UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
ANNUAL REPORT PURSUANT TO SECTION 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 1999
Commission File No. 1-11941
FARM FAMILY HOLDINGS, INC.
(Exact name of registrant as specified in its charter)
Delaware IRS No. 14-1789227
344 Route 9W, Glenmont, New York 12077
Registrant's telephone number: (518) 431-5000
Securities registered pursuant to Section 12(b) of the Act:
Name of each exchange
Title of each class on which registered
Common Stock, par value $0.01 New York Stock Exchange
per share (the "Common Stock")
Securities registered pursuant to Section 12(g) of the Act: None
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes [ X ] No [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [ ]
On March 1, 2000, Registrant had 6,110,684 shares of Common Stock outstanding.
Of these, 6,098,717 shares, having an aggregate market value (based on the
closing price of these shares as reported in a summary of composite transactions
in the Wall Street Journal for stocks listed on the New York Stock Exchange
March 1, 1999) of approximately $219,553,812 were owned by stockholders other
than directors and executive officers of the Registrant.
<PAGE>
Documents Incorporated By Reference
Portions of the following documents are incorporated by reference as follows:
Documents Incorporated Part of Form 10K
Farm Family Holdings, Inc. I and II
Annual Report to Stockholders
for the fiscal year ended
December 31, 1999
(the "Annual Report")
Farm Family Holdings, Inc. III
Proxy Statement for the
2000 Annual Meeting of
Stockholders
(the "Proxy Statement")
<PAGE>
FARM FAMILY HOLDINGS, INC.
FORM 10-K
YEAR ENDED DECEMBER 31, 1999
TABLE OF CONTENTS
PART I Page
Item 1. Business 1
Item 2. Properties 18
Item 3. Legal Proceedings 18
Item 4. Submission of Matters to a Vote of Security Holders 18
Part II
Item 5. Market for Registrant's Common Equity and Related Stockholder
Matters 19
Item 6. Selected Financial Data 19
Item 7. Management's Discussion and Analysis of Financial Condition and
Results of Operations 19
Item 7A. Quantitative and Qualitative Disclosures About Market Risk 19
Item 8. Financial Statements and Supplementary Data 20
Item 9. Changes in and Disagreements With Accountants on Accounting and
Financial Disclosure 20
Part III
Item 10. Directors and Executive Officers of the Registrant 20
Item 11. Executive Compensation 20
Item 12. Security Ownership of Certain Beneficial Owners and Management 20
Item 13. Certain Relationships and Related Transactions 20
Part IV
Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K 21
Signatures 22
Index to Financial Statements and Financial Statement Schedules S-1
Exhibit Index E-1
<PAGE>
PART I
ITEM 1. BUSINESS
Overview of Operations and Marketing Strategy
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" or "we"). The primary subsidiaries of Farm Family
Holdings are Farm Family Casualty Insurance Company ("Farm Family Casualty") and
Farm Family Life Insurance Company ("Farm Family Life").
On July 26, 1996, Farm Family Mutual Insurance Company ("Farm Family
Mutual") converted from a mutual property and casualty insurance company to a
stockholder-owned property and casualty insurance company and became a
wholly-owned subsidiary of Farm Family Holdings pursuant to a plan of
Reorganization and Conversion (the "Plan"). In addition, Farm Family Mutual was
renamed Farm Family Casualty Insurance Company. As part of the Plan, Farm Family
Mutual policyholders received approximately 2,237,000 shares of Farm Family
Holding's common stock and $11,735,000 in cash in exchange for their membership
interest in Farm Family Mutual.
On July 23, 1996, Farm Family Holdings made an initial public offering of
its common stock at a price of $16.00 per share. Farm Family Holdings received
net proceeds of $41,453,000 for approximately 2,786,000 shares sold in the
initial public offering. In addition, Farm Family Holdings received $3,427,000
for approximately 214,000 shares purchased by policyholders of Farm Family
Mutual in a subscription offering. In addition, pursuant to the Plan, holders of
Farm Family Mutual debt could elect to exchange their debt instruments for
shares of common stock or cash. As a result, there were 17,000 common shares and
$1,107,000 in cash exchanged for debt with an outstanding principal amount of
$1,371,000.
On April 6, 1999, Farm Family Holdings acquired all of the outstanding
capital stock of Farm Family Life. Farm Family Holdings' aggregate purchase
price was approximately $38.3 million, including direct acquisition costs. The
purchase price consisted of approximately $30.6 million of Farm Family Holdings'
common stock ($31.5 million less certain expenses paid by Farm Family Life),
approximately $5.8 million stated value of 6-1/8% voting preferred stock ($6
million less certain expenses paid by Farm Family Life) and approximately $1.9
million in direct acquisition costs. 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. Farm
Family Holdings issued 856,871 shares of common stock and 163,214 shares of
voting preferred stock to the Selling Stockholders. After the acquisition, Farm
Family Holdings' 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 Farm Family Holdings. Accordingly, the financial
results of Farm Family Life and Farm Family Life's wholly-owned property and
casualty subsidiary, United Farm Family Insurance Company ("United Farm
Family"), are included in our consolidated financial statements effective April
6, 1999.
Farm Family Casualty and United Farm Family are specialized insurance
companies that provide property and casualty insurance coverages to farms,
agribusiness, and other generally related businesses and residents of rural and
suburban communities. Farm Family Casualty provides insurance to members of the
state Farm Bureau(R) organizations in New York, New Jersey, Delaware, West
Virginia and all of the New England states (collectively the "Farm Bureaus").
Membership in a state Farm Bureau organization is a prerequisite for voluntary
insurance coverage with Farm Family Casualty, except for our employees. United
Farm Family provides similar property and casualty insurance products in
Pennsylvania and Maryland. Membership in a state Farm Bureau organization is not
a prerequisite for purchasing insurance coverage from United Farm Family. United
Farm Family began operations in these states during 1998.
Farm Family Life provides life insurance, annuity, and accident and health
insurance coverages principally to members of the state Farm Bureau
organizations in the same states as Farm Family Casualty and United Farm Family.
Membership in a state Farm Bureau organization is not a prerequisite for
purchasing insurance coverage from Farm Family Life.
Farm Family Casualty, Farm Family Life and United Farm Family share the
same agency force, certain employees and office facilities. Most administrative
and operating expenses are allocated between the companies pursuant to expense
sharing and service agreements.
1
<PAGE>
We market our insurance products through more than 290 agents and field
managers who are primarily located in the rural and suburban communities we
serve. We believe that our distinctive focus on meeting the specialized
insurance needs of rural and suburban communities has provided us with the
knowledge and experience to adapt to changes in the demographics of our markets
and in the nature of agricultural related businesses.
In addition to insuring those engaged in agricultural pursuits such as
dairy, vegetable and fruit farming, we insure a wide range of other businesses
related to agriculture, such as distributors of agricultural products, horse
breeding and training facilities, landscapers, nurseries, florists, wineries and
growers of specialty products. We also offer businessowners products for certain
retail and contractor businesses and for owners of apartment and office
buildings, as well as a homeowners product.
Our principal strategy is to focus on meeting the specialized insurance
needs of the rural and suburban communities in which we currently operate. We
offer personal and commercial automobile products, and also property and
liability products. Our flagship product, the Special Farm Package, is a
flexible policy that can be adapted to meet the needs of a variety of
agricultural and agricultural related businesses.
We also emphasize cross-selling opportunities within our distribution
system. In addition to the property and casualty products, the acquisition of
Farm Family Life added life insurance, annuities, and accident and health
products to our product portfolio. Also, through Farm Family Financial Services,
Inc. and its affiliation with a national broker-dealer, our agents and
policyholders have access to mutual funds, variable annuity policies and other
related products.
We seek to leverage our local reputation, agency force, knowledge and
experience to expand our product offerings to a wider variety of customers in
the rural and suburban communities in which we currently operate. In addition,
we continue to seek to facilitate and expedite sales, underwriting and policy
administration functions through the use of computer networking communications
with the home office.
Relationship with Farm Bureaus
Farm Family Casualty and Farm Family Life were established through the
efforts of certain Farm Bureaus to provide property and casualty and life
insurance for Farm Bureau members in the Northeast. These Farm Bureaus are
affiliated with the American Farm Bureau Federation, the nation's largest
general farm organization with over 4.9 million families, which has
traditionally sought to advance the interests of the agricultural community. The
majority of our directors are directors or executive officers of Farm Bureau
organizations in the Northeast.
Farm Family Casualty and Farm Family Life are parties to Membership List
Purchase Agreements with each of the state Farm Bureaus in ten of the twelve
states in which we operate. Pursuant to the Membership List Purchase Agreements,
the Farm Bureaus provide us with the right to utilize their membership lists in
connection with the marketing of our insurance products and the financial
services and products of financial institutions and authorize us to use the Farm
Bureau names and service marks in connection with the marketing of our insurance
products. In exchange for these rights, we pay to each of the Farm Bureaus an
annual fee of $15.00 per Farm Bureau member. The Membership List Purchase
Agreements are for six years and expire on December 31, 2001. For the years
ended December 31, 1999, 1998 and 1997, we incurred expense of $1,227,000,
$660,000, and $600,000, respectively, pursuant to the Membership List Purchase
Agreements. The 1999 amount includes Farm Family Life's expense of $526,000 for
the Membership List Purchase Agreements, since its acquisition effective April
6, 1999.
Industry Segments
Our operations consist of two operating segments: property and casualty
insurance, which is sold through Farm Family Casualty and United Farm Family,
and life insurance which is sold through Farm Family Life. The property and
casualty segment accounted for 87% of the 1999 consolidated premium revenue and
90% of the 1999 consolidated operating income. Prior to the acquisition of Farm
Family Life, we did not market life insurance products. Information regarding
the last three years' revenues, operating profits, and identifiable assets for
each of the operating segments is contained in Note 18 of the Notes to
Consolidated Financial Statements appearing on pages 26 to 46 of our Annual
Report, incorporated herein by reference and included as part of Exhibit 13 to
this Form 10-K.
2
<PAGE>
Property and Casualty Insurance Business
Products
Our property and casualty insurance segment includes activities related to
the Special Farm Package, a flexible multi-line package of insurance coverages,
and other insurance products covering, personal and commercial automobiles,
businessowners and homeowners.
We offer a variety of property and casualty insurance products primarily
designed to meet the unique insurance needs of our agricultural clients and the
general insurance needs of the rural and suburban communities in which we write
business. Many policyholders have more than one policy with us.
The following table sets forth, by product, the direct written premiums for
property and casualty insurance business, including assigned risk business, for
the following years:
<TABLE>
<CAPTION>
Year Ended December 31,
----------------------------------------------------------------------
% of % of % of
($ in millions) 1999 Total 1998 Total 1997 Total
- -----------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Personal Automobile* $68.0 35.2% $68.3 36.9% $62.3 36.9%
Special Farm Package 41.5 21.5% 40.6 21.9% 38.4 22.8%
Commercial Automobile* 31.0 16.1% 28.9 15.6% 26.1 15.5%
Workers' Compensation 13.1 6.8% 12.6 6.8% 11.3 6.7%
Businessowners 11.5 6.0% 10.1 5.5% 9.0 5.3%
Homeowners 10.3 5.3% 9.2 5.0% 7.7 4.6%
Umbrella 5.9 3.0% 5.0 2.7% 4.8 2.9%
Commercial General Liability 5.1 2.6% 4.5 2.4% 4.1 2.4%
Special Home Package 3.4 1.8% 3.3 1.8% 3.1 1.8%
Fire, Allied, Inland Marine 1.9 1.0% 1.8 1.0% 1.3 0.8%
Country Estate 0.7 0.4% 0.2 0.1% ---- ----
Products Liability 0.4 0.2% 0.4 0.2% 0.4 0.2%
Pollution 0.2 0.1% 0.2 0.1% 0.2 0.1%
- -----------------------------------------------------------------------------------------------------------------
Total $193.0 100.0% $185.1 100.0% $168.7 100.0%
=================================================================================================================
</TABLE>
*Includes $4.8, $3.9, and $6.3 million of assigned risk automobile premiums
for personal automobile business and $0.3, $0.3, and $0.7 million of premiums
for assigned risk commercial automobile business for each of the years ended
December 31, 1999, 1998, and 1997, respectively.
Personal Automobile - Our personal automobile policy provides us with more
premium than any of our other products. Our industry standard personal
automobile policy is generally marketed in conjunction with our other
products, such as the Special Farm Package, the businessowners policy or the
homeowners policy.
Special Farm Package - The Special Farm Package, is a flexible, multi-line
package of insurance coverages we regard as our "flagship" product. As a result
of its flexible features, this product can be adapted to meet the needs of a
variety of agricultural and related businesses. The Special Farm Package policy
combines personal, farm and business property and liability insurance for
agribusiness, as well as owners of other agricultural related businesses, such
as horse breeding and training facilities, nurseries, wineries and greenhouses.
Commercial Automobile - Commercial automobile is primarily used for
commercial automobiles utilized in conjunction with agricultural and related
businesses.
Workers' Compensation - We generally do not seek to market or write our
workers' compensation policy apart from a Special Farm Package or a
businessowners policy.
Businessowners - Our businessowners product (based on the industry standard
policy form) is designed to meet the needs of small businesses within our rural
and suburban markets. This product is marketed to two distinct groups: (i)
"mercantile businessowners" with property based risks, including apartment and
office building owners and small to medium-sized retail businesses, such as
florists and farm markets and (ii) small, established artisan contractors
principally serving the agricultural community.
3
<PAGE>
Special Home Package and Homeowners - Our homeowners policy is a standard
multi-peril policy for the rural and suburban homeowner. Increasingly, the
homeowners policy is being sold to provide coverage for the insured's principal
residence, while the Special Home Package is used to insure rural-based, tenant
occupied residences. Like the Special Farm Package, the Special Home Package
combines personal and commercial property and liability coverages, and contains
flexible features, which also allow it to be adapted to meet the needs of a
variety of customers.
Umbrella Liability - We write commercial and personal excess liability
policies covering business, farm and personal liabilities of our policyholders
in excess of amounts covered under Special Farm Package, homeowners,
businessowners and automobile policies. Such policies are available with limits
of $1.0 million to $5.0 million. We do not generally seek to market our excess
liability policies unless we also write an underlying liability policy.
Commercial General Liability - We write a standard commercial general
liability policy which is generally marketed in connection with the Special Farm
Package, or other property insurance coverage. The commercial general liability
policy is generally not written apart from these other policies. We typically
write the policy for unique business situations, such as horse breeding and
training facilities and certain landscaper risks, which do not meet the criteria
for liability coverage under a businessowners or Special Farm Package policy.
The policy insures businesses against third party liability from accidents
occurring on their premises or arising out of their operations or products. Most
of our products liability line is written as part of the commercial general
liability product.
Country Estate - In October 1997, we began marketing the Country Estate
program, a specialized version of the Special Farm Package. The program covers
rural residents where agricultural exposures are present, but agribusiness is
not the main source of income for the household.
Pollution - We write a small number of pollution liability policies
covering specified farm risks on a "claims-made" basis. The policy insures
against losses incurred from third party liability, including bodily injury and
property damages, and from pollution incidents, such as those caused from
pesticides, fertilizers, herbicides and manure piles. An "extended reporting
period" option is available under certain circumstances which allows for claim
reporting after the policy expiration.
The following table sets forth our direct written premiums by state for property
and casualty insurance:
<TABLE>
<CAPTION>
Year Ended December 31,
--------------------------------------------------------------------------
% of % of % of
($ in millions) 1999 Total 1998 Total 1997 Total
- ----------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
New York $67.9 35.2% $64.3 34.8% $61.5 36.5%
New Jersey 51.2 26.6% 52.4 28.3% 44.5 26.4%
Massachusetts 16.0 8.3% 14.6 7.9% 12.9 7.6%
Connecticut 12.4 6.4% 12.1 6.5% 11.0 6.5%
West Virginia 10.8 5.6% 10.1 5.4% 9.1 5.4%
New Hampshire 7.4 3.8% 6.9 3.8% 6.5 3.9%
Vermont 6.9 3.6% 6.3 3.4% 5.8 3.4%
Delaware 6.6 3.4% 6.5 3.5% 5.8 3.4%
Maine 6.5 3.4% 6.5 3.5% 6.7 4.0%
Rhode Island 5.5 2.8% 5.4 2.9% 4.9 2.9%
Pennsylvania 1.4 0.7% ---- ---- ---- ----
Maryland 0.4 0.2% ---- ---- ---- ----
- ----------------------------------------------------------------------------------------------------------------------
Total $193.0 100.0% $185.1 100.0% $168.7 100.0%
======================================================================================================================
</TABLE>
4
<PAGE>
Underwriting
We seek to underwrite our commercial and personal insurance risks by
evaluating loss experience and underwriting profitability with consistently
applied standards. We maintain information on many aspects of our business,
which is routinely reviewed by our staff of underwriters in relationship to
product line profitability. Our underwriters generally specialize by agency
territory, or line of business. Specific information is monitored with regard to
individual insureds, which is used to assist us in making decisions about policy
renewals or modifications.
We concentrate on our established major product lines (personal and
commercial auto, Special Farm Package, businessowners and homeowners policies).
We generally do not pursue the development of products with risk profiles with
which we are not familiar, nor do we, typically, actively market our automobile,
workers' compensation or general liability policies except to policyholders who
may also purchase our Special Farm Package, businessowners or homeowners
products. We typically seek to sell multiple products to a household to enhance
persistency and profitability. We believe our extensive knowledge of local
markets within our service territory is a key element in our underwriting
process.
Claims
Claims on insurance policies written by us are usually investigated and
settled by one of our claim adjusters or claim managers. Our claim adjusters are
strategically located in our service territory in eight offices. Our claim
philosophy emphasizes timely investigation, evaluation and settlement of claims,
while maintaining adequate reserves and controlling claim adjustment expenses.
Our claim philosophy is designed to support our marketing efforts by providing
agents and policyholders with prompt service.
Claim settlement authority levels are established for each adjuster and
claim manager based upon the employee's ability and level of experience. Claims
are reported directly to our central claim processing unit located in the home
office or to a field claim office. Specialized units exist at the home office
for no-fault automobile, subrogation and large, litigated and certain other
claims. We also have a special investigative unit to investigate suspected
insurance fraud, including arson. The claims department is responsible for
reviewing all claims, obtaining necessary documentation, estimating the loss
reserves and resolving the claims.
Claims for New York private passenger assigned risk business are handled by
an outside claim adjusting firm that specializes in this line of business. An
outside adjusting firm that specializes in workers compensation claims handles
claims on our workers compensation policies issued on or after January 1, 1999.
Reinsurance
Reinsurance Ceded:
Prior to January 1, 1998, the largest net per risk exposure retained by us
on any one individual property or casualty risk was $100,000 and United Farm
Family covered property and casualty risks in excess of $100,000 on an excess of
loss basis up to $300,000 per risk. Effective January 1, 1998, the largest net
per risk exposure retained by us on any one individual property or casualty risk
is $300,000. Per risk property losses in excess of $300,000 up to $4 million are
reinsured on an excess of loss basis by unaffiliated reinsurers. Casualty losses
per risk in excess of $300,000 up to $1 million (which is generally the maximum
limit of liability written on our casualty insurance policies, other than
workers' compensation and umbrella liability policies) are covered on an excess
of loss basis by unaffiliated reinsurers. Clash coverage, which provides
coverage for a single event that results in multiple casualty losses to our
insureds, is provided by unaffiliated reinsurers and covers casualty losses,
including workers' compensation, in excess of $1 million up to $15 million. In
addition, workers' compensation claims, on a per occurrence basis with a
$600,000 per person limit, in excess of $3 million up to $20 million are
separately reinsured on an excess of loss basis by unaffiliated reinsurers.
Prior to January 1, 1998, we reinsured 95% of our umbrella liability losses
(including a 5% quota share participation by United Farm Family) under $1
million per loss on a quota share basis and 100% of our umbrella liability
losses in excess of $1 million up to $5 million per loss with unaffiliated
reinsurers. Effective January 1, 1998, umbrella losses per occurrence in excess
of $300,000 up to $2 million are covered on an excess of loss basis with
unaffiliated reinsurers. In addition, we reinsure 100% of our umbrella liability
losses in excess of $2 million up to $5 million per loss with unaffiliated
reinsurers. Facultative reinsurance coverage is obtained for property policies
written for limits in excess of $4 million per risk, casualty risks in excess of
$1 million, and umbrella policies written for limits in excess of $5 million.
5
<PAGE>
We terminated certain reinsurance agreements with United Farm Family
effective December 31, 1997. However, United Farm Family retains liability for
covered losses arising from occurrences prior to the termination date.
Our property catastrophe reinsurance is placed with unaffiliated reinsurers
and provides for recovery of 95% of the losses over $3 million up to a maximum
of $51 million per occurrence. We retain the first $3 million of losses per
occurrence under our property catastrophe program.
We also have aggregate stop loss reinsurance covering net losses incurred
in excess of 66% of our net earned premiums, up to a maximum of $12.5 million
per accident year, for accident years 1998 and 1999. Aggregate stop loss
reinsurance covers our direct written and assumed reinsurance business, net of
inuring reinsurance ceded. This coverage is provided by unaffiliated reinsurers
and covers each accident year separately.
The insolvency or inability of any reinsurer to meet its obligations to us
could have a material adverse effect on our results of operations or financial
condition. As of December 31, 1999, more than 95% of our reinsurance program was
provided by reinsurers which were rated "A-" (Excellent) or above by A.M. Best
Company, Inc. ("A.M. Best").
Reinsurance Assumed:
We assume voluntary reinsurance primarily covering property, property
catastrophe and casualty risks generally located outside of the Northeast. We
believe that, among other benefits, our assumed reinsurance arrangements enhance
our geographic spread of risk. We also assumed an insignificant amount of
property and casualty reinsurance covering substandard automobile policies from
United Farm Family through December 31, 1997. For the years ended December 31,
1999 and 1998, we earned premiums of $12.6 million and $11.2 million,
respectively, under various voluntary proportional and non-proportional
reinsurance agreements. In addition, we have a retrocessional reinsurance
program covering our assumed business, which is placed with unaffiliated
reinsurers and provides for recovery of 95% of losses over $1 million up to a
maximum of $6 million per occurrence.
Loss and Loss Adjustment Expense ("LAE") Reserves
Our reserves for losses are an estimate of the unpaid amount, as of
December 31, of the losses incurred in both the current year and all prior
years. The LAE reserve is an estimate of the unpaid expenses required to settle
losses incurred in both the current year and all prior years. We are required to
maintain reserves for payment of estimated losses and LAE for both reported
claims and claims which have been incurred but not yet reported. We regularly
update our reserve estimates as new facts become known and further events occur
which may impact the resolution of unsettled claims. Therefore, the ultimate
liability incurred may differ materially from current reserve estimates.
Adjustments in aggregate reserves, if any, are reflected in the operating
results of the period during which such adjustments are made. Although reserves
for losses and loss adjustment expenses may not be paid for many years, such
reserves are not discounted except for certain lifetime workers' compensation
indemnity reserves where the reserves are discounted at 3.5%.
6
<PAGE>
The following table provides a reconciliation of beginning and ending loss and
LAE reserve balances for each of the years in the three-year period ended
December 31, 1999.
<TABLE>
<CAPTION>
Reconciliation of Liability for Losses and Loss Adjustment Expenses
Year ended December 31,
-------------------------------------
($ in thousands) 1999 1998 1997
- ------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Reserves for losses and loss adjustment expenses at beginning of year $174,435 $156,622 $141,220
Less reinsurance recoverables and receivables (30,908) (29,054) (26,837)
- ------------------------------------------------------------------------------------------------------------------------------
Net reserves for losses and loss adjustment expenses at beginning of year 143,527 127,568 114,383
Net reserves for losses and loss adjustment expenses from the acquisition of
United Farm Family 12,335 ---- ----
- ------------------------------------------------------------------------------------------------------------------------------
155,862 127,568 114,383
- ------------------------------------------------------------------------------------------------------------------------------
Incurred losses and loss adjustment expenses:
Provision for insured events of current year 146,829 138,201 107,273
Decrease in provision for insured events of prior years (5,320) (3,899) (3,972)
- ------------------------------------------------------------------------------------------------------------------------------
Total incurred losses and loss adjustment expenses 141,509 134,302 103,301
- ------------------------------------------------------------------------------------------------------------------------------
Loss and loss adjustment expenses payments for claims occurring in:
Current year 70,463 70,098 49,858
Prior years 61,630 48,245 40,258
- ------------------------------------------------------------------------------------------------------------------------------
Total payments 132,093 118,343 90,116
- ------------------------------------------------------------------------------------------------------------------------------
Net reserves for losses and loss adjustment expenses at end of year 165,278 143,527 127,568
Plus reinsurance recoverables and receivables 20,852 30,908 29,054
- ------------------------------------------------------------------------------------------------------------------------------
Reserves for losses and loss adjustment expenses at end of year $186,130 $174,435 $156,622
==============================================================================================================================
</TABLE>
Analysis of Loss and Loss Adjustment Expense Development
The following table reflects the development of losses and loss adjustment
expenses for the periods indicated at the end of that year and each subsequent
year. Each calendar year-end reserve includes the estimated unpaid liabilities
for losses and loss adjustment expenses for that accident year and for all prior
accident years. The data presented under the caption "Cumulative Amount of
Reserves Paid Through" shows the cumulative amounts paid related to the reserve
as of the end of each subsequent year. The data presented under the caption
"Reserves, Net, Reestimated as of" shows the original recorded reserve as
adjusted as of the end of each subsequent year to reflect the cumulative amounts
paid and all other facts and circumstances discovered during each such year. The
line "Cumulative Redundancy (Deficiency)" reflects the difference between the
latest reestimated reserve amount and the reserve amount as originally
established.
The amounts in the following table include the effects of all changes in
amounts of prior periods. For example, if a loss determined in 1998 to be
$150,000 was first reserved in 1995 at $100,000, the $50,000 deficiency (actual
loss minus original estimate) would be included in the cumulative deficiency in
each of the years 1995 through 1998 shown below. This table presents development
data by calendar year and does not relate the data to the year in which the
accident actually occurred. Conditions and trends that have affected the
development of these reserves in the past may not necessarily recur in the
future.
7
<PAGE>
The following table sets forth the development of loss and loss adjustment
expenses reserves for the ten-year period ended December 31, 1999:
<TABLE>
<CAPTION>
Analysis of Losses and Loss Adjustment Expense Development
- -----------------------------------------------------------------------------------------------------------------------------
($ in thousands)
Year Ended December 31 1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999
- -----------------------------------------------------------------------------------------------------------------------------
Reserves for Losses
and Loss Adjustment
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Expenses $78,339 $94,135 $110,135 $117,497 $123,477 $127,954 $137,978 $141,220 $156,622 $174,435 $186,130
Reinsurance Recoverable
on Unpaid Losses (11,784) (22,123) (25,048) (24,463) (28,761) (28,230) (28,655) (26,837) (29,054) (30,908) (20,852)
- -----------------------------------------------------------------------------------------------------------------------------
Reserves for Losses and
Loss Adjustment
Expenses, Net $66,555 $72,012 $85,087 $93,034 $94,716 $99,724 $109,323 $114,383 $127,568 $143,527 $165,278
=============================================================================================================================
Reserves, Net,
Reestimated as of:
One year later 69,036 76,786 84,514 91,561 88,296 94,542 104,649 110,411 123,654 136,305
Two years later 72,478 76,442 84,305 89,666 82,876 87,592 101,561 107,610 117,283
Three years later 72,926 76,832 83,960 86,876 81,556 84,840 100,295 103,055
Four years later 73,130 77,879 82,750 85,204 79,139 84,167 96,798
Five years later 74,599 77,375 81,690 83,875 78,948 81,565
Six years later 74,391 76,811 80,487 83,964 77,110
Seven years later 74,578 76,080 80,385 82,776
Eight years later 73,993 76,179 79,575
Nine years later 74,364 75,556
Ten years later 73,956
Cumulative Redundancy
(Deficiency) (7,401) (3,544) 5,512 10,258 17,606 18,159 12,525 11,328 10,285 7,222
- -----------------------------------------------------------------------------------------------------------------------------
Cumulative Amount of
Reserves Paid
Through:
One year later 29,587 29,446 32,708 36,692 34,439 33,069 39,796 40,258 48,232 57,931
Two years later 46,469 47,392 53,455 57,236 49,867 53,121 59,671 62,486 72,748
Three years later 57,838 60,737 65,951 66,127 62,138 64,023 72,234 75,631
Four years later 65,803 67,401 70,176 73,409 67,865 70,114 78,999
Five years later 68,950 68,634 74,752 76,434 71,160 73,918
Six years later 68,652 71,697 76,266 78,502 73,252
Seven years later 71,075 72,820 77,550 79,842
Eight years later 72,038 73,790 78,387
Nine years later 72,736 74,417
Ten years later 73,328
</TABLE>
Prior to 1990, we had a history of cumulative deficiencies in reserving for
losses and LAE. These deficiencies were primarily caused by the underestimation
of reserves for workers' compensation, automobile and other liability claims. In
1991, we reviewed and revised our process for estimating reserves for losses and
LAE, and in recent years we have generally experienced overall redundancies. The
redundancies at December 31, 1999 of $11.3 million, $10.3 million and $7.2
million for the December 31, 1996, 1997 and 1998 reserves, respectively, were
primarily attributable to favorable development of IBNR and case reserves for
commercial multiple peril, commercial automobile, automobile physical damage,
and workers' compensation claims.
