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, 1996
Commission File No. 2-57299
FARM FAMILY CASUALTY INSURANCE COMPANY
New York IRS No. 14-1415410
344 Route 9W, Glenmont, New York 12077
Registrant's telephone number: (518) 431-5000
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act: None
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes No
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K.
Farm Family Casualty Insurance Company issued 2,253,878 shares of $1.60 par
common stock (the "Common Stock) to Farm Family Holdings,Inc. on July 26, 1996.
All of the Common Stock is owned by Farm Family Holdings, Inc. There is no
market for the Common Stock.
PART I
ITEM 1. BUSINESS
Overview
Farm Family Casualty Insurance Company (referred to herein as the "Company"
or "FFCIC") is a specialized property and casualty insurer of farms, other
generally related businesses and residents of rural and suburban communities in
Connecticut, Delaware, Maine, Massachusetts, New Hampshire, New Jersey, New
York, Rhode Island, Vermont and West Virginia. Established in 1955 to meet
certain insurance needs of Farm Bureau(R) members in the Northeast, the Company
provides flexible, multi-line packages of insurance for those engaged in
agricultural pursuits, as well as automobile, commercial general liability,
workers' compensation, umbrella liability, businessowners, homeowners and other
insurance products to rural and suburban policyholders in ten states. Life
insurance products are also sold to many of these customers by Farm Family Life
Insurance Company (the "Life Company"), an affiliate of the Company. In
addition, the Company's wholly owned subsidiary, Rural Agency and Brokerage,
Inc. ("Rural Agency") places insurance coverages not underwritten by the Company
for the Company's policyholders. The Company is a wholly owned subsidiary of
Farm Family Holdings, Inc.
The Company is closely affiliated with the Farm Bureaus(R) in the ten
states in which it operates (collectively, the "Farm Bureaus"). The Company has
the exclusive endorsement of the Farm Bureaus to market property casualty
insurance in these states. Membership in state or county Farm Bureau
organizations is generally a prerequisite for the issuance or renewal of any
policy by the Company.
The Company markets its insurance products through more than 200 Farm
Family agents and field managers who are located in the rural and suburban
communities served by the Company. These agents generally sell insurance
products only for the Company and the Life Company. The Company believes that
the distinctive focus of the Company and its agents on meeting the specialized
insurance needs of rural communities has provided the Company with the knowledge
and experience to adapt to changes in the demographics of its 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, the Company
insures 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. In
recent years, the Company has also introduced businessowners products for
certain retail and contractor businesses and for owners of apartment and office
buildings, as well as a homeowners product.
The Company's principal strategy is to maintain its focus on meeting many
of the specialized insurance needs of Northeastern rural and suburban
communities. The Company's 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. As evidenced by its
introduction of businessowners products in 1990, the Company also seeks to
leverage its local reputation, agency force, knowledge and experience to expand
its product offerings to a wider variety of customers in the rural and suburban
communities in which it currently operates. In addition, the Company will
continue to seek to facilitate and expedite sales, underwriting and policy
administration functions through the expanded use of local service centers and
computer networking communications with the home office.
Plan of Reorganization and Conversion:
On July 26, 1996, in accordance with a Plan of Reorganization and
Conversion ( the "Plan") filed with and approved by the Superintendent of
Insurance of the State of New York, the Company converted from a mutual property
and casualty insurance company to a stock property and casualty insurance
company, changed its name from Farm Family Mutual Insurance Company to Farm
Family Casualty Insurance Company, and became a wholly owned subsidiary of Farm
Family Holdings, Inc. (the "Holding Company"). Under the Plan, eligible Farm
Family Mutual policyholders received either shares of common stock of the
Holding Company or cash in exchange for their policyholder interests in the
Company, and holders of surplus notes electing to surrender such notes in the
reorganization received shares of common stock of the Holding Company or cash in
exchange for such notes. The principal purposes of the reorganization are to
improve the Company's access to the capital markets and to raise capital to
expand and develop its business in the rural and suburban areas in which it
currently operates.
<PAGE>
Related Party Transactions
The operations of the Company are closely related with those of its parent, Farm
Family Holdings, Inc., and its affiliates, the Life Company and the Life
Company's wholly owned subsidiary, United Farm Family Insurance Company
("United"). The affiliated companies operate under similar Board of Directors
and have similar senior management. In addition, the affiliated companies share
home office facilities, data processing equipment, certain personnel and other
operational expenses.
The Company and the Life Company are parties to an Amended and Restated Expense
Sharing Agreement, effective as of February 14, 1996 (the "Expense Sharing
Agreement"), pursuant to which shared expenses for goods, services and
facilities are allocated between the Company and the Life Company. Under the
Expense Sharing Agreement, expenses are allocated in accordance with applicable
provisions of the New York Insurance Law and regulations promulgated thereunder.
Direct expenses are charged as incurred to the Company and the Life Company, as
applicable, at cost. For each of the years ended December 31, 1996, 1995, and
1994, 63%, 61%, and 60%, respectively, of aggregate operating expenses totaling
$30.7 million, $26.8 million and $23.8 million, respectively, were allocated to
the Company, under a similar expense sharing arrangement.
The Company and the Life Company are parties to a Lease Agreement dated July 1,
1988, as amended by Amendment to Lease Agreement, effective January 1, 1994 (as
so amended, the "Lease Agreement") pursuant to which the Company leases home
office space in Glenmont, New York from the Life Company. Annual rent under the
Lease Agreement was $712,000, $687,000, and $629,000 for each of the years ended
December 31, 1996, 1995, and 1994, respectively.
The Company's reinsurance program includes reinsurance agreements with United.
In accordance with the provisions of these reinsurance agreements, premiums
earned, losses and expenses ceded by the Company to United were as follows:
($ in thousands) 1996 1995 1994
- ---------------------------------------- ---- ---- ----
Premiums earned ............................... $9,334 $9,238 $9,750
Losses ........................................ 7,049 6,447 7,158
Expenses ...................................... 446 199 213
Net ........................................... $1,839 $2,592 $2,379
The Company and United are parties to a Service Agreement dated July 25,
1988 (the "Service Agreement") pursuant to which the Company provides United
with certain administrative and special services necessary for its operations,
including, but not limited to, claims management, underwriting, accounting, tax
and auditing, investment management, and functional support services. In
addition, the Company provides United with certain personnel, property,
equipment and facilities for its operations. For each of the years ended
December 31, 1996, 1995, and 1994, United incurred approximately $0.7 million,
$0.8 million, and $0.5 million, respectively, in direct and allocated expenses
and overhead under the Service Agreement.
Products
The Company offers a variety of property and casualty insurance products
primarily designed to meet the unique insurance needs of its agricultural
clients and the general insurance needs of the rural and suburban communities in
which it does business. Many policyholders have more than one policy with the
Company, most commonly, a property policy (such as a Special Farm Package or
homeowners policy) and an automobile policy.
The following table sets forth by product the direct premiums written by the
company for the periods indicated:
<TABLE>
<CAPTION>
Year Ended December 31,
($ in millions)
% of % of % of
1996 Total 1995 Total 1994 Total
---- ----- ---- ----- ---- -----
<S> <C> <C> <C> <C> <C> <C>
Personal Automobile ...... $50.0 34.2% $46.5 34.2% $40.3 33.0%
Special Farm Package 35.9 24.5% 34.0 25.0% 32.7 26.8%
Commercial Automobile 24.1 16.5% 22.7 16.7% 20.2 16.6%
Workers' Compensation 9.7 6.5% 9.1 6.7% 8.1 6.6%
Businessowners 7.6 5.2% 6.6 4.9% 5.3 4.3%
Homeowners 6.1 4.2% 5.2 3.8% 4.1 3.4%
Umbrella 4.6 3.1% 4.4 3.2% 4.2 3.4%
Commercial General Liability 3.9 2.7% 3.4 2.5% 3.0 2.5%
Special Home Package 2.9 2.0% 2.8 2.1% 2.8 2.3%
Fire, Allied, Inland Marine 1.2 0.8% 1.0 0.7% 1.0 0.8%
Products Liability 0.3 0.2% 0.2 0.1% 0.2 0.2%
Pollution 0.1 0.1% 0.1 0.1% 0.1 0.1%
--- --- --- --- --- ---
Total $146.4 100.0% $136.0 100.0% $122.0 100.0%
====== ===== ====== ===== ====== =====
</TABLE>
Personal Automobile. Personal automobile is the Company's largest product.
The Company's industry standard policies are generally marketed in conjunction
with its other products, such as the Special Farm Package, the businessowners
policy or the homeowners policy.
Special Farm Package. The Special Farm Package, developed in 1980, is a
flexible, multi-line package of insurance coverages which the Company regards as
its "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 the farm owner, 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 the Company's third largest
product. The Company's industry standard policies are generally marketed in
conjunction with the Special Farm Package or the businessowners policy.
Workers' Compensation. The Company generally does not seek to market or
write its workers' compensation policy apart from a Special Farm Package or a
businessowners policy.
Businessowners. The Company introduced a businessowners product (based on
the industry standard policy form) in 1990 to meet the needs of small businesses
within its 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.
Special Home Package and Homeowners Policy. The Special Home Package was
developed in 1980 as a companion product for the Special Farm Package policy.
The Company's homeowners policy, introduced in 1989, is a standard homeowners
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 by the Company 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. The Company writes commercial and personal line excess
liability policies covering business, farm and personal liabilities of its
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 $5.0 million. The Company does not generally seek
to market its excess liability policies unless it also writes an underlying
liability policy.
Commercial General Liability. The Company writes an industry standard
commercial general liability policy which is generally marketed in connection
with the Special Farm Package or, as an accommodation to policyholders in
connection with the commercial automobile policy. The commercial general
liability policy is generally not written apart from these other policies. The
policy is usually written by the Company for unique business situations, such as
horse breeding and training facilities and certain landscaper risks, which do
not meet the criteria for liability coverage under a businessowners or Special
Farm Package policy. The policy insures businesses against third party liability
from accidents occurring on their premises or arising out of their operations or
products. Most of the Company's products liability line is written as part of
the commercial general liability product.
Pollution. The Company writes a small number of pollution liability
policies covering specified farm risks on a "claims-made" basis. The policy
insures against losses incurred from third party liability, including bodily
injury and property damages, for pollution incidents, such as those caused from
pesticides, fertilizers, herbicides and manure piles. An "extended reporting
period" option is available under certain circumstances which allows for claim
reporting after the policy expiration. As of December 31, 1996, The Company had
approximately 260 pollution policies in force.
Marketing
The following table sets forth the Company's direct written premiums by
state for the periods indicated:
<TABLE>
<CAPTION>
Year Ended December 31,
($ in millions) % of % of % of
1996 Total 1995 Total 1994 Total
----- ----- ----- ----- ----- -----
<S> <C> <C> <C> <C> <C> <C>
New York .... $ 56.5 38.6% $ 53.2 39.1% $ 47.0 38.5%
New Jersey .. 33.1 22.6% 28.3 20.8% 23.9 19.6%
Massachusetts 10.3 7.0% 10.5 7.7% 10.1 8.3%
Connecticut . 9.8 6.7% 9.1 6.7% 8.2 6.7%
West Virginia 8.1 5.5% 7.8 5.7% 7.3 6.0%
Maine ....... 6.8 4.7% 6.9 5.1% 6.7 5.5%
New Hampshire 6.7 4.6% 6.8 5.0% 6.7 5.5%
Vermont ..... 5.7 3.9% 5.3 3.9% 5.0 4.1%
Delaware .... 5.0 3.4% 4.4 3.3% 4.1 3.4%
Rhode Island 4.4 3.0% 3.7 2.7% 3.0 2.4%
--- --- --- --- --- ---
$ 146.4 100.0% $ 136.0 100.0% $ 122.0 100.0%
======== ===== ======== ===== ======== =====
</TABLE>
As of December 31, 1996, the Company marketed its property and casualty
insurance products in its ten state region through approximately 189 full-time
agents, 15 field managers and 10 associate field managers. Many of the Company's
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 Company's agents generally market and write the full range of
its products. In addition to marketing the Company's property and casualty
insurance products, the agency force also markets life insurance products for
the Life Company. The Company's policies are marketed exclusively through its
agency force. In 1996 Agent compensation was comprised entirely of fixed
commissions, office expense allowances and incentive bonuses.
The Company emphasizes personal contact between its agents and the
policyholders. The Company believes that its name recognition, 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. In addition, the Company believes
that its relationship with the Farm Bureaus in its target markets promotes the
Company's name recognition and new customer referrals among Farm Bureau members.
See " Relationship with Farm Bureaus."
Relationship with Farm Bureaus
The Company was organized through the efforts of certain Farm Bureaus, and
its relationship with the Farm Bureaus in its ten state region continues to be a
fundamental aspect of its business. These Farm Bureaus are affiliated with the
American Farm Bureau Federation, the nation's largest general farm organization
with over four million members, which has traditionally sought to advance the
interests of the agricultural community. The Company was established in 1955
through the efforts of certain Farm Bureaus to provide property and casualty
insurance for Farm Bureau members in the Northeast. Substantially all of the
directors of the Company are associated with Farm Bureau organizations in the
Northeast. The Company has the exclusive endorsement of the Farm Bureaus to
market property and casualty insurance in the ten states in which it operates.
The endorsement of the Farm Bureaus generally means that the Farm Bureaus
provide the Company with the right to utilize their membership lists and
authorize the use of their name and service marks in connection with the
marketing of the Company's products. In exchange for these rights, the Company
pays to each of the Farm Bureaus an annual fee of $7.50 per Farm Bureau member,
pursuant to agreements with each Farm Bureau (the "Membership List Purchase
Agreements"). The current term of each Membership List Purchase Agreement is six
years, commencing on January 1, 1996. Pursuant to the Membership List Purchase
Agreements, the Farm Bureaus may not endorse the products of other property and
casualty insurers within the Company's ten state region. The Life Company has
entered into similar membership list purchase agreements with each of the Farm
Bureaus.
Underwriting
The Company seeks to write its commercial and personal lines risks by
evaluating loss experience and underwriting profitability with consistently
applied standards. The Company maintains information on all aspects of its
business which is routinely reviewed by the Company's staff of underwriters in
relationship to product line profitability. The Company's underwriters generally
specialize by agency territory. Specific information is monitored with regard to
individual insureds which is used to assist the Company in making decisions
about policy renewals or modifications.
The Company concentrates on its established major product lines (personal
and commercial auto, Special Farm Package, businessowners and homeowners
policies). It generally does not pursue the development of products with risk
profiles with which it is not familiar, nor does it, typically, actively market
its automobile, workers' compensation or general liability policies except to
policyholders who may also purchase its Special Farm Package, businessowners or
homeowners products. The Company believes its extensive knowledge of local
markets in its region is a key element in its underwriting process.
Claims
Claims on insurance policies written are usually investigated and settled
by one of the Company's staff claims adjusters, located in nine field offices.
The Company's claims philosophy emphasizes timely investigation, evaluation and
settlement of claims, while maintaining adequate reserves and controlling claim
adjustment expenses. The claims philosophy is designed to support the Company's
marketing efforts by providing agents and policyholders with prompt service.
Claims settlement authority levels are established for each adjuster and
claims manager based upon the employee's ability and level of experience. Claims
are reported directly to the claims department, located at a field office or
through the central claim reporting unit at the home office. Specialized units
exist at the home office for no-fault automobile and workers' compensation
claims, as well as subrogation and large, litigated or certain other claims. The
Company also has on staff a special investigator 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.
<PAGE>
Reinsurance
Reinsurance Ceded
The Company's reinsurance arrangements are generally placed directly with
non-affiliated reinsurers through reinsurance brokers. In addition, certain
reinsurance coverages are also placed directly with United. See "Related Party
Transactions." The largest net per risk exposure retained by the Company on any
one individual property or casualty risk is $100,000. Property and casualty
risks in excess of $100,000 are covered on an excess of loss basis up to
$250,000 and $300,000, respectively, per risk by United. Per risk property
losses in excess of $250,000 but less than $4 million are reinsured on an excess
of loss basis by unaffiliated reinsurers. Facultative coverage is available for
certain property risks in excess of $4 million per risk. Casualty losses per
risk in excess of $300,000 but less than $1 million (which is generally the
maximum limit of liability written by the Company's casualty insurance policies,
other than workers' compensation and umbrella liability policies) are covered on
an excess of loss basis by unaffiliated reinsurers. Clash coverage provided by
unaffiliated reinsurers covers casualty losses, including workers' compensation,
in excess of $1 million but less than $5 million. In addition, workers'
compensation claims, on a per occurrence basis with a $600,000 per person limit,
in excess of $3 million but less than $10 million are separately reinsured on an
excess of loss basis by an unaffiliated reinsurer. The Company reinsures 95% of
its umbrella liability losses (including a 5% quota share participation by
United) under $1 million per loss on a quota share basis and 100% of umbrella
liability losses in excess of $1 million up to $5 million per loss by
unaffiliated reinsurers.
