consolidated balance sheets.
The following table provides a reconciliation of beginning and ending
liability balances for reserves for losses and loss adjustment expenses
for the years ended December 31, 1998, 1997 and 1996.
<TABLE>
<CAPTION>
Year Ended December 31,
-----------------------
1998 1997 1996
---- ---- ----
($ in thousands)
Reserves for losses and loss adjustment
<S> <C> <C> <C>
expenses at beginning of year $17,423 16,785 15,363
Less reinsurance recoverables and receivables - - -
-------------------------------------
Net reserves for losses and loss adjustment
expenses at beginning of year 17,423 16,785 15,363
-------------------------------------
Incurred losses and loss adjustment expenses:
Provision for insured events of current year 155 9,785 8,157
Increase (decrease) in provision for
insured events of prior years 1,548 190 (401)
-------------------------------------
Total incurred losses and loss adjustment expenses 1,703 9,975 7,756
-------------------------------------
Payments:
Losses and loss adjustment expenses
attributable to insured events of current year 24 1,839 1,579
Losses and loss adjustment expenses
attributable to insured events of prior years 4,526 7,498 4,755
-------------------------------------
Total payments 4,550 9,337 6,334
-------------------------------------
Net reserves for losses and loss
adjustment expenses at end of year 14,576 17,423 16,785
Plus reinsurance recoverables and receivables - - -
-------------------------------------
Reserves for losses and loss adjustment
expenses at end of year $14,576 $17,423 $16,785
-------------------------------------
</TABLE>
F-26
<PAGE>
10. Dividends and Statutory Financial Information
The Company's payment of dividends to stockholders is regulated by New
York State insurance law and is subject to certain limitations based on
statutory stockholder surplus. The Company paid dividends to it's
stockholders of $480,000 in 1998, 1997 and 1996.
Farm Family Life's net income and capital and surplus as determined in
accordance with statutory accounting practices are as follows:
<TABLE>
<CAPTION>
($ in thousands) 1998 1997 1996
------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Net income $8,409 $10,106 $8,111
Capital and surplus attributable to participating
policyholders and stockholders 103,828 92,237 74,081
------------------------------------------------------------------------------------------------
</TABLE>
The National Association of Insurance Commissioners ("NAIC") requires
insurance companies to calculate and report risk based capital
information under a set of formulas which measure statutory capital and
surplus needs based on a regulatory definition of the risks in a
company's mix of products and its balance sheet. As of December 31,
1998, Farm Family Life's total capital exceeds the threshold level of
regulatory action, as defined by the NAIC.
11. Commitments, Contingencies and Uncertainties
The Company is party to numerous legal actions arising in the normal
course of business. Management believes that resolution of these legal
actions will not have a material adverse effect on its consolidated
financial condition.
The Company is a party to Membership List Purchase Agreements with each
of the state Farm Bureaus in the ten states in which it conducts
business. The Membership List Purchase Agreements are for six years
commencing on January 1, 1996. For the years ended December 31, 1998,
1997 and 1996, the Company paid a total of $660,000, $600,000 and
$571,000, respectively, to the Farm Bureaus pursuant to the Membership
List Purchase Agreements.
During 1996, the Company entered into a capital lease for certain
electronic data processing equipment that expires on September 1, 1999.
At December 31, 1998, the gross amount of property and equipment and
related accumulated depreciation recorded under the capital lease was
$698,000 and $279,000, respectively. The future minimum capital lease
payments as of December 31, 1998 were $170,000 for 1999. The present
value of net minimum capital lease payments as of December 31, 1998 was
$166,000.
F-27
<PAGE>
At December 31, 1998, the Company had an available line of credit with a
bank for $5,000,000. There were no amounts outstanding on this line of
credit at December 31, 1998.
The Company's liability for funds on deposit from policyholders includes
amounts subject to discretionary withdrawal from annuity investment
contracts. Withdrawal characteristics of annuity deposit liabilities as
of December 31, 1998 are as follows:
<TABLE>
<CAPTION>
($ in thousands) Amount % of Total
------ ----------
Subject to discretionary withdrawal at book
<S> <C> <C> <C>
value less surrender charge of 5% or more $ 5,836 1.9%
Subject to discretionary withdrawal at book
value less no or minimal surrender charge 290,995 95.1%
Not subject to discretionary withdrawal 9,300 3.0%
--------------------------------
Total annuities and deposit fund liabilities $ 306,131 100.0%
--------------------------------
</TABLE>
Farm Family Life's primary policy administration system was created
using four digits to identify a year in the date field and is generally
Year 2000 compliant. However, many of the other computer programs 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. 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,
United Farm Family 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.
F-28
<PAGE>
12. Non-Recurring Expenses
Pursuant to the Statement of Financial Accounting Standards No. 87,
"Employers' Accounting for Pensions," the Company recorded a
nonrecurring expense, of $594,000 which is net of an income tax benefit
of $320,000 for the Company's share of the costs of a voluntary early
retirement program offered to certain eligible employees in 1996.
Eligibility for the program was based on age and years of service.
The Company recorded a nonrecurring expense, net of an income tax
benefit of $71,000 and $237,000, of $198,000 and $470,000 for costs
incurred by the shareholders of the Company relating to the acquisition
of Farm Family Life in 1998 and 1997, respectively.
13. Future Application of Accounting Standards
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 the
recognition of all derivatives as either assets or liabilities in the
statement of financial position and the measurement of those
instruments at fair value. Management does not believe that Statement
133 will have a material impact on the Company's financial statements.
14. Subsequent Events
On April 6, 1999, the transactions contemplated in the Option Purchase
Agreement, as amended by Amendment No. 1 and Amendment No. 2, were
consummated. Under the terms of the Option Purchase Agreement, as
amended, the price used to determine the number of shares of common
stock and voting preferred stock of Farm Family Holdings, Inc. issued
in the acquisition was fixed at $35.72 per share.