8
<PAGE>
<TABLE>
<CAPTION>
Year Ended December 31,
------------------------------------------------
($ in thousands) 1999 1998 1997
- -------------------------------------------------------------------------------------------------------------------
Reserve for unpaid losses and loss adjustment expenses:
<S> <C> <C> <C>
Gross liability $186,130 $174,435 $156,622
Reinsurance recoverable (20,852) (30,908) (29,054)
------------------------------------------------
Net liability $165,278 $143,527 $127,568
================================================
One year later:
Gross reestimated liability $159,166 $156,928
Reestimated reinsurance recoverable (22,861) (33,274)
--------------------------------
Net reestimated liability $136,305 $123,654
================================
Two years later:
Gross reestimated liability $144,069
Reestimated reinsurance recoverable (26,786)
----------------
Net reestimated liability $117,283
================
</TABLE>
Our statutory reserves for unpaid losses and LAE are equal to the liability
amounts in the table, net of reinsurance recoverable.
We believe that our reserves at December 31, 1999 are adequate. Conditions
and trends that have historically affected our claims may not necessarily occur
in the future. Accordingly, it would not be appropriate to extrapolate future
deficiencies or redundancies based on the results set forth above. Future
adjustments to loss reserves and LAE that are unanticipated by us could have a
material adverse impact on our financial condition and results of operations.
Life Insurance Business
Our life insurance operations are conducted through Farm Family Life, which
was acquired on April 6, 1999. Our results of operations for periods prior to
April 6, 1999 do not include the results of Farm Family Life. However,
comparative information for 1999, 1998 and 1997 for premium and other
operational information have been provided for Farm Family Life for
informational purposes only.
Products
The life insurance segment includes the sale of individual whole life, term
and universal life products, single and flexible premium deferred annuity
products, single premium immediate annuity products and disability income
insurance products through Farm Family Life.
Individual life insurance, annuities and disability income products
accounted for 98% of the life insurance segment's statutory direct collected
premiums for the period April 6, 1999 through December 31, 1999. Group sales of
life insurance, annuities and accident and health insurance comprise the
remaining 2% of statutory direct collected premiums.
Life Insurance Products:
The first year statutory direct premiums for life insurance products for
1999, 1998 and 1997 are summarized in the following table:
<TABLE>
<CAPTION>
Year Ended December 31,
---------------------------------------------------------------
($ in thousands) 1999 1998 1997
----------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Universal $2,037 45.1% $4,741 67.7% $3,552 57.5%
Term 719 15.9% 583 8.3% 595 9.6%
Whole life 1,765 39.0% 1,677 24.0% 2,032 32.9%
======================================================================================================================
Total first year statutory direct premiums $4,521 100.0% $7,001 100.0% $6,179 100.0%
======================================================================================================================
</TABLE>
Whole Life Insurance Products - Whole life insurance is designed to provide
benefits for the life of the insured. It is generally designed to provide level
premiums and a level death benefit and requires payments in excess of mortality
charges in early years to offset increasing mortality costs in later years.
Under the terms of the contract, policyholders have a right to participate in
the surplus of Farm Family Life to the extent determined by the Board of
Directors, through annual participating policyholder dividends.
9
<PAGE>
Term Life Products - Our term insurance provides life insurance protection
for a specified time period. Term insurance is mortality-based and generally has
no accumulation values. We can choose to change the premium scales at any time;
however, the scales can not exceed the guaranteed rates.
Universal Life Products - Universal life provides benefits for the life of
the insured. Interest is credited to the cash value of the policy at rates
periodically set by us. We also market a last survivor universal life product
designed especially for the estate planning market. There is no set premium
scale for our flexible universal life policies except premium contributions
cannot exceed Internal Revenue Code limitations. Our Single Premium Life policy
requires a one-time premium payable at issue.
Annuity Products:
We offer single premium fixed annuities and flexible premium annuities.
Single premium fixed annuities feature a single premium paid when the contract
is issued. Flexible premium annuities allow for flexibility, within certain
parameters, in the payment of periodic annuity premiums.
During June 1999, we marketed a single premium deferred annuity at a
special rate ("special annuity"). We received $55.1 million in premiums from
sales of the special annuity. The total amount received included $50.4 million
of money from other annuity policies held with us that did not have surrender
protection which were exchanged for special annuity policies that have
seven-year surrender protection.
Disability Income Insurance Products:
Our disability income policies provide payment of benefits in the event of
a disabling accident or illness. Disability benefits reimburse the insured for a
specified dollar amount payable over a specific time period or for the duration
of the disability. Disability is generally defined as the inability of the
policyholder to perform one's occupation for the first two years after
disability, and inability to pursue any occupation thereafter. One of our
products provides extended-care benefits beyond age 65. Since the majority of
the policies are issued on a "guaranteed renewable" basis, we may change the
premium scale at any time based on claim costs incurred, subject to regulatory
approval.
The following table sets forth information regarding life insurance and
annuities for each of the periods presented. Statutory-basis premiums are used
in lieu of GAAP-basis premiums because they provide a consistent measure across
varying product types, in contrast to GAAP which provides different revenue
recognition rules for different classes of long-duration contacts as defined by
the requirements of FASB No. 60, "Accounting and Reporting by Insurance
Enterprises", FASB No. 97, "Accounting and Reporting by Insurance Enterprises
for Certain Long-Duration Contracts and for Realized Gains and Losses from the
Sale of Investments", and SOP 95-1, "Accounting for Certain Insurance Activities
of Mutual Life Insurance Enterprises".
<TABLE>
<CAPTION>
As of and for the Year Ended
December 31,
-------------------------------------------------------------
($ in thousands, except face amounts in millions) 1999 1998 1997
- --------------------------------------------------------------------------------------------------------------------------
Life insurance:
Universal
<S> <C> <C> <C>
Number of policies 8,652 8,895 9,053
Statutory direct premiums $8,571 $11,627 $10,078
GAAP policyholder account balances $118,673 $112,864 $103,970
Direct face amounts $1,041 $1,060 $1,067
Whole life and term
Number of policies 66,777 66,999 67,262
Statutory direct premiums $30,939 $30,301 $28,799
GAAP policyholder account balances $226,704 $212,618 $200,526
Direct face amounts $2,892 $2,740 $2,629
Total life
Number of policies 75,429 75,894 76,315
Statutory direct premiums $39,510 $41,928 $38,877
Direct face amounts $3,933 $3,800 $3,696
Annuities:
Number of policies 10,377 11,141 11,490
Statutory direct premiums(1) $68,065 $13,797 $15,292
GAAP policyholder account balances $226,746 $238,395 $279,130
</TABLE>
(1) The 1999 amount includes $55.1 million from the special annuity program
during June, as previously discussed.
For 1999 and 1998, approximately 45.8% and 43.1%, respectively, of the life
insurance segment's statutory direct life insurance premiums were in New York
and 13.3% and 12.6%, respectively, were written in New Jersey.
10
<PAGE>
Interest Crediting
Interest crediting rates for universal life type contracts and investment
contracts are determined by the Board of Directors and are based on each
product's target interest rate spread and competitive market conditions. For
annuity products, the interest crediting rate is determined by the Board of
Directors and generally varies monthly based on an established market rate or
our investment portfolio rate, subject to a contractual minimum rate. Interest
rates credited on universal life contracts for 1999, 1998 and 1997 range from
5.8% to 7.0%. Interest rates credited on annuity contracts range from 4.0% to
8.3% for the same period.
Underwriting
We have adopted and follow detailed, uniform underwriting practices and
procedures designed to assess risks before issuing coverage to qualified
applicants. Our underwriters review each applicant's written application, which
is prepared under the supervision of the selling agent, and any required medical
records. We employ blood and urine testing to provide additional information on
applications over $100,000 face amount. Based on the results of these tests, we
may adjust the mortality charge or decline coverage completely. Any nicotine use
by a life insurance applicant within the preceding year results in a higher
mortality charge.
Reinsurance
We purchase reinsurance for our life insurance and accident and health
lines of business to mitigate the impact of potential large or unusual claims on
our liquidity and operating results. Our life insurance reinsurance program
provides for coverage for individual life insurance claims greater than $400,000
and $250,000 on our last survivor universal life product. In addition, 50% of
term insurance business is ceded to an unaffiliated reinsurer.
Participating Business
A significant portion of our life insurance policies are written on a
"participating" basis, as defined in the New York Insurance Law. A participating
policy is a policy under which there is a right to participate in the divisible
surplus of an insurance company. Typically, there is an expectation that a
participating policy will pay a dividend to the policyholder based on the actual
experience of the insurer. Favorable operating results are more likely to result
in the payment of such dividends. Annual policyholder dividends are often paid
in a manner that identifies divisible surplus and distributes that surplus in
approximately the same proportion as the contracts are considered to have
contributed to divisible surplus. Participating insurance represented 89% of the
total life insurance in force at December 31, 1999 and 38% of the total
statutory premiums collected for the year ended December 31, 1999. 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 each year to the greater of 10% of the statutory
profits on participating business, or fifty cents per year per thousand dollars
of the face amount of participating life insurance in force other than group
term insurance. In addition to the greater of 10% of the statutory profit on
participating business or fifty cents per year per thousand dollars of the face
amount of participating life insurance in force, earnings available to
stockholders consist of earnings on non-participating business and a pro rata
share of net investment income and realized investment gains (losses). The
accumulated profit held by us for the benefit of participating policyholders is
shown as a liability on the Consolidated Balance Sheets, under the caption,
"Participating Policyholders' Interest". Policyholder dividends are paid to
participating policyholders, principally holders of whole life products, based
on the profitability of the products. Policyholder dividends are declared
annually by the Board of Directors, and are effective on the anniversary date of
the policy. At the option of the policyholder, policyholder dividends can be
paid in cash, credited to renewal premiums due, left to accumulate at interest
with Farm Family Life, or used to purchase additional life insurance.
Policyholder dividend expense is charged against Participating Policyholders'
Interest. Policyholder dividends incurred for the period April 6, 1999 through
December 31, 1999 were $7.2 million.
IMSA Certification
During 1999, Farm Family Life earned the Insurance Marketplace Standards
Association ("IMSA") certification and has been accepted as an IMSA member. IMSA
is an independent, voluntary association created by the life insurance industry
to promote high standards of ethical conduct in advertising, sales and service
for individual life insurance and annuity products. These standards are
specified in a set of principles and code of conduct. IMSA companies must
demonstrate that they have met these standards by undergoing a self-assessment
and a second assessment by an independent examiner to determine compliance with
IMSA's Principles and Code. Farm Family Life is a member for three years, after
which it must repeat the self and independent assessment processes to retain its
membership.
11
<PAGE>
Marketing
As of December 31, 1999, we marketed our products in twelve states through
approximately 218 primarily career agents, 74 independent agents and 12 field
managers. Many of our agents are established residents of the rural and suburban
communities in which they operate and often have specific prior experience in
agricultural related businesses. The majority of our agency force markets
property and casualty and life insurance products. We have designed our
commission program in a manner to encourage agents to produce profitable
business for us.
In 1999, agent compensation for the property and casualty insurance segment
was comprised entirely of commissions earned by our agents for premiums written
by the agents during 1999. The commissions earned by our agents on property and
casualty business are determined by applying a commission rate to the amount of
the premiums written by the agent. We apply a fixed commission rate to determine
commissions earned on workers compensation and umbrella business produced by our
agents. For automobile business and property liability business, the commission
rate varies monthly based upon the loss ratio of such business written by the
agent during the previous twelve-month period.
In 1999, agent compensation for the life insurance segment was comprised
entirely of commissions, office expense allowance and an annual persistency
bonus. In addition, in order to assist in the development of a book of business,
most new agents receive a salary during their first two years of licensing
provided they meet certain minimum production requirements.
We emphasize personal contact between our agents and policyholders. We
believe that recognition of our name, policyholder loyalty and policyholder
satisfaction with agent and claims relationships are the principal sources of
new customer referrals, cross-selling of additional insurance products and
policyholder retention.
Investments
An important component of our operating results has been the return on
invested assets. Our investment objective is to maximize current yield while
maintaining safety of capital together with adequate liquidity for our insurance
operations.
At December 31, 1999, we had cash and invested assets with an aggregate
carrying value of $1.1 billion. We primarily invest in high quality fixed
maturity securities and to a lesser extent, equity securities. At December 31,
1999, 88.7% of our total cash and invested assets consisted of fixed maturities,
4.2% consisted of equity securities, 2.8% consisted of policy loans, 2.5%
consisted of mortgage loans, and 1.8% consisted of cash and short-term
investments.
Since September 1, 1997, we have retained the services of a professional
asset management firm, specializing in the management of investments for
insurance companies, to supplement our internal capabilities and improve upon
the management of our investments in fixed maturities. Prior to September 1,
1997, we exclusively managed our invested assets internally. We continue to
internally manage our equity securities, cash and short-term investments, and
mortgage loans. Our investment activities are subject to oversight by management
as well as an Investment Committee of the Board of Directors.
We actively manage and monitor our exposure to credit risk. Invested assets
are reviewed regularly for credit quality. Investments which have experienced
payment delinquencies, adverse changes in credit ratings or deterioration in the
financial condition of the borrower, or which have otherwise been identified as
having potential adverse credit implications are placed on a credit watch
report. On a regular basis, management and the investment committee of our Board
of Directors review securities placed on the credit watch list. At December 31,
1999, we had identified 13 securities, with an aggregate carrying value of $15.9
million on the credit watch report. Only two of these securities were considered
non-performing or in default. During 1999, these two securities were in default
of $0.1 million in interest. In addition, our holdings of NAIC Class 3 through 6
bonds, generally considered non-investment grade, were $15.9 million or 1.6% of
our fixed maturity portfolio at carrying value, at December 31, 1999. Due to
uncertainties in the economic environment, it is possible that the quality of
investments currently held in our investment portfolio may change.
For the year ended December 31, 1999, compared with the prior year, the
amortized cost of our cash and invested assets increased $827.4 million to $1.1
billion, primarily as a result of the additional investments acquired with the
acquisition of Farm Family Life.
12
<PAGE>
The following table sets forth the carrying and market values of our investments
as of December 31, 1999:
<TABLE>
<CAPTION>
Carrying Value(1)
----------------------------------------------------
($ in thousands) Percentage
of Total
Type of Investment Amortized Property Corporate Carrying
Cost and Casualty Life and Other Total Value
- ------------------------------------------------------------------------------------------------------------------------------------
Available For Sale Portfolio:
Fixed Maturities(1)
United States government and
<S> <C> <C> <C> <C> <C> <C>
government agencies and authorities $30,741 $13,283 $12,300 $4,463 $30,046 2.8%
States, municipalities and political
subdivisions 196,311 112,777 76,347 ---- 189,124 17.7%
Corporate bonds 558,252 137,459 392,224 ---- 529,683 49.4%
Mortgage-backed securities 202,091 47,229 149,206 ---- 196,435 18.3%
Redeemable preferred stock 15,455 9,051 5,715 ---- 14,766 1.4%
- ------------------------------------------------------------------------------------------------------------------------------------
Total Fixed Maturities 1,002,850 319,799 635,792 4,463 960,054 89.6%
Equity securities 42,819 6,075 39,734 ---- 45,809 4.3%
- ------------------------------------------------------------------------------------------------------------------------------------
Total Available for Sale 1,045,669 325,874 675,526 4,463 1,005,863 93.9%
- ------------------------------------------------------------------------------------------------------------------------------------
Held to Maturity Portfolio:
Fixed Maturities(2)
States, municipalities and political
subdivisions 4,009 4,009 ---- ---- 4,009 0.4%
All other corporate bonds 3,962 3,962 ---- ---- 3,962 0.3%
- ------------------------------------------------------------------------------------------------------------------------------------
Total Held to Maturity 7,971 7,971 ---- ---- 7,971 0.7%
- ------------------------------------------------------------------------------------------------------------------------------------
Mortgage loans(1) 26,832 ---- 26,832 ---- 26,832 2.5%
Policy loans(1) 30,839 ---- 30,839 ---- 30,839 2.9%
Other invested assets(1) 176 ---- 176 ---- 176 ----
- ------------------------------------------------------------------------------------------------------------------------------------
Total Investments $1,111,487 $333,845 $733,373 $4,463 $1,071,681 100.0%
====================================================================================================================================
</TABLE>
(1) Fixed maturities (bonds, redeemable preferred stocks and mortgage-backed
securities) and equity securities in the Available for Sale Portfolio are
carried at market value in our Consolidated Financial Statements. Mortgage
loans, policy loans and other invested assets are carried at cost, which
approximates market value. We primarily obtain market value information
through our professional asset management firm.
(2) Fixed maturities in the Held to Maturity Portfolio are carried at amortized
cost.
13
<PAGE>
Our investments in fixed maturity securities are comprised primarily of
intermediate-term, investment grade securities. The table below contains
additional information concerning the investment ratings of our fixed maturity
investments at December 31, 1999.
<TABLE>
<CAPTION>
Amortized Market
Type/Ratings of Investment(1) Cost Value Percentage(4)
- ----------------------------------------------------------------------------------------------------------------------
($ in thousands)
Available for Sale Portfolio:(2)
<S> <C> <C> <C>
U.S. Government and Agencies $30,741 $30,046 3.1%
AAA 230,211 224,193 23.4%
AA 176,136 167,958 17.4%
A 293,367 280,116 29.2%
BBB 233,001 221,819 23.1%
BB 13,026 11,349 1.2%
B and below 8,943 7,689 0.8%
Not rated(1) 17,425 16,884 1.8%
- ----------------------------------------------------------------------------------------------------------------------
Total Available for Sale $1,002,850 $960,054 100.0%
======================================================================================================================
Held to Maturity Portfolio:(3)
AAA $2,765 $2,787 35.6%
AA ---- ---- ----
A 2,042 1,992 25.5%
BBB ---- ---- ----
BB ---- ---- ----
B and below ---- ---- ----
Not rated(1) 3,164 3,041 38.9%
- ----------------------------------------------------------------------------------------------------------------------
Total Held to Maturity $7,971 $7,820 100.0%
======================================================================================================================
</TABLE>
(1) The ratings set forth in this table are based on the ratings assigned by
Standard & Poor's Corporation ("S&P") or Moody's Investors Services, Inc.
("Moody's"). Securities listed as "not rated" above were not assigned a
rating by S&P or Moody's. 93% of the investments included in "not rated" in
the Available for Sale and Held to Maturity portfolios were rated in Class
1 or 2 by the NAIC, which is considered investment grade.
(2) Fixed maturities in the Available for Sale portfolio are carried at market
value in our Consolidated Financial Statements.
(3) Fixed maturities in the Held to Maturity portfolio are carried at amortized
cost.
(4) Represents percent of market value for classification as a percent of total
for each portfolio.
The average effective duration of our fixed maturity investments as of
December 31, 1999 was approximately 5.7 years and their average maturity was
15.6 years. As a result, the market value of our investments may fluctuate
significantly in response to changes in interest rates. In addition, we may also
experience investment losses to the extent our liquidity needs require the
disposition of fixed maturity securities in unfavorable interest rate
environments.
The maturity profile of our Available for Sale and Held to Maturity
investments is included at Note 5 of the Notes to the Consolidated Financial
Statements on pages 32 - 34 of our Annual Report, incorporated herein by
reference in response to Item 8 hereof and included as part of Exhibit 13 to
this Form 10-K.
For a discussion of the yields on our investment portfolios by operating
segment, see "Management's Discussion and Analysis of Financial Condition and
Results of Operations" on pages 10 - 21 of our 1999 Annual Report, incorporated
herein by reference in response to Item 7 hereof and included as part of Exhibit
13 to this Form 10-K.
Information Services
Our automated information processing capabilities are supported by
centralized computer systems and a network of personal computers linking agents,
claims offices and service centers with our home office data center and
information services division. This network enables field employees and agents
to work directly with clients in response to service questions and policy
transactions. Our agents have access to a specialized client information system
containing policy and claim information for each customer's portfolio to monitor
policy activity. Also, personalized summaries of material events affecting each
agent's policies are updated daily on the network and forwarded to agents.
14
<PAGE>
We are also in the process of developing web-enabled systems to improve our
service delivery to our agents and customers. These system initiatives are aimed
at increasing the accessibility and usability of our primary product systems for
our agents. We plan to roll out these capabilities on a product-by-product basis
over the next 24 months.
A.M. Best Rating
A.M. Best, which rates insurance companies based on factors of concern to
policyholders, currently assigns a Best's Rating of "A" (Excellent), its third
highest rating category, to Farm Family Casualty, Farm Family Life and United
Farm Family. A.M. Best assigns "A" or "A-" ratings to companies, which, in its
opinion, have demonstrated excellent overall performance when compared to the
standards established by A.M. Best. Companies rated "A" or "A-" have a strong
ability to meet their obligations to policyholders over a long period of time.
In evaluating a company's financial and operating performance, A.M. Best reviews
the company's profitability, leverage and liquidity, as well as the company's
book of business, the adequacy and soundness of its reinsurance, the quality and
estimated market value of its assets, the adequacy of its loss reserves, the
adequacy of its surplus, its capital structure, the experience and competency of
its management and its market presence. No assurance can be given that A.M. Best
will not downgrade any of the companies' current ratings in the future.
Competition
We compete in property and casualty, life insurance and financial services
markets that are highly competitive. We compete with stock insurance companies,
mutual insurance companies, local cooperatives, other underwriting organizations
and other financial services providers. The Gramm-Leach-Bliley Act of 1999 was
passed which permits mergers that combine commercial banks, insurers and
securities firms under one holding company. Prior to this Act, limitations were
imposed on banks to engage in securities-related business and from being
affiliated with insurance companies. The passage of the Gramm-Leach-Bliley Act
of 1999 may increase competition within the insurance, financial services and
banking industries. In addition, we believe advances in technology and the use
and acceptance of the internet have also intensified the competition we face in
the markets we serve. Certain competitors have substantially greater financial,
technical and operating resources than we do. Our ability to compete
successfully in our principal markets is dependent upon a number of factors,
many of which (including market and competitive conditions) are outside our
control. The lines and types of insurance we write are subject to significant
price competition. Some companies may offer insurance at lower premium rates
through the use of salaried personnel or through the use of the internet to
quote, process or distribute policies. In addition to price, competition in our
operating segments are based on the quality of the products, quality and speed
of service (including claims service), financial strength, ratings, distribution
systems and technical expertise.
We also compete with other companies for qualified agents to distribute our
products. Strong competition exists among insurance companies for agents with
demonstrated ability to sell insurance products. We maintain strong
relationships with our agents through a competitive commission structure,
support services, a range of competitive products and continuing communication
with management.
Seasonality
Although the insurance business generally is not seasonal, losses and loss
adjustment expenses associated with property and casualty insurance tend to be
higher for periods of severe or inclement weather.
Employees
As of December 31, 1999, we had 469 full time employees, of which 325 were
employed in the home office. None of these employees are covered by a collective
bargaining agreement, and we believe that our employee relations are good.
Effect of Regulation
General
We are regulated by government agencies in the states in which we do
business. This regulation has a substantial effect on our business. For example,
such regulation usually includes regulating premium rates and policy forms;
setting minimum capital and surplus requirements; regulating guaranty fund
assessments and residual markets; licensing companies, adjusters and agents;
approving accounting methods and methods of setting statutory loss and expense
reserves; setting requirements for and limiting the types and amounts of
investments; establishing requirements for the filing of annual statements and
other financial reports; conducting periodic statutory examinations of the
affairs of insurance companies; approving proposed changes in control and
limiting the amount of dividends that may be paid without prior regulatory
approval.
15
<PAGE>
Insurance companies are also affected by a variety of state and federal
legislative and regulatory measures and judicial decisions that define and
extend the risks and benefits for which insurance is sought and provided. These
include redefining risk exposures in areas such as products liability,
environmental damage and workers' compensation. Certain state insurance
departments and legislatures may prevent premium rates for some classes of
insureds from reflecting the level of risk assumed by the insurer for those
classes. Several states place restrictions on the ability of insurers to
discontinue or withdraw from certain lines of insurance. Such developments may
adversely affect the profitability of various lines of insurance.
Effective March 22, 1999, all insurers in New Jersey were required to
reduce personal automobile rates by approximately 15% pursuant to the Automobile
Insurance Cost Reduction Act of 1998 (the "Act"). Our direct premium written for
New Jersey personal automobile business in 1999 was $23.2 million which was
approximately 12.0% of our total direct written premium, for the year ended
December 31, 1999. The Act also made coverage and other changes to the statutory
requirements governing personal automobile insurance in New Jersey, which are
intended to reduce losses, and loss adjustment expenses. The impact on our
losses and loss adjustment expenses, if any, cannot be determined at this time.
Risk-Based Capital
State insurance departments have adopted a methodology developed by the
NAIC for assessing the adequacy of statutory surplus of insurance companies. The
methodology includes a risk-based capital formula that attempts to measure
statutory capital and surplus needs based on the risks in a company's mix of
products and investment portfolio. The formula is designed to allow state
insurance regulators to identify potential inadequately capitalized companies.
Under the formula, a company determines its "risk-based capital"("RBC") by
taking into account certain risks related to the insurer's assets (including
risks related to its investment portfolio and ceded reinsurance) and the
insurer's liabilities (including underwriting risks related to the nature and
experience of its insurance business). The risk-based capital rules provide for
different levels of regulatory attention depending on the ratio of a company's
total adjusted capital to its "authorized control level" of RBC. At December 31,
1999, the RBC for each of our insurance subsidiaries exceeded a level that would
trigger regulatory attention.
NAIC-IRIS Ratios
The NAIC's Insurance Regulatory Information System ("IRIS") was developed
by a committee of state insurance regulators and is primarily intended to assist
state insurance departments in executing their statutory mandates to oversee the
financial condition of insurance companies operating in their respective states.
IRIS identifies 12 ratios for the property and casualty and life insurance
industries and specifies a range of "usual values" for each ratio. A ratio
falling outside the usual range of IRIS ratios is not considered a failing
result; rather, unusual values are viewed as part of the regulatory early
monitoring system. Departure from the "usual value" range on four or more ratios
may lead to increased regulatory oversight from individual state insurance
commissioners. None of our insurance subsidiaries had four or more ratios that
varied from the "usual value" range in 1999.
Risk Factors
In addition to the normal risks of business, we are subject to significant risk
factors, including but not limited to:
o the inherent uncertainty in the process of establishing property-casualty
loss reserves, including reserves for the cost of pollution claims, and the
fact that ultimate losses could materially exceed established loss reserves
and have a material adverse effect on our results of operations and
financial condition;
o the potential material adverse impact on our financial condition, results
of operations and cash flows of losses arising out of catastrophes;
o the inability of any reinsurer to meet its obligations to us which may have
a material adverse effect on our financial condition, results of operations
and cash flows;
o the need for our insurance company subsidiaries to maintain appropriate
levels of statutory capital and surplus, particularly in light of
continuing scrutiny by rating organizations and state insurance regulatory
authorities, and to maintain acceptable financial strength and
claims-paying ability ratings;
o changes in interest rates which may cause a reduction of investment income
or operating cash flow, an increase in policyholder lapses for our life
insurance segment and an adverse impact on the attractiveness of certain
life insurance segment products;
16
<PAGE>
o the inherent uncertainty in the economic environment which may cause the
quality of the investments currently held in our investment portfolio to
change;
o significant variations of actual experience from assumptions regarding
future morbidity, persistency, lapse rates, expenses, mortality, and
interest rates used in calculating reserve and liability amounts for our
life insurance segment and in developing pricing and other terms of life
insurance products;
o the ability of our insurance company subsidiaries to maintain their current
A.M. Best ratings and the fact that our business and results of operations
could be materially adversely affected by a rating downgrade;
o the highly competitive insurance environment including certain competitors
that may have substantially greater financial, technical and operating
resources than we have;
o the extensive regulation and supervision to which we are subject, various
regulatory initiatives that may affect us and regulatory and other legal
actions involving us;
o Farm Family Holdings' primary reliance, as a holding company, on dividends
and other payments from its subsidiaries for funds to meet its obligations,
and regulatory restrictions on its subsidiaries to pay such dividends;
o the impact on our revenues and profitability from prevailing economic,
regulatory, demographic and other conditions in New York, New Jersey and
the other states in which we operate;
o storm and weather related losses may have a material adverse impact on our
results of operations, financial condition and cash flow;
o the need to adjust the duration of assets in order to meet anticipated cash
flow requirements of our policyholder obligations; and
o the impact of the Year 2000 related issues on our business.
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-K are 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-K
include, but are not limited to, statements concerning our exposure to interest
rate and market risk, statements regarding the adequacy of the Company's capital
resources, liquidity, 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-K 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, exposure to catastrophic loss, the frequency
and severity of weather related losses, geographic concentration of loss
exposure in New York, New Jersey and the Northeastern United States generally,
the effect of regulatory changes governing personal automobile insurance in New
Jersey and the impact thereof on the Company's direct written premium, losses
and loss adjustment expenses, the risks associated with the legislative,
regulatory and competitive environments in the states in which the Company
currently operates, heightened competition, including specifically the
intensification of competition, failure to obtain new customers or to retain
existing customers, the effect of the uncertainties related to the Year 2000
issue, the Company's primary reliance, as a holding company, on dividends from
its subsidiaries and the applicable regulatory restrictions on the ability of
the Company's subsidiaries to pay such dividends, and conditions specific to the
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,
tax law changes and other risk factors listed from time to time in the Company's
Securities and Exchange Commission filings. Accordingly, there can be no
assurance that actual results will conform to the forward-looking statements in
this Form 10-K.