The Company 's property catastrophe reinsurance provides for recovery of
95% of the losses over $6 million up to a maximum of $51 million per occurrence
and approximately 79% of the losses between $3 million and $6 million per
occurrence. The Company retains the first $3 million of losses per occurrence
under its property catastrophe program. United is a participant in Farm Family's
property catastrophe reinsurance program and assumes 2% of losses per occurrence
between $11 million and $51 million and approximately 16% of losses between $3
million and $6 million.
The insolvency or inability of any reinsurer to meet its obligations to the
Company could have a material adverse effect on the results of operations or
financial condition of the Company. As of December 31, 1996, more than 95% of
the Company's reinsurance program was provided by reinsurers which were rated
"A-" (Excellent) or above by A.M. Best Company, Inc. ("A.M. Best").
In June 1995, the Company terminated its excess casualty reinsurance
agreement with American Agricultural Insurance Company to reduce administrative
and financial costs associated with the reinsurance arrangement. The reinsurance
arrangement was commuted for casualty and workers' compensation risks for
accident years 1980 to 1988 and prior to 1975. As a result of the termination of
this arrangement, the Company does not have reinsurance in effect for any future
development on casualty and workers' compensation losses for accident years 1980
to 1988 and prior to 1975. The Company received approximately $1.8 million in
cash as a result of the termination of this arrangement and established
additional net loss reserves of approximately $1.7 million for any casualty and
worker's compensation losses for accident years 1980 to 1988 and prior to 1975.
Separate reinsurance agreements with American Agricultural Insurance Company,
however, continue to remain in effect for property and umbrella risks for those
accident years.
Reinsurance Assumed
The Company assumes voluntary reinsurance covering primarily property,
property catastrophe and casualty risks located outside of the Northeast. The
Company believes that, among other benefits, its assumed reinsurance
arrangements balance to a limited extent the geographic concentration of its
risks in the Northeast. The Company also assumes an insignificant amount of
reinsurance covering substandard automobile policies from United. For the year
ended December 31, 1996, the Company earned premiums of $1.6 million under
various voluntary excess of loss and pro rata reinsurance agreements. In 1996,
the Company generally retroceded 50% of all assumed reinsurance to United.
Loss and Loss Adjustment Expense ("LAE") Reserves
The Company's loss reserve is an estimate of the unpaid amount, as of
December 31, of the losses incurred in both the current year and all prior
years. The LAE reserve is an estimate of the unpaid expenses required to settle
losses incurred in both the current year and all prior years. The Company is
required to maintain reserves for payment of estimated loss and LAE for both
reported claims and claims which have been incurred but not yet reported. The
ultimate liability incurred by the company may be different from current reserve
estimates.
Adjustments in aggregate reserves, if any, are reflected in the operating
results of the period during which such adjustments are made. Although claims
for which reserves are established may not be paid for several years, reserves
for losses and LAE are not discounted, except for certain lifetime workers'
compensation indemnity reserves where the reserves are discounted at 3.5%.
The following table provides a reconciliation of beginning and ending loss
and LAE reserve balances of the Company for each of the years in the three year
period ended December 31, 1996.
<TABLE>
Reconciliation of Liability for Loss
and Loss Adjustment Expenses
($ in thousands)
<CAPTION>
For the years ended December 31,
--------------------------------
1996 1995 1994
---- ---- ----
<S> <C> <C> <C>
Reserves for losses and loss adjustment
expenses at the beginning of the year ............... $ 137,978 $ 127,954 $ 123,477
Less:Reinsurance recoverables and receivables ....... 28,655 28,230 28,761
------ ------ ------
Net reserves for losses and loss
adjustment expenses at beginning of year ............ 109,323 99,724 94,716
------- ------ ------
Provision for losses and loss adjustment expenses for claims occurring in:
Current year ..................................... 101,418 88,366 86,370
Prior years ...................................... (5,441) (5,182) (3,690)
------ ------ ------
Total incurred losses and loss adjustment expenses .. 94,977 83,184 82,680
------ ------ ------
Loss and loss adjustment expenses payments for claims occurring in:
Current year ..................................... 50,122 40,519 43,232
Prior years ...................................... 39,795 33,066 34,440
------ ------ ------
Total payments ...................................... 89,917 73,585 77,672
Net reserves for losses and loss
adjustment expenses at end of year .................. 114,383 109,323 99,724
Add:Reinsurance recoverables and receivables ........ 26,837 28,655 28,230
------ ------ ------
Reserves for losses and loss adjustment expenses at
end of year ......................................... $ 141,220 $ 137,978 $ 127,954
========= ========= =========
</TABLE>
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 that accident year and for all prior accident years. The data presented
under the caption "Cumulative Amount of Reserves Paid Through" show 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"
show 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.
In evaluating the information in the table below, it should be noted that
each amount includes the effects of all changes in amounts of prior periods. For
example, if a loss determined in 1993 to be $150,000 was first reserved in 1985
at $100,000, the $50,000 deficiency (actual loss minus original estimate) would
be included in the cumulative deficiency in each of the years 1986 through 1992
shown below. This table presents development data by calendar year and does not
relate the data to the year in which the accident actually occurred. Conditions
and trends that have affected the development of these reserves in the past may
not necessarily recur in the future.
<PAGE>
The following table sets forth the development of loss and loss adjustment
expenses reserves of the Company for the ten-year period ended December 31,
1996:
<TABLE>
Analysis of Loss and Loss Adjustment Expense Development
($ in thousands)
<CAPTION>
Year Ended December 31, 1986 1987 1988 1989 1990 1991 1992 1993 1994 1995 1996
------ ------ ------ ------ ------ ------ ------ ------ ----- ------ ------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Reserves for Losses
and Loss
Adjustment Expenses . $41,718 $53,126 $65,543 $78,339 $94,135 $110,135 $117,497 $123,477 $127,954 $137,978 $141,220
Reinsurance Recoverable
on unpaid losses ..... (5,053) (5,468) (7,126) (11,784) (22,123) (25,048) (24,463) (28,761) (28,230) (28,655) (26,837)
------ ------ ------ ------- ------- ------- ------- ------- ------- ------- -------
Reserves for Losses
and Loss Adjustment
Expenses, Net ....... 36,665 47,658 58,417 66,555 72,012 85,087 93,034 94,716 99,724 109,323 114,383
====== ====== ====== ====== ====== ====== ====== ====== ====== ======= =======
Reserves, Net,
Reestimated as of:
One year later ........ 37,961 50,145 57,932 69,036 76,786 84,514 91,561 88,296 94,542 103,882
Two years later ....... 38,047 50,572 63,348 72,478 76,442 84,305 89,666 82,876 87,592
Three years later ..... 39,057 53,540 65,399 72,926 76,832 83,960 86,876 81,556
Four years later ...... 39,981 55,303 65,842 73,130 77,879 82,750 85,204
Five years later ...... 41,097 55,445 66,289 74,599 77,375 81,690
Six years later ....... 41,088 56,018 68,298 74,391 76,811
Seven years later ..... 41,072 57,751 68,370 74,578
Eight years later ..... 42,622 58,323 68,678
Nine years later ...... 42,759 58,754
Ten years later ....... 44,734
Cumulative Redundancy
(Deficiency) . (8,069) (11,096) (10,261) (8,023) (4,799) 3,397 7,830 13,160 12,132 5,441
------ ------- ------- ------ ------ ----- ----- ------ ------ -----
Cumulative Amount of
Reserves Paid Through:
One year later ........ 16,621 21,931 23,852 29,587 29,446 32,708 36,692 34,439 33,066 39,796
Two years later ....... 26,294 33,879 40,454 46,469 47,392 53,455 57,236 49,867 53,121
Three years later ..... 31,636 42,838 51,147 57,838 60,737 65,951 66,127 62,138
Four years later ...... 35,838 48,480 57,239 65,803 67,401 70,176 73,409
Five years later ...... 38,588 51,216 62,168 68,950 68,634 74,752
Six years later ...... 39,836 54,644 64,423 68,652 71,697
Seven years later ..... 40,920 55,794 63,815 71,075
Eight years later ..... 41,693 55,313 65,940
Nine years later ...... 41,116 57,174
Ten years later ....... 41,698
</TABLE>
Prior to 1990, the Company 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, the Company reviewed and revised its process for
estimating reserves for losses and LAE, and in recent years the Company has
generally experienced overall redundancies. The redundancies at December 31,
1996 of $13.2 million, $12.1 million and $5.4 million for the December 31, 1993,
1994 and 1995 reserves, respectively, were primarily attributable to favorable
development of IBNR and case reserves for personal automobile, commercial
automobile, automobile physical damage, and workers' compensation claims.
<PAGE>
<TABLE>
<CAPTION>
Year Ended December 31,
-----------------------
($ in thousands)
<S> <C> <C> <C>
1996 1995 1994
----- ----- -----
Reserve for unpaid losses and loss adjustment expenses:
Gross liability ................... $141,220 $137,978 $127,954
Reinsurance recoverable ........... 26,837 28,655 28,230
------ ------ ------
Net liability ..................... $114,383 $109,323 $ 99,724
======== ======== ========
One year later:
Gross reestimated liability ....... $126,779 $116,672
Reestimated reinsurance recoverable 22,130 22,897
------ ------
Net reestimated liability ......... $103,882 $ 94,542
======== ========
Two years later:
Gross reestimated liability ....... $105,637
Reestimated reinsurance recoverable 18,045
------
Net reestimated liability ......... $ 87,592
========
</TABLE>
The Company believes that its reserves at December 31, 1996 are adequate.
Conditions and trends that have historically affected the Company's 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 the
Company could have a material adverse impact upon the Company's financial
condition and results of operations.
Investments
An important component of the operating results of the Company has been the
return on invested assets. The Company's investment objective is to maximize
current yield while maintaining safety of capital together with adequate
liquidity for its insurance operations. In an effort to improve the quality and
safety of its investments, the Company embarked on a plan in 1995 to reduce
significantly its holdings of non-investment grade fixed maturity securities.
The Company reduced its holdings of NAIC Class 3 through 6 bonds, generally
considered non-investment grade, from $10.8 million, or 5.6% of its fixed
maturity portfolio, as of December 31, 1995 to $6.9 million, or 3.2% of its
fixed maturity portfolio, as of December 31, 1996. Due to uncertainties in the
economic environment, however, it is possible that the quality of investments
currently held in the Company's investment portfolio may change.
The Company manages all of its investments internally. Investment decisions
and guidelines are made and implemented by the Company's investment department
under the supervision of an investment committee comprised of members of the
board of directors. In addition, the Company maintains a Credit Watch Committee
comprised of the Chief Executive Officer, Executive Vice President - Finance,
and the Senior Vice President - Investments in order to monitor securities which
have experienced late payments, adverse changes in credit rating or financial
condition of the borrower or any modifications of terms. At December 31, 1996,
the Company had five investments totaling $4.9 million on the Credit Watch
Report, of which none were considered non-performing or in default.
<PAGE>
The following table sets forth certain information concerning the Company's
investments:
<TABLE>
<CAPTION>
($ in thousands) December 31, 1996 December 31, 1995
- ---------------- ----------------- -----------------
Type of Investment Amortized Market Amortized Market
<S> <C> <C> <C> <C>
Cost Value(3) Cost Value(3)
Available For Sale Portfolio:
Fixed Maturities(1)
United States government and government
agencies and authorities ...................... $ 11,017 $ 11,305 $ 22,700 $ 24,243
States, municipalities and political subdivisions 42,568 43,950 21,871 23,480
Public utilities ................................ 26,244 26,233 20,008 21,126
All other corporate bonds ....................... 109,241 111,643 99,311 104,245
Mortgage-backed securities ...................... 9,676 10,342 1,082 1,130
Redeemable preferred stock ...................... 8,095 8,277 6,722 6,965
----- ----- ----- -----
Total Fixed Maturities ..................... $206,841 $211,750 $171,694 $181,189
Equity securities .................................... 2,546 7,908 334 4,746
----- ----- --- -----
Total Available for Sale ................... $209,387 $219,658 $172,028 $185,935
======== ======== ======== ========
Held to Maturity Portfolio:
Fixed Maturities(2)
States, municipalities and political subdivisions $ 5,423 $ 5,482 $ 5,925 $ 6,298
All other corporate bonds ....................... 4,359 4,491 6,461 6,802
----- ----- ----- -----
Total Held to Maturity .......................... $ 9,782 $ 9,973 $ 12,386 $ 13,099
======== ======== ======== ========
Mortgage loans ....................................... $ 1,745 $ 1,745 $ 1,822 $ 1,822
Short-term investments ............................... 1,982 1,982 6,532 6,532
Other Invested Assets ................................ 748 748 1,246 1,246
--- --- ----- -----
Total Investments ............................... $223,664 $234,106 $194,014 $208,634
======== ======== ======== ========
- --------------------------------------------------------------------------------
(1) Fixed maturities (bonds, redeemable preferred stocks and mortgage-backed
securities) and equity securities in the Available for Sale Portfolio are
carried at market value in the consolidated financial statements of the
Company. Mortgage loans, cash and short-term investments and other invested
assets are carried at cost, which approximates market value.
(2) Fixed maturities in the Held to Maturity Portfolio are carried at amortized
cost.
(3) The Company primarily obtains market value information through the pricing
service offered by Interactive Data Corporation. Market values are
also obtained, to a lesser extent, from various brokers who provide price
quotes.
</TABLE>
<PAGE>
The Company's investments in fixed maturity securities are composed
primarily of intermediate-term, investment grade securities. The table below
contains additional information concerning the investment ratings of the
Company's fixed maturity investments at December 31, 1996.
<TABLE>
<CAPTION>
Amortized Market
Type/Ratings of Investment(1) Cost Value Percentage(4)
- ------------ -- ------------- ---- ----- -------------
($ in Thousands)
<S> <C> <C> <C>
Available for Sale Portfolio:(2)
- --------------------------------
U.S. Government and Agencies . $ 19,740 $ 20,665 9.8%
AAA .......................... 20,229 21,034 9.9%
AA ........................... 30,900 31,145 14.7%
A ............................ 62,070 64,205 30.3%
BBB .......................... 66,075 66,876 31.6%
-------- -------- -----
Total BBB or Better ..... 199,014 203,925 96.3%
BB ........................... 5,877 5,924 2.8%
B and Below .................. 1,950 1,901 0.9%
-------- -------- -----
Total Available for Sale $206,841 $211,750 100.0%
======== ======== =====
Held to Maturity Portfolio:(3)
U.S. Government and Agencies . 0 0 0.0%
AAA .......................... $ 3,115 $ 3,188 32.0%
AA ........................... 1,270 1,326 13.3%
A ............................ 4,091 4,207 42.2%
BBB .......................... 0 0 0.0%
-------- -------- -----
Total BBB or Better ..... 8,476 8,721 87.4%
BB ........................... 1,306 1,252 12.6%
B and Below .................. 0 0 0.0%
-------- -------- -----
Total Held to Maturity .. $ 9,782 $ 9,973 100.0%
======== ======== =====
(1) The ratings set forth in this table are based on the ratings, if any,
assigned by Standard & Poor's Corporation ("S&P"). If S&P's ratings were
unavailable, the equivalent ratings supplied by Moody's Investors Services,
Inc., Fitch Investors Service, Inc. or the NAIC were used where available. The
percentage of securities that were not assigned a rating by S&P at December 31,
1996 was 4.7%.
(2) Fixed maturities in the Available for Sale Portfolio are carried at market
value in the consolidated financial statements of the Company.
(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.
</TABLE>
<PAGE>
The table below sets forth the maturity profile of the Company's fixed
maturity investments as of December 31, 1996
<TABLE>
<CAPTION>
Amortized Market
Maturity Cost(1) Value(2) Percentage
<S> <C> <C> <C>
Available for Sale:
1 year or less ....................... $ 771 $ 746 0.4%
More than 1 year through 3 years ..... 13,354 13,490 6.4%
More than 3 years through 5 years .... 9,719 10,253 4.8%
More than 5 years through 10 years ... 98,271 99,677 47.1%
More than 10 years through 15 years .. 44,228 44,784 21.1%
More than 15 years through 20 years .. 14,032 14,389 6.8%
More than 20 years ................... 16,790 18,069 8.5%
Mortgage backed securities ........... 9,676 10,342 4.9%
----- ------ ---
Total ................................ $206,841 $211,750 100.0%
======== ======== =====
Held to Maturity:
1 year or less ....................... $ 350 $ 358 3.6%
More than 1 year through 3 years ..... 706 716 7.2%
More than 3 years through 5 years .... 211 207 2.1%
More than 5 years through 10 years ... 3,186 3,173 31.8%
More than 10 years through 15 years .. 5,329 5,519 55.3%
More than 15 years through 20 years .. -- -- 0.0%
More than 20 years ................... -- -- 0.0%
----- ----- -----
Total ................................ $ 9,782 $ 9,973 100.0%
======== ======== =====
(1) Fixed maturities in the Available for Sale Portfolio are carried at market
value in the consolidated financial statements of the Company. Fixed maturities
in the Held to Maturity Portfolio are carried at amortized cost.