F-29
<PAGE>
Signatures
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)
April 20, 1999 /s/ Philip P. Weber
- ------------------------- ---------------------------------------------------
(Date) Philip P. Weber
President and CEO
<PAGE>
EXHIBIT 99
CONTACT:
[LOGO] Timothy A. Walsh
Executive Vice President
Finance & Treasurer
(518) 431-5410
FOR IMMEDIATE RELEASE
Farm Family Holdings Provides Additional Pro Forma Financial Information
Regarding Acquisition of Farm Family Life
Glenmont, New York - April 19, 1999 - On April 6, 1999, Farm Family Holdings,
Inc. (NYSE: FFH) acquired all of the outstanding capital stock of Farm Family
Life Insurance Company pursuant to the terms of an Amended and Restated Option
Purchase Agreement, as amended (the "Option Purchase Agreement") among the
Company and the shareholders of Farm Family Life (the "Selling Stockholders").
The Company paid an exercise price of $37.5 million to acquire Farm Family Life
and Farm Family Life's wholly owned subsidiary, United Farm Family Insurance
Company, consisting of $31.5 million of the Company's common stock and $6
million stated value of the Company's 6-1/8% voting preferred stock, less
certain expenses paid by Farm Family Life. Under the terms of the Option
Purchase Agreement, the price used to determine the number of shares of common
and voting preferred stock issued in the acquisition was fixed at $35.72 per
share. The Company issued 856,871 shares of common stock and 163,214 shares of
voting preferred stock to the Selling Stockholders in payment of the exercise
price.
The selected unaudited pro forma consolidated financial information included as
part of this press release gives effect to the acquisition of Farm Family Life
using the purchase method of accounting. The selected unaudited pro forma
consolidated statement of income data gives effect to the acquisition as if the
acquisition had occurred at January 1, 1998. The balance sheet data gives effect
to the acquisition as if it had occurred at December 31, 1998. The pro forma
information is provided for informational purposes only and is not necessarily
indicative of actual results that would have been achieved had the acquisition
been consummated at the beginning of the periods presented or of future results.
The Company previously provided unaudited pro forma consolidated financial data
in the Company's Proxy Statement dated February 17, 1999 for its Special Meeting
of Stockholders held on March 25, 1999.
Farm Family Holdings is the parent of Farm Family Casualty Insurance Company and
Farm Family Life Insurance Company. Farm Family Casualty and Farm Family Life's
wholly owned subsidiary, United Farm Family are specialized, property and
casualty insurers of farms, agricultural related business and residents and
businesses of rural and suburban communities. Farm Family Life principally sells
individual whole life, term and universal life products, in addition to single
and flexible premium deferred annuities, single premium immediate annuities and
disability income insurance products.
- --------------------------
Safe Harbor Statement under the Private Securities Litigation Reform Act of
1995: This press release contains 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 press release include, but
are not limited to, statements with respect to the Company's acquisition of Farm
Family Life, statements of the plans and objectives of the Company or its
management, 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 press release 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 and other risks listed
from time to time in the Company's Securities and Exchange Commission filings,
including Form 10-K for the fiscal year ended December 31, 1998 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 press
release.
<PAGE>
Selected Comparative Financial Data
(dollars in millions, except per share data)
The following table presents selected comparative financial data for the Company
on a historical and unaudited pro forma consolidated basis. The selected
historical financial data is based upon the historical financial statements of
the Company. The selected unaudited pro forma consolidated financial information
gives effect to the acquisition of Farm Family Life using the purchase method of
accounting. The selected unaudited pro forma consolidated Statement of Income
data gives effect to the acquisition of Farm Family Life as if it occurred at
the beginning of the period. The selected unaudited pro forma consolidated
Balance Sheet data gives effect to the acquisition as if it occurred at December
31, 1998. The pro forma information is provided for informational purposes only
and is not indicative of the actual results that would have been achieved had
the acquisition of Farm Family Life been consummated at the beginning of the
period presented or of future results.
<TABLE>
<CAPTION>
For the Year Ended December 31, 1998
------------------------------------
Selected Unaudited
Pro Forma Selected
Consolidated Data Historical Data
Statement of Income Data:
<S> <C> <C>
Total revenues $297.8 $202.4
Total losses, benefits and expenses 272.7 181.8
Gain on the partial reduction of extended earnings liability 6.3 6.3
----------------------- --------------------
Income before federal income tax expense 31.4 26.9
Federal income tax expense 9.5 8.2
----------------------- --------------------
Income before preferred stock dividends 21.9 18.7
Preferred stock dividends 0.3 -
----------------------- --------------------
Income attributable to common shareholders $21.6 $18.7
----------------------- --------------------
Operating income(1) $17.0 $14.3
----------------------- --------------------
Per Share Data:
Net income per common share - Diluted $3.50 $3.52
----------------------- --------------------
Operating income per common share - Diluted (1) $2.76 $2.69
----------------------- --------------------
Weighted average shares - Diluted 6,160,836 5,303,965
----------------------- --------------------
Balance Sheet Data (at December 31, 1998):
Total assets $1,250.1 $406.5
Participating policyholders' interest 111.5 -
Total liabilities 1,069.5 262.3
Redeemable preferred stock 5.8 -
Total equity 174.8 144.2
Book value per share $28.61 $27.45
----------------------- --------------------
</TABLE>
(1) Operating income excludes the impact of realized investment gains (losses),
the gain on the partial reduction of the Company's extended earnings
liability, the adjustments to restate prior period financial statements for
the Company's extended earnings liability, nonrecurring charges, and the
related taxes thereon.