17
<PAGE>
<TABLE>
<CAPTION>
Executive Officers of the Registrant
Date First Elected
Officer of
Registrant or
Name Age Position Presently Held with Registrant Subsidiary
- -------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Philip P. Weber 51 President & Chief Executive Officer 1987
James J. Bettini 45 Executive Vice President - Operations 1990
Victoria M. Stanton 40 Executive Vice President, 1991
General Counsel and Secretary
Timothy A. Walsh 38 Executive Vice President - Finance and Treasurer 1996
William T. Conine 51 Senior Vice President - Information Services, Farm 1985
Family Casualty Insurance Company and Farm Family
Life Insurance Company
Dale E. Wyman 57 Senior Vice President - New York Sales, Farm 1989
Family Casualty Insurance Company and Farm Family
Life Insurance Company
Richard E. Long 43 Senior Vice President - Casualty Claims, Farm 1999
Family Casualty Insurance Company
Sharon T. DiLorenzo 43 Senior Vice President - Life Operations, Farm 1996
Family Life Insurance Company
</TABLE>
There are no family relationships among any of the executive officers nor
are there any arrangements or understandings between any person pursuant to
which he/she was elected as an officer. All officers serve at the pleasure of
the Board of Directors, but subject to the foregoing, are elected for terms of
approximately one year until our next Annual Meeting.
Mr. Bettini currently serves as a Director of Ambanc Holding Co., Inc.
The Registrant or its subsidiary has employed all of the Executive Officers
of the Registrant in various executive or administrative capacities for at least
five years, except for the following:
Mr. Walsh has served as Executive Vice President - Finance & Treasurer of
Farm Family Holdings since December 1996 and Executive Vice President - Finance
& Treasurer of Farm Family Casualty and Farm Family Life since April 1997, as
Executive Vice President - Finance of Farm Family Casualty and Farm Family Life
from December 1996 to April 1997, and as Treasurer of Farm Family Holdings from
October 1996 to December 1996. Mr. Walsh was Senior Vice President - Finance of
Farm Family Casualty and Farm Family Life from March 1996 to December 1996, and
was previously Director of Corporate Development for Farm Family Casualty and
Farm Family Life from August 1995 to March 1996. Previously, Mr. Walsh was Vice
President, Finance & Chief Financial Officer with MPW Industrial Services, Inc.,
Columbus, OH, from April 1994 to August 1995, Corporate Controller of NSC
Corporation, Methuen, MA from July 1992 to April 1994 and Senior Manager at KPMG
Peat Marwick from July 1983 to July 1992. Mr. Walsh currently serves as a
Director of MPW Industrial Services Group, Inc.
ITEM 2. PROPERTIES
We own our home office buildings located in Glenmont, New York, consisting
of three buildings containing a total of approximately 140,000 square feet of
space. We believe our property and facilities are adequate and suitable for our
current and anticipated future needs.
ITEM 3. LEGAL PROCEEDINGS
We are subject to litigation in the normal course of business. Based upon
information presently available, management believes that resolution of these
legal actions will not have a material adverse effect on our consolidated
results of operations and financial condition. However, given the uncertainties
attendant to litigation, there can be no assurance that our consolidated results
of operations and financial condition will not be materially adversely affected
by any threatened or pending litigation.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None
18
<PAGE>
PART II
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON STOCK AND RELATED
STOCKHOLDER MATTERS
Our common stock is traded on the New York Stock Exchange. There were
approximately 26,975 registered holders of our common stock on February 28,
2000. We have never paid cash dividends on shares of our common stock. We
currently intend to retain any earnings in order to develop our business and
support our operations, and, as such, do not anticipate that we will pay any
dividends to stockholders in the foreseeable future. The declaration of
dividends in the future is at the discretion of our Board of Directors, subject
to certain regulatory constraints and will depend upon, among other things, our
results of operations, financial condition, cash requirements, dividends from
our insurance subsidiaries, future prospects and other factors.
Discussion regarding the distribution of dividends from our insurance
subsidiaries is included at Note 15 of the Notes to the Consolidated Financial
Statements on page 42 of our Annual Report, incorporated herein by reference in
response to Item 8 hereof and included as part of Exhibit 13 to this Form 10-K.
The high and low New York Stock Exchange closing market prices for our
common stock for each quarter during 1999 and 1998 were as follows:
<TABLE>
<CAPTION>
For the Quarter Ended High Low
- ---------------------------------------------------------------------
1998
<S> <C> <C>
First quarter 38 3/4 31 5/8
Second quarter 42 5/8 38 9/16
Third quarter 40 5/8 29 1/4
Fourth quarter 38 3/16 28
1999
First quarter 34 3/8 31 3/4
Second quarter 36 15/16 31 9/16
Third quarter 40 34 1/8
Fourth quarter 43 38 5/8
</TABLE>
ITEM 6. SELECTED FINANCIAL DATA
The "Selected Financial Data" on page 9 of the Annual Report is
incorporated herein by reference and included as part of Exhibit 13 to this Form
10-K.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
The "Management's Discussion and Analysis of Financial Condition and
Results of Operations" on pages 10 - 21 of our 1999 Annual Report is
incorporated herein by reference and included as part of Exhibit 13 to this Form
10-K.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The Quantitative and Qualitative Disclosures about Market Risk under the
caption "Market Sensitive Instruments and Risk Management" on page 11 of our
1999 Annual Report is incorporated herein by reference and included as part of
Exhibit 13 to this Form 10-K.
19
<PAGE>
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
Our Consolidated Financial Statements, including the accompanying Notes to
Consolidated Financial Statements and Report of Independent Accountants, on
pages 22 - 47 of our 1999 Annual Report are incorporated herein by reference and
included as part of Exhibit 13 to this Form 10-K.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON
ACCOUNTING AND FINANCIAL DISCLOSURE
There were no disagreements with our independent auditors.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
Certain information regarding our directors is located in the Proxy
Statement under the caption "Item 1 - Election of Directors" and is incorporated
herein by reference.
Information regarding our executive officers in Item 1 of Part 1 of this
Report under the caption "Executive Officers of the Registrant" is incorporated
herein by reference.
Information required by Item 405 of Regulation S-K of the Securities
Exchange Act of 1934 located in the Proxy Statement under the caption "Section
16(a) Beneficial Ownership Reporting Compliance" is incorporated herein by
reference.
ITEM 11. EXECUTIVE COMPENSATION
Information regarding executive compensation located in the Proxy Statement
under the caption "Item 1 - Election of Directors - Compensation of Directors",
"Executive Compensation - Summary Compensation Table, Option/SAR Grants in Last
Fiscal Year, Aggregated Option/SAR Exercises in Last Fiscal Year and Fiscal
Year-End Option/SAR Values, Pension Benefits, Severance Plan, Change of Control
Arrangements and Compensation Committee Interlocks and Insider Participation" is
incorporated herein by reference.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
Information regarding security ownership of certain beneficial owners and
management located in the Proxy Statement under the caption "Stock Ownership of
Management and Certain Beneficial Owners" is incorporated herein by reference.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Information regarding certain relationships and related transactions
located in the Proxy Statement under the caption "Certain Relationships and
Related Transactions" is incorporated herein by reference.
20
<PAGE>
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(a)1& 2 An "Index to Financial Statements and Financial Statement Schedules"
has been filed as a part of this Report beginning on page S-1 hereof.
(a)3 An "Exhibit Index" has been filed as a part of this report beginning
on page E-1 hereof and is incorporated herein by reference.
(b) Reports on Form 8-K:
On October 28, 1999, a Report on Form 8-K was filed regarding a press
release announcing the results of our operations for the three months
and the nine months ended September 30, 1999.
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, the Registrant has duly caused this report to be signed on its
behalf by the undersigned, thereunto duly authorized.
FARM FAMILY HOLDINGS, INC.
By: /s/ Philip P. Weber Philip P. Weber, President
March 29, 2000
21
<PAGE>
SIGNATURES
Pursuant to the requirements of Securities Exchange Act of 1934, this report has
been signed below by the following persons on behalf of the Registrant and in
the capacities and on the dates indicated.
<TABLE>
<S> C> <C> <C>
President and CEO
/s/ Philip P. Weber (Principal Executive Officer) /s/ Arthur D. Keown, Jr. Director
- ------------------------------------ -----------------------------
Philip P. Weber February 29, 2000 Arthur D. Keown, Jr. February 29, 2000
Executive Vice President - Finance &
Treasurer
/s/ Timothy A. Walsh (Principal Financial & Accounting Officer) /s/ W. Bruce Krenning Director
- ------------------------------------ -----------------------------
Timothy A. Walsh February 29, 2000 W. Bruce Krenning February 29, 2000
/s/ Robert L. Baker Director /s/ John W. Lincoln Director
- ------------------------------------ -----------------------------
Robert L. Baker February 29, 2000 John W. Lincoln February 29, 2000
/s/ Wayne R. Bissonette Director /s/ Wayne A. Mann Director
- ------------------------------------ -----------------------------
Wayne R. Bissonette February 29, 2000 Wayne A. Mann February 29, 2000
/s/ Randolph C. Blackmer, Jr. Director /s/ Frank W. Matheson Director
- ------------------------------------ -----------------------------
Randolph C. Blackmer, Jr. February 29, 2000 Frank W. Matheson February 29, 2000
/s/ Fred G. Butler, Sr. Director /s/ John P. Moskos Director
- ------------------------------------ -----------------------------
Fred G. Butler, Sr. February 29, 2000 John P. Moskos February 29, 2000
/s/ Joseph E. Calhoun Director /s/ Norma R. O'Leary Director
- ------------------------------------ -----------------------------
Joseph E. Calhoun February 29, 2000 Norma R.O'Leary February 29, 2000
/s/ James V. Crane Director /s/ John I. Rigolizzo, Jr. Director
- ------------------------------------ -----------------------------
James V. Crane February 29, 2000 John I. Rigolizzo, Jr. February 29, 2000
/s/ Sandra A. George Director /s/ Howard T. Sprow Director
- ------------------------------------ -----------------------------
Sandra A. George February 29, 2000 Howard T. Sprow February 29, 2000
/s/ Stephen J. George Director /s/ William M. Stamp, Jr. Director
- ------------------------------------ -----------------------------
Stephen J. George February 29, 2000 William M. Stamp, Jr. February 29, 2000
/s/ Gordon H. Gowen Director /s/ Charles A. Wilfong Director
- ------------------------------------ -----------------------------
Gordon H. Gowen February 29, 2000 Charles A. Wilfong February 29, 2000
/s/ Jon R. Greenwood Director /s/ Tyler P. Young Director
- ------------------------------------ -----------------------------
Jon R. Greenwood February 29, 2000 Tyler P. Young February 29, 2000
/s/ Clark W. Hinsdale III Director
- ------------------------------------
Clark W. Hinsdale III February 29, 2000
</TABLE>
22
<PAGE>
FARM FAMILY HOLDINGS, INC. AND SUBSIDIARIES
INDEX TO FINANCIAL STATEMENTS AND FINANCIAL STATEMENT SCHEDULES
Year Ended December 31, 1999
<TABLE>
<CAPTION>
Page
<S> <C> <C>
Report of Independent Accountants on Financial Statement Schedules S-2
Schedule I Summary of Investments - Other than Investments in Related Parties S-3
Schedule II Condensed Financial Information of the Registrant S-4
Schedule III Supplementary Insurance Information S-8
Schedule IV Reinsurance S-9
Schedule VI Supplemental Information Concerning
Property - Casualty Insurance Operations S-10
Page in
Page in Exhibit 13
Annual Report to Form 10-K
Consolidated Statements of Income and Comprehensive Income 22 E-26
Consolidated Balance Sheets 23 E-27
Consolidated Statements of Stockholders' Equity 24 E-28
Consolidated Statements of Cash Flows 25 E-29
Notes to Consolidated Financial Statements 26 E-30
Report of Independent Accountants 47 E-50
</TABLE>
S-1
<PAGE>
Report of Independent Accountants on Financial Statement Schedules
To the Board of Directors
of Farm Family Holdings, Inc.
Our audits of the consolidated financial statements referred to in our report
dated February 11, 2000, appearing in the 1999 Annual Report to Shareholders of
Farm Family Holdings, Inc. and Subsidiaries (which report and consolidated
financial statements are incorporated by reference in this Annual Report on Form
10-K) also included an audit of the financial statement schedules listed in Item
14(a)(2) of this Form 10-K. In our opinion, these financial statement schedules
present fairly, in all material respects, the information set forth therein when
read in conjunction with the related consolidated financial statements.
/s/ PricewaterhouseCoopers LLP
Albany, New York
February 11, 2000
S-2
<PAGE>
Farm Family Holdings, Inc. and Subsidiaries
Schedule I
Summary of Investments Other Than Investments in Related Parties
December 31, 1999
($ in thousands)
<TABLE>
<CAPTION>
Cost/
Amortized Balance Sheet
Type of Investment Cost Fair Value Carrying Value
- --------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Available for sale
Fixed maturities:
United States Government and government agencies and
authorities $30,741 $30,046 $30,046
States, municipalities and political subdivisions 196,311 189,124 189,124
Public utilities 119,326 112,310 112,310
All other corporate bonds 438,926 417,373 417,373
Mortgage-backed securities 202,091 196,435 196,435
Redeemable preferred stock 15,455 14,766 14,766
- --------------------------------------------------------------------------------------------------------------------------
Total fixed maturities 1,002,850 960,054 960,054
- --------------------------------------------------------------------------------------------------------------------------
Equity securities:
Common stocks:
Public utilities 3,108 2,908 2,908
Banks, trusts and insurance companies 7,304 6,770 6,770
Industrial and miscellaneous 32,407 36,131 36,131
- --------------------------------------------------------------------------------------------------------------------------
Total equity securities 42,819 45,809 45,809
- --------------------------------------------------------------------------------------------------------------------------
Total available for sale 1,045,669 1,005,863 1,005,863
- --------------------------------------------------------------------------------------------------------------------------
Held to Maturity
Fixed maturities:
States, municipalities and political subdivisions 4,009 3,931 4,009
All other Corporate bonds 3,962 3,889 3,962
- --------------------------------------------------------------------------------------------------------------------------
Total held to maturity 7,971 7,820 7,971
- --------------------------------------------------------------------------------------------------------------------------
Mortgage loans 26,832 26,832 26,832
Short-term investments 30,839 30,839 30,839
Other invested assets 176 176 176
- --------------------------------------------------------------------------------------------------------------------------
Total investments $1,111,487 $1,071,530 $1,071,681
==========================================================================================================================
</TABLE>
S-3
<PAGE>
Farm Family Holdings, Inc. and Subsidiaries
Schedule II
Condensed Financial Information of Registrant (Parent Company)
Statements of Operations
($ in thousands)
<TABLE>
<CAPTION>
Years Ended December 31, 1999 1998 1997
- -----------------------------------------------------------------------------------------------------------------------
Revenues:
<S> <C> <C> <C>
Investment income $388 $518 $608
Realized gains 15 3 ----
- -----------------------------------------------------------------------------------------------------------------------
Total revenues 403 521 608
Expenses:
General and administrative expenses (1,481) (1,403) (1,347)
- -----------------------------------------------------------------------------------------------------------------------
Loss before federal income tax benefit and preferred stock dividends (1,078) (882) (739)
Federal income tax benefit 302 306 125
- -----------------------------------------------------------------------------------------------------------------------
Loss before preferred stock dividends (776) (576) (614)
Preferred stock dividends (278) ---- ----
- -----------------------------------------------------------------------------------------------------------------------
Net loss from operations (1,054) (576) (614)
Income from investments in subsidiaries 19,672 19,247 18,114
- -----------------------------------------------------------------------------------------------------------------------
Net income 18,618 18,671 17,500
- -----------------------------------------------------------------------------------------------------------------------
Other comprehensive Income:
Unrealized holding gains (losses) arising during the year (net of tax
expense (benefit) of $(6,902), $1,046 and $(1,255)) (11,718) 1,943 (2,329)
Reclassification adjustment for (gains) losses included in net income
(net of tax expense (benefit) of $(296), $211 and $1,622) (550) 390 3,011
- -----------------------------------------------------------------------------------------------------------------------
Other comprehensive income (loss) (12,268) 2,333 682
- -----------------------------------------------------------------------------------------------------------------------
Comprehensive income $6,350 $21,004 $18,182
=======================================================================================================================
</TABLE>
S-4
<PAGE>
Farm Family Holdings, Inc. and Subsidiaries
Schedule II
Condensed Financial Information of Registrant (Parent Company)
Balance Sheets
($ in thousands)
<TABLE>
<CAPTION>
As of December 31, 1999 1998
- -------------------------------------------------------------------------------------------------------------
Assets:
<S> <C> <C>
Fixed maturities available for sale $4,463 $7,436
Investment in subsidiaries 180,989 135,059
Cash and cash equivalents 400 156
Investment income due or accrued 86 145
Deferred tax asset 42 ----
Other assets 2,566 2,387
- -------------------------------------------------------------------------------------------------------------
Total assets $188,546 $145,183
=============================================================================================================
Liabilities:
Payable to affiliates $118 $129
Deferred tax liability ---- 72
Other liabilities 1,404 744
- -------------------------------------------------------------------------------------------------------------
Total liabilities 1,522 945
- -------------------------------------------------------------------------------------------------------------
Commitments and Contingencies
Mandatory redeemable preferred stock 5,830 ----
Stockholders' Equity:
Common stock, $.01 par value, 10,000,000 shares authorized
and 6,110,684 and 5,253,813 shares issued and outstanding 61 53
Additional paid-in capital 123,504 92,906
Retained earnings 60,172 41,554
Accumulated other comprehensive income (2,543) 9,725
- -------------------------------------------------------------------------------------------------------------
Total stockholders' equity 181,194 144,238
- -------------------------------------------------------------------------------------------------------------
Total liabilities and stockholders' equity $188,546 $145,183
=============================================================================================================
</TABLE>
S-5
<PAGE>
Farm Family Holdings, Inc. and Subsidiaries
Schedule II
Condensed Financial Information of Registrant (Parent Company)
Statements of Cash Flows
($ in thousands)
<TABLE>
<CAPTION>
Years Ended December 31, 1999 1998 1997
- ----------------------------------------------------------------------------------------------------------
Cash Flows From Operating Activities
<S> <C> <C> <C>
Net income $18,618 $18,671 $17,500
Adjustments to reconcile net income to net cash provided by
operating activities:
Realized investment gains (15) (3) ----
Amortization of bond discount (16) (18) (17)
Deferred income taxes (8) (8) (31)
Changes in assets and liabilities:
Equity in net income of subsidiaries (19,672) (19,247) (18,114)
Accrued investment income 59 12 (5)
Other assets, net (196) (1,440) (716)
Payable to affiliates (11) (63) (164)
Other liabilities 660 195 75
- ----------------------------------------------------------------------------------------------------------
Total adjustments (19,199) (20,572) (18,972)
- ----------------------------------------------------------------------------------------------------------
Net cash used in operating activities (581) (1,901) (1,472)
- ----------------------------------------------------------------------------------------------------------
Cash Flows From Investing Activities
Proceeds from sales:
Fixed maturities available for sale 2,720 303 ----
Investment purchases:
Acquisition costs (1,895) ---- ----
Investment in subsidiary ---- (55) (70)
- ----------------------------------------------------------------------------------------------------------
Net cash provided by(used in) investing activities 825 248 (70)
- ----------------------------------------------------------------------------------------------------------
Net change in cash and cash equivalents 244 (1,653) (1,542)
Cash and cash equivalents, beginning of year 156 1,809 3,351
- ----------------------------------------------------------------------------------------------------------
Cash and cash equivalents, end of year $400 $156 $1,809
==========================================================================================================
</TABLE>
S-6
<PAGE>
Farm Family Holdings, Inc. and Subsidiaries
Schedule II
Condensed Financial Information of Registrant (Parent Company)
Notes To Condensed Financial Information
1. Basis of Presentation
The financial statements of the registrant should be read in conjunction with
the Consolidated Financial Statements and Notes thereto included in the Farm
Family Holdings, Inc. 1999 Annual Report.
The accompanying condensed financial information includes the accounts of Farm
Family Holdings, Inc. Farm Family Holdings, Inc. was incorporated on February
14, 1996.
2. Preferred Stock
Farm Family Holdings' Certificate of Incorporation authorizes the issuance of
1,000,000 shares of preferred stock with a par value of $.01, issuable in
classes or series. Of the 1,000,000 shares authorized, 163,214 shares of
mandatory redeemable preferred stock have been issued and outstanding and are
reported in the accompanying consolidated balance sheets as mandatory redeemable
preferred stock. The remaining 836,786 shares are reported in preferred stock in
the stockholders' equity section. None of the remaining 836,786 shares have been
issued as of December 31, 1999.
In connection with the acquisition of Farm Family Life, Farm Family Holdings
issued 163,214 shares of 6 1/8% Series A preferred stock with a redemption value
of $5,830,000, or $35.72 per share. Dividends on the preferred stock are payable
on each January 15, April 15, July 15 and October 15 and must be fully paid or
declared with funds set aside for payment before any dividend can be declared or
paid on any other class of Farm Family Holdings' stock. The preferred stock must
be redeemed by Farm Family Holdings on April 7, 2019 (or the next business day)
and may be redeemed, at Farm Family Holdings' option, in whole or in part, on
and after April 6, 2009. Farm Family Holdings has the option to pay the
redemption amount in cash or by delivery of Farm Family Holdings' common stock.
S-7
<PAGE>
Farm Family Holdings, Inc. and Subsidiaries
Schedule III
Supplementary Insurance Information
($ in Thousands)
<TABLE>
<CAPTION>
Reserves Amortization
for Losses, of
Losses, Premium Loss Deferred
Deferred Expenses Revenue Adjustment Policy Other Premiums
Policy and and Net Expenses Acquisition Operating Written
Acquisition Contract Unearned Policyholder Contract Investment And Contract Costs and Costs and (Excluding
Segment Costs Benefits Premiums Funds Charges Income (1) Benefits PVFP Expenses Life)
- ------------------------------------------------------------------------------------------------------------------------------------
1999
Property and casualty
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
insurance $13,975 $186,130 $74,364 $---- $188,921 $20,449 $141,509 $36,378 $10,252 $191,702
Life Insurance 3,655 239,891 ---- 416,971 27,799 37,673 38,710 1,804 9,293 ----
Corporate and other ---- ---- ---- ---- ---- 388 ---- ---- 1,564 ----
Intersegment
eliminations ---- ---- ---- ---- ---- 48 ---- ---- (675) ----
- ------------------------------------------------------------------------------------------------------------------------------------
Total $17,630 $426,021 $74,364 $416,971 $216,720 $58,558 $180,219 $38,182 $20,434 $191,702
====================================================================================================================================
1998
Property and casualty
insurance $13,668 $174,435 $71,209 $---- $181,756 $18,601 $134,302 $35,019 $10,951 $188,824
Life Insurance ---- ---- ---- ---- ---- ---- ---- ---- ---- ----
Corporate and other ---- ---- ---- ---- ---- 518 ---- ---- 1,480 ----
Intersegment
eliminations ---- ---- ---- ---- ---- ---- ---- ---- ---- ----
- ------------------------------------------------------------------------------------------------------------------------------------
Total $13,668 $174,435 $71,209 $---- $181,756 $19,119 $134,302 $35,019 $12,431 $188,824
====================================================================================================================================
1997
Property and casualty
insurance $12,613 $156,622 $66,069 $---- $149,220 $17,468 $103,301 $28,794 $13,533 $159,245
Life Insurance ---- ---- ---- ---- ---- ---- ---- ---- ---- ----
Corporate and other ---- ---- ---- ---- ---- 609 ---- ---- 1,377 ----
Intersegment
eliminations ---- ---- ---- ---- ---- ---- ---- ---- ---- ----
- ------------------------------------------------------------------------------------------------------------------------------------
Total $12,613 $156,622 $66,069 $---- $149,220 $18,077 $103,301 $28,794 $14,910 $159,245
====================================================================================================================================
</TABLE>
(1) Each of the Company's subsidiaries maintain separate investment portfolios.
Therefore, net investment income attributable to each segment is readily
available.
S-8
<PAGE>
Farm Family Holdings, Inc. and Subsidiaries
Schedule IV
Reinsurance
($ in Thousands)
<TABLE>
<CAPTION>
Percentage of
Ceded to Other Assumed from Amount
Gross Amount Companies Other Companies Net Amount Assumed to Net
- ----------------------------------------------------------------------------------------------------------------------
Year ended December 31, 1999
<S> <C> <C> <C> <C> <C>
Life insurance in force $3,993,117 $510,174 ---- $3,422,943 ----
============================================================
Premiums and contract charges:
Property and casualty insurance $189,337 $15,385 $14,969 $188,921 7.9%
Life insurance 26,532 876 ---- 25,656 ----
Accident and health insurance 2,385 242 ---- 2,143 ----
------------------------------------------------------------
Total premiums and contract charges $218,254 $16,503 $14,969 $216,720 6.9%
============================================================
Year ended December 31, 1998
Property and casualty insurance $180,996 $13,277 $14,037 $181,756 7.7%
============================================================
Year ended December 31, 1997
Property and casualty insurance $160,988 $22,454 $10,686 $149,220 7.2%
============================================================
</TABLE>
Note: The Company did not have premiums and contract charges earned on life
insurance or accident and health insurance prior to the acquisition of
Farm Family Life, effective April 6, 1999.
S-9
<PAGE>
Farm Family Holdings, Inc. and Subsidiaries
Schedule Vl
Supplemental Information Concerning Consolidated
Property-Casualty Insurance Operations
($ in Thousands)
<TABLE>
<CAPTION>
Reserve for
Deferred Unpaid claims Claims & Claim Adj.Exp. Paid Claims Premium
Policy and Claim Net Incurred Related to Amortization and Claim Written, Net
Acquisition Adjustment Unearned Earned Investment ------------------------ of Adjustment of
Costs Expenses Premiums Premiums Income Current Year Prior Years DAC Expenses Reinsurance
- -----------------------------------------------------------------------------------------------------------------------------------
Year Ended
December 31, 1999
Property and
casualty
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
insurance $13,975 $186,130 $74,364 $188,921 $20,449 $146,829 $(5,320) $36,378 $132,093 $191,702
Year Ended
December 31, 1998
Property and
casualty
insurance 13,668 174,435 71,209 181,756 18,601 138,201 (3,899) 35,019 118,343 188,824
Year Ended
December 31, 1997
Property and
casualty
insurance 12,613 156,622 66,069 149,220 17,468 107,273 (3,972) 28,794 90,116 159,245
</TABLE>
S-10
<PAGE>
Exhibit Index
Farm Family Holdings, Inc. Form 10-K
For The Year Ended December 31, 1999
<TABLE>
<CAPTION>
Sequential
Exhibit Page
Number Document Description Number
- --------------- -------------------------------------------------------------------------------------------------------- -----------
<S> <C> <C>
*2.1 Plan of Reorganization and Conversion dated February 14, 1996 as amended by Amendment No. 1, dated
April 23, 1996
*3.1 Certificate of Incorporation of Farm Family Holdings, Inc.
*3.2 Bylaws of Farm Family Holdings, Inc.
4.1 Certificate of Designations of Junior Participating Cumulative Preferred Stock of Farm Family
Holdings, Inc. (incorporated by reference to Exhibit 4.3 to Form S-8, Registration No. 333-80723 filed
with the Securities and Exchange Commission on June 15, 1999)
4.2 Certificate of Corrections to Certificate of Designations of Junior Participating Cumulative Preferred
Stock of Farm Family Holdings, Inc. (incorporated by reference to Exhibit 4.4 to Form S-8,
Registration No. 333-80723 filed with the Securities and Exchange Commission on June 15, 1999)
4.3 Certificate of Designations of Farm Family Holdings, Inc. Preferred Stock, Series A (incorporated by
reference to Exhibit 4.5 to Form S-8, Registration No. 333-80723 filed with the Securities and
Exchange Commission on June 15, 1999)
4.4 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 of Form 8-K/A filed with the
Securities and Exchange Commission on June 14, 1999)
4.5 Registration Rights Agreement, dated as of April 6, 1999 by and among Farm Family Holdings, Inc. and
the Shareholders of the Farm Family Life Insurance Company (incorporated by reference to Farm Family
Holdings, Inc. Form 10-Q for the quarter ended June 30, 1999)
10.1 Amended and Restated Option Purchase Agreement, dated February 26, 1998 among Farm Family Holdings,
Inc. and the Shareholders of Farm Family Life Insurance Company, as amended by Amendment No. 1 dated
as of April 28, 1998 and Amendment No. 2 dated as of January 14, 1999 (incorporated by reference to
the Proxy Statement of Farm Family Holdings, Inc. dated February 17, 1999)
**10.2 Amended and Restated Expense Sharing Agreement, made effective as of February 14, 1996, by and among
Farm Family Mutual Insurance Company, Farm Family Life Insurance Company and Farm Family Holdings, Inc.