(2) The Company obtains market value information primarily through the pricing
service offered by Interactive Data Corporation. Market values are also
obtained, to a lesser extent, from various brokers who provide price quotes
</TABLE>
The average duration and average maturity of the Company's fixed maturity
investments as of December 31, 1996 were approximately 6.2 and 10.1 years,
respectively. As a result, the market value of the Company's investments may
fluctuate significantly in response to changes in interest rates. In addition,
the Company may also be likely to experience investment losses to the extent its
liquidity needs require the disposition of fixed maturity securities in
unfavorable interest rate environments.
For the year ended December 31, 1996, compared with the prior year, the
amortized cost of the Company's cash and invested assets increased 16.0% to
$227.8 million. As a result of the reduction in holdings of certain
non-investment grade securities, the Company anticipates that future investment
yields may be lower than they otherwise would be. For the years ended December
31, 1996, 1995 and 1994, the Company's net investment income, average cash and
invested assets and return on average cash and invested assets were as follows:
<TABLE>
<CAPTION>
Years Ended December 31,
($ in millions)
<S> <C> <C> <C>
1996 1995 1994
---- ---- ----
Net investment income .................... $ 15.6 $ 14.3 $ 13.2
Average cash and invested assets ......... $ 212.0 $ 187.8 $ 173.9
Return on average cash and invested assets 7.5% 7.6% 7.6%
</TABLE>
<PAGE>
Information Services
The Company's automated information processing capabilities are supported
by centralized computer systems and a network of personal computers linking
agents, claims offices and service centers with the Company's 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. A specialized client information system containing policy
and claim information for each customer's portfolio is utilized by the Company's
agents 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. Substantially all of the Company's information services
equipment, including the centralized computer systems and computer network, is
owned by the Life Company. Information systems expenses are shared by the
Company and the Life Company pursuant to an agreement. (See Item 1:
Business-Related Parties.)
A.M. Best Rating
A.M. Best, which rates insurance companies based on factors of concern to
policyholders, currently assigns an "A-" (Excellent) rating (its fourth highest
rating category) to Farm Family Casualty. 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 reduce the
Company's current rating in the future.
Competition
The property and casualty insurance market is highly competitive. The
Company competes with stock insurance companies, mutual companies, local
cooperatives and other underwriting organizations. Certain of these competitors
have substantially greater financial, technical and operating resources than the
Company. The Company's ability to compete successfully in its principal markets
is dependent upon a number of factors, many of which (including market and
competitive conditions) are outside the Company's control. Many of the lines of
insurance written by the Company are subject to significant price competition.
Some companies may offer insurance at lower premium rates through the use of
salaried personnel or other methods, rather than agents paid on a commission
basis, as the Company does. In addition to price, competition in the lines of
business written by the Company is based on quality of the products, quality and
speed of service (including claims service), financial strength, ratings,
distribution systems and technical expertise.
Seasonality
Although the insurance business generally is not seasonal, losses and loss
adjustment expenses tend to be higher for periods of severe or inclement
weather.
Employees
The Company shares many of its employees with Farm Family Life. As of
December 31, 1996, the total number of full time employees of the Company and
Farm Family Life was 389 employees in aggregate, of which 286 were employed in
the home office. Based on annual time studies, 63% of total employee expenses,
including salary expense, is currently allocated to the Company and 37% is
allocated to Farm Family Life, Farm Family Holdings and United Farm Family. See
"Certain Relationships and Related Transactions". None of these employees are
covered by a collective bargaining agreement, and the Company believes that its
employee relations are good.
Effect of Regulation
General
The Company is regulated by government agencies in the states in which it
does business. Such regulation usually includes (i) regulating premium rates and
policy forms, (ii) setting minimum capital and surplus requirements, (iii)
regulating guaranty fund assessments and residual markets, (iv) licensing
companies, adjusters and agents, (v) approving accounting methods and methods of
setting statutory loss and expense reserves, (vi) setting requirements for and
limiting the types and amounts of investments, (vii) establishing requirements
for the filing of annual statements and other financial reports, (viii)
conducting periodic statutory examinations of the affairs of insurance
companies, (ix) approving proposed changes in control and (x) limiting the
amount of dividends that may be paid without prior regulatory approval.
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 redefinitions of risk exposure 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 some lines of insurance. Such developments may
adversely affect the profitability of various lines of insurance.
Risk-Based Capital
State insurance departments use a methodology developed by the NAIC for
assessing the adequacy of statutory surplus of property and casualty insurers
which 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. Based on calculations made by
the Company, the risk-based capital level for the Company exceeds a level that
would trigger regulatory attention. At December 31, 1996, the Company's total
adjusted capital was $83.2 million, and the threshold requiring the least
regulatory attention was $26.7 million.
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 insurance industry and
specifies a range of "usual values" for each ratio. Departure from the "usual
value" range on four or more ratios may lead to increased regulatory oversight
from individual state insurance commissioners. The Company did not have any
ratios which varied from the "usual value" range in 1996, 1995 or 1994.
Risk Factors
In addition to the normal risks of business, the Company is subject to
significant risk factors, including but not limited to: (i) the inherent
uncertainty in the process of establishing property-liability 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 results of operations and financial condition; (ii) the
potential material adverse impact on its financial condition, results of
operations and cash flow of losses arising out of catastrophes; (iii) the
insolvency or inability of any reinsurer to meet its obligations to the Company
may have a material adverse effect on the business and results of operations of
the Company; (iv) the need 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 or claims-paying ability ratings; (v) there can be
no assurance that the Company will be able to maintain its current A.M. Best
rating and that the Company's business and results of operations could be
materially adversely affected by a rating downgrade; (vi) the fact that the
property and casualty market is highly competitive and certain of its
competitors may have substantially greater financial, technical and operating
resources than the Company; (vii) the extensive regulation and supervision to
which the Company is subject, various regulatory initiatives that may affect the
Company, and regulatory and other legal actions involving the Company; (viii)
the impact on the revenues and profitability of the Company from prevailing
economic, regulatory, demographic and other conditions in New York, New Jersey
and the other states in which the company operates; (ix) the fact that since a
substantial portion of the Company's business is concentrated in a relatively
small number of states, a significant change in or the termination of the
Company's relationship with the Farm Bureaus in certain of these states could
have a materially adverse effect on the Company's results of operations and
financial condition; and (x) the inherent uncertainty in the economic
environment may cause the quality of the investments currently held in the
Company's investment portfolio to change. The Company has experienced, and can
be expected in the future to experience, storm and weather related losses which
may have a material adverse impact on the Company's results of operations,
financial condition and cash flow.
"Safe Harbor" statement under the Private Securities Litigation Reform Act of
1995
With the exception of historical information, the matters discussed or
incorporated by reference in this Report on Form 10-K are forward-looking
statements that involve risks and uncertainties that could cause actual results
to differ materially from those expected and projected. Such risks and
uncertainties include, but are not limited to, the following: exposure to
catastrophe losses, general economic conditions and conditions specific to the
property and casualty insurance industry including its cyclical nature,
regulatory changes and conditions, rating agency policies and practices,
competitive factors, claims development and the impact thereof on loss reserves
and the Company's reserving policy, the adequacy of the Company's reinsurance
programs, developments in the securities markets and the impact on the Company's
investment portfolio and other risks indicated in this Report on Form 10-K and
other risk factors listed from time to time in the Company's Securities and
Exchange Commission Filings.
Executive Officers of the Registrant
Date First
Elected
Officer of
Name Age Position Presently Held with Registrant Registrant
- ---- --- --------------------------------------- ----------
Philip P. Weber 48 President & Chief Executive Officer 1987
James J. Bettini 42 Executive Vice President - Operations 1990
Victoria M. Stanton 37 Executive Vice President, 1991
General Counsel and Secretary
Timothy A. Walsh 35 Executive Vice President - Finance 1996
William T. Conine 48 Senior Vice President - Information Services 1985
Stuart C. Henderson 41 Senior Vice President - Casualty Operations 1991
Raymond A. Osterhout 52 Senior Vice President - Investments 1987
Dale E. Wyman 54 Senior Vice President - Marketing 1989
There are no family relationships among any of such 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 the next Annual Meeting of the Company.
All the Executive Officers of the Registrant have been employed by 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, Inc. and Executive Vice President - Finance since December
1996 and Treasurer of Farm Family Holdings, Inc. from October 1996 to December
1996. Mr. Walsh was Senior Vice President - Finance of Farm Family Casualty
Insurance Company from March 1996 to December 1996, and Director of Corporate
Development of FFCIC 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.
ITEM 2. PROPERTIES
The Company currently leases space for its home office in Glenmont, New
York from the Life Company. The lease provides for the Company to pay the Life
Company an annual rental of approximately $712,000. The lease expires on
December 31, 1998. See "Related Party Transactions".
ITEM 3. LEGAL PROCEEDINGS
The Company is subject to litigation in the normal course of business.
Based upon information presently available to it, the Company does not consider
any threatened or pending litigation to be material. However, given the
uncertainties attendant to litigation, there can be no assurance that the
Company's 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
PART II
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON STOCK AND RELATED
STOCKHOLDER MATTERS
Pursuant to the Plan of Reorganization and Conversion (see Item 1. Business
- - Plan of Reorganization and Conversion) , the Company issued 2,253,878 shares
of $1.60 par common stock to Farm Family Holdings, Inc., on July 26, 1996 . All
of the Company's common stock is owned by Farm Family Holdings, Inc. There is no
market for the Company's common stock. No dividends were paid in 1996 on the
Company's common stock. As an insurance company domiciled in the state of New
York, the Company's dividend payments are restricted by New York state law. The
Company currently does not plan to pay dividends in the foreseeable future.
ITEM 6. SELECTED FINANCIAL DATA
The following table sets forth certain consolidated financial data for the
Company and its subsidiary prior to and after the reorganization pursuant to the
Plan that took place during 1996. The consolidated statement of income data set
forth below for the years ended December 31, 1996, 1995, 1994 and 1993 and the
consolidated balance sheet data as of December 31, 1996, 1995 and 1994 are
derived from the consolidated financial statements of the Company which have
been audited by Coopers & Lybrand L.L.P, independent auditors. The consolidated
statement of income data for the year ended December 31, 1992 and the
consolidated balance sheet data as of December 31, 1993 and 1992 are derived
from the unaudited consolidated financial statements of the Company. The Company
believes that such unaudited financial data fairly reflect the consolidated
results of operations and the consolidated financial condition of the Company
for such periods. This data should be read in conjunction with Item 7
Management's Discussion and Analysis of Financial Condition and Results of
Operations as well as Item 8 Financial Statements and Supplementary Data
included elsewhere herein.
<PAGE>
<TABLE>
<CAPTION>
($ in millions) Year Ended December 31,
-----------------------
<S> <C> <C> <C> <C> <C>
Statement of Income Data: 1996 1995 1994 1993 1992
- ------------------------- ---- ---- ---- ---- ----
Revenues:
Premiums .............................................. $ 130.8 $ 116.9 $ 101.5 $ 96.7 $ 90.0
Net Investment Income ................................. 15.6 14.3 13.2 13.8 12.9
Net realized investment gains (losses) ................ (0.6) 0.9 1.3 (0.2) 1.0
Other Income(1) ....................................... 0.9 0.9 0.7 0.7 0.5
--- --- --- --- ---
Total Revenues ........................................ 146.7 133.0 116.7 111.0 104.4
----- ----- ----- ----- -----
Losses and Expenses:
Losses and loss adjustment expenses ................... 95.0 83.2 82.7 73.2 72.1
Underwriting expenses ................................. 37.6 34.9 28.8 26.8 24.0
Early retirement program expense ...................... 1.2 -- -- -- --
Interest and other expense ............................ 0.5 0.3 0.3 0.3 0.3
-- --- --- --- ---
Total losses and expenses ............................. 134.3 118.4 111.8 100.3 96.4
----- ----- ----- ----- ----
Income before federal income tax and extraordinary item 12.4 14.6 4.9 10.7 8.0
Federal income tax expense ............................ 3.8 5.0 1.4 3.1 1.8
--- --- --- --- ---
Income before extraordinary item ...................... 8.6 9.6 3.5 7.6 6.2
Extraordinary item - Demutualization expense .......... 1.5 -- -- -- --
---
Net Income ............................................ $ 7.1 $ 9.6 $ 3.5 $ 7.6 $ 6.2
======== ======== ======== ======== ========
Balance Sheet Data (at December 31):
Total investments(2) .................................. $ 233.9 $ 207.9 $ 170.6 $ 177.7 $ 160.8
Total assets .......................................... 308.6 278.3 243.1 244.1 221.5
Long term debt ........................................ 1.3 2.7 2.7 2.8 2.8
Total liabilities ..................................... 208.2 204.1 190.1 183.6 175.0
Total equity(2) ....................................... 100.4 74.2 53.0 60.5 46.5
GAAP Ratios:
Loss and loss adjustment expense ratio(3) ............. 72.6% 71.1% 81.5% 75.7% 80.2%
Underwriting expense ratio(4) ......................... 28.7% 29.8% 28.4% 27.7% 26.6%
Combined ratio(5) ..................................... 101.3% 100.9% 109.9% 103.4% 106.8%
Statutory Data:
Statutory Combined Ratio (6)........................... 101.8% 101.0% 108.9% 104.2% 106.0%
Statutory Surplus ..................................... $ 83.2 $ 55.9 $ 42.9 $ 39.1 $ 33.5
Ratio of annual written premiums to surplus -
statutory basis(7) .................................... 1.61x 2.16x 2.46x 2.52x 2.73x
(1) Primarily represents service fee income on the Company's property and
casualty insurance business.
(2) Due to the adoption by the Company on December 31, 1993 of SFAS No. 115,
"Accounting for Certain Investments in Debt and Equity Securities," total
investments and stockholder's equity were adjusted to reflect changes in market
value, which resulted in an increase of $6.8 million, a reduction of $11.1
million an increase of $11.7 million, and a decrease of $2.3 million as of
December 31, 1993, 1994, 1995 and 1996, respectively.
(3) Calculated by dividing losses and loss adjustment expenses by premiums.
(4) Calculated by dividing underwriting expenses by premiums.
(5) The sum of the Loss and Loss Adjustment Expense Ratio and the Underwriting
Expense Ratio.
(6) Calculated by dividingstatutory net written premiums for the period by
statutory surplus at the end of the period.
</TABLE>
<PAGE>
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
The following analysis of the consolidated results of operations and financial
condition of the Company should be read in conjunction with "Selected
Consolidated Financial Data," the Consolidated Financial Statements and the
accompanying notes to the Consolidated Financial Statements included elsewhere
herein.
Corporate Profile
The following discussion and analysis of financial condition and results of
operations includes the operations of Farm Family Casualty Insurance Company
("Farm Family Casualty") and Farm Family Casualty's wholly owned subsidiary,
Rural Agency and Brokerage, Inc. (collectively referred to as the "Company").
Farm Family Casualty is a wholly owned subsidiary of Farm Family Holdings, Inc.
The operations of the Company are also closely related with those of its
affiliates, Farm Family Life Insurance Company and Farm Family Life Insurance
Company's wholly owned subsidiary, United Farm Family Insurance Company.
Conversion and Initial Public Offering
On July 26, 1996, Farm Family Mutual Insurance Company ("Farm Family Mutual")
converted from a mutual property and casualty insurance company to a stockholder
owned property and casualty insurance company and became a wholly owned
subsidiary of Farm Family Holdings, Inc. pursuant to a plan of Reorganization
and Conversion (the "Plan of Conversion"). In addition, Farm Family Mutual was
renamed Farm Family Casualty Insurance Company. As part of the Plan, Farm Family
Holdings was formed and the Farm Family Mutual policyholders received 2,237,000
shares of Farm Family Holding's common stock and $11,735,000 in cash in exchange
for their membership interest in Farm Family Mutual.
On July 23, 1996, Farm Family Holdings made an initial public offering of its
common stock at a price of $16 per share. Farm Family Holdings received net
proceeds of $41,453,000 for 2,786,000 shares sold in the initial public
offering. In addition, Farm Family Holdings received $3,427,000 for 214,000
shares purchased by policyholders of Farm Family Mutual in a subscription
offering. In addition, pursuant to the Plan, holders of Farm Family Mutual debt
could elect to exchange their debt instruments for shares of common stock or
cash. As a result, there were 17,000 common shares and $1,107,000 in cash
exchanged for debt with an outstanding principal amount of $1,371,000.
Farm Family Casualty
Farm Family Casualty is a specialized property and casualty insurer of farms,
other generally related businesses and residents of rural and suburban
communities principally in the Northeastern United States. Farm Family Casualty
provides property and casualty insurance coverages to members of the state Farm
Bureau organizations in New York, New Jersey, Delaware, West Virginia and all of
the New England states. Membership in the state Farm Bureau organizations is a
prerequisite for voluntary insurance coverage (except for employees of the
Company and its affiliates)..
Operating Environment
The operating results of companies in the property and casualty insurance
industry have historically been subject to fluctuations due to competition,
economic conditions, weather and various other factors. Factors affecting the
results of operations of the property and casualty insurance industry include
price competition and aggressive marketing which historically have resulted in
higher combined loss and expense ratios. The Company's premium revenue is a
function of changes in average premiums per policy and the growth in the number
of policies. Premium rates are regulated by the state insurance departments in
the states in which the Company operates. Because of the nature of the property
and casualty insurance industry, it is difficult to predict future trends in the
industry's overall profitability.
The Company's operating results are subject to significant fluctuations from
period to period depending upon, among other factors, the frequency and severity
of losses from weather related and other catastrophic events, the effect of
competition, and regulation on the pricing of products, changes in interest
rates, general economic conditions, tax laws and the regulatory environment. As
a condition of its license to do business in various states, the Company is
required to participate in a variety of mandatory residual market mechanisms
(including mandatory pools) which provide certain insurance (most notably
automobile insurance) to consumers who are otherwise unable to obtain such
coverages from private insurers. Residual market premium rates for automobile
insurance have generally been inadequate. The amount of future losses or
assessments from residual market mechanisms can not be predicted with certainty
and could have a material adverse effect on the Company's results of operations.
For the years ended December 31, 1996, 1995, and 1994, 38.6%, 39.1% and 38.5%,
respectively, of the Company's direct written premiums were derived from
policies written in New York and 22.6%, 20.8%, and 19.6%, respectively, were
derived from policies written in New Jersey. For these periods, no other state
accounted for more than 10.0% of the company's direct written premiums. As a
result of the concentration of the Company's business in the states of New York
and New Jersey and more generally in the Northeastern United States, the
Company's results of operations may be significantly affected by weather
conditions, catastrophic events and regulatory developments in these two states
and in the Northeastern United States.
Products
The Special Farm Package is a flexible, multi-line package of insurance coverage
which the Company regards as its "flagship" product. For the year ended December
31, 1996, 24.5% of the Company's total direct premiums written were derived from
the Special Farm Package product.
The Company concentrates on its primary products: personal and commercial auto,
the Special Farm Package its businessowners, and homeowners policies. The
Company underwrites its commercial and personal lines risks by evaluating
historical loss experience, current prevailing market conditions, and product
profitability with consistently applied standards. The adequacy of premium rates
is affected mainly by the severity and frequency of claims and changes in the
competitive, legal and regulatory environment in which the Company operates.
Expense Management
During the fourth quarter of 1996, the Company announced the implementation of a
voluntary early retirement program and other changes to the Company's benefit
plans as part of its continuous expense management program. The Company recorded
a nonrecurring charge, net of an income tax benefit of $405,000, of $752,000 for
the Company's share of the costs of this voluntary early retirement program.
Eligibility for the program was based on age and years of service. In addition,
effective January 1, 1997, the Company froze benefits available through its
defined benefit plan and enhanced its defined contribution plan. As a result,
the Company's contributions to the defined contribution plan will vary to a
greater extent based upon the Company's profitability than the contributions
previously required to fund its defined benefit plan. The Board of Directors
also approved an annual incentive plan for officers.
Results of Operations
The Year Ended December 31, 1996 Compared to Year Ended December 31, 1995
Premiums
Premium revenue increased $13.9 million or 11.8%, during the year ended December
31, 1996 to $130.8 million from $116.9 million in 1995. The increase in premium
revenue in 1996 resulted from an increase of $11.1 million in earned premiums on
additional business directly written by the Company (principally in New York and
New Jersey) and an increase of $2.4 million in earned premiums retained by the
Company and not ceded to reinsurers, in addition to an increase of $0.4 million
in earned premiums assumed. The $11.1 million increase in earned premiums on
additional business directly written by the Company was primarily attributable
to an increase of $9.9 million, or 9.2%, in earned premiums from the Company's
primary products (personal and commercial automobile products other than
assigned risk business, the Special Farm Package, businessowners products,
homeowners products, and Special Home Package) and to an increase of $0.7
million in earned premiums on workers' compensation business. The number of
policies in force related to the Company's primary products increased by 8.6% to
approximately 114,000 in 1996 from approximately 105,000 in 1995 and the average
premium earned for each such policy increased by 0.6% in 1996. The $2.4 million
increase in earned premiums retained by the Company was primarily the result of
a change in the terms of certain of the Company's reinsurance agreements
pursuant to which the earned premiums ceded by the Company were reduced.
Net Investment Income
Net investment income increased $1.3 million or 9.1% to $15.6 million for the
year ended December 31, 1996 from $14.3 million in 1995. The increase in net
investment income was primarily the result of an increase in cash and invested
assets (at amortized cost) of approximately $34.7 million, or 17.7%. The
increase in average cash and invested assets was primarily attributable to the
capital contribution of $18.0 million from Farm Family Holdings received in July
1996. The average return realized on the Company's cash and invested assets was
7.5% in 1996 and 7.6% in 1995.
Net Realized Investment Gains (Losses) Net realized investment losses were $0.6
million for the year ended December 31, 1996 compared to a gain of $0.9 million
in 1995.
Losses and Loss Adjustment Expenses
Losses and loss adjustment expenses increased $11.8 million, or 14.2%, to $95.0
million for the year ended December 31, 1996 from $83.2 million in 1995. The
increase in losses and loss adjustment expenses was primarily attributable to
the overall growth in the Company's business, as well as the frequency of
weather related losses in the Northeastern United States during the three months
ended March 31, 1996. Loss and loss adjustment expenses were 72.6% of premium
revenue in 1996 compared to 71.1% of premium revenue in 1995. Losses and loss
adjustment expenses believed to be weather related aggregated $10.6 million in
1996 compared to $5.2 million in 1995.
Underwriting Expenses
Underwriting expenses increased $2.7 million, or 7.7%, to $37.6 million for the
year ended December 31, 1996 from $34.9 million for the same period in 1995. For
the year ended December 31, 1996, underwriting expenses were 28.7% of premium
revenue compared to 29.8% in 1995. The reduction in the Company's underwriting
expense ratio was primarily attributable to a smaller relative increase in
overhead expenses than in premium revenue for the period.
Federal Income Tax Expense
Federal income tax expense decreased $1.2 million to $3.8 million in 1996 from
$5.0 million in 1995. Federal income tax expense was 30.4% of income before
federal income taxes in 1996 compared to 34.2% in 1995. The decrease in the
Company's effective federal income tax rate was primarily attributable to an
increase in tax exempt interest income in 1996.
Income Before Extraordinary Item Income before extraordinary item decreased $1.0
million to $8.6 million in 1996 from $9.6 million in 1995 primarily as a result
of the foregoing factors.
Net Income
Net income decreased $2.5 million to $7.1 million in 1996 from $9.6 million in
1995 primarily as a result of the foregoing factors and the impact of $1.5
million of expenses related to the demutualization of the Company which the
Company has identified as an extraordinary item, as well as the implementation
of a voluntary early retirement program which resulted in a one time charge to
earnings of $0.8 million, net of income tax benefit of $0.4 million,in the last
quarter of 1996.
The Year Ended December 31, 1995 Compared to the Year Ended December 31, 1994
Premiums
Premium revenue increased $15.5 million or 15.2%, during the year ended December
31, 1995 to $116.9 million from $101.5 million in 1994. The increase in premium
revenue in 1995 resulted from an increase of $14.3 million in earned premiums on
additional business directly written by the Company (principally in New York and
New Jersey) and an increase of $2.3 million in earned premiums retained by the
Company and not ceded to reinsurers, which were partially offset by a decrease
of $1.1 million in earned premiums assumed. The $14.3 million increase in earned
premiums on additional business directly written by the Company was primarily
attributable to an increase of $10.8 million, or 11.1%, in earned premiums from
the Company's primary products (personal and commercial automobile products
other than assigned risk business, the Special Farm Package, businessowners
products, homeowners products, and Special Home Package) and to an increase of
$1.8 million in earned premiums on assigned risk business. The number of
policies in force related to the Company's primary products increased by 8.4% to
approximately 105,000 in 1995 from approximately 97,000 in 1994 and the average
premium earned for each such policy increased by 2.5% in 1995. The $2.3 million
increase in earned premiums retained by the Company was primarily the result of
a change in the terms of certain of the Company's reinsurance agreements
pursuant to which both the amount of earned premiums ceded by the Company and
the ceding commissions received by the Company were reduced. The $1.1 million
decrease in earned premiums assumed was attributable to a reduction in premiums
assumed from mandatory pools as a result of the depopulation of such pools.
Net Investment Income
Net investment income increased $1.1 million or 8.6% to $14.3 million for the
year ended December 31, 1995 from $13.2 million in 1994. The increase in net
investment income was primarily the result of an increase in cash and invested
assets (at amortized cost) of approximately $17.2 million, or 9.6%. The return
realized on the Company's cash and invested assets was 7.6% in 1995 and 1994.
Net Realized Investment Gains
Net realized investment gains were $0.9 million for the year ended December 31,
1995 compared to $1.3 million in 1994.
Losses and Loss Adjustment Expenses
Losses and loss adjustment expenses increased $0.5 million, or 0.6%, to $83.2
million for the year ended December 31, 1995 from $82.7 million in 1994. The
increase in losses and loss adjustment expenses was primarily attributable to
the overall growth in the Company's business and was significantly offset by a
reduction in the loss and loss adjustment expense ratio. Loss and loss
adjustment expenses were 71.1% of premium revenue in 1995 compared to 81.5% of
premium revenue in 1994. The decrease in the loss and loss adjustment expense
ratio was primarily attributable to improved loss ratios on the Company's
personal and commercial automobile lines and to a decline in the frequency and
severity of weather related property losses in 1995 as compared with 1994.
Losses and loss adjustment expenses believed to be weather related aggregated
$5.2 million in 1995 compared to $7.9 million in 1994. To a much lesser extent,
the decrease in the loss and loss adjustment expense ratio on assumed
reinsurance also contributed to the decrease in the Company's overall loss and
loss adjustment expense ratio during 1995.
Underwriting Expenses
Underwriting expenses increased $6.1 million, or 21%, to $34.9 million for the
year ended December 31, 1995 from $28.8 million for the same period in 1994. For
the year ended December 31, 1995, underwriting expenses were 29.8% of premium
revenue compared to 28.4% in 1994. A reduction in 1994 of $2.2 million in
amounts accrued for the Company's share of the deficit of the New Jersey Market
Transition Facility had a favorable impact on the Company's underwriting expense
ratio in that year. Without taking into account the effect of this reduction,
underwriting expenses in 1994 would have been 30.5% of premium revenue
Federal Income Tax Expense
Federal income tax expense increased $3.6 million to $5.0 million in 1995 from $
1.4 million in 1994. Federal income tax expense was 34.2% of income before
federal income tax expense in 1995 compared to 29.1% in 1994. The increase in
the Company's effective federal income tax rate was primarily attributable to
the increase in income before federal income tax expense, certain expenses
related to the demutualization of Farm Family Mutual, and reductions in tax
exempt interest income in 1995.
Net Income Net income increased $6.1 million to $9.6 million in 1995 from $3.5
million in 1994 primarily as a result of the foregoing factors.
Liquidity and Capital Resources
Historically, the principal sources of the Company's cash flow have been
premiums, investment income, maturing investments, and proceeds from sales of
invested assets. In addition to the need for cash flow to meet operating
expenses, the liquidity requirements of the Company relate primarily to the
payment of losses and loss adjustment expenses. The liquidity requirements of
the Company vary because of the uncertainties regarding the settlement dates for
liabilities for unpaid claims and because of the potential for large losses,
either individually or in the aggregate.
During 1996, the Company continued to reduce its holdings of non-investment
grade fixed maturities to improve the overall quality of its investment
portfolio. The aggregate carrying value of fixed maturity securities rated as
non-investment grade by the NAIC was reduced to $6.9 million, or 3.2% of its
fixed maturity portfolio, at December 31, 1996 from $10.8 million, or 5.6% of
its fixed maturity portfolio, at December 31, 1995. High yield corporate bonds
constituted most of the non-investment grade securities held by the Company as
of December 31, 1996. As a result of the reduction in holdings of certain
non-investment grade securities, the Company anticipates that future investment
yields may be lower than they otherwise would be. Approximately 4% of the
Company's investment portfolio consists of investments in mortgage-backed
securities. The mortgage-backed securities held by the Company as of December
31, 1996 were primarily GNMA, FNMA, and Federal Home Loan Mortgage Corp.
pass-through securities. The Company currently has no investments in such
derivative financial instruments as futures, forward, swap, or option contracts,
or other financial instruments with similar characteristics. The market value of
the Company's fixed maturity investments is subject to fluctuations directly
attributable to prevailing rates of interest as well as other factors. As of
December 31, 1996, the aggregate market value of the Company's fixed maturity
investments exceeded the aggregate amortized cost of such investments by $5.1
million. As of December 31, 1995, the aggregate market value of the Company's
fixed maturity investments exceeded the aggregate amortized cost of such
investments by $10.2 million
The Company has in place an unsecured line of credit with Key Bank of New York
under which it may borrow up to $2.0 million. At December 31, 1996, no amount
was outstanding on the line of credit which has an annual interest rate equal to
the bank's prime rate. In addition, the Company had notes payable outstanding
consisting of $0.3 million of debentures and $1.0 million of subordinated
surplus certificates (collectively "the Surplus Notes"). The Surplus Notes bear
interest at the rate of 8% per annum, have no maturity date, and principal and
interest are repayable only with the approval of the Insurance Department of the
State of New York.
Net cash provided by operating activities was $12.1 million, $16.4 million, and
$8.6 million during the years ended December 31, 1996, 1995, and 1994,
respectively. The decrease in cash provided by operating activities in 1996 was
primarily attributable to the decrease in net income which included the impact
of $1.5 million of expenses related to the demutualization of the Company which
the Company has identified as an extraordinary item during 1996 compared to
1995. The increase in net cash provided by operating activities in 1995 was
primarily attributable to the increase in net income and a decrease in payments
for losses and loss adjustment expenses during 1995 compared to 1994.
Net cash used in investing activities was $30.3 million, $18.5 million, and $7.7
million during the years ended December 31, 1996, 1995, and 1994, respectively.
The increase in net cash used in investing activities in 1996 resulted primarily
from a reduction in proceeds on the maturities and sales of fixed maturities and
the investment of the Capital Contribution from the Company's parent. The
increase in net cash used in investing activities in 1995 resulted from the net
increase in cash available from the Company's operations during 1995 and a
corresponding increase in investments in short-term investments and fixed
maturities.
Net cash provided by financing activities for the year ended December 31, 1996
of $20.0 million was the result of a Capital Contribution from the Company's
parent on July 26, 1996.
The Company purchases reinsurance in part to mitigate the impact of large or
unusual losses and loss expenses on its liquidity. As a condition of writing
business in certain states, the Company participates in a number of mandatory
pools and the Company may be required to pay assessments to the extent such
pools require the funding of deficits in the future.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The response to Item 8 is submitted as a separate section of this report.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON
ACCOUNTING AND FINANCIAL DISCLOSURE
There were no disagreements with our independent auditors on accounting and
financial disclosure.
<PAGE>
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
MANAGEMENT
DIRECTORS
- ---------
The following persons were elected as Directors on March 7, 1996:
Served as
Name Age Term Expires Director Since
---- --- ------------ --------------
(1) William M. Stamp, Jr 57 April 22, 1997 1975
(1)(3) John W. Lincoln 58 April 22, 1997 1984
(2) Robert L. Baker 47 April 22, 1997 1988
(2)(3) Randolph C. Blackmer, Jr 55 April 22, 1997 1984
(1) Fred G. Butler, Sr 68 April 22, 1997 1981
(1) Joseph E. Calhoun 62 April 22, 1997 1990
James V. Crane 35 April 22, 1997 1994
(1) Stephen J. George 57 April 22, 1997 1989
(1) Gordon H. Gowen 70 April 22, 1997 1991
(2) Jon R. Greenwood 43 April 22, 1997 1995
(1)(3) Clark W. Hinsdale III 41 April 22, 1997 1993
Richard A. Jerome 48 April 22, 1997 1995
(1) Arthur D. Keown, Jr 51 April 22, 1997 1993
(1) Daniel R. LaPointe 59 April 22, 1997 1987
(2) Wayne A. Mann 63 April 22, 1997 1994
Frank W. Matheson 71 April 22, 1997 1996
(1) Norma R. O'Leary 63 April 22, 1997 1983
John I. Rigolizzo 43 April 22, 1997 1995
Harvey T. Smith 51 April 22, 1997 1994
(2) Charles A. Wilfong 39 April 22, 1997 1991
Tyler P. Young 36 April 22, 1997 1995
(1) Members of Executive Committee and Investment Committee
(2) Members of the Audit Committee
(3) Members of the Compensation Committee
All of the Registrant's Directors have been engaged in farming operations for
over 5 years. There is no family relationship among any of the Directors. Mr.
Stamp is Chairman of the Board and Mr. Lincoln is Vice Chairman of the Board.
None of the directors hold another position with the Company.
EXECUTIVE OFFICERS
- ------------------
Information regarding executive officers of the Company in Item 1 of this Report
under the caption "Executive Officers of the Registrant" in Part I hereof is
incorporated herein by reference.
<PAGE>
ITEM 11. EXECUTIVE COMPENSATION
The following table sets forth information regarding the compensation of
the Chief Executive Officer and the other most highly compensated executive
officers of Farm Family Casualty Insurance Company. The figures below represent
the aggregate compensation paid to such executive officers by Farm Family
Holdings, Inc. (the "Corporation"), Farm Family Casualty Insurance Company
("FFCIC"), Farm Family Life Insurance Company (the "Life Company") and United
Farm Family Insurance Company ("United") (collectively, the "Companies").