10.3 Indenture of Lease, made the 1st day of January 1999, between Farm Family Life Insurance Company and
Farm Family Casualty Insurance Company (incorporated by reference to Farm Family Holdings, Inc. Form
10-Q for the quarter ended March 31, 1999)
E-1
<PAGE>
Sequential
Exhibit Page
Number Document Description Number
- --------------- -------------------------------------------------------------------------------------------------------- -----------
10.4 Underlying Multi-Line Per Risk Reinsurance Contract, effective January 1, 1995, issued to Farm Family
Mutual Insurance Company by The Subscription Reinsurer(s) Executing the Interests and Liabilities
Agreement(s) Attached Thereto, as amended by Addendum No. 1, effective January 1, 1996 (Incorporated
by reference to Registration Statement No. 333-4446), Addendum No. 2, effective January 1, 1996,
Addendum No. 3, effective July 26, 1996 (Incorporated by reference to Farm Family Holdings, Inc. 1997
Form 10-K for the year ended December 31, 1996), Addendum No. 4, effective January 1, 1997
(Incorporated by reference to Farm Family Holdings, Inc. Form 10-Q for the quarter ended March 31,
1997), and Termination Addendum, effective December 31, 1997 (Incorporated by reference to Farm Family
Holdings, Inc. Form 10-K/A for the year ended December 31, 1997)
10.5 Umbrella Quota Share Reinsurance Contract, effective January 1, 1995, issued to Farm Family Mutual
Insurance Company and United Farm Family Insurance Company, as amended by Addendum No. 1, effective
January 1, 1995 (Incorporated by reference to Registration Statement No. 333-4446), and Addendum No. 2
effective July 26, 1996 (Incorporated by reference to Farm Family Holdings, Inc. 1997 Form 10-K for
the year ended December 31, 1996), Addendum No. 3, effective January 1, 1997 (Incorporated by
reference to Farm Family Holdings, Inc. Form 10-Q for the quarter ended March 31, 1997), and
Termination Addendum, effective January 1, 1998 (Incorporated by reference to Farm Family Holdings,
Inc. Form 10-K/A for the year ended December 31, 1997)
10.6 Form of Membership List Purchase Agreement between Farm Family Mutual Insurance Company and each of
the Farm Bureaus (incorporated by reference to Exhibit 10.9 to Form S-1, Registration No. 333-4446
filed with the Securities and Exchange Commission on May 3, 1996) as amended by Amendment No. 1 to
Membership List Purchase Agreements, effective July 26, 1996 (incorporated by reference to Farm Family
Holdings, Inc.'s Form 10-Q for the quarter ended March 31, 1997) and Amendment No. 2 to Membership
List Purchase Agreements (Farm Family Casualty Insurance Company), effective January 1, 1998
(incorporated by reference to Farm Family Holdings, Inc.'s Form 10-Q for the quarter ended June 30,
1999)
10.7 Form of Membership List Purchase Agreement between Farm Family Life Insurance Company and each of the
Farm Bureaus, as amended by Amendment No. 1 to Membership List Purchase Agreements (Farm Family Life
Insurance Company), effective January 1, 1998 (incorporated by reference to Farm Family Holdings,
Inc.'s Form 10-Q for the quarter ended June 30, 1999)
10.8 Farm Family Life Insurance Company Annual Incentive Plan, as amended and restated as of October 27,
1998 (incorporated by reference to Farm Family Holdings, Inc.'s Form 10-Q for the quarter ended June
30, 1999) as amended by Amendment No. 1 to the Farm Family Life Insurance Company Annual Incentive
Plan effective July 28, 1999 (incorporated by reference to Farm Family Holdings, Inc.'s Form 10-Q for
the quarter ended September 30, 1999)
10.9 Farm Family Supplemental Profit Sharing and Money Purchase Plan, effective January 1, 1997
(incorporated by reference to Farm Family Holdings, Inc.'s Form 10-K for the year ended December 31,
1996) as amended by Amendment No. 1 to Supplemental Profit Sharing and Money Purchase Plan effective
as of April 27, 1999 (incorporated by reference to Farm Family Holdings, Inc.'s Form 10-Q for the
quarter ended June 30, 1999) and Amendment No. 2 to the Farm Family Holdings, Inc. Supplemental Profit
Sharing and Money Purchase Plan effective July 28, 1999 (incorporated by reference to Farm Family
Holdings, Inc.'s Form 10-Q for the quarter ended September 30, 1999)
*10.10 Service Agreement, made effective as of July 25, 1988 by and between Farm Family Mutual Insurance
Company and United Farm Family Insurance Company
E-2
<PAGE>
Sequential
Exhibit Page
Number Document Description Number
- --------------- -------------------------------------------------------------------------------------------------------- -----------
10.11 Farm Family Life Insurance Company, Farm Family Casualty Insurance Company, Farm Family Holdings, Inc.
Officer Severance Pay Plan Effective July 28, 1999 (incorporated by reference to Farm Family Holdings,
Inc.'s Form 10-Q for the quarter ended September 30, 1999)
*10.12 Farm Family Mutual Insurance Company Supplemental Employee Retirement Plan, adopted as of January 1,
1994
10.13 Farm Family Holdings, Inc. Directors' Deferred Compensation Plan, effective January 1, 1997
(Incorporated by reference to Farm Family Holdings, Inc. Form 10-K for the year ended December 31,
1996) as amended by Amendment No. 1 dated as of October 27, 1998 (incorporated by reference to Farm
Family Holdings, Inc.'s Form 10-K for the year ended December 31, 1998) and Amendment No. 2 effective
July 28, 1999 (incorporated by reference to Farm Family Holdings, Inc.'s Form 10-Q for the quarter
ended September 30, 1999)
10.14 Farm Family Holdings, Inc. Officers' Deferred Compensation Plan, effective January 1, 1997
(Incorporated by reference to Farm Family Holdings, Inc. Form 10-K for the year ended December 31,
1996) as amended by Amendment No. 1 dated as of October 27, 1998 (incorporated by reference to Farm
Family Holdings, Inc.'s Form 10-K for the year ended December 31, 1998) and Amendment No. 2 effective
July 28, 1999 (incorporated by reference to Farm Family Holdings, Inc.'s Form 10-Q for the quarter
ended September 30, 1999)
10.15 Farm Family Holdings, Inc. Annual Incentive Plan effective, as amended and restated as of October 27,
1998 (incorporated by reference to Farm Family Holdings, Inc.'s Form 10-K for the year ended December
31, 1998) as amended by Amendment No. 1 effective July 28, 1999 (incorporated by reference to Farm
Family Holdings, Inc.'s Form 10-Q for the quarter ended September 30, 1999)
**10.16 Tax Payment Allocation Agreement effective January 1, 1996 by and between Farm Family Holdings, Inc.
and Farm Family Casualty Insurance Company
10.17 Excess Catastrophe Reinsurance Contract issued to Farm Family Casualty Insurance Company effective
January 1, 1997 (incorporated by reference to Farm Family Holdings, Inc. Form 10-Q for the quarter
ended March 31, 1997)
10.18 Farm Family Holdings, Inc. Omnibus Securities Plan, as amended by Amendment No. 1 dated February 13,
1997 (incorporated by reference to Exhibit 99 to Form S-8, Registration No. 333-8073 filed with the
Securities and Exchange Commission on June 15, 1999) and amended by Amendment No. 2 dated as of
October 27, 1998 (incorporated by reference to Farm Family Holdings, Inc.'s Form 10-K for the year
ended December 31, 1998) and Amendment No. 3 effective July 28, 1999 (incorporated by reference to
Farm Family Holdings, Inc.'s Form 10-Q for the quarter ended September 30, 1999)
10.19 Indenture of Lease made the 1st day of January 1999, between Farm Family Life Insurance Company and
New York Farm Bureau, Inc. (filed herewith)
13 Farm Family Holdings, Inc. 1999 Annual Report (only those portions of such Annual Report that are
incorporated by reference in this Report on Form 10-K)(filed herewith) E-14
21 Subsidiaries of the Registrant E-51
27 Financial Data Schedule (for electronic filing purposes only)
</TABLE>
* Incorporated by reference to Registration Statement No. 333-4446
** Incorporated by reference to Farm Family Holdings, Inc. Form 10-K for the
year ended December 31, 1996
E-3
Exhibit 10.19
LEASE
This Indenture of Lease, made this 1st day of January, 1999, between Farm
Family Life Insurance Company, a corporation organized and existing pursuant to
the laws of the State of New York, having its principal office and place of
business at Route 9W, Glenmont, New York 12077, hereinafter called the
"Landlord", and New York Farm Bureau, Inc., a corporation organized and existing
pursuant to the laws of the State of New York, having its office and principal
place of business at Route 9W, Glenmont, New York 12077, hereinafter called the
"Tenant".
A. TERM AND RENT
The Landlord hereby leases to the Tenant the following premises: Seven
Thousand Eight Hundred Fifty Nine (7,859) square feet located in the Landlord's
Home Office building at Route 9W, Glenmont, New York 12077, as and for office
space and in addition thereto, Two Thousand One Hundred Forty Eight (2,148)
square feet of storage space located in the same building and/or in a nearby
storage building also owned by Landlord, for a term to commence on the 1st day
of January, 1999 and to end December 31, 2001. Landlord and Tenant hereby
acknowledge that the 7,859 square feet designated as office space herein
includes an allocation for Tenant's use of common areas within the building and
is, therefore, a stipulated number for rent calculation purposes.
Provided that Tenant is not in default in the performance of this lease,
Tenant shall have the option to renew the lease for an additional term of three
(3) years commencing at the expiration of the initial lease term. All of the
terms and conditions of the lease shall apply. The option shall be exercised by
written notice given to Landlord not less than 180 days prior to the expiration
of the initial lease term. If notice is not given in the manner provided herein
within the time specified, this option shall expire.
The Tenant shall pay to the Landlord, without notice or demand and without
abatement, deduction or set off, in lawful money of the United States, rental at
the rate of $13.72 per square foot for office space and $2.74 per square foot
for storage space for a total of $113,711 for the period January 1, 1999 through
December 31, 1999. For the period January 1, 2000 through December 31, 2001 (and
January 1, 2002 through December 31, 2004 if the option to renew is exercised by
Tenant) the rent shall be based on the rent for the period January 1, 1999
through December 31, 1999 but it shall be adjusted annually by the adjustment in
the Housing Component of the Department of Labor's Consumer Price Index. Said
rent shall be paid in equal monthly installments in advance on the first day of
each calendar month, commencing January 1, 1999, at the office of the Landlord
or at such other place as the Landlord may designate. The Tenant shall also pay
the Landlord "additional rents" as hereinafter provided.
E-4
<PAGE>
B. DEFINITIONS
For purposes of this lease , the parties have agreed that:
1. The term "Lease Year" shall mean every period of twelve (12) consecutive
months commencing on the 1st day of January following the commencement of the
term of this lease.
2. The term "Real Property" shall mean collectively that land owned by
the Landlord in Glenmont, New York and the buildings attached to said land.
3. The term "Taxes" shall mean the total of the amount of real estate taxes
now or hereafter levied or assessed or imposed against the Real Property.
4. The term "Tax Base Year" shall mean: (i) the property tax assessments
for the Real Property for calendar year 1998 and (ii) the school tax assessments
for the Real Property for July 1997 through June 1998.
5. The term "Expenses" shall mean the total expenses paid by or incurred by
the Landlord in the operation of the Real Property for power, light and heat.
6. The term "Expense Base Year" shall mean the average of the costs paid by
or incurred by the Landlord for Expenses in calendar year 1997 and calendar year
1998.
C. TAXES
If the Taxes in any Lease Year shall be more than the Taxes in the Tax Base
Year by ten or more percent, then the Tenant shall pay to the Landlord as
additional rent, an amount equal to its proportionate share of any increase in
Taxes as may exceed 10 percent of the Taxes in the Tax Base Year. If the Taxes
in any Lease Year shall be less than the Taxes in the Tax Base Year by ten or
more percent, then the Landlord shall pay to the Tenant an amount equal to its
proportionate share of any reduction in Taxes as may exceed 10 percent of the
Taxes in the Tax Base Year. Tenant's proportionate share shall be a fraction
where the numerator is the total amount of square footage leased by Tenant and
the denominator is the total amount of square footage in the buildings attached
to the Real Property.
D. EXPENSES
If the Expenses in any Lease Year shall be more than the Expenses in the
Expense Base Year by ten or more percent, then the Tenant shall pay to the
Landlord as additional rent an amount equal to its proportionate share of any
increase in Expenses as may exceed 10 percent or more of the Expenses in the
Expense Base Year. If the Expenses in any Lease Year shall be less than the
Expenses in the Expense Base Year by 10 or more percent, then the Landlord shall
pay to the Tenant an amount equal to its proportionate share of any reduction in
Expenses as may exceed 10 percent of the Expenses in the Expense Base Year.
Tenant's proportionate share shall be a fraction where the numerator is the
total amount of square footage leased by Tenant and the denominator is the total
amount of square footage in the buildings attached to the Real Property.
E-5
<PAGE>
E. NEXT PAYMENT
Any additional rent due to the Landlord for Taxes or Expenses shall be paid
within thirty (30) days after the submission of a statement to the Tenant
showing the computation of the amount due to the Landlord. Any amounts due to
the Tenant for Taxes or Expenses shall be paid by the Landlord to the Tenant by
crediting such amount toward the payment of the monthly installment of fixed
rent becoming due on the first day of the month immediately following the
submission of such statement, or, in the case of the last Lease Year of the
term, shall be refunded to the Tenant within thirty (30) days after the end of
such last Lease Year. The Landlord shall make available records in reasonable
details supporting the items referred to in such statements for at least sixty
(60) days after the submission thereof, for examination at reasonable times by
the Tenant and its representatives.
F. BUILD OUT ALLOWANCE
The parties acknowledge that Landlord will, at Tenant's request, undertake
certain renovations of the leased premises prior to and during the term of the
lease. A "build out allowance" of $47,154 will be available to Tenant solely for
purposes of such renovations. The parties agree that, as of December 15, 1998,
certain renovations have been undertaken by the Landlord, with the Tenant's
knowledge and consent, the cost of which shall be allocated against the build
out allowance. Renovations which the Tenant may request after December 15,1998
will be subject to the mutual agreement of the Tenant and Landlord. Tenant
agrees to reimburse Landlord for the cost of any such renovations in excess of
the build out allowance.
G. STORAGE SPACE
1. During the term of the lease, Tenant will have the right to relinquish
its interest in all or part of the storage space leased hereunder, subject to
the following:
a. Tenant will give the Landlord 30 days prior written notice of its
intent to relinquish its leasehold interest in any portion of the leased storage
space;
b. The storage space to be relinquished by Tenant will, for each
written notice rendered, be at least one hundred (100) square feet of
contiguous space;
c. Tenant will promptly (but in no event later than 30 days from the
date of delivery of its written notice to the Landlord) remove all personal
property from such storage space and return such storage space to Landlord in
good order and condition, damages by the elements and ordinary wear and tear
excepted; and
d. Tenant will have no further rights or interests in any storage
space on which it relinquishes its leasehold interest under this provision.
Commencing on the 31st day from the date of delivery of its written notice
to the Landlord, the rental amount payable by Tenant under the lease shall be
appropriately adjusted to reflect any storage space relinquished under this
provision,
E-6
<PAGE>
2. Landlord agrees that it will store, at no additional expense to Tenant,
up to six (6) of Tenant's mail carts in the Home Office building of Landlord.
3. Landlord agrees that it will, at no additional expense to Tenant,
provide an enclosed area with a separate lock for Tenant's storage space in the
long term storage building. Tenant acknowledges that, in order to gain access to
the long term storage building after normal work hours (Monday through Friday
from 8:00 a.m. to 4:00 p.m., excluding holidays), it will be necessary to give
prior notice to Landlord. If Tenant will require access to the long term storage
building after normal work hours on any workday, then Tenant will give Landlord
notice by 4.p.m. on that day. If Tenant will require access to the long term
storage building on any Saturday, Sunday or holiday, then Tenant will give
Landlord notice by 4.p.m. on the last workday prior to such Saturday, Sunday or
holiday.
H. ADDITIONAL RIGHTS AND OBLIGATIONS OF THE PARTIES:
1. Landlord shall arrange and be responsible for all of the following
matters concerning the maintenance and operation of the entire building, grounds
and parking lots at Route 9W, Glenmont, New York 12077:
a. Cost of power, light, heat, gas, rubbish removal, cleaning and
maintenance supplies, cleaning services, grounds maintenance, landscape
maintenance, snow removal, safety and police alarm service, maintenance repairs,
painting, and miscellaneous expenses, only as they relate to operation and
maintenance of all of the premises. If the Landlord fails to make appropriate
maintenance and repairs, Tenant may, at its option, take such action as is
necessary, after due notice is given to the Landlord.
b. All Taxes, water rents, sewer rents, assessments, fire and liability
insurance as relates to the total of the premises now owned by the Landlord on
Route 9W, Glenmont, New York.
c. All structural repairs or major repairs resulting from damage (except to
the extent caused by the negligence or willful misconduct of Tenant, its
employees, or agents) or obsolescence.
2. Tenant shall take good care of the premises and shall at the Tenant's
own cost and expense make all repairs, installations, and replacements necessary
for the appropriate use of the facilities and space, to be used for its
purposes, as well as those of its sub-tenants, and at the end or other
expiration of the term shall deliver up the demised premises in good order and
condition, damages by the elements and ordinary wear and tear excepted.
3. Tenant shall promptly execute and comply with all statutes, ordinances,
rules, regulations and requirements of the federal, state and local governments
and of any and all of their departments and bureaus applicable to said premises,
for the correction, prevention, and abatement of nuisances or other grievances,
in, upon, or connected with said premises during said term; and shall also
promptly comply with and execute all rules, orders and regulations of the New
York Board of Fire Underwriters, or any other similar body, at the Tenant's own
cost and expense.
E-7
<PAGE>
4. Tenant, or its successors, shall not assign this agreement or underlet
or underlease the premises, or any part or portion thereof, or make any
alterations on the premises without the Landlord's consent in writing; or
occupy, or permit or suffer the same to be occupied for any business or purpose
deemed disreputable or extra-hazardous on account of fire, under the penalty of
damages and forfeiture, and in the event of a breach thereof, the term herein
shall immediately cease at the option of the Landlord as if it were the
expiration of the term. The consent of the Landlord shall not be unreasonably
withheld.
5. In the case of damage by fire, or other cause, to the building in which
the leased premises are located, without the fault of the Tenant or of the
Tenant's agents or employees, if the damage is so extensive as to amount
practically to the total destruction of the leased premises or of the building,
or if the Landlord shall within a reasonable time decide not to rebuild, this
lease shall cease and come to an end and the rent shall be apportioned to the
time of the damage. In all other cases where the leased premises are damaged by
fire, or other cause, without the fault of the Tenant or of the Tenant's agents
or employees, the Landlord shall repair the damage with reasonable dispatch
after notice of the damage, and if the damage has rendered the premises
untenantable, in whole or in part, there shall be an apportionment of the rent
until the damage has been repaired. In determining what constitutes reasonable
dispatch, consideration shall be given to delays caused by strikes, adjustment
of insurance and other causes beyond the Landlord's reasonable control.
6. Tenant agrees that the Landlord and the Landlord's agents and other
representatives shall have the right to enter into and upon the premises, or any
part thereof, at all reasonable hours for the purposes of examining the same, or
making such repairs or alterations therein as may be necessary for the safety
and preservation thereof.
7. If the premises, or any part thereof, shall be deserted or become vacant
during the term of this lease, or if any default be made in the payment of the
rent or any part thereof, or if any default be made in the performance of any of
the Tenant's covenants herein contained, the Landlord or its representatives may
re-enter the premises by force, summary proceedings or otherwise, and remove all
persons therefrom, without being liable for prosecution therefor, and the Tenant
hereby expressly waives the service of any notice in writing of intention to
re-enter, and the Tenant shall pay at the same time as the rent becomes payable
under the terms hereof a sum equivalent to the rent reserved herein, and the
Landlord may rent the premises on behalf of the Tenant, reserving the right to
rent the premises for a longer period of time than fixed in the original lease
without releasing the original Tenant from any liability, applying any monies
collected, first to the expense of resuming or obtaining possession, second to
restoring the premises to a rentable condition, and then to the payment of rent
and all other charges due and to grow due to the Landlord, any surplus to be
paid to the Tenant, who shall remain liable for the deficiency.
8. The Tenant shall not encumber or obstruct the entrance to any building,
driveway, or parking lot on the Real Property or to the halls and stairs of any
building on the Real Property, nor allow the same to become obstructed or
encumbered in any manner. The Landlord agrees to make a parking area available
for Tenant in the immediate vicinity of the building in which the leased
premises are located. Such parking area shall have a sufficient number of
parking spaces to reasonably meet the Tenant's needs. In the event the existing
parking area is insufficient, upon sixty (60) days notice in writing by the
Tenant to the Landlord setting forth valid justification, the Landlord shall
furnish additional parking spaces.
E-8
<PAGE>
9. Tenant shall not cause, place or allow to be placed, modify or remove
any exterior signs except with the consent of the Landlord, such consent not to
be unreasonably withheld.
10. Landlord will not be liable to Tenant for any damage or injury to
person or property caused by or resulting from steam, electricity, gas, water,
rain, ice or snow, or any leak or flow from or into any part of any building or
from any damage or injury resulting or arising from any other cause or happening
whatsoever unless said damage or injury be caused by or be due to the negligence
or willful misconduct of the Landlord.
Landlord will indemnify, defend, and hold Tenant harmless from claims for
personal injury, death, or property damage for incidents occurring on or about
the Real Property which were caused by the negligence or willful misconduct of
the Landlord. When the claim is caused by the joint negligence or willful
misconduct of the Landlord and Tenant or the Landlord and a third party for whom
Landlord is not legally responsible, then the Landlord's duty to defend,
indemnify, and hold Tenant harmless shall be in proportion to Landlord's
allocable share of the joint negligence or willful misconduct.
Tenant will indemnify, defend, and hold Landlord harmless from claims for
personal injury, death, or property damage for incidents occurring on or about
the Real Property which were caused by the negligence or willful misconduct of
Tenant. When the claim is caused by the joint negligence or willful misconduct
of the Tenant and Landlord or the Tenant and a third party for whom Tenant is
not legally responsible, then the Tenant's duty to defend, indemnify, and hold
Landlord harmless shall be in proportion to Tenant's allocable share of the
joint negligence or willful misconduct.
If any proceeding shall be instituted involving a party in respect of whom
indemnity may be sought under this lease, such party (the "Indemnified Party")
must promptly provide written notification to the party from whom indemnity is
sought (the "Indemnitor"). Upon request of the Indemnified Party, the Indemnitor
shall retain counsel to represent the Indemnified Party and any others which the
Indemnitor may designate in such proceeding and shall pay as incurred the
reasonable fees and expenses of such counsel related to such proceeding. In such
event, the Indemnitor shall not be liable for the fees and expenses of any other
counsel retained by any Indemnified Party in connection with such proceeding.
The Indemnitor will not be liable under this lease for any amount paid by
an Indemnified Party to settle any claims or actions if the settlement is
entered into without the Indemnitor's prior written consent. An Indemnified
Party must cooperate with the Indemnitor in investigating, preparing or
defending, or providing evidence in, any pending or threatened claim or
proceeding in respect of which indemnification may be sought under this lease.
The Indemnitor will reimburse an Indemnified Party for all reasonable expenses
(but not including any reimbursement associated with the loss of an Indemnified
Party's time) actually incurred by such Indemnified Party at the Indemnitor's
request in connection with the investigation, preparation or defense of any
pending or threatened claim or proceeding.
E-9
<PAGE>
11. Tenant agrees that this instrument shall not be a lien against the Real
Property in respect to any mortgages that are now on or hereafter may be placed
against the Real Property, and that the recording of such mortgage or mortgages
shall have preference and precedence and be superior and prior in lien of this
lease, irrespective of the date of recording and the Tenant agrees to execute
any such instrument without cost, which may be deemed necessary or desirable to
further effect the subordination of this lease to any such mortgage or mortgages
or any such manner or method of financing which the Landlord in its sole
discretion may select during the term of this lease or any renewal thereof. A
refusal to execute such instrument shall entitle the Landlord or the Landlord's
assigns and legal representatives to cancel this lease without incurring any
expense or damage and the term hereby granted is expressly limited accordingly.
12. It is expressly understood and agreed that in case the demised premises
shall be deserted or vacated, or if default be made in the payment of the rent,
or any part thereof, as herein specified, or if, without the consent of the
Landlord, the Tenant shall sell, assign or mortgage this lease or if default be
made in the performance of any of the covenants and agreements in this lease
contained on the part of the Tenant to be kept and performed, or if the Tenant
shall fail to comply with any of the statutes, ordinances, rules, orders,
regulations and requirements of the federal, state, and local governments or of
any and all their departments and bureaus, applicable to said premises or if the
Tenant shall file, or there shall be filed against the Tenant, a petition in
bankruptcy or for arrangements, or Tenant be adjudicated a bankrupt or make an
assignment for the benefit of creditors or take advantage of any insolvency act,
the Landlord may, if the Landlord so elects, at any time thereafter terminate
this lease and the term thereof, on giving the Tenant five (5) days notice in
writing of the Landlord's intention to do so, and this lease and the term
thereof shall expire and come to an end on the date fixed in such notice as if
the said date were the date originally fixed in this lease for the expiration
hereof. Such notice may be given by mail to the Tenant addressed to the demised
premises.
13. The Tenant will not nor will the Tenant permit undertenants or other
persons to do anything in said premises, or bring anything into said premises,
or permit anything to be brought into said premises, or to be kept therein,
which will in any way increase the rate of fire insurance on said premises, nor
use the demised premises or any part thereof, nor suffer or permit their use for
any business or purpose which would cause an increase in the rate of fire
insurance on said building. In the event the Tenant or its sub-tenants cause
such an increase in the rate of fire insurance on said building, the Tenant and
its sub-tenants shall pay the increased insurance cost.
14. The failure of a party to insist upon strict performance of any of the
terms, conditions and covenants herein, shall not be deemed a waiver of any of
the other rights or remedies that the party may have, and shall not be deemed a
waiver of any subsequent breach or default in the terms, conditions and
covenants herein contained. This instrument may not be changed, modified,
discharged or terminated orally.
15. If the whole or any part of the demised premises shall be acquired or
condemned by Eminent Domain for any public or quasi public use or purpose, then
and in that event, the term of this lease shall cease and terminate from the
date of title vesting in such proceeding and Tenant shall have no claim against
Landlord for the value of any unexpired term of said lease. No part of any award
shall belong to Tenant.
E-10
<PAGE>
16. If after default in payment of rent or violation of any other
provisions of this lease, or upon the expiration of this lease, the Tenant moves
out or is dispossessed and fails to remove any trade fixtures or other property
prior to such default, removal, expiration of lease, or prior to the issuance of
the final order or execution of the warrant, then and in that event, the said
fixtures and property shall be deemed abandoned by said Tenant and shall become
the property of the Landlord.
17. In the event that the relation of the Landlord and Tenant may cease or
terminate by reason of the re-entry of the Landlord under the terms and
covenants contained in this lease or by the ejectment of the Tenant by summary
proceedings or otherwise, or after the abandonment of the premises by Tenant, it
is hereby agreed that the Tenant shall remain liable and shall pay in monthly
payments the rent which accrues subsequent to the re-entry by the Landlord, and
the Tenant expressly agrees to pay as damages for the breach of the covenants
herein contained, the difference between the rent reserved and the rent
collected and received, if any, by the Landlord during the remainder of the
unexpired term, such difference or deficiency between the rent herein reserved
and the rent collected, if any, shall become due and payable in monthly payments
during the remainder of the unexpired term, as the amounts of such difference or
deficiency shall from time to time be ascertained; and it is mutually agreed
between Landlord and Tenant that the respective parties hereto shall and hereby
do waive trial by jury in any action, proceedings or counterclaim brought by
either of the parties against the other on any matters whatsoever arising out of
or in any way connected with this lease, the Tenant's use or occupancy of said
premises, and/or any claim of injury or damage.
18. The Tenant waives all rights to redeem under any law of the State of
New York.
19. This lease and the obligation of Tenant to pay rent hereunder shall in
nowise be affected, impaired or excused because Landlord is unable to supply or
is delayed in supplying any services expressly or impliedly to be supplied or
because Landlord is unable to make or is delayed in making any repairs,
additions, alterations or decorations or is unable to supply or is delayed in
supplying any equipment or fixtures if Landlord is prevented or delayed from so
doing by reason of governmental preemption in connection with a National
Emergency or in connection with any rule, order or regulation of any department
or subdivision of any governmental agency or by reason of a condition of supply
and demand which has been or is affected by war or other emergency; except for
such damages as arise from the negligence of the Landlord.