Pursuant to an expense sharing arrangement among the Companies, 0.58% of such
aggregate compensation expense in 1996 was charged to the Corporation, 62.55%
was charged to FFCIC, 34.44% was charged to the Life Company and 2.44% was
charged to United. <TABLE>
SUMMARY COMPENSATION TABLE
<CAPTION>
Annual Compensation
-------------------
<S> <C> <C> <C> <C> <C>
Name and Other Annual All Other
Principal Position Year Salary Bonus Compensation Compensation
- ------------------ ---- ------ ----- -------------------------
Philip P. Weber 1996 $285,000 $114,000(1) $ __(2) $4,090(3)
President & Chief Executive Officer 1995 240,000 0 __(2) 1,449(4)
1994 210,000 0 __(2) 1,547(5)
Victoria M. Stanton 1996 150,000 45,000(1) __(2) 4,090(6)
Executive Vice President, 1995 118,000 11,150 13,643(7) 4,377(8)
General Counsel & Secretary 1994 108,000 200 11,083(7) 3,513(9)
James J. Bettini 1996 131,154 39,900(1) __ (2) 4,090(10)
Executive Vice President-Operations 1995 114,500 10,000 14,898(7) 4,271(11)
1994 104,500 0 12,525(7) 3,438(12)
Timothy A. Walsh 1996 91,308 28,500(1) __ (2) 840(13)
Executive Vice President - Finance 1995 30,000(14) 0 0 0
Dale E. Wyman 1996 118,000 0 13,676(15) 1,318(16)
Senior Vice President - Marketing 1995 112,000 0 11,650(7) 1,309(17)
1994 107,000 0 10,430(7) 1,353(18)
Charles E. Simon(19) 1996 160,223 0 __(2) 173,678(20)
1995 152,550 0 17,384(21) 4,599(23)
1994 146,750 0 14,358(22) 4,247(24)
- --------------------------------------------------------------------------------
</TABLE>
(1) Represents bonus paid by the Corporation to the named executive officer
for the officer's role in the initial public offering of the
Corporation's Common Stock.
(2) Does not include certain compensation in the form of perquisites and
other personal benefits provided to the named executive officer for
services to the Companies during the year reported, the aggregate value
of which did not exceed 10% of total annual salary and bonus.
(3) Represents a contribution by the Companies to Mr. Weber's account of
$2,940 under the Farm Family Employee "Savings Plus" Plan (the "Savings
Plus Plan"), and a group term life insurance premium of $1,150 paid by
the Companies for the benefit of Mr. Weber, of which $696 was taxable
income.
(4) Represents a contribution by the Companies to Mr. Weber's account of $240
under the Savings Plus Plan, and a group term life insurance premium of
$1,209 paid by the Companies for the benefit of Mr. Weber, of which $696
was taxable income.
(5) Represents a contribution by the Companies to Mr. Weber's account of $240
under the Savings Plus Plan, and a group term life insurance premium of
$1,307 paid by the Companies for the benefit of Mr. Weber, of which $696
was taxable income.
(6) Represents a contribution by the Companies to Ms. Stanton's account of
$2,940 under the Savings Plus Plan, and a group term life insurance
premium of $1,150 paid by the Companies for the benefit of Ms. Stanton,
of which $264 was taxable income.
(7) Includes a car allowance of $8,640 paid by the Companies.
(8) Represents a contribution by the Companies to Ms. Stanton's account of
$3,244 under the Savings Plus Plan, and a group term life insurance
premium of $1,133 paid by the companies for the benefit of Ms. Stanton of
which $245 was taxable income.
(9) Represents a contribution by the Companies to Ms. Stanton's account of
$2,390 under the Savings Plus Plan, and a group term life insurance
premium of $1,124 paid by the companies for the benefit of Ms. Stanton of
which $179 was taxable income.
(10) Represents a contribution by the Companies to Mr. Bettini's account of
$2,940 under the Savings Plus Plan, and a group term life insurance
premium of $1,150 paid by the Companies for the benefit of Mr. Bettini,
of which $406 was taxable income.
(11) Represents a contribution by the Companies to Mr. Bettini's account of
$3,175 under the Savings Plus Plan, and a group term life insurance
premium of $1,096 paid by the Companies for the benefit of Mr. Bettini,
of which $365 was taxable income.
(12) Represents a contribution by the Companies to Mr. Bettini's account of
$2,352 under the Savings Plus Plan, and a group term life insurance
premium of $1,086 paid by the Companies for the benefit of Mr. Bettini,
of which $324 was taxable income.
(13) Represents a group term life insurance premium of $840 paid by the
Corporation for the benefit of Mr. Walsh, of which $185 was taxable
income.
(14) Mr. Walsh joined FFCIC as Director of Corporate Development in August
1995.
(15) Includes a car allowance of $8,916 paid by the Companies.
(16) Represents a contribution by the Companies to Mr. Wyman's account of $240
under the Savings Plus Plan, and a group term life insurance premium of
$1,078 paid by the Companies for the benefit of Mr. Wyman, of which
$1,071 was taxable income.
(17) Represents a contribution by the Companies to Mr. Wyman's account of $240
under the Savings Plus Plan, and an insurance premium of $1,069 paid by
the Companies for the benefit of Mr. Wyman, of which $1,002 was taxable
income.
(18) Represents a contribution by the Companies to Mr. Wyman's account of $240
under the Savings Plus Plan, and an insurance premium of $1,113 paid by
the Companies for the benefit of Mr. Wyman, of which $945 was taxable
income.
(19) Mr. Simon resigned his positions with the Companies effective November
15, 1996. See "Settlement Agreement".
(20) Represents an amount of $172,528 paid or to be paid to Mr. Simon pursuant
to a Separation Agreement and General Release whereby he resigned his
positions with the Companies effective November 15, 1996 (see "Settlement
Agreement"), and a group term life insurance premium of $1,150 paid by
the Companies for the benefit of Mr. Simon, of which $975 was taxable
income.
(21) Includes a car allowance of $8,640 and gasoline credit card payments of
$4,434 paid by the Companies.
(22) Includes a car allowance of $7,200 and gasoline credit card payments of
$3,585 paid by the Companies.
(23) Represents a contribution by the Companies to Mr. Simon's account of
$3,390 under the Savings Plus Plan, and a group term life insurance
premium of $1,209 paid by the Corporation for the benefit of Mr. Simon,
of which $ 1,152 was taxable income.
(24) Represents a contribution by the Companies to Mr. Simon's account of
$2,940 under the Savings Plus Plan, and a group term life insurance
premium of $1,307 paid by the Corporation for the benefit of Mr. Simon,
of which $ 696 was taxable income.
Severance Plan
Each of the officers of the Corporation is eligible for severance benefits under
FFCIC's and the Life Company's joint Officer Severance Pay Plan (the "Severance
Plan") when such officer's employment is terminated under defined qualifying
conditions, which include, but are not limited to, certain sales of assets or
mergers or other corporate reorganizations involving the Companies. Under the
Severance Plan, the Companies will pay to a qualifying officer severance
benefits generally equal to the greater of (i) one week's salary for each year
of service with the Companies or (ii) 24 months salary in the case of the Chief
Executive Officer, 12 months salary in the case of a Senior Vice President and 6
months salary in the case of any other officer.
Settlement Agreement
Pursuant to the Severance Plan, Charles E. Simon has entered into a Separation
Agreement and General Release (the "Settlement Agreement") pursuant to which Mr.
Simon resigned his position with the Companies effective November 15, 1996.
Pursuant to the Settlement Agreement, Mr. Simon receives an amount equal to the
total amount Mr. Simon would have received for (i) the Severance Plan, (ii)
premium for medical and dental insurance through December of 1997, and (iii) the
Companies' 1996 contribution to Mr. Simon's "Savings Plus" Plan if he were
employed by the Companies at year end. In addition, pursuant to the Settlement
Agreement, Mr. Simon received an amount equal to the value of his accrued but
unused vacation time. As a material inducement to enter into the Settlement
Agreement, Mr. Simon executed a general release releasing the Companies and
their Related Persons (as defined in the Settlement Agreement) from certain
obligations including, but not limited to, any claims arising out of or in any
way related to (i) ownership of any common stock of the Companies, (ii) Mr.
Simon's employment with the Companies and the conclusion thereof, (iii) any
severance plan, and (iv) any future Voluntary Retirement Incentive Plan which
may be offered to employees of the Companies.
Pension Benefits
The Corporation and FFCIC are participating employers under the Farm Family
Employee Retirement Plan (the "Retirement Plan"). Substantially all salaried
employees of the Corporation who were participants in the Plan on December 31,
1996, including executive officers, are eligible to receive pension benefits
under the Retirement Plan. The Retirement Plan is a tax-qualified defined
benefit retirement plan which is subject to the Employee Retirement Income
Security Act of 1974, as amended. Federal law limits the amount of pension
benefits that can be accrued and compensation that can be recognized under a
tax-qualified retirement plan such as the Retirement Plan. FFCIC has adopted a
non-qualified unfunded retirement plan, the Farm Family Supplemental Employee
Retirement Plan (the "SERP"), for the payment of those benefits at retirement
that cannot be accrued under the Retirement Plan on account of the Federal law
limits on the amount of pension benefits that can be accrued and compensation
that can be recognized under the Retirement Plan. The practical effect of the
SERP is to provide for the calculation of retirement benefits on a uniform basis
for all employees. Benefit payments under the Retirement Plan and the SERP are
allocated among the Corporation, FFCIC, the Life Company and United pursuant to
expense sharing arrangements. New benefit accruals under the Retirement Plan
were discontinued as of December 31, 1996.
The table below illustrates the approximate annual retirement benefits which
would be payable at age 65 under the Retirement Plan and, if applicable, under
the SERP.
Average Annual Years of Service
Compensation 15 20 25 30 35
$100,000 $ 30,000 $ 40,000 $ 50,000 $ 60,000 $ 60,000
150,000 45,000 60,000 75,000 90,000 90,000
200,000 60,000 80,000 100,000 120,000 120,000
250,000 75,000 100,000 125,000 150,000 150,000
300,000 90,000 120,000 150,000 180,000 180,000
350,000 105,000 140,000 175,000 210,000 210,000
400,000 120,000 160,000 200,000 240,000 240,000
For purposes of calculating retirement benefits, a participant's average annual
compensation ("Average Annual Compensation") shall be equal to a participant's
compensation during the five calendar years (out of the last ten calendar years
of employment) for which the participant's compensation was highest, divided by
five. Compensation, as used to calculate retirement benefits, means the
aggregate of the amounts listed in the Summary Compensation Table under the
captions "Salary," "Bonus" and "Other Annual Compensation" and the portion of
the amount listed under the caption "All Other Compensation" which corresponds
to the part of the group term life insurance premium, if any, paid by the
Corporation which is taxable as income to the participant in the Retirement
Plan.
The credited years of service as of December 31, 1996 for Mr. Weber, Mr.
Bettini, Mr. Simon, Ms. Stanton, Mr. Walsh and Mr. Wyman were 17.0, 18.0, 24.4,
6.0, 2.0, 14.9, respectively.
The annual pension benefit under the Retirement Plan and, when applicable, the
SERP, equals 2.0% of Average Annual Compensation multiplied by years of service
(not to exceed 30 years). Benefits under the Retirement Plan and the SERP are
not subject to Social Security or other offset amounts.
COMPENSATION OF DIRECTORS
In 1996, the Chairman of the Board and the Vice Chairman of the Board received
an annual retainer of $10,000 and $4,500 respectively. All other directors
received an annual retainer of $3,000. Directors also received a daily fee of
$500 for meetings of the boards of directors of the companies, $250 per meeting
of a board committee and $250 per day for attendance at other company functions.
Effective January 1, 1997, the Chairman of the Board and Vice Chairman of the
Board receive an annual retainer of $20,000 and $10,000 respectively. All other
directors receive an annual retainer of $5,000. Also effective January 1, 1997,
daily meeting fees were increased to $1,000 for meetings of the boards of
directors of the companies, $500 per meeting of a board committee and $500 per
day for attendance at other company functions. Effective January 1, 1997,
Directors may defer their compensation pursuant to a non-qualified deferred
compensation plan. Directors are reimbursed for reasonable travel and other
expenses of attending meetings of the boards of directors and board committees
and other functions. Fees and expenses paid to directors are allocated among the
Corporation, FFCIC, the Life Company and United pursuant to expense sharing
arrangements.
CHANGE IN CONTROL ARRANGEMENTS
Certain of the Corporation's compensation plans applicable to the named
executive officers appearing in the Summary Compensation Table include
provisions regarding payments pursuant to such plans in the event of the change
of control of the Corporation. Except for the Corporation's Omnibus Securities
Plan, which is described in "Item III - Approval of the Corporation's Omnibus
Securities Plan," in the Proxy Statement, plans containing such provisions are
described below. These provisions are generally applicable to all participants
in such plans.
ANNUAL INCENTIVE PLAN
In 1996, the Board of Directors of the Corporation adopted the Farm Family
Holdings, Inc. Annual Incentive Plan (the "Annual Incentive Plan") to provide
incentives and financial rewards to officers and other key employees of the
Corporation selected for participation by the Board of Directors. The Annual
Incentive Plan authorizes the payment of cash awards calculated as a percentage
of base salary with the applicable percentage determined based on the
performance of the participant assessed according to the achievement of
predefined goals derived from the Corporation's and its affiliates' strategic
plans and budgets. Except in the event of a Change of Control (as defined in the
Annual Incentive Plan), achievement of a target performance level is a
prerequisite to the receipt of an award pursuant to the Annual Incentive Plan.
In the event of a Change of Control, each participant will receive payment of an
amount equal to the greater of the participant's actual Earned Award or Target
Award Opportunity (both as defined in the Annual Incentive Plan) for the plan
year in which the Change of Control occurs, regardless of whether the
participant achieved the target performance level.
OFFICERS' DEFERRED COMPENSATION PLAN
In 1996, the Board of Directors of the Corporation adopted a non-qualified,
unfunded Officers' Deferred Compensation Plan (the "Deferred Compensation Plan")
pursuant to which officers of the Corporation and its affiliates selected by the
Board of Directors as eligible to participate in the Deferred Compensation Plan
may elect to defer compensation payable by the Corporation or its affiliates.
Participants may elect to receive their Accrued Benefit (as defined in the
Deferred Compensation Plan) in a single lump sum or in five (5), ten (10) or
fifteen (15) equal annual installments commencing upon the date of termination
of service with the Corporation. In the event of a Change of Control (as defined
in the Deferred Compensation Plan), each participant shall receive that
participant's entire Accrued Benefit, in a single sum, as soon as
administratively practicable following the date of the Change of Control.
Compensation Committee Interlocks and Insider Participation
In 1996, the Corporation's Compensation Committee was comprised of John W.
Lincoln, Randolph C. Blackmer, Clark W. Hinsdale III and John P. Moskos. Mr.
Lincoln is Vice Chairman of the Board of Directors of the Corporation.
<PAGE>
Report of the Compensation Committee of Farm Family Holdings, Inc., Compensation
Committee of Farm Family Casualty Insurance Company and Executive Committee of
Farm Family Casualty Insurance Company on Executive Compensation
Overview
This report is the first report submitted to stockholders since the Corporation
became a publicly-held entity in July 1996, upon the conversion of its
subsidiary, FFCIC, from a mutual property casualty insurance company to a stock
property casualty insurance company. Prior to the formation of the Corporation,
the Executive Committee of the Board of Directors of FFCIC (the "Executive
Committee") recommended to FFCIC's Board the salaries of the executive officers
for 1996. In 1996, the Board of Directors of the Corporation established the
Corporation's Compensation Committee for the purposes of recommending to the
Board policies and plans concerning salaries, bonuses and other compensation of
the Corporation's officers. In addition, in 1996, the Board of Directors of
FFCIC established FFCIC's Compensation Committee and the compensation-related
functions of the Executive Committee were transferred to FFCIC's Compensation
Committee. The Compensation Committees of the Corporation and FFCIC are
collectively referred to herein as the "Compensation Committees." During 1996,
FFCIC retained an independent compensation consulting firm to educate the
Compensation Committees with respect to incentive compensation arrangements.
Working with the consulting firm, the Corporation's Compensation Committee has
recommended to the Board of Directors of the Corporation and the Board has
adopted an Omnibus Securities Plan, subject to shareholder approval, and an
Annual Incentive Plan for 1997 which are intended to provide incentives that
encourage and reward the creation of additional shareholder value.
Except for bonuses paid by the Corporation in 1996 to certain of the executive
officers appearing in the Summary Compensation Table, all compensation prior to
and following the conversion of FFCIC was paid by FFCIC and allocated among the
Corporation, FFCIC, the Life Company and United (collectively the "Companies")
pursuant to expense sharing arrangements among the Companies. This report
reflects the compensation philosophy of the Corporation and FFCIC, as endorsed
by the Executive Committee and the Compensation Committees and approved by the
Boards of Directors of the Corporation and FFCIC.