E-11
<PAGE>
20. No diminution or abatement of rent, or other compensation shall be
claimed or allowed for inconvenience or discomfort arising from the making of
repairs or improvements to the building or to its appliances, nor for any space
taken to comply with any law, ordinance or order of a governmental authority. In
respect to the various "services", if any, herein expressly or impliedly agreed
to be furnished to the Tenant by the Landlord, it is agreed that there shall be
no increase, diminution, or abatement of the rent, or any other compensation,
for interruption or curtailment of such "services" when such interruption or
curtailment shall be due to accident, alterations or repairs desirable or
necessary to be made, or to inability or difficulty in securing supplies or
labor for the maintenance of such "services", or to some other cause beyond the
reasonable control of the Landlord. No such interruption or curtailment of any
such "services" shall be deemed a constructive eviction. The Landlord shall not
be required to furnish, and the Tenant shall not be entitled to receive, any of
such "services" during any period wherein the Tenant shall be in default in
respect to the payment of rent. Neither shall there be any abatement or
diminution of rent because of making of repairs, improvements or decorations to
the demised premises after the date above fixed for the commencement of the
term, it being understood that rent shall, in any event, commence on such date
so above fixed.
21. Tenant shall, at all times during the term of this lease, at Tenant's
cost, obtain and keep in effect:
a. commercial general liability insurance including fire legal liability
and "insured contract" coverage with respect to Tenant's operations associated
with the premises. The coverage is to include activities and operations
conducted by Tenant and any other person associated with Tenant and those for
whom Tenant is by law responsible. Such insurance shall be written with limits
of not less than Five Hundred Thousand Dollars ($500,000) per occurrence, One
Million Dollars ($1,000,000) aggregate for bodily injury and property damage,
personal injury, or advertising injury, and together with a commercial umbrella
policy shall provide total available limits of not less than Two Million Dollars
($2,000,000). Landlord shall be added as additional insured on all commercial
general liability policies maintained by Tenant with respect to the demised
premises.
b. Workers' compensation insurance for all Tenant's employees working on or
about the demised premises in an amount sufficient to comply with applicable
laws or regulations.
All policies of insurance required to be maintained by Tenant hereunder
shall be in a form acceptable to Landlord; shall be issued by an insurer with an
A.M. Best rating of at least (A-)(VIII) who is licensed to do business in New
York; and shall contain a requirement that at least thirty (30) days prior
written notice of termination or material alteration be provided to Landlord.
22. Under conditions mutually agreed upon by the parties, the Tenant may
increase or reduce the amount of space occupied by the Tenant and its authorized
sub-tenants.
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<PAGE>
23. Landlord and Tenant hereby agree that in the event that the Landlord
shall elect to sell all or any portion of the demised premises, the Landlord
shall promptly notify the Tenant of the Landlord's intentions, and the Tenant
shall have the first option to purchase the demised premises or any portion
thereof for thirty (30) days upon terms agreeable to all parties.
24. Landlord covenants that the Tenant, upon paying the rent required under
this lease, and performing all the covenants aforesaid, shall and may peacefully
and quietly have, hold and enjoy the demised premises for the term aforesaid.
25. The parties agree that the covenants and agreements contained in this
lease shall be binding upon their respective heirs, assigns and successors in
interest.
IN WITNESS WHEREOF, the parties have caused these presents to be signed by
their respective corporate officers.
FARM FAMILY LIFE INSURANCE NEW YORK FARM BUREAU, INC.
COMPANY
By: /s/ Philip P. Weber By: /s/ John W. Lincoln
Philip P. Weber John W. Lincoln
President & C.E.O. President
Date: 12/30/98 Date: 12/18/98
E-13
Exhibit 13
Farm Family Holdings, Inc.
1999 Annual Report
<TABLE>
<CAPTION>
Selected Financial Data
($ in thousands, except per share amounts)
1999 1998 1997 1996 1995
- ------------------------------------------------------------------------------------------------------------------------------
Consolidated Statement of Income Data:
<S> <C> <C> <C> <C> <C>
Premiums from property/casualty insurance $188,921 $181,756 $149,220 $130,780 $116,936
Premiums from life and health insurance and
contract charges 27,799 ---- ---- ---- ----
Net investment income 58,558 19,119 18,077 15,952 14,326
Total revenues 274,863 202,359 173,723 146,997 133,014
Total losses, benefits, expenses and other(1) 248,527 175,434 147,005 136,159 119,569
Net income attributable to common stockholders -
before extraordinary item(2) 18,618 18,671 17,500 7,557 8,853
Net income attributable to common stockholders 18,618 18,671 17,500 6,014 8,853
Operating income(3) $19,131 $14,271 $14,990 $9,648 $9,004
- ------------------------------------------------------------------------------------------------------------------------------
Income before extraordinary item per share-basic(2) $3.16 $3.55 $3.33 $1.90 $2.95
Income before extraordinary item per share-diluted(2) 3.13 3.52 3.32 1.90 2.95
- ------------------------------------------------------------------------------------------------------------------------------
Net income per share-basic 3.16 3.55 3.33 1.51 2.95
Net income per share-diluted 3.13 3.52 3.32 1.51 2.95
- ------------------------------------------------------------------------------------------------------------------------------
Operating income per share-basic(3) 3.25 2.72 2.85 2.42 3.00
Operating income per share-diluted(3) $3.22 $2.69 $2.84 $2.42 $3.00
- ------------------------------------------------------------------------------------------------------------------------------
Weighted average shares outstanding-diluted(4)(5) 5,948,213 5,303,965 5,270,947 3,979,115 3,000,000
- ------------------------------------------------------------------------------------------------------------------------------
Consolidated Balance Sheet Data:
Total investments $1,071,681 $307,524 $274,788 $240,594 $201,389
Total assets 1,261,798 406,503 371,231 321,836 280,317
Debt ---- ---- 1,268 1,304 2,707
Total liabilities 1,074,774 262,265 247,997 216,784 210,932
Mandatory redeemable preferred stock(5) 5,830 ---- ---- ---- ----
Total stockholders' equity $181,194 $144,238 $123,234 $105,052 $69,385
Book value per share(4)(5) $29.65 $27.45 $23.46 $20.00 $23.13
Property and Casualty GAAP Ratios:
Loss and loss adjustment expense ratio(6) 74.9% 73.9% 69.2% 72.6% 71.1%
Underwriting expense ratio(6) 24.6% 25.2% 28.2% 29.7% 30.9%
Combined ratio(6) 99.5% 99.1% 97.4% 102.3% 102.0%
Property and Casualty Statutory Ratios(7):
Statutory combined ratio(6) 100.0% 98.4% 95.6% 101.8% 101.0%
Statutory capital and surplus $131,617 $105,165 $94,592 $83,194 $55,916
Life Insurance Statutory Data(7):
Statutory capital and surplus $110,374 ---- ---- ---- ----
Life insurance in force $3,933,117 ---- ---- ---- ----
==============================================================================================================================
</TABLE>
(1) Includes a gain of $6.3 million on the partial reduction of the Company's
extended earnings liability during the year ended December 31, 1998, which
was the result of modifications made to the agreements with the Company's
agents and agency managers that relieved the Company of the primary
obligation to make extended earnings payments.
(2) Extraordinary item for $1.5 million was recorded during 1996 for
demutualization expenses related to Farm Family Casualty's conversion from
a mutual company to a stockholder owned company.
(3) Operating income excludes realized investment gains (losses), nonrecurring
items, and the related taxes thereon.
(4) Includes the allocation of 3,000,000 shares to eligible policyholders on
July 26, 1996 pursuant to Farm Family Casualty's conversion from a mutual
company to a stockholder owned company.
(5) Includes the effect of the issuance of 856,871 shares of common stock and
163,214 shares of voting preferred stock in connection with the purchase of
Farm Family Life on April 6, 1999.
(6) In 1999, these ratios include nine months of operations of United Farm
Family, which is in start-up mode, having just completed its first full
year of operations as a direct writer in Pennsylvania and Maryland.
Excluding United Farm Family, the 1999 ratios would have been as follows:
GAAP loss and loss adjustment expense ratio - 73.8%, GAAP underwriting
expense ratio - 24.3%, GAAP combined ratio - 98.1% and statutory combined
ratio - 98.5%.
(7) Statutory data is derived from the annual statements of the Company's
insurance subsidiaries, prepared in accordance with statutory accounting
practices.
E-14
<PAGE>
Management's Discussion and Analysis of Financial Condition and Results of
Operations
Corporate Profile
The following discussion and analysis of financial condition and results of
operations includes the operations of Farm Family Holdings, Inc. ("Farm Family
Holdings") and its wholly-owned subsidiaries (collectively referred to as the
"Company" or "we"). The primary subsidiaries of Farm Family Holdings are Farm
Family Casualty Insurance Company ("Farm Family Casualty") and Farm Family Life
Insurance Company ("Farm Family Life"). On April 6, 1999, Farm Family Holdings
acquired Farm Family Life and Farm Family Life's wholly-owned subsidiary, United
Farm Family Insurance Company ("United Farm Family"). The following should be
read in conjunction with the Consolidated Financial Statements and related Notes
included as part of Exhibit 13 to this Farm 10-K.
1999 Highlights
On April 6, 1999, Farm Family Holdings acquired Farm Family Life and Farm Family
Life's wholly-owned subsidiary, United Farm Family, for an aggregate purchase
price of approximately $38.3 million, including direct acquisition costs. As a
result of the acquisition, Farm Family Life became a wholly-owned subsidiary of
Farm Family Holdings. The acquisition was accounted for as a purchase and,
accordingly, the financial results of Farm Family Life have been included in the
accompanying consolidated financial statements effective April 6, 1999. See Note
3 to the consolidated financial statements for further detail. The acquisition
of Farm Family Life enables us to market life insurance in 12 states and expands
the number of states in which we sell property and casualty insurance from 10
states to 12 states.
Consolidated operating income for the year ended December 31, 1999 was $19.1
million compared to $14.3 million for the same period in 1998. On a diluted per
share basis, consolidated operating income for the year ended December 31, 1999
was $3.22 compared to $2.69 for the same period in 1998. Operating income
excludes realized investment gains (losses), nonrecurring items, and the related
taxes thereon. Operating income for 1999 excludes realized investment losses of
$266,000, net of tax, and nonrecurring charges of $247,000, net of tax,
consisting of $76,000 related to employee severance costs and $171,000 related
to the evaluation of potential business transactions which we are no longer
evaluating. Operating income for 1998 excludes realized investment gains of
$293,000, net of tax, and a gain of $4,107,000, net of tax, on the partial
reduction of the Company's extended earnings liability.
We continue to execute the expense management initiatives we began during 1996.
The goal of our expense management initiatives is to continually review our cost
structure and reduce or eliminate certain expenses. Additionally, we seek to tie
expenses to operating results so that expenses become increasingly more variable
with the Company's profitability and less fixed or volume sensitive. As a
result, portions of the compensation for agents, employees and management are
influenced by the Company's operating results. These programs help to align our
agents', employees' and management's interests more directly with those of our
shareholders. As a result of these initiatives, as well as a greater relative
increase in premium revenue compared to the level of overhead expenses,
underwriting expenses as a percent of premium revenue for property and casualty
insurance business were reduced during 1999 to 24.6% compared to 25.2% for 1998.
Excluding the impact of United Farm Family, which is in start-up mode, having
just completed its first full year of operations as a direct writer in
Pennsylvania and Maryland, the underwriting expense ratio for 1999 was 24.3%.
Operating Environment
Our operating results are subject to significant fluctuations from period to
period depending upon, among other factors, the frequency and severity of
property and casualty losses from weather related and other catastrophic events,
the effect of competition and regulation on the pricing of products, changes in
interest rates which may cause a reduction of investment income or operating
cash flow, or an increase in policyholder lapses for our life insurance segment,
significant variations of actual experience from assumptions regarding future
morbidity, persistency, lapse rates, expenses, mortality, and interest rates
used in calculating reserve and liability amounts for our life insurance segment
and in developing pricing and other terms of life insurance products, the
ability of our insurance subsidiaries to maintain their current ratings from
A.M. Best Company, Inc., and changes in general economic conditions, tax laws
and the regulatory environment.
E-15
<PAGE>
As a condition of our license to do business in various states, we are 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 departments. Residual market premium
rates for automobile insurance 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 our results of
operations.
For the years ended December 31, 1999, 1998, and 1997, 35.2%, 34.8%, and 36.5%,
respectively, of the property and casualty insurance segment's direct written
premiums were derived from policies written in New York and 26.6%, 28.3%, and
26.4%, respectively, were derived from policies written in New Jersey. For these
periods, no other state accounted for more than 10.0% of direct written
premiums. As a result of the concentration of our 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, generally.
Effective March 22, 1999, all insurers in New Jersey were required to reduce
personal automobile rates by approximately 15% pursuant to the Automobile
Insurance Cost Reduction Act of 1998 ("The Act"). The Act also made coverage and
other changes to the statutory requirements governing personal automobile
insurance in New Jersey which are intended to reduce losses and loss adjustment
expenses. The impact on our losses and loss adjustment expenses, if any, cannot
be determined at this time.
Market-Sensitive Instruments and Risk Management
Our investment objective is to maximize after tax yield while maintaining safety
of capital and providing adequate liquidity for our insurance operations. We
seek to meet these objectives and simultaneously manage interest rate risk and
market risk by investing in primarily investment-grade fixed maturity securities
that have similar cash flows to the liabilities they support, and are
diversified by industry, issuer, type and geography. We utilize the services of
a professional asset management firm specializing in the management of assets
for insurance companies to assist in meeting these objectives. Our invested
assets are managed to maximize long term risk adjusted returns consistent with
and in support of our product liabilities and capital position.
The fair value of our fixed maturity portfolio is sensitive to changes in
interest rates. We estimate that if interest rates were to increase by 100 basis
points from their December 31, 1999 levels, our fixed maturity portfolio would
decline in fair value by approximately $52.4 million.
The calculation of interest rate sensitivity uses numerous assumptions, requires
significant estimates and assumes an immediate change in interest rates without
any management of the investment portfolio in reaction to such a change.
Consequently, the estimated change in the fair value of our fixed maturity
portfolio will likely be different from the actual change experienced under the
given interest rate scenario, and the difference may be material.
We currently do not have any investments in derivative financial instruments
such as futures, forward, swap, or option contracts, or other financial
instruments with similar characteristics.
Year 2000
Many computer programs and other computer systems upon which we rely 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. Our overall plan for dealing
with the Year 2000 problem covers information technology ("IT") systems, non-IT
systems, and third-party providers. We established a Year 2000 team to lead our
activities relating to Year 2000 issues. Our Year 2000 team works with senior
management, legal and business units on Year 2000 issues. Our current state of
readiness with respect to each of our IT systems, non-IT systems and third-party
providers is discussed below.
We used a process consisting of the following five phases to approach Year 2000
compliance of our IT systems: (1) Inventory (cataloging the systems portfolio);
(2) Assessment (identifying possible Year 2000 related failures and developing
strategies to remediate them); (3) Remediation (creating or acquiring
corrections to deficiencies); (4) Testing (confirming whether remediation is
successful); and (5) Implementation (installing solutions).
E-16
<PAGE>
Critical IT systems include product administration systems, key financial
systems and core IT infrastructure. We believe that the phases of inventory,
assessment, remediation, testing and implementation for critical IT systems
currently in use by the Company were completed by December 31, 1999. Noncritical
IT systems include certain other business applications which we do not believe
to be critical. The inventory phase, assessment, remediation, testing and
implementation phases for the Company's noncritical IT systems were also
completed by the end of 1999.
We have tested the operation of IT systems working together in an integrated
test environment that replicated the Company's live environment. This test
exercised software and hardware using dates advanced to Year 2000 and beyond.
There can be no assurances that this integrated testing discovered all potential
Year 2000 problems.
Non-IT systems typically include embedded technology such as microcontrollers.
Our non-IT systems include machinery and equipment in the buildings it occupies,
such as elevators, telephone equipment, HVAC, security and alarm systems and
print shop/mail room equipment. We reviewed these systems for Year 2000
compliance with the third-party providers we use to service and maintain this
equipment.
Our Year 2000 effort also included a systematic assessment of the Year 2000
compliance status of third-party providers. We believed loss of public
utilities, phone, banking, mail or certain outsourced processing services could
have had an immediate adverse impact on our operations, which under certain
circumstances could be material. We contacted each of our third-party providers,
through letters, questionnaires and/or interviews depending upon the nature of
the product or service supplied, to determine if the provider is Year 2000
compliant. As of December 31, 1999, we had received responses from approximately
90% of such third-parties. These responses generally stated that the third-party
providers believed they will be Year 2000 compliant and that no products or
services provided will be materially affected. However, few providers gave
written assurances directly to us that they were currently Year 2000 compliant.
Management believes that the process of evaluating the Year 2000 compliance
status of the Company's third-party providers who provide critical services and
products was substantially complete at December 31, 1999. We did not change our
dependency on any of these third-party providers because of concerns about their
Year 2000 compliance status and plans.
We do not separately track the internal costs incurred for the Year 2000 project
which are principally the related payroll costs for our IT staff. However, we
have identified certain costs related to the Year 2000 project including costs
related to outside consultants and software and hardware applications. The
identified costs incurred for the year ended December 31, 1999 were
approximately $152,000. The total identified costs related to the Year 2000
project to date are approximately $630,000, of which $614,000 was expensed and
$16,000 was capitalized. Based on information currently available, we do not
anticipate incurring any significant additional costs for Year 2000 projects.
The incurred costs noted above include costs relating to Farm Family Life and
United Farm Family, including costs incurred by Farm Family Life and United Farm
Family prior to Farm Family Holdings' acquisition of Farm Family Life on April
6, 1999. Our estimated costs of the Year 2000 project are based on management's
best estimates, which were derived from numerous assumptions, including the
extent of remaining remediation and testing activities, availability of certain
resources and other factors.
The phases of inventory, assessment, remediation, testing and implementation of
our software for Year 2000 issues was performed primarily by our existing IT
staff. Correction of Year 2000 issues is a high priority project and certain
other less critical IT projects were deferred due to Year 2000 efforts; however,
we do not believe the deferral of other IT projects has had a material effect on
the Company's financial condition or results of operations in 1998 or 1999. Our
IT staff continued to work on other high priority projects concurrent with the
Year 2000 project. We have not conducted a comprehensive analysis of the
operational problems and costs that would be reasonably likely to result from
the failure to achieve Year 2000 compliance on a timely basis. We believed that
our most reasonably likely worst case Year 2000 scenarios may have included
these elements: (1) one or more parts of our IT systems will operate
incorrectly, thereby resulting in a temporary shutdown or miscalculations in a
system which may have an adverse effect on the our operations and (2) one or
more of our third-party providers will be unable to provide the products or
services expected which may have an adverse effect on the Company's operations.
We developed Year 2000 contingency plans for critical services and products
provided by third-parties and for internal critical IT systems. The contingency
plans vary depending on the circumstances, but most often include alternate or
backup procedures and systems, both automated and manual. The extent to which
the contingency plans will minimize disruptions of critical business processes
is not determinable.
As of the end of February 2000, the Company has not been adversely affected in
any material way because of Year 2000 difficulties with its own IT systems, or
because of any third parties that were not Year 2000 compliant. Throughout 2000,
we will continue to monitor our IT systems and those of third parties for any
Year 2000 related systems issues that have not yet been identified. However, we
do not expect any problems that would have a material effect on the Company's
results of operations, liquidity and financial condition.
E-17
<PAGE>
In addition to our own computer systems and third-party providers, we may also
have exposure in our property/casualty operations to Year 2000 claims asserted
under certain insurance policies sold to customers. Although we do not issue
insurance policies intended to cover risks related to the Year 2000 issue, there
can be no certainty regarding future judicial or legislative interpretations of
coverage. There can be no assurances that Year 2000 related claims will not
emerge and that such claims will not have a material adverse effect on the
Company's results of operations, liquidity and financial condition.
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 us for the year beginning January 1, 2001, 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. Since we do not have any investments in derivative
financial instruments, management does not believe that the implementation of
Statement 133 will have a material impact on the Company's financial statements.
In 1998, the National Association of Insurance Commissioners ("NAIC") adopted
the Codification of Statutory Accounting Principles guidance (the
"Codification"), which will replace the current Accounting Practices and
Procedures Manual as the NAIC's primary guidance on statutory accounting.
Statutory accounting is a comprehensive basis of accounting based on prescribed
accounting practices, which include state laws, regulations and general
administrative rules, as well as a variety of publications of the NAIC. The
Codification provides guidance for the areas where statutory accounting has been
silent and changes current statutory accounting in some areas. The NAIC has
established January 1, 2001 as the effective date of the Codification. The New
York Insurance Department has advised that it intends to proceed with
implementation of the Codification, subject to any provisions in New York
statute which conflict with particular points in the Codification rules. We have
not estimated the potential effect of adopting the Codification.
Safe Harbor Statement under the Private Securities Litigation Reform Act of 1995
This Annual Report 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 Annual Report include, but are not limited
to, statements concerning our exposure to interest rate and market risk,
statements regarding the adequacy of the Company's capital resources, liquidity,
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 Annual Report 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, exposure to catastrophic loss, the frequency and severity of weather related
losses, geographic concentration of loss exposure in New York, New Jersey and
the Northeastern United States generally, the effect of regulatory changes
governing personal automobile insurance in New Jersey and the impact thereof on
the Company's direct written premium, losses and loss adjustment expenses, the
risks associated with the legislative, regulatory and competitive environments
in the states in which the Company currently operates, heightened competition,
including specifically the intensification of competition, failure to obtain new
customers or to retain existing customers, the effect of the uncertainties
related to the Year 2000 issue, the Company's primary reliance, as a holding
company, on dividends from its subsidiaries and the applicable regulatory
restrictions on the ability of the Company's subsidiaries to pay such dividends,
and conditions specific to the 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, tax law changes and other risk factors listed
from time to time in the Company's Securities and Exchange Commission filings,
including the Company's 1999 Form 10-K to be filed on or about March 30, 2000.
E-18
<PAGE>
Results of Operations
This section should be read in conjunction with the Consolidated Financial
Statements and related Notes which include information for our operating
segments.
The Year Ended December 31, 1999 Compared to the Year Ended December 31, 1998
Insurance Premiums and Contract Charges
Premium revenue increased to $216.7 million in 1999 from $181.7 million in 1998.
The increase was attributable to an increase of $7.2 million in property and
casualty insurance premium revenue and $27.8 million from the addition of life
insurance segment premium revenue.
Premium revenue for property and casualty insurance increased $7.2 million, to
$188.9 million in 1999 from $181.7 in 1998. The increase in property and
casualty premium revenue for the year ended December 31, 1999 was attributable
to an increase of $7.2 million in premium revenue derived from Farm Family
Casualty's direct writings, an increase of $1.0 million in premium revenue
assumed by Farm Family Casualty and premium revenue of $1.0 million from United
Farm Family. These increases were partially offset by an increase of $2.0
million in premium revenue ceded to Farm Family Casualty's reinsurers. We ceded
$2.0 million in premium revenue in 1999, compared to $3.5 million in 1998,
pursuant to our aggregate stop loss reinsurance program.
The property and casualty insurance segment's premium revenue has been adversely
impacted by the mandated reduction in personal automobile rates in New Jersey of
approximately 15% effective March 22, 1999, as previously mentioned. In
addition, certain changes in the New Jersey Farm Bureau's membership
requirements have had a favorable impact on reducing the growth of our personal
automobile policies written in New Jersey. For the year ended December 31, 1999,
the number of personal automobile policies we had in New Jersey decreased by
2.3% compared to an increase of 18.8% during the year ended December 31, 1998.
The $7.2 million increase in premium revenue on additional business directly
written by Farm Family Casualty was primarily attributable to an increase of
$5.5 million, or 3.6%, in earned premiums from Farm Family Casualty'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) and an increase of $1.7 million
in earned premiums from other products. Farm Family Casualty had approximately
173,300 policies in force at December 31, 1999 compared to approximately 167,100
at December 31, 1998. The number of policies in force related to Farm Family
Casualty's primary products increased by 3.4% to approximately 142,500 as of
December 31, 1999 from approximately 137,800 as of December 31, 1998 and the
average premium earned for each such policy was approximately the same in 1999
compared to 1998.
Property and casualty net written premiums increased $2.9 million, or 1.5%, to
$191.7 million in 1999 compared to $188.8 million in 1998. The increase in
property and casualty net written premiums for the year ended December 31, 1999
was attributable to an increase of $5.4 million, or 3.0%, in direct writings by
Farm Family Casualty (excluding assigned risk automobile business premiums), an
increase of $0.9 million in Farm Family Casualty's assigned risk automobile
business premiums, and the inclusion of United Farm Family's net written premium
of $1.4 million. These increases were partially offset by an increase of $4.0
million in premiums ceded to reinsurers and a decrease of $0.8 million in
premiums assumed by Farm Family Casualty. Excluding premiums from personal
automobile business in the state of New Jersey and premiums from assigned risk
automobile business, Farm Family Casualty's direct writings increased $9.4
million or 6.1% in 1999 compared to 1998. The reduction in personal automobile
business in New Jersey was primarily attributable to the New Jersey legislation
mandating a rate roll back for personal automobile business in New Jersey,
effective March 22, 1999. Geographically, the increase in Farm Family Casualty's
direct writings came from all ten states in which it writes property and
casualty insurance. In addition, direct writings of all of Farm Family
Casualty's primary products, except personal automobile, increased during 1999.
Excluding personal automobile business premiums written in New Jersey, Farm
Family Casualty's direct written premiums from personal automobile policies
increased by 5.3% or $2.0 million in 1999 compared to 1998.
Life insurance premium revenue was $27.8 million. This amount includes premiums
and contract charges primarily from the sale of individual whole life, term and
universal life products, and disability income insurance products, subsequent to
April 6, 1999, the effective date of Farm Family Holdings' acquisition of Farm
Family Life.
E-19
<PAGE>
Net Investment Income
Net investment income increased $39.5 million to $58.6 million in 1999 from
$19.1 million in 1998. The increase was attributable to an increase of $1.8
million in property and casualty net investment income and $37.7 million from
the addition of the life insurance segment's net investment income.
Net investment income for the property and casualty insurance segment increased
$1.8 million, or 9.9% to $20.4 million in 1999 from $18.6 million in 1998. The
taxable equivalent yield on the property and casualty insurance segment's
investment portfolio was 6.8% and 7.0% for 1999 and 1998, respectively. The
increase in net investment income for the property and casualty insurance
segment was primarily the result of an increase in the average cash and invested
assets (at amortized cost) of $30.5 million, or 10.9%, for Farm Family Casualty
and the inclusion of United Farm Family, which accounted for $1.2 million of the
increase in investment income and an additional $26.9 million in average cash
and invested assets (at amortized cost). The overall increase in cash and
invested assets was greater than the overall increase in net investment income
in 1999 primarily as a result of an increase in the investment in tax-exempt
fixed maturity securities. The investment income from the property and casualty
insurance segment's tax-exempt securities increased to $4.3 million in 1999 from
$2.7 million in 1998. United Farm Family's investment income from tax-exempt
securities was not material in 1999.
Net investment income for the life insurance segment was $37.7 million in 1999,
which represents net investment income for Farm Family Life since its
acquisition by Farm Family Holdings on April 6, 1999. The yield on fixed
maturity investments (at amortized cost) was 6.9% for that period.
Net Realized Investment Gains (Losses)
Net realized investment losses were $2.0 million in 1999 compared to a net
realized gain of $0.5 million in 1998. During 1999, we sold several bonds from
the life insurance investment portfolio at losses and recorded a write down of
approximately $0.5 million as an other-than-temporary impairment on a bond held
in the life insurance segment investment portfolio, which represents the
majority of the realized investment losses.
Losses and Loss Adjustment Expenses
Losses and loss adjustment expenses on property and casualty insurance increased
$7.2 million, or 5.4%, to $141.5 million in 1999 from $134.3 million in 1998.
Losses and loss adjustment expenses were 74.9% of premium revenue in 1999
compared to 73.9% of premium revenue in 1998. Excluding United Farm Family,
losses and loss adjustment expenses were 73.8% of premium in 1999 compared to
73.9% in 1998.
Losses and loss adjustment expenses incurred were reduced by $2.8 million and
$3.2 million in 1999 and 1998, respectively, as a result of coverage provided by
our aggregate stop loss reinsurance program. This program, which became
effective January 1, 1998, covers net losses incurred on the Company's net
earned premium.
Losses related to our direct writings believed to be weather related aggregated
$11.1 million in 1999 compared to $11.7 million in 1998.
Amortization Expense
Amortization expense increased $3.2 million, or 9.0%, to $38.2 million in 1999
from $35.0 million in 1998. The increase was attributable to the inclusion of
amortization expense of deferred acquisition costs and present value of future
profits for the life insurance segment of $1.8 million and an increase in
amortization of deferred acquisition costs for the property and casualty segment
of $1.4 million. The increase in amortization of deferred acquisition costs for
the property and casualty segment is due to the increase in premium volume and
the inclusion of United Farm Family's amortization of $0.5 million.
E-20
<PAGE>
Other Operating Costs and Expenses
Other operating costs and expenses increased $8.0 million to $20.4 million in
1999 from $12.4 million in 1998. The increase was primarily due to the inclusion
of Farm Family Life's other operating costs and expenses of $9.3 million in 1999
partially offset by a decrease in property and casualty underwriting expenses of
$0.7 million and the elimination of rental income of $0.7 million paid by Farm
Family Casualty to Farm Family Life in 1999. This amount was not eliminated in
1998 since the operations of Farm Family Life were not consolidated with the
Company's until its acquisition on April 6, 1999. For 1999, property and
casualty insurance underwriting expenses (including amortization expenses) were
24.6% of premium revenue compared to 25.2% in 1998. The decrease in underwriting
expenses as a percent of premium revenue was primarily attributable to a greater
relative increase in the Company's premium revenue than in the level of overhead
expenses, as well as the continuation of a company-wide expense management
program, partially offset by the inclusion of the costs and expenses for United
Farm Family since its acquisition by Farm Family Holdings. Excluding United Farm
Family, property and casualty underwriting expenses (including amortization
expenses) were 24.3% of premium revenue in 1999 compared to 25.2% for the same
period in 1998.
Participating Policyholders' Interest
Participating policyholders' interest of $9.7 million in 1999 is attributable to
the inclusion of Farm Family Life since its acquisition by Farm Family Holdings.
Federal Income Tax Expense
Federal income tax expense decreased $0.8 million to $7.4 million in 1999 from
$8.2 million in 1998. Federal income tax expense was 28.3% of income before
federal income tax expense and preferred stock dividends in 1999 compared to
30.7% in 1998. The reduction is primarily due to an increased proportion of
interest income from tax-exempt securities.
Net Income Attributable to Common Stockholders
Net income decreased to $18.6 million in 1999 compared $18.7 million in 1998
primarily due to a net gain of $4.1 million recorded in 1998 as a result of the
reduction of a significant portion of the liability for the extended earnings
program with our agents, partially offset by the foregoing factors. Excluding
the impact of this gain, net income increased $4.0 million from the prior year.
The Year Ended December 31, 1998 Compared to the Year Ended December 31, 1997
Insurance Premiums
Premium revenue increased $32.5 million, or 21.8%, to $181.7 million in 1998
from $149.2 million in 1997. The increase in premium revenue in 1998 resulted
from an increase of $20.0 million in earned premiums on additional business
directly written by the Company (principally in New Jersey and New York), an
increase of $3.4 million in earned premiums assumed by the Company, and a
decrease of $9.1 million in earned premiums ceded to reinsurers.
The $20.0 million increase in earned premiums on additional business directly
written by the Company was primarily attributable to an increase of $18.2
million, or 13.6%, 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), an increase of $1.8 million in earned
premiums on workers' compensation business, and an increase of $1.1 million in
earned premiums on the Company's other products. These increases were somewhat
offset by a decrease of $1.1 million in earned premiums from assigned risk
automobile business. Premiums earned on personal automobile policies directly
written by the Company (excluding assigned risk personal automobile) accounted
for $62.7 million or 34.7% of the Company's premium revenue in 1998 compared to
$52.9 million or 32.9% in 1997. Premiums earned on personal automobile policies
in the state of New Jersey accounted for $7.0 million of the $20.0 million
increase in earned premiums from the Company's primary products. The number of
policies in force of the Company's primary products increased by 8.7% to
approximately 137,800 in 1998 from approximately 127,000 in 1997 and the average
premium earned for each such policy increased by 4.6% in 1998 compared to 1997.
E-21
<PAGE>
The decrease in premiums ceded to reinsurers of $9.1 million was primarily
attributable to the termination of certain reinsurance agreements with the
Company's affiliate, United Farm Family. We ceded $3.5 million in premium
revenue pursuant to our aggregate stop loss reinsurance program, which commenced
January 1, 1998. The Company's assumed premiums increased as a result of both
new reinsurance contracts written in 1998 and increases in premiums for
reinsurance contracts renewed.
Net Investment Income
Net investment income increased $1.0 million, or 5.8%, to $19.1 million in 1998
from $18.1 million in 1997. The taxable equivalent yield on the Company's
investment portfolio was 7.0% and 7.3% in 1998 and 1997, respectively. The
increase in net investment income was primarily the result of an increase in
cash and invested assets (at amortized cost) of approximately $28.3 million, or
10.3%. The increase in cash and invested assets was greater than the increase in
net investment income for the year ended December 31, 1998 primarily as a result
of a decline in prevailing interest rates as well as an increase in the
Company's investment in tax exempt fixed maturity securities. The Company's
investment income from tax exempt securities increased to $2.7 million in 1998
from $1.4 million in 1997.
Net Realized Investment Gains (Losses)
Net realized investment gains were $0.5 million in 1998 compared to $5.4 million
in 1997. During 1997, the Company sold an investment in common stock which
resulted in a realized gain of $5.7 million.
Losses and Loss Adjustment Expenses
Losses and loss adjustment expenses increased $31.0 million, or 30.0%, to $134.3
million in 1998 from $103.3 million in 1997. The increase in loss and loss
adjustment expenses was primarily attributable to a 21.8% increase in premium
revenue in 1998 as compared to 1997. Losses and loss adjustment expenses were
73.9% of premium revenue in 1998 compared to 69.2% of premium revenue in 1997.
The increase in losses and loss adjustment expenses as a percent of premium
revenue was attributable to an increase in weather related losses and certain
other factors during 1998 compared to the same period in 1997.
Losses and loss adjustment expenses incurred by the Company in 1998 were reduced
by $3.2 million as a result of coverage provided by the Company's aggregate stop
loss reinsurance program. This program, which became effective January 1, 1998,
covers net losses incurred on the Company's direct written, as well as its
assumed reinsurance business.
Losses related to the Company's direct writings believed to be weather related
aggregated $11.7 million in 1998 compared to $5.2 million in 1997. The increase
in weather related losses was primarily attributable to severe ice storms which
impacted the upstate New York and Maine territories in which the Company writes
business during the first three months of 1998, and tornadoes and severe
thunderstorms which impacted the Northeast during the second quarter of 1998.
The Company incurred an additional $3.9 million of losses in 1998, as compared
to 1997, on its personal and commercial automobile business. The ratio of losses
incurred to premiums earned for the Company's personal and commercial automobile
business was 69.3% in 1998 compared to 65.1% in 1997. The Company also incurred
an additional $1.4 million of losses in 1998 as compared to 1997 on its workers
compensation business. The loss ratio for worker's compensation was 53.1% in
1998 compared to 41.7% in 1997.
Losses and loss adjustment expenses on the Company's voluntary assumed business
increased $2.6 million in 1998 as compared to 1997 and was 60.0% of earned
premiums for such business for the year ended December 31, 1998 compared to
57.7% in 1997. The increase in the ratio of loss and loss adjustment expenses to
earned premiums on business assumed was primarily attributable to losses caused
by severe weather in the Midwest.
Amortization Expense
Amortization expense increased $6.2 million, or 21.6%, to $35.0 million in 1998
from $28.8 million in 1997. The increase was primarily attributable to the
increase in deferred acquisition costs associated with the growth in direct
written premiums during 1998 and 1997.
Other Operating Costs and Expenses
Other operating costs and expenses decreased $2.5 million to $12.4 million in
1999 from $14.9 million in 1998. Property and casualty insurance underwriting
expenses (including amortization expenses) were 25.2% of premium revenue in 1998
compared to 28.2% in 1997. The decrease in underwriting expenses as a percent of
premium revenue was primarily attributable to a smaller relative increase in
overhead expenses than in premium revenue for the year and the Company's
continued expense management initiatives which began in 1996. The 1997
underwriting expenses include the impact of the prior period adjustment made to
reflect the Company's retroactive adoption of Statement 112 to account for the
Company's extended earnings program. Excluding the impact of this prior period
adjustment, the underwriting expenses were 27.2% of premium revenue for 1997.
E-22
<PAGE>
Gain on the Partial Reduction of Extended Earnings Liability
The Company recorded a gain of $6.3 million on the partial reduction of its
extended earnings liability in 1998, which was the result of modifications made
to the agreements with the Company's agents and agency managers that relieved
the Company of the primary obligation to make extended earnings payments.
The Company is primarily liable for its remaining extended earnings liability
which represents the aggregate amount owed by the Company to eligible former
agents who have terminated their association with the Company and are currently
receiving extended earnings payments.
Federal Income Tax Expense
Federal income tax expense decreased $1.0 million to $8.2 million in 1998 from
$9.2 million in 1997. Federal income tax expense was 30.7% of income before
federal income taxes in 1998 compared to 34.5% in 1997. The decrease in the
Company's federal income tax expense as a percentage of income before federal
income tax expense in 1998 as compared to 1997 was primarily attributable to an
increased proportion of tax exempt interest income earned on the Company's
investments reflecting the Company's increased investment in tax exempt fixed
maturity securities.
Net Income
Net income increased $1.2 million to $18.7 million in 1998 from $17.5 million in
1997 primarily as a result of the foregoing factors, including the gain of $6.3
million on the partial reduction of the Company's extended earnings liability
recognized in 1998.
Liquidity and Capital Resources
Our primary sources of cash flow are premiums, investment income, principal from
maturing investments, and proceeds from sales of invested assets. The property
and casualty insurance and life insurance segments typically generate positive
cash flows from operations as a result of premiums being received in advance of
the related claim and benefit payments. In addition to the need for cash flow to
meet operating expenses, the liquidity requirements of the property and casualty
insurance segment relate primarily to the payment of losses and loss adjustment
expenses and the liquidity requirements of the life insurance segment relate
primarily to the payment of benefits under life insurance, annuity, and accident
and health policies. The liquidity requirements of the property and casualty
insurance and life insurance segments can vary because of the uncertainties
regarding the settlement dates for liabilities for unpaid claims and the
potential for large losses, either individually or in the aggregate.
In addition, Farm Family Holdings may receive dividends from subsidiaries, if
declared and paid. The New York Insurance Law regulates the distribution of
dividends and other payments to Farm Family Holdings by Farm Family Casualty and
Farm Family Life. As of December 31, 1999, the maximum amount of dividends that
could be paid by Farm Family Casualty without the prior approval of the New York
State Insurance Department (the "Department") was approximately $4.3 million.
The payment of stockholder dividends by Farm Family Life is subject to the prior
approval of the Department. Under the New York Insurance Law, the Superintendent
of Insurance has broad discretion to determine whether the financial condition
of a stock life insurance company would support the payment of dividends to its
shareholders. Such restrictions, or any subsequently imposed restrictions, may
in the future affect the liquidity of Farm Family Holdings.
We believe that the Company's liquidity and capital resources are adequate for
the coming year.
Our asset/liability management process is designed to mitigate the risks
associated with interest-sensitive assets and liabilities. We price our annuity
and universal life products based on assumptions considering prevailing and
expected interest rates and other factors to achieve a positive difference, or
spread, between its expected return on investments and the crediting rate. We
attempt to achieve this spread by active portfolio management focusing on
matching the duration of invested assets and related liabilities to minimize the
exposure to fluctuations in interest rates and by the adjustment of the
crediting rate on annuity products. The results of the asset/liability matching
are analyzed periodically through cash flow analysis under multiple interest
rate scenarios. We believe that we will continue to achieve a positive spread
and that the amount of lapses and surrender rates generally will remain
consistent with those assumed in the pricing of the products. We utilize the
services of a professional investment management firm specializing in managing
insurance company assets. We believe this supplements our internal capabilities
and will further improve the management of the invested assets.
E-23
<PAGE>
At December 31, 1999, our cash and invested assets, at amortized cost, were $1.1
billion, a $827.4 million increase from 1998. The increase is primarily the
result of the acquisition of Farm Family Life. During 1999, we continued to
invest primarily in investment grade fixed maturities to maintain the overall
quality of our investment portfolio. We also increased investments in commercial
mortgage loans in the life insurance segment to further diversify and increase
the yield of the investment portfolio in this segment. The market value of fixed
maturity investments is subject to fluctuations directly attributable to
prevailing rates of interest as well as other factors.
Fixed maturity securities, at amortized cost, rated as investment grade by the
National Association of Insurance Commissioners were $968.2 million, or 95.8% of
the fixed maturity portfolio, at December 31, 1999 compared to $282.0 million,
or 97.7% of the fixed maturity portfolio, at December 31, 1998.
We currently do not have any investments in derivative financial instruments
such as futures, forward, swap, or option contracts, or other financial
instruments with similar characteristics.
During 1999 and 1998, we had in place unsecured lines of credit with two banks
under which we could borrow up to $17.0 million. At December 31, 1999, no
amounts were outstanding on the lines of credit. In addition, our reinsurance
intermediary has extended a "Rapid Recovery Facility" which will issue cash
advances of up to $8.0 million within 48 hours of experiencing a catastrophic
loss. We did not utilize this facility in 1999, 1998 or 1997.
In January 2000, we replaced our existing lines of credit discussed above with a
revolving credit agreement with three banks. The credit agreement, which expires
during January 2003, provides for uncollateralized borrowings of up to $30.0
million at the lending banks' prime rate or LIBOR plus 0.8%. On each anniversary
date, the committed amount may decrease by $10.0 million, unless otherwise
extended by mutual agreement. The terms of the credit agreement contain, among
other provisions, requirements for maintaining minimum levels of surplus, net
worth and debt service coverage.
On April 27, 1999, our Board of Directors adopted a stock repurchase plan that
authorizes us to repurchase shares of the Company's common stock in an aggregate
amount of up to $7.5 million. The repurchase program has been authorized for a
one-year period ending on April 27, 2000. The extent and timing of any
repurchases will depend on market conditions and other corporate considerations.
No repurchases were made under the plan through December 31, 1999.
Net cash provided by operating activities was $64.5 million, $29.5 million, and
$31.4 million during the years ended December 31, 1999, 1998, and 1997,
respectively. The $35.0 million increase in net cash provided by operating
activities in 1999 resulted primarily from approximately $32.0 million in cash
provided by operating activities of the life insurance segment. The decrease in
net cash provided by operating activities in 1998 compared to 1997 was primarily
attributable to an increase in losses paid.
Net cash used in investing activities was $36.1 million, $29.0 million, and
$29.3 million during the years ended December 31, 1999, 1998, and 1997,
respectively. The $7.1 million increase in net cash used in investing activities
in 1999 was primarily due to $10.4 million in cash used in investing activities
of the life insurance segment. The decrease in net cash used in investing
activities in 1998 compared to 1997 primarily resulted from an increase in
investment collections from fixed maturities available for sale due to an
increase in the redemption of fixed maturities. During 1998, issuers paid $26.9
million to redeem fixed maturities prior to their stated maturity, compared to
$10.6 million in 1997.
E-24
<PAGE>
Net cash used in financing activities for the year ended December 31, 1999 of
$19.9 million was the result of contractholder fund withdrawals on interest
sensitive products exceeding the related deposits for these products. We believe
the excess of contractholder fund withdrawals over deposits is directly related
to the strength of the stock market and the prevailing interest rate environment
during 1999. These contractholder items have been reported since the acquisition
of Farm Family Life on April 6, 1999. Also, during June 1999, we marketed a
single premium deferred annuity at a special rate ("special annuity"). We
received $55.1 million in premiums from sales of the special annuity. The total
amount received included $50.4 million of money from other policies held with
the Company that did not have surrender protection which were exchanged for
special annuity policies that have seven-year surrender protection.
The Company's liability for funds on deposit from policyholders includes amounts
subject to discretionary withdrawal. Withdrawal characteristics as of December
31, 1999 are as follows:
<TABLE>
<CAPTION>
($ in thousands) Amount % of Total
------------------------------------------------------------------------------------------------------
Surrender charge rate:
<S> <C> <C>
Greater than or equal to 5% $85,127 20.4%
Less than 5%, but still subject to surrender charge 73,384 17.6%
Not subject to surrender charge 249,861 59.9%
Not subject to discretionary withdrawal 8,599 2.1%
--------------------------------
Total funds on deposit from policyholders $416,971 100.0%
================================
</TABLE>
On April 1, 1998, we redeemed $1.3 million principal amount of surplus notes
bearing interest at a rate of 8.0% per annum. Interest expense incurred on the
surplus notes for the year ended December 31, 1998 was $25,000 and $102,000 in
1997.
Effective December 31, 1997, we revised our property and casualty reinsurance
program. Certain reinsurance agreements with our affiliate, United Farm Family,
were terminated effective December 31, 1997. As a result, United Farm Family
discontinued reinsuring losses incurred by Farm Family Casualty which exceeded
$100,000 up to $300,000 and, accordingly, Farm Family Casualty's retention
increased from $100,000 to $300,000 effective January 1, 1998. In addition, we
entered into an agreement with unaffiliated reinsurers that provides reinsurance
protection within certain dollar limits for losses in excess of a predetermined
ratio of losses to earned premiums for accident years 1998 and 1999. This
agreement covers all direct and assumed voluntary business as well as mandatory
residual market mechanisms. Our reinsurance program is structured to partially
mitigate the impact of large or unusual losses as well as the aggregation of
smaller, more frequent losses on liquidity and operating results.
We also purchase reinsurance for our life insurance and accident and health
lines of business to mitigate the impact of potential large or unusual claims on
our liquidity and operating results. Our life insurance reinsurance program
provides for coverage for individual life insurance claims greater than
$400,000.
E-25
<PAGE>
Farm Family Holdings, Inc. and Subsidiaries
Consolidated Statements of Income and Comprehensive Income
($ in thousands, except per share amounts)
<TABLE>
<CAPTION>
Years Ended December 31, 1999 1998 1997
- ---------------------------------------------------------------------------------------------------------------------
Revenues:
<S> <C> <C> <C>
Premiums from property/casualty insurance $188,921 $181,756 $149,220
Premiums from life and health insurance and contract charges 27,799 ---- ----
Net investment income 58,558 19,119 18,077
Realized investment gains (losses), net (1,984) 451 5,406
Other income 1,569 1,033 1,020
- ---------------------------------------------------------------------------------------------------------------------
Total revenues 274,863 202,359 173,723
- ---------------------------------------------------------------------------------------------------------------------
Losses, benefits, expenses and other:
Losses and loss adjustment expenses on property/casualty insurance 141,509 134,302 103,301
Policyholder contract benefits 38,710 ---- ----
Amortization expense 38,182 35,019 28,794
Other operating costs and expenses 20,434 12,431 14,910
Participating policyholders' interest 9,692 ---- ----
- ---------------------------------------------------------------------------------------------------------------------
Total losses, benefits and expenses 248,527 181,752 147,005
Gain on partial reduction of extended earnings liability ---- (6,318) ----
- ---------------------------------------------------------------------------------------------------------------------
Total losses, benefits, expenses and other 248,527 175,434 147,005
- ---------------------------------------------------------------------------------------------------------------------
Income before federal income tax expense and preferred stock dividends 26,336 26,925 26,718
Federal income tax expense 7,440 8,254 9,218
- ---------------------------------------------------------------------------------------------------------------------
Income before preferred stock dividends 18,896 18,671 17,500
Preferred stock dividends 278 ---- ----
- ---------------------------------------------------------------------------------------------------------------------
Net income attributable to common stockholders $18,618 $18,671 $17,500
- ---------------------------------------------------------------------------------------------------------------------
Other comprehensive income, net of tax:
Unrealized holding gains (losses) arising during the year (net of tax
expense (benefit) of $(6,902), $1,046, and $(1,255)) (11,718) 1,943 (2,329)
Reclassification adjustment for (gains) losses included in net income
(net of tax expense (benefit) of $(296), $211, and $1,622) (550) 390 3,011
- ---------------------------------------------------------------------------------------------------------------------
Other comprehensive income (loss) (12,268) 2,333 682
- ---------------------------------------------------------------------------------------------------------------------
Comprehensive income $6,350 $21,004 $18,182
=====================================================================================================================
Per Share Data:
Net Income - basic $3.16 $3.55 $3.33
=====================================================================================================================
Net Income - diluted $3.13 $3.52 $3.32
=====================================================================================================================
Basic weighted average shares outstanding 5,882,968 5,253,813 5,253,813
=====================================================================================================================
Diluted weighted average shares outstanding 5,948,213 5,303,965 5,270,947
=====================================================================================================================
See accompanying notes to Consolidated Financial Statements.
</TABLE>
E-26
<PAGE>
Farm Family Holdings, Inc. and Subsidiaries
Consolidated Balance Sheets
($ in thousands)
<TABLE>
<CAPTION>
As of December 31, 1999 1998
- --------------------------------------------------------------------------------------------------------------------
Assets
Investments:
Fixed Maturities
Available for sale, at fair value
<S> <C> <C>
(Amortized cost: $1,002,850 in 1999 and $280,124 in 1998) $960,054 $293,120
Held to maturity, at amortized cost
(Fair value: $7,820 in 1999 and $8,652 in 1998) 7,971 8,390
Equity securities - available for sale, at fair value
(Cost: $42,819 in 1999 and $3,356 in 1998) 45,809 5,323
Mortgage loans 26,832 691
Policy loans 30,839 ----
Other invested assets 176 ----
- --------------------------------------------------------------------------------------------------------------------
Total investments 1,071,681 307,524
- --------------------------------------------------------------------------------------------------------------------
Cash and cash equivalents 19,190 10,677
Insurance receivables:
Reinsurance receivables 24,748 17,800
Premiums receivable, net 32,094 29,666
Deferred acquisition costs 17,630 13,668
Present value of future profits 28,571 ----
Accrued investment income 18,875 5,527
Property and equipment, net 14,520 ----
Deferred income tax asset, net 29,605 1,694
Receivable from affiliates, net ---- 16,660
Other assets 4,884 3,287
- --------------------------------------------------------------------------------------------------------------------
Total assets $1,261,798 $406,503
====================================================================================================================
Liabilities
Reserves for losses and loss adjustment expenses
for property/casualty insurance $186,130 $174,435
Reserves for life policies and contract benefits 239,891 ----
Funds on deposit from policyholders 416,971 ----
Unearned premium reserve 74,364 71,209
Accrued dividends to policyholders 5,263 ----
Reinsurance premiums payable 4,168 1,055
Accrued expenses and other liabilities 19,471 15,566
Participating policyholders' interest 128,516 ----
- --------------------------------------------------------------------------------------------------------------------
Total liabilities 1,074,774 262,265
- --------------------------------------------------------------------------------------------------------------------
Commitments and contingencies
Mandatory redeemable preferred stock 5,830 ----
Stockholders' equity
Preferred stock, $.01 par value, 836,786 shares authorized
and no shares issued and outstanding ---- ----
Common stock, $.01 par value, 10,000,000 shares authorized,
6,110,684 and 5,253,813 shares issued and outstanding 61 53
Additional paid-in capital 123,504 92,906
Retained earnings 60,172 41,554
Accumulated other comprehensive income (loss) (2,543) 9,725
- --------------------------------------------------------------------------------------------------------------------
Total stockholders' equity 181,194 144,238
- --------------------------------------------------------------------------------------------------------------------
Total liabilities and stockholders' equity $1,261,798 $406,503
====================================================================================================================
See accompanying notes to Consolidated Financial Statements.
</TABLE>
E-27
<PAGE>
Farm Family Holdings, Inc. and Subsidiaries
Consolidated Statements of Stockholders' Equity
($ in thousands)
<TABLE>
<CAPTION>
Years Ended December 31, 1999 1998 1997
- --------------------------------------------------------------------------------------------------------------------
Shares of common stock issued
<S> <C> <C> <C>
Balance, beginning of year 5,253,813 5,253,813 5,253,813
Issuance of shares for acquisition 856,871 ---- ----
- --------------------------------------------------------------------------------------------------------------------
Balance, end of year 6,110,684 5,253,813 5,253,813
====================================================================================================================
Common stock issued
Balance, beginning of year $53 $53 $53
Issuance of shares for acquisition 8 ---- ----
- --------------------------------------------------------------------------------------------------------------------
Balance, end of year 61 53 53
- --------------------------------------------------------------------------------------------------------------------
Additional paid-in capital
Balance, beginning of year 92,906 92,906 98,140
Prior period adjustment ---- ---- (5,234)
- --------------------------------------------------------------------------------------------------------------------
Adjusted balance, beginning of year 92,906 92,906 92,906
Issuance of shares for acquisition 30,598 ---- ----
- --------------------------------------------------------------------------------------------------------------------
Balance, end of year 123,504 92,906 92,906
- --------------------------------------------------------------------------------------------------------------------
Retained earnings
Balance, beginning of year 41,554 22,883 5,838
Prior period adjustment ---- ---- (455)
- --------------------------------------------------------------------------------------------------------------------
Adjusted balance, beginning of year 41,554 22,883 5,383
Net income 18,618 18,671 17,500
- --------------------------------------------------------------------------------------------------------------------
Balance, end of year 60,172 41,554 22,883
- --------------------------------------------------------------------------------------------------------------------
Accumulated other comprehensive income (loss)
Balance, beginning of year 9,725 7,392 6,710
Unrealized holding gains (losses) arising during the year,
net of tax (11,718) 1,943 (2,329)
Reclassification adjustment for (gains) losses included in
net income, net of tax (550) 390 3,011
- --------------------------------------------------------------------------------------------------------------------
Balance, end of year (2,543) 9,725 7,392
- --------------------------------------------------------------------------------------------------------------------
Total stockholders' equity $181,194 $144,238 $123,234
====================================================================================================================
See accompanying notes to Consolidated Financial Statements.
</TABLE>
E-28
<PAGE>
Farm Family Holdings, Inc. and Subsidiaries
Consolidated Statements of Cash Flows
($ in thousands)
<TABLE>
<CAPTION>
Years Ended December 31, 1999 1998 1997
- ----------------------------------------------------------------------------------------------------------------------
Cash Flows From Operating Activities
<S> <C> <C> <C>
Net income $18,618 $18,671 $17,500
- ----------------------------------------------------------------------------------------------------------------------
Adjustments to reconcile net income
to net cash provided by operating activities:
Realized investment (gains) losses, net 1,984 (451) (5,406)
Amortization of bond discount 3,752 328 329
Amortization and depreciation 40,154 35,019 28,794
Interest credited to policyholders 17,636 ---- ----
Deferred income taxes (719) 1,472 (845)
Gain on partial reduction of extended earnings liability ---- (6,318) ----
Participating policyholders' interest 9,692 ---- ----
Dividends to policyholders (7,205) ---- ----
Capitalization of deferred acquisition costs (41,039) (36,074) (30,725)
Changes in assets and liabilities, net of effects of the acquisition:
Reinsurance receivables (4,071) (5,457) (1,600)
Premiums receivable, net (2,428) (1,525) (5,478)
Accrued investment income (780) (119) (547)
Receivable from affiliates, net 1,471 1,126 (1,653)
Other assets 475 959 (250)
Reserves for property/casualty insurance losses and loss adjustment
expenses 11,695 17,813 15,402
Reserves for life policies and contract benefits 9,586 ---- ----
Unearned premium reserve 3,155 5,140 10,124
Reinsurance premiums payable 3,113 (1,509) 1,923
Accrued expenses and other liabilities (592) 410 3,800
- ----------------------------------------------------------------------------------------------------------------------
Total adjustments 45,879 10,814 13,868
- ----------------------------------------------------------------------------------------------------------------------
Net cash provided by operating activities 64,497 29,485 31,368
- ----------------------------------------------------------------------------------------------------------------------
Cash Flows From Investing Activities
Proceeds from sales:
Fixed maturities 57,178 3,684 8,019
Equity securities 3,459 ---- 6,257
Investment collections:
Fixed maturities 46,271 39,397 17,339
Other investments 1,221 977 85
Investment purchases:
Fixed maturities (133,900) (73,484) (60,961)
Other investments (9,118) ---- ----
Policy loans issued, net (396) ---- ----
Change in other invested assets 102 402 (30)
Purchases of property and equipment (2,337) ---- ----
Proceeds from sale of property and equipment 36 ---- ----
Cash of subsidiary at date of acquisition 3,295 ---- ----
Acquisition costs ( 1,895) ---- ----
- ----------------------------------------------------------------------------------------------------------------------
Net cash used in investing activities (36,084) (29,024) (29,291)
- ----------------------------------------------------------------------------------------------------------------------
Cash Flows From Financing Activities
Contractholder fund deposits 76,728 ---- ----
Contractholder fund withdrawals (96,628) ---- ----
Principal payments on debt ---- (1,268) (36)
- ----------------------------------------------------------------------------------------------------------------------
Net cash used in financing activities (19,900) (1,268) (36)
- ----------------------------------------------------------------------------------------------------------------------
Net increase (decrease) in cash 8,513 (807) 2,041
Cash and cash equivalents, beginning of year 10,677 11,484 9,443
- ----------------------------------------------------------------------------------------------------------------------
Cash and cash equivalents, end of year $19,190 $10,677 $11,484
======================================================================================================================
See accompanying notes to Consolidated Financial Statements.
</TABLE>
E-29
<PAGE>
Notes to Consolidated Financial Statements
1. General
Basis of Presentation:
The accompanying consolidated financial statements have been prepared in
conformity with generally accepted accounting principles and include the
accounts of Farm Family Holdings, Inc. ("Farm Family Holdings") and its
wholly-owned subsidiaries (collectively referred to as the "Company"). The
primary subsidiaries of Farm Family Holdings are Farm Family Casualty Insurance
Company ("Farm Family Casualty") and Farm Family Life Insurance Company ("Farm
Family Life"). On April 6, 1999, Farm Family Holdings acquired Farm Family Life
and Farm Family Life's wholly-owned subsidiary, United Farm Family Insurance
Company ("United Farm Family") (see Note 3). All significant intercompany
balances and transactions have been eliminated.
Certain reclassifications have been made to prior periods' financial statements
to conform to the current period's presentation.
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, the disclosures of
contingent assets and liabilities at the date of the financial statements and
the reported amounts of revenues and expenses during the reporting period.