Components of Executive Compensation
The components of the 1996 compensation for executive officers of the
Corporation, including the Chief Executive Officer, consist of base salary and
bonus. Annual incentive compensation and long-term incentive compensation plans
have been put in place for 1997.
Base Salary. Base salary for each executive officer is set based on a subjective
evaluation of the recommendations of the Chief Executive Officer, salary levels
in effect for comparable positions in the market place, personal performance and
potential future contributions to the Companies. The 1996 base salaries for the
executive officers were recommended by the Executive Committee and approved by
the Board of Directors of FFCIC.
Bonus. In 1996, the Compensation Committee of the Board of Directors of the
Corporation recommended, and the Board approved, the payment by the Corporation
of a 1996 bonus to Mr. Weber, Mr. Bettini, Ms. Stanton, and Mr. Walsh for such
officers' roles in the initial public offering of the Corporation's Common
Stock.
Annual Incentive Compensation . During 1996, the Corporation's Compensation
Committee recommended, and the Board approved, an Annual Incentive Plan to
provide incentives and financial rewards to officers and other key employees of
the Corporation and its subsidiaries who are responsible for or contribute to
the management, growth or profitability of the business of the Corporation, or
its subsidiaries. The Annual Incentive Plan became effective January 1, 1997 and
will tie annual incentive compensation to performance goals.
Long-Term Incentive Compensation. In addition, during 1996, the Corporation's
Compensation Committee recommended, and the Board adopted, the Corporation's
Omnibus Securities Plan (the "Plan") which is being submitted for approval by
the stockholders of the Corporation at the Annual Meeting. The Board of
Directors of the Corporation has approved the Compensation Committee's
recommendation of grants of non-qualified options to certain executive officers
of the Corporation and its subsidiary, FFCIC, pursuant to the Plan, subject to
the approval of the Plan by the stockholders of the Corporation at the Annual
Meeting. The grants of non-qualified options were based in part on insurance
industry survey data. See "Item III - Approval of the Corporation's Omnibus
Securities Plan."
CEO Compensation
For 1996, Mr. Weber's base salary was established at $285,000. Mr. Weber's 1996
base salary was set based on a subjective evaluation of salary levels in effect
for comparable positions in the marketplace, personal performance and potential
future contributions to the Companies. In 1996, the Compensation Committee of
the Board of Directors of the Corporation recommended, and the Board approved,
the payment of a 1996 bonus in the amount of $114,000 to Mr. Weber for Mr.
Weber's role in the initial public offering of the Corporation's common stock.
In addition, during 1996, the Compensation Committee recommended, and the Board
approved subject to approval of the Plan by the stockholders of the Corporation,
the grant to Mr. Weber of non-qualified stock options to purchase 75,000 shares
of Common Stock of the Corporation under the Plan. See "Item III - Approval of
the Corporation's Omnibus Securities Plan."
Compliance with Internal Revenue Code Section 162(m)
Section 162(m) of the Internal Revenue Code, enacted in 1993, generally
disallows a tax deduction to public companies for compensation over $1 million
paid to the Chief Executive Officer and four other most highly compensated
executive officers. Qualifying performance-based compensation will not be
subject to the deduction limit if certain requirements are met. The Corporation
has not paid any compensation to any executive officers that was not deductible
by reason of the prohibition in Section 162(m). The Compensation Committees
believe that tax deductibility is a important factor, but not the sole factor to
be considered in setting executive compensation policy. Accordingly, the
Compensation Committees generally intend to take such reasonable steps as are
required to avoid the loss of a tax deduction due to Section 162(m), but reserve
the right, in appropriate circumstances, to pay amounts which are not
deductible.
Compensation Committee of Farm Family Holdings, Inc.
Randolph C. Blackmer, Jr.
Clark W. Hinsdale III
John W. Lincoln
John P. Moskos
Compensation Committee of Farm Family Casualty Insurance Company
Randolph C. Blackmer, Jr.
Clark W. Hinsdale III
John W. Lincoln
Executive Committee of Farm Family Casualty Insurance Company
Fred G. Butler Daniel R. LaPointe
Joseph E. Calhoun John W. Lincoln
Stephen J. George Norma R. O'Leary
Gordon H. Gowen William M. Stamp, Jr.
Clark W. Hinsdale III Richard D. Tryon
COMMON STOCK PERFORMANCE GRAPH
The graph is omitted because all of the common stock of Farm Family Casualty
Insurance Company is held by Farm Family Holdings, Inc. There is no public share
price for the common stock of Farm Family Casualty Insurance Company, nor is the
common stock publicly traded.
<PAGE>
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
MANAGEMENT
(1) (2) (3) (4)
Percent
Name and Address of Amount and Nature of of
Title of Class Beneficial Owner Beneficial Ownership Class
- -------------- ---------------- -------------------- -----
common stock Farm Family Holdings, Inc. 2,253,878 shares 100%
P.O. Box 656
Albany, NY 12201-0656
Farm Family Holdings is the actual owner of all the shares shown in column (3).
No shares are owned by Directors or by Executive Officers.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Life Company
Substantially all of the directors and executive officers of the Company are
also directors and executive officers of the Life Company.
Expense Sharing Agreement
The Company, the Holding Company and the Life Company are parties to an amended
and restated expense sharing agreement, effective February 14, 1996 (the
"Expense Sharing Agreement") pursuant to which shared expenses for goods,
services and facilities are allocated among the parties in accordance with
applicable provisions of the New York Insurance Law and regulations promulgated
thereunder. For the year ended December 31, 1996, shared expenses totaled $30.7
million of which 63% or $19.3 million was allocated to the Company.
Lease Agreement
The Company and the Life Company are parties to a Lease Agreement, dated July 1,
1988, as amended by Amendment to Lease Agreement, effective January 1, 1994 (as
so amended, the "Lease Agreement"), pursuant to which the Company leases home
office space in Glenmont, New York from the Life Company. Annual rent under the
Lease Agreement for the year ended December 31, 1996 was $712,000.
United
Per Risk Reinsurance Contract
The Company and United are parties to an Underlying Multi-Line Per Risk
Reinsurance Contract, effective January 1, 1995, as amended by Addendum No. 1,
effective January 1, 1996 and Addendum No. 2, effective January 1, 1996,
Addendum No. 3, effective July 26, 1996, and Addendum No. 4, effective January
1, 1997 (as so amended, the "Per Risk Reinsurance Agreement"). For the year
ended December 31, 1996, net earned premiums ceded by the Company to United were
$8.0 million.
Umbrella Reinsurance Agreement
United has assumed 5% of the Company's net liability retained under an Umbrella
Quota Share Reinsurance Contract, effective January 1, 1995, as amended by
Addendum No. 1, effective January 1, 1995 and Addendum No. 2 effective July 26,
1996 (as so amended, the "Umbrella Reinsurance Agreement"). For the year ended
December 31, 1996, net written premiums ceded by FFCIC to United under the
Umbrella Reinsurance Agreement were $0.2 million.
Catastrophe Reinsurance Contract
United has assumed 16.67% of the 1st layer and 2% of the 3rd and 4th layers of
the Company's per occurrence losses under an Excess Catastrophe Reinsurance
Contract, effective January 1, 1997 (the "Catastrophe Reinsurance Contract").
For the year ended December 31, 1996, net earned premiums ceded by the Company
to United were $0.11 million under a reinsurance contract containing
substantially similar terms.
<PAGE>
Assumption Agreement
The Company and United were parties to an Assumption Agreement, commencing
January 1, 1995 (the "Assumption Agreement"), pursuant to which the Company
retroceded to United a portion of its assumed reinsurance obligations each year
during the term of the Agreement. For the year ended December 31, 1996, premiums
of $1.0 million were retroceded to United. The Assumption Agreement was
terminated effective December 31, 1996.
Service Agreement
The Company and United are parties to a Service Agreement, dated July 25, 1988
(the "Service Agreement"), pursuant to which the Company provides United with
certain services, property, equipment and facilities necessary for its
operations. For the year ended December 31, 1996, United incurred approximately
$0.7 million in direct and allocated expenses and overhead under the Service
Agreement.
Farm Bureaus
Membership List Purchase Agreement
The Company has entered into a Membership List Purchase Agreement, commencing on
January 1, 1996, with the Farm Bureau in each of the ten states in which it
operates (collectively, the "Farm Bureaus"). Pursuant to each Membership List
Purchase Agreement, Farm Bureau membership lists are provided to the Company on
an exclusive basis for the purpose of marketing its insurance products. For the
year ended December 31, 1996, the Company paid approximately $571,000 to the
Farm Bureaus, in the aggregate, under the Membership List Purchase Agreements.
<PAGE>
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON
FORM 8-K
(a) The following documents are filed as part of this Form 10-K
1. The audited consolidated financial statements of the
Registrant as listed in the "Index to Financial Statements"
submitted as a separate section of this report beginning on
page F-1.
2. An "Index to Financial Statement Schedules" has been filed
as a part of this report beginning on page S-1.
3. Exhibits
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:
None
<PAGE>
FARM FAMILY CASUALTY INSURANCE COMPANY AND SUBSIDIARY
INDEX TO FINANCIAL STATEMENTS
Year Ended December 31, 1996
Report of Independent Accountants F-2
Consolidated Balance Sheets as of December 31, 1996 and 1995 F-3
Consolidated Statements of Income for the Years Ended
December 31, 1996, 1995 and 1994 F-4
Consolidated Statements of Stockholder's Equity for the Years Ended
December 31, 1996, 1995 and 1994 F-5
Statements of Consolidated Cash Flows for the Years Ended
December 31, 1996, 1995 and 1994 F-6
Notes to Consolidated Financial Statements F-7 to F-19
F-1
<PAGE>
Report of Independent Accountants
To the Shareholder and Board of Directors of
Farm Family Casualty Insurance Company
We have audited the consolidated financial statements and the financial
statement schedules of Farm Family Casualty Insurance Company and Subsidiary
listed in Item 14(a) of this Form 10-K. These financial statements and financial
statement schedules are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements and
financial statement schedules based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion the financial statements referred to above present fairly, in all
material respects, the consolidated financial position of Farm Family Casualty
Insurance Company and Subsidiary as of December 31, 1996 and 1995, and the
consolidated results of their operations and their cash flows for each of the
three years in the period ended December 31, 1996 in conformity with generally
accepted accounting principles. In addition, in our opinion, the financial
statement schedules referred to above, when considered in relation to the basic
financial statements taken as a whole, present fairly, in all material respects,
the information required to be included therein.
Coopers & Lybrand L.L.P.
Albany, New York
February 13, 1997
F-2
<PAGE>
<TABLE>
FARM FAMILY CASUALTY INSURANCE COMPANY & SUBSIDIARY
Consolidated Balance Sheets
($ in thousands)
<CAPTION>
As of December 31,
1996 1995
ASSETS
<S> <C> <C>
Investments:
Fixed Maturities
Available for sale, at fair value
(Amortized cost: $206,841 in 1996 and $171,694 in 1995 ) ................ $211,750 $ 181,189
Held to maturity, at amortized cost
(Fair value: $9,973 in 1996 and $13,100 in 1995) ........................ 9,782 12,386
Equity securities
Available for sale, at fair value (Cost: $2,546 in 1996 and $334 in 1995) 7,908 4,746
Mortgage loans ............................................................... 1,745 1,822
Other invested assets ........................................................ 748 1,246
Short-term investments ....................................................... 1,982 6,532
----- -----
Total investments .................................................. 233,915 207,921
------- -------
Cash ......................................................................... 4,108 2,410
Insurance receivables:
Reinsurance receivables .................................................... 10,743 13,773
Premiums receivable ........................................................ 22,663 21,791
Deferred acquisition costs ................................................... 10,682 10,527
Accrued investment income .................................................... 4,709 4,260
Deferred income tax asset, net ............................................... 1,531 --
Prepaid reinsurance premiums ................................................. 1,944 1,864
Receivable from affiliates, net .............................................. 16,489 13,860
Other assets ................................................................. 1,826 1,434
----- -----
Total Assets ....................................................... $ 308,610 $278,288
========= ========
LIABILITIES AND STOCKHOLDER'S EQUITY
Liabilities:
Reserves for losses and loss adjustment expenses ............................ $ 141,220 $137,978
Unearned premium reserve .................................................... 55,945 52,799
Reinsurance premiums payable ................................................ 641 2,635
Accrued expenses and other liabilities ...................................... 9,081 7,788
Debt ........................................................................ 1,304 2,707
Deferred income tax liability, net .......................................... -- 217
----- ---
Total liabilities .................................................. 208,191 204,124
------- -------
Stockholder's equity:
Common Stock $1.60 par value 3,200,000 shares authorized,
2,253,878 shares issued and outstanding ................................. 3,606 --
Additional paid in capital .................................................. 84,125 --
Retained earnings ........................................................... 6,012 65,284
Net unrealized investment gains ............................................. 6,676 8,998
Minimum pension liability adjustment ........................................ -- (118)
----- ----
Total stockholder's equity ......................................... 100,419 74,164
------- ------
Total Liabilities and Stockholder's Equity ......................... $ 308,610 $ 278,288
========= =========
See accompanying notes to Consolidated Financial Statements.
</TABLE>
F-3
<PAGE>
<TABLE>
FARM FAMILY CASUALTY INSURANCE COMPANY & SUBSIDIARY Consolidated Statements of
Income ($ in thousands)
<CAPTION>
Year Ended December 31, 1996 1995 1994
--------- -------- --------
<S> <C> <C> <C>
Revenues:
Premiums ................................................................ $ 130,780 $116,936 $101,466
Net investment income ................................................... 15,633 14,326 13,190
Realized investment gains (losses), net ................................. (640) 912 1,340
Other income ............................................................ 905 840 696
--- --- ---
Total revenues .......................................................... 146,678 133,014 116,692
------- ------- -------
Losses and Expenses:
Losses and loss adjustment expenses ..................................... 94,977 83,184 82,680
Underwriting expenses 37,593 34,902 28,768
Early retirement program expense ........................................ 1,157 -- --
Interest expense ........................................................ 167 216 220
Dividends to policyholders .............................................. 373 122 51
--- --- --
Total losses and expenses ............................................... 134,267 118,424 111,719
------- ------- -------
Income before federal income tax expense and extraordinary item ......... 12,411 14,590 4,973
Federal income tax expense .............................................. 3,770 4,984 1,447
----- ----- -----
Income before extraordinary item ........................................ 8,641 9,606 3,526
Extraordinary item - demutualization expenses ........................... 1,543 -- --
----- ----- -----
Net income .............................................................. $ 7,098 $ 9,606 $ 3,526
======== ======== ========
See accompanying notes to Consolidated Financial Statements.
</TABLE>
F-4
<PAGE>
<TABLE>
FARM FAMILY CASUALTY INSURANCE COMPANY AND SUBSIDIARY
Consolidated Statements of Stockholder's Equity
($ in thousands)
<CAPTION>
Year Ended December 31 1996 1995 1994
<S> <C> <C> <C>
Common stock
- ------------
Balance, beginning of year ....................................................... $ -- $ -- $ --
Common stock issued .............................................................. 3,606 -- --
----- ------ ------
Balance, end of year ............................................................. 3,606 -- --
----- ------ ------
Additional paid in capital
- --------------------------
Balance, beginning of year ....................................................... -- -- --
Paid in Capital during the year .................................................. 16,321 -- --
Transfer of Surplus Notes to Paid in Capital ..................................... 1,434 -- --
Demutualization of Farm Family Mutual ............................................ 66,370 -- --
------ ------ ------
Balance, end of year ............................................................. 84,125 -- --
------ ------ ------
Retained earnings
- -----------------
Balance, beginning of year ....................................................... 65,284 55,678 52,152
Net income ....................................................................... 7,098 9,606 3,526
Demutualization of Farm Family Mutual ............................................ (66,370) -- --
------- ------ ------
Balance, end of year ............................................................. 6,012 65,284 55,678
----- ------ ------
Net unrealized appreciation (depreciation) of investments
- ---------------------------------------------------------
Balance, beginning of year ....................................................... 8,998 (2,701) 8,360
Change in unrealized appreciation (depreciation), net ............................ (2,322) 11,699 (11,061)
------ ------ -------
Balance, end of year ............................................................. 6,676 8,998 (2,701)
----- ----- ------
Minimum pension liability adjustment
- ------------------------------------
Balance, beginning of year ....................................................... (118) -- --
Minimum pension liability adjustment ............................................. 118 (118) --
------- ------ ------
Balance, end of year ............................................................. -- (118) --
------- ------ ------
Total Stockholder's Equity ....................................................... $ 100,419 $ 74,164 $ 52,977
========= ========= =========
See accompanying notes to Consolidated Financial Statements.