Actual results could differ from those estimates.
Nature of Operations:
Farm Family Casualty and United Farm Family are specialized insurance companies
that provide property and casualty insurance coverages to farms, agribusiness,
other generally related businesses and residents of rural and suburban
communities. Farm Family Casualty provides insurance 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 with Farm Family
Casualty, except for employees of the Company and its affiliates. United Farm
Family provides similar property and casualty insurance products in Pennsylvania
and Maryland. United Farm Family began operations in these states during 1998.
Membership in a state Farm Bureau organization is not a prerequisite for
purchasing insurance coverage from United Farm Family.
Farm Family Life provides life insurance, annuity, and accident and health
insurance coverages principally to members of the state Farm Bureau
organizations in the same states as Farm Family Casualty and United Farm Family.
Membership in a state Farm Bureau organization is not a prerequisite for
purchasing insurance coverage from Farm Family Life.
Farm Family Casualty, Farm Family Life and United Farm Family have substantially
identical directors and officers, share the same agency force and certain
employees and utilize common office facilities. Most administrative and
operating expenses are allocated between the companies pursuant to expense
sharing and service agreements (see Note 13).
2. Summary of Significant Accounting Policies
Cash and cash equivalents:
The Company considers all highly liquid investments purchased with a maturity of
three months or less to be cash equivalents.
Investments:
Fixed maturities include primarily bonds, redeemable preferred stocks,
asset-backed securities and mortgage-backed securities. Investments in fixed
maturities which the Company has both the ability and positive intent to hold to
maturity are classified as held to maturity and carried at amortized cost.
Investments classified as held to maturity on the Company's consolidated balance
sheets consist primarily of private placements. Fixed maturities which may be
sold prior to their contractual maturity are classified as available for sale
and are 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, is reflected as a component
of stockholders' equity.
E-30
<PAGE>
Equity securities include common stocks which are carried at fair value. The
difference between cost and fair value of equity securities, less deferred
income taxes, is reflected as a component of stockholders' equity.
Mortgage loans are carried at their outstanding principal balance. At December
31, 1999, 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.
The carrying values of all investments are reviewed on an ongoing basis. If this
review indicates a decline in fair value below cost is other than temporary, the
Company's carrying value in the investment is reduced to its estimated
realizable value and a specific write-down is taken. Such write-downs are
included in realized investment gains and losses.
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 and asset-backed securities is
determined by the effective yield method based on estimated principal
repayments. Realized investment gains and losses are determined on a specific
identification basis.
Income Taxes:
The income tax provision is calculated under the liability method. Deferred
income tax assets and liabilities are recorded based on the difference between
the financial statement and tax bases of assets and liabilities and the enacted
tax rates. The principal assets and liabilities giving rise to such differences
are reserves for losses and loss adjustment expenses, unearned premiums,
reserves for life policies and contract benefits, funds on deposit from
policyholders, present value of future profits, 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.
Stock Compensation Plan:
The Company has elected to account for its stock compensation plan using the
intrinsic value based method as prescribed by Accounting Principles Board
Opinion No. 25, "Accounting for Stock Issued to Employees" ("APB 25").
Accordingly, no compensation cost is recognized in the financial statements for
employee stock options that are issued with an exercise price equal to the fair
market value of the stock.
Recognition of Premium Revenues and Costs:
Premiums on property and casualty business 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.
Traditional life insurance products include those products with fixed and
guaranteed premiums and benefits, and consist principally of whole life and term
insurance policies. Life insurance 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 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.
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. Revenues for universal life-type
policies consist of charges assessed against policy account values for the cost
of insurance and policy administration. Other 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.
E-31
<PAGE>
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. Revenues for investment contracts
consist of investment income and policy administration charges. Other 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.
Policy benefits and claims that are charged to expense for universal life-type
contracts and investment contracts include interest credited to contracts and
benefit claims incurred in the period in excess of related policy account
balances. Interest crediting rates for universal life type contracts and
investment contracts are based on current market conditions and are determined
by the Board of Directors.
All insurance related revenues, losses, benefits and expenses are reported net
of reinsurance.
Deferred Acquisition Costs:
Policy acquisition costs that vary with and are primarily related to the
production of property and casualty insurance business have been deferred. These
amounts 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.
Certain costs of writing life insurance and annuity 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, and
have been reported as deferred acquisition costs. Such costs include
commissions, certain costs of policy issuance and underwriting, and certain
variable agency expenses. Future investment income is considered in determining
the recoverability of deferred acquisition costs.
For traditional life 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 25-year period is used for
annuities.
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.
The Company reviews the carrying amount of deferred acquisition costs on a
periodic basis.
Amortization of deferred acquisition costs includes amounts relating to property
and casualty and life insurance business and has been reported as amortization
expense in the accompanying consolidated statements of income and comprehensive
income.
Reserves for Losses and Loss Adjustment Expenses:
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 for property and casualty
insurance business. The reserve estimates are based on known facts and
circumstances, including the Company's experience with similar cases and
historical trends involving reserving patterns, loss payments, pending levels of
unpaid claims and product mix, as well as other factors including court
decisions, economic conditions and public attitudes. The reserves for losses and
loss adjustment expenses include case basis estimates of reported losses,
estimates of incurred but not reported losses based upon prior experience
adjusted for current trends, and estimates of losses to be paid under assumed
reinsurance contracts. Estimated amounts of recoverable salvage and subrogation
are deducted from the reserves for losses and loss adjustment expenses. The
establishment of appropriate reserves, as well as related amounts recoverable
under reinsurance contracts is an inherently uncertain process. Reserve
estimates are regularly reviewed and updated, using the most current information
available. Any resulting adjustments, which may be material, are reflected in
current operations (see Note 10).
E-32
<PAGE>
Reserves for Life Policies 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 assumptions as to interest and
mortality. Reserve interest assumptions are level and range from 2.5% to 4.5%.
The average rate of assumed investment yields used in estimating gross margins
was 7.5% in 1999. 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.
Present Value of Future Profits ("PVFP"):
The actuarially determined present value of anticipated net cash flows to be
realized from insurance, annuity and investment contracts in force at the date
of an acquisition is recorded as PVFP. This balance is amortized and evaluated
for recoverability in the same manner as the deferred acquisition costs
described above. The $28.6 million of PVFP in the accompanying consolidated
balance sheets reflects the original $29.7 million from the acquisition of Farm
Family Life, less accumulated amortization. Interest accrues on the unamortized
balance at rates that range from 4.6% to 6.3%, with $1.2 million accrued during
1999. PVFP amortization is projected to range from 0.3% to 5.8% of the December
31, 1999 unamortized balance for each of the next five years.
Property and Equipment:
Property and equipment are stated at cost, net of accumulated depreciation. The
Company uses the straight-line method of depreciation over the estimated useful
life ranges of 10 to 20 years for property and 3 to 7 years for equipment. The
Company reviews its property and equipment for impairment whenever events or
changes in circumstances indicate that the carrying amount may not be
recoverable.
During 1999, the Company adopted Statement of Position ("SOP") No. 98-1,
"Accounting for the Costs of Computer Software Developed or Obtained for
Internal Use". This statement requires the capitalization of certain costs
incurred in connection with developing or obtaining internal use software. Prior
to the adoption of SOP No. 98-1, the Company capitalized external software
development costs and charged internal costs, primarily payroll and related
items, to expense as they were incurred. Pursuant to the SOP, these internal
costs are now capitalized. The effect of adopting SOP No. 98-1 was not material
to the Company's consolidated financial statements.
Participating Policyholders' Interest:
A significant portion of the life insurance segment's products are written on a
"participating" basis, as defined in the New York State insurance law.
Participating insurance represented 89% of the total life insurance in force at
December 31, 1999 and 38% of the total statutory premiums collected for the
period April 6, 1999 through December 31, 1999.
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. The Board of
Directors approves dividends to policyholders.
E-33
<PAGE>
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).
For the nine months ended December 31, 1999, participating policyholder
dividends were $7.2 million and net income attributable to participating
policyholders was $6.3 million.
Guaranty Fund Assessments:
During 1999, the Company adopted Statement of Position No. 97-3, "Accounting by
Insurance and Other Enterprises for Insurance-Related Assessments". This
statement requires the accrual of assessments levied on insurance companies by
guaranty associations, and potential assessments for events that have occurred,
in certain states. The effect of adopting SOP No. 97-3 was not material to the
Company's consolidated financial statements.
Dividend Policy:
The Company has never paid cash dividends on shares of common stock. The Company
currently intends to retain any earnings in order to develop its business and
support its operations, and, as such, does not anticipate that it will pay
dividends to stockholders in the foreseeable future. The declaration and payment
of dividends in the future are at the discretion of the Board of Directors of
the Company, are subject to certain regulatory constraints and will depend upon,
among other things, the Company's results of operations, financial condition,
cash requirements, future prospects and other factors.
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, 2001, 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. Since the Company does not have any investments in
derivative financial instruments, management does not believe that the
implementation of Statement 133 will have a material impact on the Company's
financial statements.
In 1998, the National Association of Insurance Commissioners ("NAIC") adopted
the Codification of Statutory Accounting Principles guidance (the
"Codification"), which will replace the current Accounting Practices and
Procedures Manual as the NAIC's primary guidance on statutory accounting.
Statutory accounting is a comprehensive basis of accounting based on prescribed
accounting practices, which include state laws, regulations and general
administrative rules, as well as a variety of publications of the NAIC. The
Codification provides guidance for the areas where statutory accounting has been
silent and changes current statutory accounting in some areas. The NAIC has
established January 1, 2001 as the effective date of the Codification. The New
York Insurance Department has advised that it intends to proceed with
implementation of the Codification, subject to any provisions in New York
statute which conflict with particular points in the Codification rules. The
Company has not estimated the potential effect of adopting the Codification.
3. Acquisition of Farm Family Life
On April 6, 1999, Farm Family Holdings acquired all of the outstanding capital
stock of Farm Family Life. Farm Family Holdings' aggregate purchase price was
approximately $38.3 million, including direct acquisition costs. The fair value
of the assets acquired and liabilities assumed was $854.1 million and $815.8
million, respectively. The purchase price consisted of approximately $30.6
million of Farm Family Holdings' common stock ($31.5 million less certain
expenses paid by Farm Family Life), approximately $5.8 million stated value of
6-1/8% voting preferred stock ($6 million less certain expenses paid by Farm
Family Life) and approximately $1.9 million in direct acquisition costs. The
price used to determine the number of shares of common and voting preferred
stock issued in the acquisition was fixed at $35.72 per share. Farm Family
Holdings issued 856,871 shares of common stock and 163,214 shares of voting
preferred stock to the Selling Stockholders. After the acquisition, Farm Family
Holdings' total number of common shares outstanding increased to 6,110,684. As a
result of the acquisition, Farm Family Life became a wholly-owned subsidiary of
Farm Family Holdings. The acquisition has been accounted for under the purchase
method of accounting. Accordingly, the financial results of Farm Family Life and
Farm Family Life's wholly-owned property and casualty subsidiary, United Farm
Family, are included in these consolidated financial statements effective April
6, 1999.
E-34
<PAGE>
The following unaudited pro forma information for the Company gives effect to
the Farm Family Life acquisition as if it happened at the beginning of the
periods presented. These pro forma results have been prepared for comparative
purposes only and are not necessarily indicative of what would have resulted had
the acquisition been made on the dates indicated, or future results.
<TABLE>
<CAPTION>
Twelve Months Ended
December 31,
- ------------------------------------------------------------------------------------ ------------------------------
($ in thousands, except per share data) 1999 1998
- ------------------------------------------------------------------------------------ -------------- ---------------
<S> <C> <C>
Revenues $297,615 $293,626
Income attributable to common shareholders $19,485 $21,646
Net income per common share - diluted $3.14 $3.51
</TABLE>
4. Net Income Per Share
The following table for the years ended December 31, 1999, 1998 and 1997
presents a reconciliation of the numerators and denominators of the basic and
diluted earnings per share computations.
<TABLE>
<CAPTION>
1999 1998 1997
<S> <C> <C> <C>
Net income available to common stockholders $18,618,000 $18,671,000 $17,500,000
==================================================================================================================
Weighted average number of
shares in basic earnings per share 5,882,968 5,253,813 5,253,813
Effect of stock options 65,245 50,152 17,134
- ------------------------------------------------------------------------------------------------------------------
Weighted average number
of shares in diluted earnings per share 5,948,213 5,303,965 5,270,947
==================================================================================================================
Basic net income per share $3.16 $3.55 $3.33
==================================================================================================================
Diluted net income per share $3.13 $3.52 $3.32
==================================================================================================================
</TABLE>
5. Investments
The amortized cost, fair value and gross unrealized gains and losses of
available for sale securities and held to maturity securities at December 31,
1999 and 1998 are as follows:
<TABLE>
<CAPTION>
Amortized Gross Unrealized Fair
($ in thousands) Cost Gains Losses Value
- -------------------------------------------------------------------------------------------------------------------
1999
Available for Sale
Fixed maturities:
<S> <C> <C> <C> <C>
U.S. Government & Agencies $30,741 $274 $969 $30,046
States, Municipalities & Political Subdivisions 196,311 1,020 8,207 189,124
Corporate 558,252 1,781 30,350 529,683
Mortgage-backed Securities 202,091 432 6,088 196,435
Redeemable Preferred Stock 15,455 111 800 14,766
- -------------------------------------------------------------------------------------------------------------------
Total fixed maturities 1,002,850 3,618 46,414 960,054
Equity securities 42,819 7,596 4,606 45,809
- -------------------------------------------------------------------------------------------------------------------
Total Available for Sale $1,045,669 $11,214 $51,020 $1,005,863
===================================================================================================================
Held to Maturity
Fixed maturities:
States, Municipalities & Political Subdivisions $4,009 $21 $99 $3,931
Corporate 3,962 17 90 3,889
- -------------------------------------------------------------------------------------------------------------------
Total Held to Maturity $7,971 $38 $189 $7,820
===================================================================================================================
</TABLE>
E-35
<PAGE>
<TABLE>
<CAPTION>
Amortized Gross Unrealized Fair
($ in thousands) Cost Gains Losses Value
- -------------------------------------------------------------------------------------------------------------------
1998
Available for Sale
Fixed maturities:
<S> <C> <C> <C> <C>
U.S. Government & Agencies $14,754 $887 $ ---- $15,641
States, Municipalities & Political Subdivisions 98,354 4,856 21 103,189
Corporate 129,347 7,187 937 135,597
Mortgage-backed Securities 31,367 678 13 32,032
Redeemable Preferred Stock 6,302 362 3 6,661
- -------------------------------------------------------------------------------------------------------------------
Total fixed maturities 280,124 13,970 974 293,120
Equity securities 3,356 1,967 ---- 5,323
- -------------------------------------------------------------------------------------------------------------------
Total Available for Sale $283,480 $15,937 $974 $298,443
===================================================================================================================
Held to Maturity
Fixed maturities:
States, Municipalities & Political Subdivisions $4,278 $54 $75 $4,257
Corporate 4,112 283 ---- 4,395
- -------------------------------------------------------------------------------------------------------------------
Total Held to Maturity $8,390 $337 $75 $8,652
===================================================================================================================
</TABLE>
The table below presents the amortized cost and fair value of fixed maturities
at December 31, 1999, by contractual maturity. Actual maturities may differ from
contractual maturities as a result of prepayments.
<TABLE>
<CAPTION>
Available for Sale Held to Maturity
Amortized Fair Amortized Fair
($ in thousands) Cost Value Cost Value
- ----------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Due in one year or less $16,010 $15,663 $100 $94
Due after one year through five years 122,304 119,429 1,414 1,350
Due after five years through ten years 226,978 219,818 5,212 5,114
Due after ten years 435,467 408,709 1,245 1,262
- ----------------------------------------------------------------------------------------------------------------
Subtotal 800,759 763,619 7,971 7,820
Mortgage-backed securities 202,091 196,435 ---- ----
- ----------------------------------------------------------------------------------------------------------------
Total $1,002,850 $960,054 $7,971 $7,820
================================================================================================================
</TABLE>
Unrealized investment gains and losses on fixed maturities classified as
available for sale and equity securities included in stockholders' equity as
accumulated other comprehensive income and in participating policyholders'
interest at December 31, 1999 are as follows:
<TABLE>
<CAPTION>
Cost/ Net
Amortized Cost Fair Gross Unrealized Unrealized
($ in thousands) Value Gains Losses Gains(Losses)
- -------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Fixed maturities available for sale $1,002,850 $960,054 $3,618 $46,414 $(42,796)
Equity securities 42,819 45,809 7,596 4,606 2,990
- -------------------------------------------------------------------------------------------------------------------
Total $1,045,669 $1,005,863 $11,214 $51,020 $(39,806)
=====================================================
Deferred income taxes 13,931
----------------
Total net unrealized loss (25,875)
Net unrealized losses attributable to
participating policyholders' interest 23,332
----------------
Total $(2,543)
================
</TABLE>
E-36
<PAGE>
The change in unrealized appreciation (depreciation) of investments included in
stockholders' equity as accumulated other comprehensive income and participating
policyholders' interest is as follows:
<TABLE>
<CAPTION>
($ in thousands) 1999 1998 1997
- -------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Fixed maturities available for sale $(55,782) $2,781 $5,253
Equity securities 1,012 809 (4,204)
- -------------------------------------------------------------------------------------------------------------------
(54,770) 3,590 1,049
Deferred income taxes 19,170 (1,257) (367)
- -------------------------------------------------------------------------------------------------------------------
Total change in unrealized appreciation (depreciation) (35,600) 2,333 682
Change in unrealized appreciation (depreciation) of investments
attributable to participating policyholders' interest 23,332 ---- ----
- -------------------------------------------------------------------------------------------------------------------
Total $(12,268) $2,333 $682
===================================================================================================================
The components of net investment income for the years 1999, 1998 and 1997 are as follows:
($ in thousands) 1999 1998 1997
- -------------------------------------------------------------------------------------------------------------------
Interest on fixed maturities $55,959 $19,031 $17,968
Dividends from equity securities 699 179 152
Interest on mortgage loans 1,319 90 154
Interest on short-term investments 976 458 416
Interest on policy loans 1,347 ---- ----
Other, net 66 43 25
- -------------------------------------------------------------------------------------------------------------------
Gross investment income 60,366 19,801 18,715
Investment expense (1,808) (682) (638)
- -------------------------------------------------------------------------------------------------------------------
Net investment income $58,558 $19,119 $18,077
===================================================================================================================
A summary of realized investment gains (losses), net, for the years 1999, 1998 and 1997 is as follows:
($ in thousands) 1999 1998 1997
- -------------------------------------------------------------------------------------------------------------------
Fixed maturities $(2,752) $598 $(149)
Equity securities 493 1 5,780
Other invested assets 275 (148) (225)
- -------------------------------------------------------------------------------------------------------------------
Total $(1,984) $451 $5,406
===================================================================================================================
</TABLE>
6. Fair Value of Financial Instruments
The following table presents the carrying amounts and estimated fair values of
financial instruments held by the Company at December 31, 1999 and 1998. The
fair value of a financial instrument is the amount at which the instrument could
be exchanged in a current transaction between willing parties. The table
excludes cash and cash equivalents, insurance receivables, receivables from
affiliates, accrued investment income and other assets, and accrued expenses and
other liabilities, all of which had fair values approximating carrying values.
As a number of the Company's significant assets (including deferred acquisition
costs, and deferred income taxes) and liabilities (including reserves for
property/casualty insurance losses and loss adjustment expenses and reserves for
life policies and contract benefits) are not considered financial instruments,
the disclosures that follow do not reflect the fair value of the Company as a
whole.
<TABLE>
<CAPTION>
1999 1998
Carrying Fair Carrying Fair
($ in thousands) Value Value Value Value
- -------------------------------------------------------------------------------------------------------------------
Assets:
<S> <C> <C> <C> <C>
Fixed maturities $968,025 $967,874 $301,510 $301,772
Equity securities 45,809 45,809 5,323 5,323
Mortgage loans 26,832 26,832 691 691
Policy loans 30,839 30,839 ---- ----
Other invested assets 176 176 ---- ----
Liabilities:
Funds on deposit from policyholders 416,971 415,223 ---- ----
</TABLE>
E-37
<PAGE>
The following methods and assumptions were used in estimating the fair value
disclosures for the financial instruments:
Fixed maturities, equity securities and other invested assets -- The fair value
is based upon quoted market prices where available or from independent pricing
services.
Mortgage loans -- The fair value is based on discounted cash flows using
interest rates at which similar loans would be made to borrowers with similar
characteristics.
Policy loans -- Future cash flows of policy loans are uncertain and difficult to
predict. Therefore management believes that the fair value of policy loans
approximates the unpaid principal balance.
Funds on deposit from policyholders -- Deposit funds include investment
contracts that earn interest at either fixed or variable rates. Interest rates
are adjusted monthly to market rates for those investment contracts with a
variable rate. The carrying value is the fair value for these liabilities. Other
investment contracts earn interest at a fixed rate for one, three or five-year
terms. Fair value for these liabilities is set by discounting future cash flows
to present value at current market rates.
Fair values for the Company's off-balance-sheet instruments (letters of credit)
are based on fees currently charged to enter into similar agreements, taking
into account the remaining terms of the agreements and the counter parties'
credit standing. The fair value of the Company's off-balance-sheet instruments
at December 31, 1999 is not considered to be material.
7. Property and Equipment
The carrying value of the Company's property and equipment at December 31 is as
follows:
<TABLE>
<CAPTION>
($ in thousands) 1999
- ---------------------------------------------------------------------------
<S> <C>
Home office building and grounds $8,898
Furniture and equipment 7,051
Automobiles 506
- ---------------------------------------------------------------------------
16,455
Accumulated depreciation (1,935)
- ---------------------------------------------------------------------------
Property and equipment, net $14,520
===========================================================================
</TABLE>
Depreciation expense was $2.0 million for 1999.
8. Reinsurance
The Company purchases property and casualty reinsurance to limit its exposure to
losses from catastrophic events, such as hurricanes, tornadoes or earthquakes,
and to limit losses from any single large risk. Reinsurance contracts do not
relieve the Company from its obligations to policyholders as the primary
insurer. The Company evaluates the financial condition of its reinsurers and
monitors concentrations of risk arising from similar geographic regions,
activities and economic characteristics of the reinsurers to minimize its
exposure to significant losses from reinsurer insolvencies. The Company
regularly evaluates amounts recoverable and an allowance for uncollectible
reinsurance is provided when collection is in doubt. At December 31, 1999 and
1998, the Company determined it was not necessary to provide an allowance for
uncollectible reinsurance. Reinsurance receivables at December 31, 1999 include
$21.8 million related to the property and casualty insurance segment and $2.9
million related to the life insurance segment. Approximately 90% of the property
and casualty reinsurance receivables balances at December 31, 1999 and 1998 were
due from six reinsurers.
Effective December 31, 1997, the Company revised its property and casualty
reinsurance program. Certain reinsurance agreements with its affiliate, United
Farm Family, were terminated effective December 31, 1997. As a result, United
Farm Family discontinued reinsuring losses incurred by Farm Family Casualty
which exceeded $100,000 up to $300,000 and, accordingly, Farm Family Casualty's
retention increased from $100,000 to $300,000 effective January 1, 1998. In
addition, the Company entered into an agreement which provides reinsurance
protection within certain dollar limits for losses in excess of a predetermined
ratio of losses to earned premiums for accident years 1998 and 1999. This
agreement covers all direct and assumed voluntary business as well as mandatory
residual market mechanisms. The Company's reinsurance program is structured to
partially mitigate the impact of large or unusual losses as well as the
aggregation of smaller, more frequent losses on liquidity and operating results.
E-38
<PAGE>
The Company also purchases reinsurance for its life insurance and accident and
health lines of business in part to mitigate the impact of large or unusual
claims on its liquidity and operating results. The Company's life insurance
reinsurance program provides for coverage for individual life insurance claims
greater than $400,000.
The effects of reinsurance on premiums written and earned, and losses and loss
adjustment expenses incurred, for the years ended December 31, were as follows:
<TABLE>
<CAPTION>
($ in thousands) 1999 1998 1997
- --------------------------------------------------------------------------------------------------------------------
Premiums From Property/Casualty Insurance Written
<S> <C> <C> <C>
Direct $192,995 $185,139 $168,707
Assumed 14,144 15,034 13,091
Ceded to United Farm Family ---- ---- (8,959)
Ceded to non-affiliates (15,437) (11,349) (13,594)
- --------------------------------------------------------------------------------------------------------------------
Premiums written, net of reinsurance $191,702 $188,824 $159,245
====================================================================================================================
Premiums From Property/Casualty Insurance Earned
Direct $189,337 $180,996 $160,988
Assumed 14,969 14,037 10,686
Ceded to United Farm Family ---- ---- (8,960)
Ceded to non-affiliates (15,385) (13,277) (13,494)
- --------------------------------------------------------------------------------------------------------------------
Premiums earned, net of reinsurance $188,921 $181,756 $149,220
====================================================================================================================
Losses and Loss Adjustment Expenses Incurred
Direct $142,883 $137,003 $113,569
Assumed 8,023 8,835 6,970
Ceded to United Farm Family 288 (1,050) (9,705)
Ceded to non-affiliates (9,685) (10,486) (7,533)
- --------------------------------------------------------------------------------------------------------------------
Losses and loss adjustment expenses incurred,
net of reinsurance $141,509 $134,302 $103,301
====================================================================================================================
Premiums From Life and Health Insurance and
Contract Charges
Direct $28,917 ---- ----
Reinsurance ceded (1,118) ---- ----
- --------------------------------------------------------------------------------------------------------------------
Premiums from life and health insurance and
contract charges, net of reinsurance $27,799 ---- ----
====================================================================================================================
</TABLE>
9. Income Taxes
<TABLE>
<CAPTION>
The components of the deferred income tax assets and liabilities at December 31, 1999 and 1998 are :
($ in thousands) 1999 1998
- -------------------------------------------------------------------------------------------------------------
Deferred Income Tax Assets
<S> <C> <C>
Reserves for losses and loss adjustment expenses $6,633 $5,863
Participating policyholders' interest 22,775 ----
Reserves for life policies and contract benefits and funds on deposit
from policyholders 13,160 ----
Unearned premium reserve 5,187 4,971
Accrued expenses 4,697 1,120
Other 811 59
- -------------------------------------------------------------------------------------------------------------
Total deferred income tax assets 53,263 12,013
- -------------------------------------------------------------------------------------------------------------
</TABLE>
E-39
<PAGE>
<TABLE>
<CAPTION>
($ in thousands) 1999 1998
- -------------------------------------------------------------------------------------------------------------
Deferred Income Tax Liabilities
<S> <C> <C>
Deferred acquisition costs 3,251 4,784
Unrealized investment gains, net 5,514 5,238
Present value of future profits 10,000 ----
Property and equipment 1,474 ----
Limited partnership investment 850 ----
Premium and agent balances 829 ----
Other assets 1,740 297
- -------------------------------------------------------------------------------------------------------------
Total deferred income tax liabilities 23,658 10,319
- -------------------------------------------------------------------------------------------------------------
Net deferred income tax asset $29,605 $1,694
=============================================================================================================
</TABLE>
There was no valuation allowance for deferred income tax assets as of December
31, 1999 or 1998. In assessing the realization of deferred tax assets,
management considers whether it is more likely than not that the deferred tax
assets will be realized. Management primarily considered the existence of
taxable income in the carry back period in making this assessment and believes
the benefits of the deductible differences recognized as of December 31, 1999
and 1998 will ultimately be realized.
The components of income tax expense (benefit) for the years ended December 31,
are as follows:
<TABLE>
<CAPTION>
($ in thousands) 1999 1998 1997
------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Current $8,724 $6,782 $10,063
Deferred (1,284) 1,472 (845)
- -------------------------------------------------------------------------------------------------------
Total income tax expense $7,440 $8,254 $9,218
=======================================================================================================
</TABLE>
The Company paid income taxes of $9.8 million, $6.7 million and $10.0 million,
in 1999, 1998 and 1997 respectively.
A reconciliation of the differences between the Company's effective tax rates
and the United States federal income tax rates for the years ended December 31,
1999, 1998 and 1997 is as follows:
<TABLE>
<CAPTION>
% of Pretax Income 1999 1998 1997
- --------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Income tax provision at prevailing rates 35.00% 35.00% 35.00%
Tax effect of:
Tax exempt interest income (5.60) (3.45) (1.42)
Dividends received deduction (0.83) (0.63) (0.59)
Other, net (0.32) (0.26) 1.51
- --------------------------------------------------------------------------------------------------------------
Federal income tax expense 28.25% 30.66% 34.50%
==============================================================================================================
</TABLE>
10. Reserves for Losses and Loss Adjustment Expenses
As described in Note 2, the Company establishes reserves for losses and loss
adjustment expenses on reported and incurred but not reported claims. The
establishment of appropriate reserves for losses and loss adjustment expenses is
an inherently uncertain process and the ultimate cost may vary materially from
the recorded amounts. Reserve estimates are regularly reviewed and updated,
using the most current information. Any resulting adjustments, which may be
material, are reflected in current operations.
E-40
<PAGE>
The following table provides a reconciliation of beginning and ending liability
balances for reserves for losses and loss adjustment expenses for the years
ended December 31, 1999, 1998 and 1997.