</TABLE>
F-5
<PAGE>
<TABLE>
FARM FAMILY CASUALTY INSURANCE COMPANY AND SUBSIDIARY Statements of Consolidated
Cash Flows ($ in thousands)
<CAPTION>
Year ended December 31 1996 1995 1994
---- ---- ----
CASH FLOWS FROM OPERATING ACTIVITIES:
<S> <C> <C> <C>
Net income $7,098 $9,606 $3,526
------ ------ ------
Adjustments to reconcile net income to net cash provided by operating
activities:
Realized investment (gains) losses ........................................ 640 (912)
(1,340)
Amortization of bond discount ............................................. 134 62 77
Deferred income taxes ..................................................... (498) 581 596
Extraordinary item - demutualization expense .............................. 1,543 -- --
Changes in:
Reinsurance receivables ................................................... 3,030 1,254 1,910
Premiums receivable ....................................................... (872) (3,062) (2,732)
Deferred acquisition costs ................................................ (155) (1,856) (39)
Accrued investment income ................................................. (449) (213) (426)
Prepaid reinsurance premiums .............................................. (80) (58) (367)
Receivable from affiliates, net ........................................... (2,629) (3,293) 1,699
Other assets .............................................................. (57) 742 (803)
Reserves for losses and loss adjustment expenses .......................... 3,242 10,024 4,477
Unearned premium reserve .................................................. 3,146 3,956 4,541
Reinsurance premiums payable .............................................. (1,994) (1,394) 4
Accrued expenses and other liabilities .................................... 1,588 1,001 (2,030)
Income taxes payable ...................................................... -- -- (459)
------ ------ ----
Total adjustments ......................................................... 6,589 6,832 5,108
----- ----- -----
Net cash provided by operating activities before extraordinary item ....... 13,687 16,438 8,634
Extraordinary item - demutualization expense .............................. (1,543) -- --
------ ------ -----
Net cash provided by operating activities ................................. 12,144 16,438 8,634
------ ------ -----
CASH FLOWS FROM INVESTING ACTIVITIES
Proceeds from sales:
Fixed maturities available for sale ....................................... 5,670 28,466 26,100
Other invested assets ..................................................... 144 -- 732
Investment collections:
Fixed maturities available for sale ....................................... 9,405 15,435 16,025
Fixed maturities held to maturity ......................................... 2,561 514 418
Mortgage loans ............................................................ 77 68 58
Investment purchases:
Fixed maturities available for sale ....................................... (51,050) (58,339) (54,010)
Fixed maturities held to maturity ......................................... -- (1,598) (1,040)
Equity securities ......................................................... (2,042) -- --
Change in short-term investments, net ..................................... 4,550 (3,519) 90
Change in other invested assets ........................................... 344 480 3,186
Proceeds from sale of property and equipment .............................. -- -- 711
------- ------ ---
Net cash used in investing activities ..................................... (30,341) (18,493) (7,730)
------- ------- ------
CASH FLOWS FROM FINANCING ACTIVITIES
Capital contribution - Common Stock ....................................... 3,606 -- --
Capital contribution - Paid in Capital .................................... 16,321 -- --
Principal payments on debt ................................................ (32) (42) (34)
--- --- ---
Net cash provided by (used in) financing activities ....................... 19,895 (42) (34)
------ --- ---
Net increase (decrease) in cash ........................................... 1,698 (2,097) 872
Cash, beginning of year ................................................... 2,410 4,507 3,635
----- ----- -----
Cash, end of year ......................................................... $ 4,108 $ 2,410 $ 4,507
======== ======== ========
See accompanying notes to Consolidated Financial Statements.
</TABLE>
F-6
1. Summary of Significant Accounting Policies
Basis of Presentation:
The accompanying consolidated financial statements have been prepared in
conformity with generally accepted accounting principles and include the
accounts of Farm Family Casualty Insurance Company ("Farm Family Casualty") and
its wholly owned subsidiary, Rural Agency and Brokerage, Inc., ("RAB")
(collectively referred to as the "Company"). The Company is a wholly owned
subsidiary of Farm Family Holdings, Inc. All significant intercompany balances
and transactions have been eliminated. The preparation of financial statements
in accordance with generally accepted accounting principles requires management
to make estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosures of contingent assets and liabilities at the date of
the financial statements and the reported amounts of revenues and expenses
during the reporting period. Actual results could differ from those estimates.
The Company provides property and casualty insurance coverages to members
of the state Farm Bureau organizations in New York, New Jersey, Delaware, West
Virginia and all of the New England states. Membership in the state Farm Bureau
organizations is a prerequisite for voluntary insurance coverage, except for
employees of the Company and its affiliates.
The operations of the Company are closely related to its affiliates, Farm
Family Life Insurance Company ("Farm Family Life") and Farm Family Life's wholly
owned subsidiary, United Farm Family Insurance Company ("United Farm Family").
(see Note 10.) Farm Family Life is a stock life insurance company owned by the
state Farm Bureau organizations of the ten states in which the Company operates.
The Company and Farm Family Life are affiliated by common management, shared
agents and employees and similar Boards of Directors.
Investments:
Fixed maturities include bonds, redeemable preferred stocks and
mortgage-backed securities. Investments in fixed maturities which the Company
has both the ability and positive intent to hold to maturity are classified as
held to maturity and carried at amortized cost. Fixed maturities which may be
sold prior to their contractual maturity are classified as available for sale
and are carried at fair value. The difference between amortized cost and fair
value of fixed maturities classified as available for sale, net of deferred
income taxes, is reflected as a component of stockholder's equity.
Equity securities include common and non-redeemable preferred stocks which
are carried at fair value. The difference between cost and fair value of equity
securities, less deferred income taxes, is reflected as a component of
stockholder's equity.
Mortgage loans are carried at their outstanding principal balance.
The carrying values of all investments are reviewed on an ongoing basis. If
this review indicates a decline in fair value below cost is other than
temporary, the Company's carrying value in the investment is reduced to its
estimated realizable value and a specific write-down is taken. Such write-downs
are included in realized investment gains and losses.
Short-term investments are carried at cost which approximates fair value.
Investment income consists primarily of interest and dividends. Interest is
recognized on an accrual basis and dividends are recorded on the ex-dividend
date. Interest income on mortgage-backed securities is determined on the
effective yield method based on estimated principal repayments. Realized
investment gains and losses are determined on a specific identification basis.
Income Taxes:
The income tax provision is calculated under the liability method. Deferred
income tax assets and liabilities are recorded based on the difference between
the financial statement and tax bases of assets and liabilities and the enacted
tax rates. The principal assets and liabilities giving rise to such differences
are reserves for losses and loss adjustment expenses, unearned premium reserve,
and deferred acquisition costs. Deferred income taxes also arise from unrealized
investment gains or losses on equity securities and on fixed maturities
classified as available for sale.
F-7
<PAGE>
Property-Liability Insurance Accounting:
Premiums are deferred and earned on a pro rata basis over the terms of the
respective policies. Amounts paid for ceded reinsurance premiums are reported as
prepaid reinsurance premiums and amortized over the remaining contract period in
proportion to premium. Premiums receivable are recorded at cost less an
allowance for doubtful accounts.
Policy acquisition costs that vary with and are primarily related to the
production of business have been deferred. Deferred acquisition costs primarily
consist of agents' compensation, premium taxes, and certain other underwriting
expenses. Such deferred acquisition costs are amortized as premium revenue is
recognized. Deferred acquisition costs are limited to their estimated realizable
value, which gives effect to the premium to be earned, related investment
income, and losses and loss adjustment expenses expected to be incurred as the
premium is earned.
Reserves for losses and loss adjustment expenses represent estimates of the
ultimate amounts necessary to settle reported losses and a provision for
incurred but not reported claims of insured losses. The reserve estimates are
based on known facts and circumstances, including the Company's experience with
similar cases and historical trends involving reserving patterns, loss payments,
pending levels of unpaid claims and product mix, as well as other factors
including court decisions, economic conditions and public attitudes. The
reserves for losses and loss adjustment expenses include case basis estimates of
reported losses, estimates of incurred but not reported losses based upon prior
experience adjusted for current trends, and estimates of losses to be paid under
assumed reinsurance contracts. Estimated amounts of recoverable salvage and
subrogation are deducted from the reserves for losses and loss adjustment
expenses. The establishment of appropriate reserves, as well as related amounts
recoverable under reinsurance contracts is an inherently uncertain process.
Reserve estimates are regularly reviewed and updated, using the most current
information available. Any resulting adjustments, which may be material, are
reflected in current operations (see Note 7).
2. Plan of Reorganization and Conversion
On July 26, 1996, Farm Family Mutual Insurance Company ("Farm Family
Mutual") converted from a mutual property and casualty insurance company to a
stockholder owned property and casualty insurance company and changed its name
to Farm Family Casualty Insurance Company. The conversion was made pursuant to a
Plan of Reorganization and Conversion ("the Plan") which was approved by the
Superintendent of the New York State Insurance Department and approved by vote
of the policyholders. As part of the Plan, Farm Family Holdings was formed and
the policyholders received 2,237,000 shares of Farm Family Holdings common stock
and $11,735,000 in cash in exchange for their membership interest in Farm Family
Mutual. Farm Family Casualty issued 2,253,878 shares of common stock to Farm
Family Holdings, and became a wholly owned subsidiary of Farm Family Holdings in
accordance with the Plan.
On July 23, 1996 Farm Family Holdings made an initial public offering of
its common stock at a price of $16 per share. Farm Family Holdings received net
proceeds of $41,453,000 for 2,786,000 shares sold in the initial public
offering. In addition, Farm Family Holdings received $3,427,000 for 214,000
shares purchased by policyholders of Farm Family Mutual in a subscription
offering.
As part of the Plan, holders of Farm Family Mutual debt (see Note 8) could
elect to exchange their debt instruments for shares of stock or cash. As a
result, there were 17,000 shares and $1,107,000 in cash exchanged for debt with
an outstanding principal amount of $1,371,000 plus accrued interest thereon.
F-8
<PAGE>
3. Investments
The amortized cost, fair value and gross unrealized gains and losses of
available for sale securities and held to maturity securities at December 31,
1996 and 1995 are as follows:
<TABLE>
($ in thousands)
<CAPTION>
Amortized Gross Unrealized Fair
Cost Gains Losses Value
---- ----- ------ -----
<S> <C> <C> <C> <C>
1996
Available for Sale
- ------------------
Fixed maturities:
U.S. Government & Agencies ......................... $ 11,017 $ 367 $ 79 $ 11,305
States, Municipalities & Political Subdivisions .... 42,568 1,500 118 43,950
Corporate .......................................... 135,485 3,918 1,527 137,876
Mortgage-backed Securities ......................... 9,676 666 -- 10,342
Redeemable Preferred Stock ......................... 8,095 276 95 8,277
----- --- -- -----
Total fixed maturities ............................. 206,842 6,727 1,819 211,750
Equity securities .................................. 2,546 5,431 69 7,908
----- ----- -- -----
Total Available for Sale ........................... $209,388 $ 12,158 $ 1,888 $219,658
======== ======== ======== ========
Held to Maturity
- ----------------
Fixed maturities:
States, Municipalities & Political Subdivisions .... $ 5,423 $ 93 $ 34 $ 5,482
Corporate .......................................... 4,359 186 54 4,491
----- --- -- -----
Total Held to Maturity ............................. $ 9,782 $ 279 $ 88 $ 9,973
======== ======== ======== ========
1995
Available for Sale
- ------------------
Fixed maturities:
U.S. Government & Agencies ......................... $ 12,797 $ 596 $---- $ 13,393
States, Municipalities & Political Subdivisions .... 21,871 1,675 66 23,480
Corporate .......................................... 119,319 7,040 987 125,372
Mortgage-backed Securities ......................... 10,985 995 -- 11,980
Redeemable Preferred Stock ......................... 6,722 322 80 6,964
----- --- -- -----
Total fixed maturities ............................. 171,694 10,628 1,133 181,189
Equity securities .................................. 334 4,440 28 4,746
--- ----- -- -----
Total Available for Sale ........................... $172,028 $ 15,068 $ 1,161 $185,935
======== ======== ======== ========
Held to Maturity
- ----------------
Fixed maturities:
States, Municipalities & Political Subdivisions .... $ 5,925 $ 373 $---- $ 6,298
Corporate .......................................... 6,461 354 13 6,802
----- --- -- -----
Total Held to Maturity ............................. $ 12,386 $ 727 $ 13 $ 13,100
======== ======== ======== ========
</TABLE>
F-9
<PAGE>
The table below presents the amortized cost and fair value of fixed
maturities at December 31, 1996, by contractual maturity. Actual maturities may
differ from contractual maturities as a result of prepayments.
<TABLE>
($ in thousands)
<CAPTION>
Available for Sale Held to Maturity
------------------ ----------------
Amortized Fair Amortized Fair
Cost Value Cost Value
<S> <C> <C> <C> <C>
Due in one year or less ................ $ 771 $ 746 $ 350 $ 358
Due after one year through five years .. 23,073 23,743 917 923
Due after five years through ten years . 98,271 99,677 3,186 3,173
Due after ten years .................... 75,050 77,242 5,329 5,519
------ ------ ----- -----
197,165 201,408 9,782 9,973
Mortgage-backed securities ............. 9,676 10,342 -- --
----- ------ ----- -----
Total .................................. $203,841 $211,750 $ 9,782 $ 9,973
======== ======== ======== ========
</TABLE>
Unrealized investment gains and losses on fixed maturities classified as
available for sale and equity securities included in policyholders' equity at
December 31, 1996 are as follows:
<TABLE>
$ in thousands)
<CAPTION>
Cost/ Net
Amortized Fair Gross Unrealized Unrealized
Cost Value Gains Losses Gains
---- ----- ----- ------ -----
<S> <C> <C> <C> <C> <C>
Fixed maturities available for sale . $ 206,841 $ 211,750 $ 6,728 $ 1,819 $ 4,909
Equity securities ................... 2,546 7,908 5,431 69 5,362
----- ----- ----- -- -----
Total ............................... $ 209,387 $ 219,658 $ 12,159 $ 1,888 10,271
========= ========= ========= =========
Deferred income taxes ............... (3,595)
------
Total ............................... $ 6,676
=========
</TABLE>
The change in unrealized appreciation (depreciation) of investments
included in stockholders' equity for the years ended December 31, 1996, 1995 and
1994 was as follows:
<TABLE>
($ in thousands)
<CAPTION>
1996 1995 1994
---- ---- ----
<S> <C> <C> <C>
Fixed maturities available for sale $ (4,586) $ 17,197 $(17,236)
Equity securities ................. 950 802 477
Other invested assets ............. 63 (63) --
-- ---
(3,573) 17,936 (16,759)
Deferred income taxes ............. 1,251 (6,237) 5,698
----- ------ -----
$ (2,322) $ 11,699 $(11,061)
======== ======== ========
</TABLE>
The components of net investment income are as follows:
<TABLE>
($ in thousands)
<CAPTION>
1996 1995 1994
---- ---- ----
<S> <C> <C> <C>
Interest on fixed maturities ..... $ 15,492 $ 14,561 $ 13,546
Dividends from equity securities . 53 19 23
Interest on mortgage loans ....... 169 180 182
Interest on short-term investments 385 315 145
Other, net ....................... -- (406) (381)
------ ---- ----
Total investment income .......... 16,100 14,669 13,515
Investment expense ............... (467) (343) (325)
---- ---- ----
Net investment income ............ $ 15,633 $ 14,326 $ 13,190
======== ======== ========
</TABLE>
F-10
A summary of realized investment gains (losses), net as follows:
<TABLE>
($ in thousands)
<CAPTION>
1996 1995 1994
------ ------ ------
<S> <C> <C> <C>
Fixed maturities .... $ (567) $ 912 $1,241
Equity securities ... -- -- 99
Other invested assets (73) -- --
--- --- ---
$ (640) $ 912 $1,340
====== ====== ======
</TABLE>
4. Fair Value of Financial Instruments
The estimated fair value of financial instruments has been determined
using available market information and appropriate valuation
methodologies. The estimated fair value of financial instruments are
not necessarily indicative of the amounts the Company might pay or
receive in actual market transactions. Potential taxes and other
transaction costs have not been considered in estimating fair value. As
a number of the Company's significant assets (including deferred
acquisition costs, and deferred income taxes) and liabilities
(including reserves for losses and loss adjustment expenses) are not
considered financial instruments, the disclosures that follow do not
reflect the fair value of the Company as a whole.
The following table presents the carrying value and fair value of the
Company's financial instruments at December 31, 1996 and 1995.
<TABLE>
<CAPTION>
($ in thousands) 1996 1995
- ---------------- ---- ----
Carrying Fair Carrying Fair
Value Value Value Value
----- ----- ----- -----
Assets
- ------
<S> <C> <C> <C> <C>
Fixed maturities ......................... $221,532 $221,723 $193,575 $194,289
Equity securities ........................ 7,908 7,908 4,746 4,746
Mortgage loans ........................... 1,745 1,745 1,822 1,822
Cash and short-term investments .......... 6,090 6,090 8,942 8,942
Premiums receivable, net ................. 22,663 22,663 21,791 21,791
Receivable from affiliates, net .......... 16,489 16,489 13,860 13,860
Accrued investment income and other assets 6,535 6,535 6,940 6,940
Liabilities
- -----------
Accrued expenses and other liabilities ... 9,081 9,081 7,788 7,788
Debt ..................................... 1,304 1,304 2,707 2,707
</TABLE>
The following methods and assumptions were used in estimating the fair
value disclosures for the financial instruments:
Fixed maturities and equity securities -- The fair value is based
upon quoted market prices where available or from independent
pricing services.