<TABLE>
<CAPTION>
($ in thousands) 1999 1998 1997
- -------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Reserves for losses and loss adjustment
expenses at beginning of year $174,435 $156,622 $141,220
Less reinsurance recoverables and receivables (30,908) (29,054) (26,837)
- -------------------------------------------------------------------------------------------------------------------
Net reserves for losses and loss adjustment expenses at beginning of year 143,527 127,568 114,383
Net reserves for losses and loss adjustment expenses from the acquisition
of United Farm Family 12,335 ---- ----
- -------------------------------------------------------------------------------------------------------------------
155,862 127,568 114,383
- -------------------------------------------------------------------------------------------------------------------
Incurred losses and loss adjustment expenses:
Provision for insured events of current year 146,829 138,201 107,273
Decrease in provision for insured events of prior years (5,320) (3,899) (3,972)
- -------------------------------------------------------------------------------------------------------------------
Total incurred losses and loss adjustment expenses 141,509 134,302 103,301
- -------------------------------------------------------------------------------------------------------------------
Payments:
Losses and loss adjustment expenses
attributable to insured events of current year 70,463 70,098 49,858
Losses and loss adjustment expenses
attributable to insured events of prior years 61,630 48,245 40,258
- -------------------------------------------------------------------------------------------------------------------
Total payments 132,093 118,343 90,116
- -------------------------------------------------------------------------------------------------------------------
Net reserves for losses and loss adjustment expenses at end of year 165,278 143,527 127,568
Plus reinsurance recoverables and receivables 20,852 30,908 29,054
- -------------------------------------------------------------------------------------------------------------------
Reserves for losses and loss adjustment expenses at end of year $186,130 $174,435 $156,622
===================================================================================================================
</TABLE>
The Company does not discount reserves for losses and loss adjustment expenses
except for certain lifetime workers' compensation indemnity reserves it assumes
from mandatory pools. The amount of such discounted reserves was $2.4 million
(net of a discount of $1.2 million), $3.3 million (net of a discount of $1.2
million), and $4.0 million (net of a discount of $1.2 million) for December 31,
1999, 1998 and 1997, respectively.
11. Debt
At December 31, 1999, the Company had no outstanding debt. On April 1, 1998 the
Company redeemed all of its outstanding debt, consisting of $293,000 of
debentures and $975,000 of subordinated surplus certificates, plus accrued
interest of $127,000. The debentures and subordinated surplus certificates paid
interest at the rate of 8% per annum, had no maturity date, and principal and
interest were repayable only with the approval of the Insurance Department of
the State of New York. No single holder held more than 5% of the outstanding
debentures or subordinated surplus certificates at the time of redemption. The
Company paid interest of $127,000 and $104,000 for the years ended December 31,
1998 and 1997, respectively.
At December 31, 1999, the Company had in place uncollateralized lines of credit
with two banks under which it could borrow up to $17.0 million. There were no
amounts outstanding on these lines of credit at December 31, 1999.
In January 2000, the Company replaced its existing lines of credit discussed
above with a revolving credit agreement with three banks. The credit agreement,
which expires during January 2003, provides for uncollateralized borrowings of
up to $30.0 million at the lending banks' prime rate or LIBOR plus 0.8%. On each
anniversary date, the committed amount may decrease by $10.0 million, unless
otherwise extended by mutual agreement. The terms of the credit agreement
contain, among other provisions, requirements for maintaining minimum levels of
surplus, net worth and debt service coverage.
E-41
<PAGE>
12. Benefits Plans
Pension and Other Postretirement Benefit Plans:
The Company sponsors a qualified noncontributory defined benefit pension plan
covering substantially all of the Company's full time employees hired prior to
January 1, 1997. Effective January 1, 1997, Farm Family Casualty and Farm Family
Life froze benefits available through the defined benefit plan. The Company also
provides life insurance benefits through a postretirement benefit plan for
retired employees meeting certain age and length of service requirements. These
benefits are shown as "Other Benefits" in the tables below. Benefits under the
postretirement benefit plan are provided by a group term life insurance policy
issued by Farm Family Life.
The change in benefit obligation for the plans for the years ended December 31,
1999, 1998 and 1997 are as follows:
<TABLE>
<CAPTION>
Pension Benefits Other Benefits
($ in thousands) 1999 1998 1997 1999 1998 1997
- ------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Benefit obligation at beginning of year $22,324 $20,785 $21,075 $1,131 $989 $962
Service cost ---- ---- ---- 34 26 26
Interest cost 1,461 1,416 1,429 66 62 65
Actuarial (gain) / loss 3 50 (62) (6) (88) (10)
Benefits paid (1,274) (1,328) (1,657) (58) (28) (54)
Changes in assumptions (650) 1,401 ---- (178) 170 ----
Curtailment gain (605) ---- ---- ---- ---- ----
------------------------------------------------------------------------------------------------------------------
Benefit obligation at end of year $21,259 $22,324 $20,785 $989 $1,131 $989
==================================================================================================================
</TABLE>
The change in plan assets for the years ended December 31, 1999, 1998 and 1997
are as follows:
<TABLE>
<CAPTION>
Pension Benefits Other Benefits
($ in thousands) 1999 1998 1997 1999 1998 1997
- -------------------------------------------------------------------------------------------------------------------
Fair value of plan assets at
<S> <C> <C> <C> <C> <C> <C>
beginning of year $20,770 $19,026 $18,881 $---- $---- $----
Actual return on plan assets 2,754 2,944 1,502 ---- ---- ----
Service cost (58) (72) ---- ---- ---- ----
Employer contribution 250 200 300 58 28 54
Benefits paid (1,274) (1,328) (1,657) (58) (28) (54)
- -------------------------------------------------------------------------------------------------------------------
Fair value of plan assets at
end of year $22,442 $20,770 $19,026 $---- $---- $----
===================================================================================================================
</TABLE>
Pension plan assets include an unallocated group annuity contract issued by Farm
Family Life. The fair value of the contract was $852,000, $870,000, and
$1,486,000 at December 31, 1999, 1998, and 1997, respectively.
The components of the plans' accrued benefit cost as of December 31, 1999, 1998
and 1997 are as follows:
<TABLE>
<CAPTION>
Pension Benefits Other Benefits
($ in thousands) 1999 1998 1997 1999 1998 1997
- -------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Funded status $1,183 $(1,554) $(1,759) $(989) $(1,131) $(989)
Unrecognized net actuarial gain (1,909) (121) (135) ---- ---- ----
Unrecognized net gain ---- ---- ---- (199) (15) ----
Unrecognized transition obligation ---- ---- ---- 664 712 759
Unrecognized prior service cost ---- ---- ---- ---- ---- (105)
- -------------------------------------------------------------------------------------------------------------------
Accrued benefit cost $(726) $(1,675) $(1,894) $(524) $(434) $(335)
===================================================================================================================
</TABLE>
E-42
<PAGE>
Weighted-average assumptions as of December 31, 1999, 1998 and 1997 are as
follows:
<TABLE>
<CAPTION>
Pension Benefits Other Benefits
1999 1998 1997 1999 1998 1997
- ------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Discount rate 7.0% 6.5% 7.0% 7.0% 6.0% 7.0%
Expected return on plan assets 8.0% 8.0% 8.0% 0.0% 0.0% 0.0%
Rate of compensation increase 0.0% 0.0% 0.0% 4.0% 4.0% 4.0%
</TABLE>
The rate of compensation increase assumptions for pension benefits are zero,
because benefits under the pension plan were frozen as of January 1, 1997.
The components of net periodic pension expense (benefit) and the net periodic
other benefit expense for the plans for the years ended December 31, 1999, 1998
and 1997 are as follows:
<TABLE>
<CAPTION>
Pension Benefits Other Benefits
($ in thousands) 1999 1998 1997 1999 1998 1997
- -------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Service cost $58 $72 $ ---- $34 $26 $26
Interest cost 1,461 1,416 1,429 66 62 65
Expected return on plan assets (1,613) (1,473) (1,463) ---- ---- ----
Amortization of unrecognized
net (gain) loss ---- (34) 34 ---- (7) ----
Amortization of unrecognized transition
obligation ---- ---- ---- 47 47 47
Curtailment gain (605) ---- ---- ---- ---- ----
- -------------------------------------------------------------------------------------------------------------------
Net periodic expense (benefit) $(699) $(19) $---- $147 $128 $138
===================================================================================================================
</TABLE>
The Company's portion of net periodic pension benefit for the years ended
December 31, 1999, 1998 and 1997 was $(505,000), $(12,000), and $0,
respectively.
The Company's portion of net periodic other benefits for the years ended
December 31, 1999, 1998 and 1997 was $137,000, $85,000, and $79,000.
Incentive Savings Plans:
The Company sponsors incentive savings plans for the benefit of its employees. A
portion of the contributions made by the Company are discretionary, based on the
profits earned by the Company. The Company's expense associated with the plans
was $1.2 million, $0.9 million, and $1.1 million in 1999, 1998 and 1997,
respectively.
Stock Compensation Plan:
In 1997, the Company adopted the Omnibus Securities Plan (the "Securities
Plan"), under which up to 500,000 shares of common stock are available for
award. Stock options granted under the Securities Plan may be either incentive
stock options ("ISO's") or non-qualified stock options ("NQSO's"). For ISO's,
the option price may be no less than the fair market value on the date of the
grant. For NQSO's, the option price may be no less than 85% of the fair market
value on the date of grant. All granted options have been at exercise prices
equal to the fair value of the Company's common stock on the applicable grant
date. The options granted vest annually in approximately equal amounts over a
three-year period. The options granted may be exercised when vested and will
expire ten years after the date of grant.
E-43
<PAGE>
<TABLE>
<CAPTION>
The following table summarizes the changes in stock options for years ended December 31, as follows:
Number of Shares Option Price Range Per Weighted Average
Subject to Option Share Exercise Price
- ---------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Outstanding at December 31, 1996 ---- ---- ----
Granted 215,000 $22.56 $22.56
Exercised ---- ---- ----
Forfeited (5,000) 22.56 22.56
- ---------------------------------------------------------------------------------------------------------------------
Outstanding at December 31, 1997 210,000 22.56 22.56
Granted ---- ---- ----
Exercised ---- ---- ----
Forfeited ---- ---- ----
- ---------------------------------------------------------------------------------------------------------------------
Outstanding at December 31, 1998 210,000 22.56 22.56
Granted 258,000 32.31-32.63 32.61
Exercised ---- ---- ----
Forfeited (21,700) 22.56-32.63 31.84
- ---------------------------------------------------------------------------------------------------------------------
Outstanding at December 31, 1999 446,300 $22.56-32.63 $27.92
=====================================================================================================================
Exercisable at December 31, 1999 208,300 $22.56 $22.56
=====================================================================================================================
</TABLE>
No stock options were exercisable at December 31, 1998 and 1997.
The Company has elected to follow APB 25 and related interpretations in
accounting for the Securities Plan. Under APB 25, because the exercise price of
the Company's stock options equals the fair market price of the underlying stock
on the date of grant, no compensation expense is recognized. If the Company had
determined the compensation expense of the Securities Plan as prescribed by
Statement 123, the Company's net income and earnings per share would have been
reduced to the pro forma amounts as follows:
<TABLE>
<CAPTION>
1999 1998 1997
- ---------------------------------------------------------------------------------------------------------------------
As As As
($ in thousands, except per share amounts) reported Pro forma reported Pro forma reported Pro forma
- ---------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Net income $18,618 $17,676 $18,671 $18,271 $17,500 $17,112
Basic earnings per share $3.16 $3.00 $3.55 $3.48 $3.33 $3.26
Diluted earnings per share $3.13 $2.97 $3.52 $3.44 $3.32 $3.25
</TABLE>
The per share weighted-average fair value of the options granted in 1999 and
1997 was $12.24 and $8.77, respectively, estimated on the date of grant using
the Black-Scholes option-pricing model and the following weighted-average
assumptions:
1997 - dividend yield of 0.0%, expected volatility of 22.79%, risk-free interest
rate of 6.78%, and an expected life of six years.
1998 - no options were granted.
1999 - dividend yield of 0.0%, expected volatility of 25.64%, risk-free interest
rate of 5.32%, and an expected life of six years.
At December 31, 1999 the weighted-average contractual life of the outstanding
options is 8.2 years.
13. Related Party Transactions
Prior to Farm Family Holdings' acquisition of Farm Family Life effective April
6, 1999, the operations of Farm Family Holdings (including Farm Family Casualty)
were closely related with those of Farm Family Life and Farm Family Life's
wholly-owned subsidiary, United Farm Family. The affiliated Companies operate
under similar Boards of Directors, with similar senior management and shared
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 operations of Farm Family Life,
which were not previously consolidated with Farm Family Holdings, have been
consolidated subsequent to the acquisition by Farm Family Holdings. For the
period January 1, 1999 through April 6, 1999 and the years ended December 31,
1998 and 1997, 68%, 68% and 67% of aggregate expenses totaling $7.7 million,
$29.3 million and $29.4 million, respectively, were allocated to the Company
under an expense sharing agreement.
E-44
<PAGE>
14. Preferred Stock
Farm Family Holdings' Certificate of Incorporation authorizes the issuance of
1,000,000 shares of preferred stock with a par value of $.01, issuable in
classes or series. Of the 1,000,000 shares authorized, 163,214 shares of
mandatory redeemable preferred stock have been issued and outstanding and are
reported in the accompanying consolidated balance sheets as mandatory redeemable
preferred stock. The remaining 836,786 shares are reported in preferred stock in
the stockholders' equity section. None of the remaining 836,786 shares have been
issued as of December 31, 1999.
In connection with the acquisition of Farm Family Life, Farm Family Holdings
issued 163,214 shares of 6 1/8% Series A preferred stock with a redemption value
of $5,830,000, or $35.72 per share. Dividends on the preferred stock are payable
on each January 15, April 15, July 15 and October 15 and must be fully paid or
declared with funds set aside for payment before any dividend can be declared or
paid on any other class of Farm Family Holdings' stock. The preferred stock must
be redeemed by Farm Family Holdings on April 7, 2019 (or the next business day)
and may be redeemed, at Farm Family Holdings' option, in whole or in part, on
and after April 6, 2009. Farm Family Holdings has the option to pay the
redemption amount in cash or by delivery of Farm Family Holdings' common stock.
15. Dividends and Statutory Financial Information
The New York Insurance Law regulates the distribution of dividends and other
payments to Farm Family Holdings by Farm Family Casualty and Farm Family Life.
As of December 31, 1999, the maximum amount of dividends that could be paid by
Farm Family Casualty without the prior approval of the New York State Insurance
Department (the "Department") is approximately $4.3 million. The payment of
stockholder dividends by Farm Family Life is subject to the prior approval of
the Department. Under the New York Insurance Law, the Superintendent of
Insurance has broad discretion to determine whether the financial condition of a
stock life insurance company would support the payment of dividends to its
shareholders.
Net income and capital and surplus of the Company, as determined in accordance
with statutory accounting practices are as follows:
<TABLE>
<CAPTION>
($ in thousands) 1999 1998 1997
- ---------------------------------------------------------------------------------------------------------------
Net income
<S> <C> <C> <C>
Property and casualty insurance(1) $14,350 $13,346 $17,081
Life insurance(2) 7,843 ---- ----
==============================================
Total $22,193 $13,346 $17,081
==============================================
Capital and Surplus
Property and casualty insurance $131,617 $105,165 $94,592
Life insurance 110,374 ---- ----
==============================================
Total $241,991 $105,165 $94,592
==============================================
</TABLE>
(1) - Net income under statutory accounting principles for 1999 includes the
operations of United Farm Family for the entire year. The Company's net income
under generally accepted accounting principles only includes the operations of
United Farm Family since April 6, 1999 - the date it was acquired by Farm Family
Holdings.
(2) - Net income under statutory accounting principles for 1999 includes the
operations for Farm Family Life for the entire year. The Company's net income
under generally accepted accounting principles only includes the operations of
Farm Family Life since April 6, 1999 - the date it was acquired by Farm Family
Holdings.
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, 1999, Farm Family Casualty's, Farm Family Life's and United Farm
Family's total capital exceeds the threshold level of regulatory action, as
defined by the NAIC.
E-45
<PAGE>
16. Commitments, Contingencies and Uncertainties
The Company is party to numerous legal actions arising in the normal course of
business. Management believes that resolution of these legal actions will not
have a material adverse effect on its consolidated financial condition.
Catastrophes are an inherent risk in the property and casualty insurance
industry and could produce significant adverse fluctuations in the Company's
results of operations and financial condition. The Company is subject to a
concentration of risk within the Northeastern United States. For the years ended
December 31, 1999, 1998 and 1997, approximately 62%, 63%, and 61%, respectively,
of the Company's property and casualty 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 adverse
weather and catastrophic events on the Company's operating results.
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 cannot be predicted with certainty and could have a
material adverse effect on the Company's future results of operations.
During the third quarter of 1998, the Company modified the agreements with its
agents to include revised conditions under which eligible agents may receive
extended earnings payments. In addition to the conditions described previously,
extended earnings will be paid only if a successor agent(s) assumes the right to
service the book of business of the eligible former agent and agrees to become
primarily responsible for making the extended earnings payments. In the event
that no successor agent(s) assumes the right to service the book of business of
an eligible former agent, the Company has no obligation to make the extended
earnings payments. The Company has no intention to waive this provision of its
agreements with its agents. As a result, the successor agent(s), not the
Company, will be the primary obligor responsible for extended earnings payments.
Since the inception of the Program in 1986, the Company has always been able to
identify successor agents willing to assume the rights to service such books of
business. The Company will act as guarantor of the amounts payable to eligible
former agents who have terminated their association with the Company by
successor agents who agree to make the extended earnings payments. At December
31, 1999, the Company was guarantor of $1.3 million for such payments. The
Company expects to enforce the terms of the guarantee in the event of default by
a successor agent.
Many of the Company's existing computer programs and other computer systems upon
which the Company relies were created using only two digits to identify a year
in the date field. If not corrected, many of these computer applications could
fail or produce erroneous results. 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 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.
As of the end of February 2000, the Company has not been adversely affected in
any material way because of Year 2000 difficulties with its own IT systems, or
because of any third parties that were not Year 2000 compliant. Throughout 2000,
management will continue to monitor the Company's IT systems and those of third
parties for any Year 2000 related systems issues that have not yet been
identified. However, management does not expect any problems that would have a
material effect on the Company's results of operations, liquidity and financial
condition.
In addition to its own computer systems and third-party providers, the Company
may also have exposure in its property/casualty operations to Year 2000 claims
asserted under certain insurance policies it has sold to customers. Although the
Company does not issue insurance policies intended to cover risks related to the
Year 2000 issue, there can be no certainty regarding future judicial or
legislative interpretations of coverage. There can be no assurances that Year
2000 related claims will not emerge and that such claims will not have a
material adverse effect on the Company's results of operations, liquidity and
financial condition.
E-46
<PAGE>
Farm Family Casualty and Farm Family Life are parties to Membership List
Purchase Agreements with the state Farm Bureaus in Connecticut, Delaware, Maine,
Massachusetts, New Hampshire, New Jersey, New York, Rhode Island, Vermont and
West Virginia. The Membership List Purchase Agreements are for six years
commencing on January 1, 1996. For the years ended December 31, 1999, 1998, and
1997, the Company incurred expense of $1.2 million, $0.7 million, and $0.6
million, respectively, to the Farm Bureaus pursuant to the Membership List
Purchase Agreements.
On December 30, 1999, the Company entered into a 36-month capital lease for
certain electronic data processing equipment. At December 31, 1999, the gross
amount of property and equipment and related depreciation recorded under the
capital lease was $365,000 and $0, respectively. The future minimum capital
lease payments as of December 31, 1999 are approximately $132,000 per year for
2000, 2001 and 2002.
The Company's liability for funds on deposit from policyholders includes amounts
subject to discretionary withdrawal. Withdrawal characteristics as of December
31, 1999 are as follows:
<TABLE>
<CAPTION>
($ in thousands) Amount % of Total
------------------------------------------------------------------------------------------------------
Surrender charge rate:
<S> <C> <C>
Greater than or equal to 5% $85,127 20.4%
Less than 5%, but still subject to surrender charge 73,384 17.6%
Not subject to surrender charge 249,861 59.9%
Not subject to discretionary withdrawal 8,599 2.1%
--------------------------------
Total funds on deposit from policyholders $416,971 100.0%
================================
</TABLE>
At December 31, 1999, the Company had $6.1 million of outstanding letters of
credit. These letters of credit are issued to insurance companies reinsured by
Farm Family Casualty and domiciled in states where Farm Family Casualty is not
licensed or authorized as a reinsurer.
17. Unaudited Interim Financial Information
Earnings per common share for each quarter is computed independently of earnings
per common share for the year. As a result, the sum of the quarterly earnings
per share amounts may not equal the earnings per common share for the year due
primarily to transactions affecting the number of weighted average common shares
outstanding in each quarter. The following table sets forth the unaudited
quarterly financial information for the periods indicated.
<TABLE>
<CAPTION>
Quarter
------------------------------------------------------------------
($ in thousands except per share data) 1st 2nd 3rd 4th
- -------------------------------------------------------------------------------------------------------------------
1999
<S> <C> <C> <C> <C>
Revenues $53,724 $71,853 $75,867 $73,419
Net income $3,743 $5,154 $5,068 $4,653
Per share:
Net income - Basic $0.71 $0.85 $0.83 $0.76
Net income - Diluted $0.71 $0.84 $0.82 $0.75
1998
Revenues $47,927 $50,160 $50,936 $53,336
Net income $3,022 $2,711 $8,458 $4,480
Per share:
Net income - Basic $0.58 $0.52 $1.61 $0.85
Net income - Diluted $0.57 $0.51 $1.59 $0.85
</TABLE>
Net income for the third quarter of 1998 included a net gain of $4,107,000 or
$0.77 per as a result of the reduction of a significant portion of the Company's
liability for its extended earnings program with its agents. During the second
quarter of 1999, Farm Family Holdings acquired Farm Family Life, as described in
Note 3.
E-47
<PAGE>
18. Segment Information
The Company has two reportable segments: property and casualty insurance and
life insurance, which offer different products and services. The property and
casualty insurance segment includes activities related to the Special Farm
Package product, a flexible multi-line package of insurance coverages, and other
insurance products covering personal and commercial automobiles, businessowners
and homeowners. The life insurance segment includes activities related to
individual whole life, term and universal life products, single and flexible
premium deferred annuity products, single premium immediate annuity products and
disability income insurance products. The Company uses operating income (net
income excluding realized investment gains (losses) and nonrecurring items, net
of taxes) to measure the financial results of its segments.
"Corporate and other" includes holding company activities and operations not
directly related to the reportable segments.
Summarized segment financial information is as follows:
<TABLE>
<CAPTION>
($ in thousands) 1999 1998 1997
- ---------------------------------------------------------------------------------------------------------------------
Premium Revenues
<S> <C> <C> <C>
Property and casualty insurance $188,921 $181,756 $149,220
Life insurance 27,799 ---- ----
- ---------------------------------------------------------------------------------------------------------------------
Total premium revenues $216,720 $181,756 $149,220
=====================================================================================================================
Net Investment Income
Property and casualty insurance $20,449 $18,601 $17,468
Life insurance 37,673 ---- ----
Corporate and other 388 518 609
Intersegment eliminations 48 ---- ----
- ---------------------------------------------------------------------------------------------------------------------
Total investment income $58,558 $19,119 $18,077
=====================================================================================================================
Amortization Expense
Property and casualty insurance
Amortization of deferred acquisition costs $36,378 $35,019 $28,794
Life insurance
Amortization of deferred acquisition costs 699 ---- ----
Amortization of present value of future profits 1,105 ---- ----
- ---------------------------------------------------------------------------------------------------------------------
Total amortization expense $38,182 $35,019 $28,794
=====================================================================================================================
Other Operating Costs and Expenses
Property and casualty insurance
Underwriting expenses $10,093 $10,759 $13,251
Dividends to policyholders 159 192 282
Life insurance 9,293 ---- ----
Corporate and other 1,564 1,480 1,377
Intersegment eliminations (675) ---- ----
- ---------------------------------------------------------------------------------------------------------------------
Total other operating costs and expenses $20,434 $12,431 $14,910
=====================================================================================================================
</TABLE>
E-48
<PAGE>
<TABLE>
<CAPTION>
($ in thousands) 1999 1998 1997
- -------------------------------------------------------------------------------------------------------------------------
Net Income
Operating Income
<S> <C> <C> <C>
Property and casualty insurance $17,140 $14,884 $15,638
Life insurance 2,879 ---- ----
Corporate and other (888) (613) (648)
- -------------------------------------------------------------------------------------------------------------------------
Total consolidated operating income 19,131 14,271 14,990
Realized investment gains, net of tax (266) 293 3,514
Other non-recurring charges, net of tax (247) ---- ----
Adjustments relating to extended earnings liability, net of tax ---- 4,107 (1,004)
- -------------------------------------------------------------------------------------------------------------------------
Total net income $18,618 $18,671 $17,500
=========================================================================================================================
Federal Income Tax Expense (Benefit)
Property and casualty insurance $6,107 $8,572 $9,343
Life insurance 1,636 ---- ----
Corporate and other (303) (318) (125)
- -------------------------------------------------------------------------------------------------------------------------
Total federal income tax expense $7,440 $8,254 $9,218
=========================================================================================================================
December 31,
---------------------------------------------
1999 1998 1997
- -------------------------------------------------------------------------------------------------------------------------
Assets
Property and casualty $446,721 $397,038 $357,972
Life insurance 812,106 ---- ----
Corporate and other 71,014 35,417 35,685
Intersegment eliminations (68,043) (25,952) (22,426)
- -------------------------------------------------------------------------------------------------------------------------
Total assets $1,261,798 $406,503 $371,231
=========================================================================================================================
</TABLE>
E-49
<PAGE>
Report of Independent Accountants
To the Shareholders and Board of Directors
of Farm Family Holdings, Inc.
In our opinion, the accompanying consolidated balance sheets and the related
consolidated statements of income and comprehensive income, of stockholders'
equity and of cash flows present fairly, in all material respects, the financial
position of Farm Family Holdings, Inc. and its subsidiaries at December 31, 1999
and 1998, and the results of their operations and their cash flows for each of
the three years in the period ended December 31, 1999, in conformity with
accounting principles generally accepted in the United States. 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
auditing standards generally accepted in the United States, 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 LLP
Albany, New York
February 11, 2000
E-50
EXHIBIT 21
FARM FAMILY HOLDINGS, INC.
SUBSIDIARIES OF THE REGISTRANT
<TABLE>
<CAPTION>
Subsidiaries State
- --------------------------------------------------------------------------------------------------------------------
<S> <C>
Farm Family Life Insurance Company is a wholly-owned subsidiary of Farm Family Holdings, Inc. NY
Farm Family Financial Services, Inc. is a wholly-owned subsidiary of Farm Family Holdings,
Inc. NY
Farm Family Casualty Insurance Company ("FFCIC") is a wholly-owned subsidiary of Farm Family
Holdings, Inc. NY
Rural Agency and Brokerage, Inc. ("RAB") is a wholly-owned subsidiary of FFCIC. NY
Rural Insurance Agency and Brokerage of Massachusetts, Inc. is a wholly-owned subsidiary of
RAB. MA
R.A.A.B of W. Va., Inc. is a wholly-owned subsidiary of RAB. WV
</TABLE>
E-51
<TABLE> <S> <C>
<ARTICLE> 7
<CIK> 0001013564
<NAME> Farm Family Holdings, Inc.
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> Dec-31-1999
<PERIOD-START> Jan-01-1999
<PERIOD-END> Dec-31-1999
<DEBT-HELD-FOR-SALE> 960,054
<DEBT-CARRYING-VALUE> 7,971
<DEBT-MARKET-VALUE> 7,820
<EQUITIES> 45,809
<MORTGAGE> 26,832
<REAL-ESTATE> 0
<TOTAL-INVEST> 1,071,681
<CASH> 19,190
<RECOVER-REINSURE> 24,748
<DEFERRED-ACQUISITION> 17,630
<TOTAL-ASSETS> 1,261,798
<POLICY-LOSSES> 426,021
<UNEARNED-PREMIUMS> 74,364
<POLICY-OTHER> 0
<POLICY-HOLDER-FUNDS> 545,487
<NOTES-PAYABLE> 0
5,830
0
<COMMON> 61
<OTHER-SE> 181,133
<TOTAL-LIABILITY-AND-EQUITY> 1,261,798
216,720
<INVESTMENT-INCOME> 58,558
<INVESTMENT-GAINS> (1,984)
<OTHER-INCOME> 1,569
<BENEFITS> 180,219
<UNDERWRITING-AMORTIZATION> 38,182
<UNDERWRITING-OTHER> 20,434
<INCOME-PRETAX> 26,336
<INCOME-TAX> 7,440
<INCOME-CONTINUING> 18,896
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 18,896
<EPS-BASIC> 3.16
<EPS-DILUTED> 3.13
<RESERVE-OPEN> 174,435
<PROVISION-CURRENT> 146,829
<PROVISION-PRIOR> (5,320)
<PAYMENTS-CURRENT> 70,463
<PAYMENTS-PRIOR> (5,320)
<RESERVE-CLOSE> 186,130
<CUMULATIVE-DEFICIENCY> 7,222
</TABLE>