Mortgage loans -- The fair value is based on discounted cash flows
using discount rates at which similar loans would be made to
borrowers with similar characteristics.
Cash and short-term investments -- Due to their short-term, highly
liquid nature, their carrying value approximates fair value.
Premiums Receivable, net; Accrued Investment Income and Other
Assets; Receivable from Affiliates, net; and Accrued Expenses and
Other Liabilities -- Due to their short-term nature, their carrying
value approximates fair value.
Debt -- The fair value is based on discounted cash flows using
current borrowing rates for similar debt arrangements.
F-11
5. Reinsurance
The Company assumes and cedes insurance to participate in the reinsurance
market, limit maximum losses and minimize exposure on large risks. Reinsurance
contracts do not relieve the Company from its obligations to policyholders as
the primary insurer. The Company evaluates the financial condition of its
reinsurers and monitors concentrations of credit risk arising from similar
geographic regions, activities and economic characteristics of the reinsurers to
minimize its exposure to significant losses from reinsurer insolvencies. Amounts
recoverable are regularly evaluated by the Company and an allowance for
uncollectible reinsurance is provided when collection is in doubt. At December
31, 1996 and 1995, the Company determined it was not necessary to provide an
allowance for uncollectible reinsurance.
The Company's reinsurance program also includes reinsurance agreements with
United Farm Family. (see Note 10.) The effects of reinsurance on premiums
written and earned, and losses and loss adjustment expenses incurred, for the
years indicated were as follows:
<TABLE>
<CAPTION>
Year Ended
December 31,
($ in thousands)
1996 1995 1994
--------- --------- ---------
<S> <C> <C> <C>
Premiums written
Direct ........................................... $ 146,408 $ 135,963 $ 122,039
Assumed .......................................... 6,462 6,261 7,577
Ceded to United Farm Family ...................... (9,336) (9,237) (9,776)
Ceded to non-affiliates .......................... (9,690) (12,153) (14,226)
------ ------- -------
Premiums written, net of reinsurance ............. $ 133,844 $ 120,834 $ 105,614
========= ========= =========
Premiums earned
Direct ........................................... $ 142,794 $ 131,717 $ 117,384
Assumed .......................................... 6,931 6,552 7,690
Ceded to United Farm Family ...................... (9,334) (9,238) (9,750)
Ceded to non-affiliates .......................... (9,611) (12,095) (13,858)
------ ------- -------
Premiums earned, net of reinsurance .............. $ 130,780 $ 116,936 $ 101,466
========= ========= =========
Losses and loss adjustment expenses incurred
Direct ........................................... $ 99,954 $ 91,176 $ 91,467
Assumed .......................................... 4,630 4,658 4,513
Ceded to United Farm Family ...................... (7,277) (6,604) (7,378)
Ceded to non-affiliates .......................... (2,330) (6,046) (5,922)
------ ------ ------
Losses and loss adjustment expenses incurred,
net of reinsurance ............................... $ 94,977 $ 83,184 $ 82,680
========= ========= =========
</TABLE>
6. Income Taxes
The components of the deferred income tax assets and liabilities at
December 31, 1996 and 1995 are as follows:
<TABLE>
($ in thousands)
<CAPTION>
Deferred Income Tax Assets 1996 1995
------- -------
<S> <C> <C>
Reserves for losses and loss adjustment expenses .......... $ 4,423 $ 4,444
Unearned premium reserve .................................. 3,774 3,559
Accrued expenses and other liabilities .................... 789 474
Investments ............................................... 148 68
--- --
Total deferred income tax assets .......................... 9,134 8,545
----- -----
Deferred Income Tax Liabilities
Deferred acquisition costs ................................ 3,739 3,685
Unrealized investment gains, net .......................... 3,595 4,846
Other assets .............................................. 269 231
Total deferred income tax liabilities ..................... 7,603 8,762
----- -----
Net deferred income tax asset (liability) ................. $ 1,531 $ (217)
======= =======
</TABLE>
F-12
There was no valuation allowance for deferred income tax assets as of
December 31, 1996 or 1995. In assessing the realization of deferred tax assets,
management considers whether it is more likely than not that the deferred tax
assets will be realized. Management primarily considered the existence of
taxable income in the carryback period in making this assessment and believes
the benefits of the deductible differences recognized as of December 31, 1996
and 1995 will ultimately be realized.
The components of income tax expense (benefit) are as follows:
<TABLE>
($ in thousands)
<CAPTION>
Year Ended December 31,
1996 1995 1994
------- ------- -------
<S> <C> <C> <C>
Current ................ $ 4,268 $ 4,403 $ 851
Deferred ............... (498) 581 596
Total income tax expense $ 3,770 $ 4,984 $ 1,447
</TABLE>
The Company paid income taxes of $4,592,000, $3,952,000 and $2,209,000 in
1996, 1995 and 1994 respectively. A reconciliation of the differences between
the Company's effective rates of tax and the United States federal income tax
rates follows:
<TABLE>
<CAPTION>
Year Ended December 31,
($ in thousands) % of % of % of
Pretax Pretax Pretax
1996 Income 1995 Income 1994 Income
---- ------ ---- ------ ---- ------
<S> <C> <C> <C> <C> <C> <C>
Income tax provision at prevailing rates $ 4,243 34.19% $ 5,006 34.31% $ 1,691 34.00%
Tax effect of:
Tax exempt interest income ............. (107) (.86) (11) (.08) (67) (1.35)
Dividends received deduction ........... (156) (1.26) (148) (1.01) (140) (2.81)
Other, net ............................. (210) (1.69) 137 .94 (37) (.74)
---- ----- --- --- --- ----
Federal income tax expense ............. $ 3,770 30.38% $ 4,984 34.16% $ 1,447 29.10%
======= ===== ======= ===== ======= =====
</TABLE>
7. Reserves for Losses and Loss Adjustment Expenses
As described in Note 1, the Company establishes reserves for losses and
loss adjustment expenses on reported and incurred but not reported claims of
insured losses. The establishment of appropriate reserves for losses and loss
adjustment expenses is an inherently uncertain process and the ultimate cost may
vary materially from the recorded amounts. Reserve estimates are regularly
reviewed and updated, using the most current information. Any resulting
adjustments, which may be material, are reflected in current operations.
F-13
The following table provides a reconciliation of beginning and ending
liability balances for reserves for losses and loss adjustment expenses for the
years ended December 31, 1996, 1995 and 1994.
<TABLE>
<CAPTION>
Year Ended December 31,
-----------------------
1996 1995 1994
---- ---- ----
($ in thousands)
<S> <C> <C> <C>
Reserves for losses and loss adjustment
expenses at beginning of year .............................. $ 137,978 $ 127,954 $ 123,477
Less reinsurance recoverables and receivables .............. 28,655 28,230 28,761
------ ------ ------
Net reserves for losses and loss adjustment
expenses at beginning of year .............................. 109,323 99,724 94,716
------- ------ ------
Incurred losses and loss adjustment expenses:
Provision for insured events of current year ............... 100,418 88,366 86,370
Decrease in provision for
insured events of prior years .............................. (5,441) (5,182) (3,690)
------ ------ ------
Total incurred losses and loss adjustment expenses ......... 94,977 83,184 82,680
------ ------ ------
Payments:
Losses and loss adjustment expenses
attributable to insured events of current year ............. 50,122 40,519 43,232
Losses and loss adjustment expenses
attributable to insured events of prior years .............. 39,795 33,066 34,440
------ ------ ------
Total Payments: ............................................ 89,917 73,585 77,672
------ ------ ------
Net reserves for losses and loss
adjustment expenses at end of year ......................... 114,383 109,323 99,724
Plus reinsurance recoverables and receivables .............. 26,837 28,655 28,230
------ ------ ------
Reserves for losses and loss adjustment
expenses at end of year .................................... $ 141,220 $ 137,978 $ 127,954
========= ========= =========
</TABLE>
The Company does not discount reserves for losses and loss adjustment
expenses except for certain lifetime workers' compensation indemnity reserves
assumed from mandatory pools. The amount of such discounted reserves was
$4,184,000 (net of a discount of $1,185,000), $4,754,000 (net of a discount of
$1,192,000) and $4,876,000 (net of a discount of $1,217,000) for December 31,
1996, 1995 and 1994, respectively.
8. Debt
At December 31, 1996, debt consists of $301,000 of debentures and
$1,003,000 of subordinated surplus certificates. The debentures and subordinated
surplus certificates bear interest at the rate of 8% per annum, have no maturity
date, and principal and interest are repayable only with the approval of the
Insurance Department of the State of New York. No single holder holds more than
5% of the outstanding debentures or subordinated surplus certificates. The
Company paid interest of $279,000, $217,000 and $220,000 for the years ended
December 31, 1996, 1995 and 1994, respectively.
At December 31, 1996, the Company had an available line of credit with a
bank for $2,000,000. There were no amounts outstanding on this line of credit at
December 31, 1996.
F-14
9. Benefits Plans
Pension Plan:
The Company and Farm Family Life sponsor a qualified
multi-employer noncontributory defined benefit pension plan covering
substantially all of the Company's and Farm Family Life's full-time employees
who meet the eligibility requirements. Benefits under the pension plan are
primarily based upon the employee's length of service and the employee's average
compensation for certain periods during the last years of employment. The
Company's funding policy for its defined benefit pension plan is to make annual
contributions in accordance with accepted actuarial cost methods subject to
regulatory funding limitations. Effective January 1, 1997, the Company and Farm
Family Life froze benefits available through the defined benefit plan. In
addition, the Company implemented a voluntary early retirement program in the
fourth quarter of 1996. (See note 13).
The net pension expense for the plan is as follows:
<TABLE>
<CAPTION>
($ in thousands) Year Ended December 31,
1996 1995 1994
------- ------- -------
<S> <C> <C> <C>
Service cost ................................ $ 869 $ 708 $ 777
Interest cost on projected benefit obligation 1,411 1,384 1,225
Actual return on plan assets ................ (854) (1,844) (401)
Net amortization (deferral) ................. (447) 632 (756)
Voluntary early retirement program .......... 2,069 -- --
----- ------ ------
Total pension expense ....................... $ 3,048 $ 880 $ 845
======= ======= =======
</TABLE>
The Company's portion of net periodic pension expense, excluding the
expense of the voluntary early retirement program for the years ended December
31, 1996, 1995 and 1994 was $607,000, $537,000 and $516,000, respectively. In
addition, the Company's portion of the expense related to the voluntary early
retirement program was $1,135,000 for 1996.
Assumptions used in the determination of pension obligations and assets
were:
<TABLE>
<CAPTION>
Year Ended December 31,
1996 1995 1994
------- ------- -------
<S> <C> <C> <C>
Weighted-average discount rate ................. 7.00% 6.40% 7.90%
Rate of increase in compensation levels ........ 4.00% 3.40% 4.90%
Expected long-term rate of return on plan assets 8.00% 8.00% 8.00%
</TABLE>
The following table summarizes the funded status of the pension plan:
Year Ended December 31,
<TABLE>
<CAPTION>
1996 1995
-------- --------
($ in thousands)
Actuarial present value of benefit obligations:
<S> <C> <C>
Vested .................................................... $ 21,075 $ 17,901
Nonvested ................................................. -- 338
------ ---
Accumulated benefit obligation ............................ 21,075 18,239
Effect of projected future salary increases on past service -- 3,204
------ -----
Projected benefit obligation .............................. 21,075 21,443
Plan assets at fair value ................................. 18,881 17,112
------ ------
Projected benefit obligation in excess of plan assets ..... $ (2,194) $ (4,331)
======== ========
</TABLE>
F-15
<PAGE>
The accrued pension liability of the plan was as follows:
<TABLE>
<CAPTION>
Year Ended December 31,
1996 1995
------- -------
($ in thousands)
<S> <C> <C>
Projected benefit obligation in excess of plan assets .. $(2,194) $(4,331)
Unrecognized prior service asset ....................... -- 114
Unrecognized net gain from past
experience different from that assumed ................. -- 3,880
Unrecognized net asset at transition ................... -- (558)
Minimum liability adjustment ........................... -- (232)
------ ----
Accrued pension liability .............................. $(2,194) $(1,127)
======= =======
</TABLE>
Incentive Savings Plan:
The Company and Farm Family Life sponsor an employee incentive savings plan
which is qualified under Section 401(k) of the Internal Revenue Code. Under the
provisions of this plan, employees may contribute 1% to 16% of their eligible
compensation, with up to 6% being eligible for matching contributions from the
Company. In addition, the Company contributed 1% of eligible compensation up to
$240 to the plan for all eligible employees in 1996, 1995 and 1994. Effective
January 1, 1997, the Company will contribute 3% of the eligible compensation to
the plan and a matching 25% of the first 6% of eligible compensation deferred by
each eligible employee. Also, the Company may elect to make additional
discretionary contributions to the plan. The Company's expense associated with
the plan was $182,000, $138,000 and $155,000 in 1996, 1995 and 1994,
respectively.
Postretirement Benefits Other Than Pensions:
The Company and Farm Family Life provide life insurance benefits for
retired employees meeting certain age and length of service requirements. The
Company's postretirement benefit plan is currently unfunded and noncontributory.
Benefits under the postretirement benefit plan are provided by a group term life
insurance policy.
Effective January 1, 1995, the Company adopted SFAS No. 106, "Employers'
Accounting for Postretirement Benefits Other than Pensions", which changed the
accounting for the Company's postretirement benefit plan from a cash basis by
requiring accrual of the expected cost of providing benefits under the plan
during the years that the employee renders the necessary service to the Company.
Net periodic postretirement benefit expense for the plan included the
following:
<TABLE>
<CAPTION>
Year Ended December 31,
($ in thousands)
1996 1995
---- ----
<S> <C> <C>
Service cost ........................... $ 27 $ 37
Interest cost .......................... 63 73
Return on assets ....................... -- --
Amortization of transition obligation .. 47 47
Voluntary early retirement program ..... 41 --
-- ----
Total .................................. $178 $157
==== ====
</TABLE>
The Company incurred postretirement benefit expenses on a cash basis of
$6,000 for the year ended December 31, 1994. The Company's portion of net
periodic postretirement benefit expense, excluding the expense related to the
voluntary early retirement program, for each of the years ended December 31,
1996 and 1995 was $66,000. In addition, the Company's portion of the expense
related to the voluntary early retirement program was $22,000 for 1996.
F-16
<PAGE>
Tthe plan's postretirement benefit obligation reconciled with the plan's
funded status and the amount recognized in the Company's consolidated balance
sheets was as follows:
<TABLE>
<CAPTION>
Year Ended December 31,
($ in thousands)
1996 1995
---- ----
<S> <C> <C>
Accumulated postretirement benefit obligation:
Retirees ......................................................... $ (487) $ (534)
Other fully eligible plan participants ........................... (182) (260)
Other active plan participants ................................... (293) (452)
---- ----
Obligation at year-end ........................................... (962) (1,246)
Plan assets ...................................................... -- --
----- -----
Funded status .................................................... (962) (1,246)
Unrecognized transition obligation ............................... 805 893
Unrecognized net loss ............................................ (95) 238
--- ---
Accrued postretirement benefit liability at year-end ............. $ (252) $ (115)
======= =======
</TABLE>
The discount rate used to determine the accumulated postretirement benefit
obligation was 7.0% at December 31, 1996 and 6.4% at December 31, 1995.
10. Related Party Transactions
The operations of the Company are closely related with those of Farm Family
Life and Farm Family Life's wholly owned subsidiary, United Farm Family, and
with the Company's parent, Farm Family Holdings. The affiliated Companies
operate under similar Boards of Directors and have similar senior management.
The affiliated Companies share home office premises, branch office facilities,
data processing equipment, certain personnel and other operational expenses.
Expenses are shared based on each Company's estimated level of usage. The gross
shared expenses and the Company's share of such expenses is summarized below:
($ in thousands)
Company's Share
---------------
Gross Shared
Year Ended December 31, Expenses Amount Percentage
- ----------------------- -------- ------ ----------
1996 $30,689 $19,379 63%
1995 26,650 16,182 61
1994 23,833 14,402 60
Farm Family Life held $813,000 of the Company's debentures in 1994 and
1995. In July 1996 the Company repurchased the debentures owned by Farm Family
Life for the principal amount of $813,000 plus accrued interest of $37,000. The
Company incurred interest expense of $37,000 in 1996 and $65,000 in 1995 and
1994 on the debentures held by Farm Family Life. During 1994, the Company sold
its data processing equipment to Farm Family Life at net book value.
The Company's reinsurance program includes reinsurance agreements with
United Farm Family. In accordance with the provisions of these reinsurance
agreements, the Company recognized commission income (expenses) of approximately
$191,000, $2,000, and ($39,000) during the years ended December 31, 1996, 1995
and 1994, respectively. A summary of the effect of the reinsurance agreements
with United Farm Family on premiums written and earned is described in Note 5.
Receivable from affiliates represents amounts due from United Farm Family
pursuant to a reinsurance agreement and amounts due from Farm Family Holdings,
Farm Family Life and United Farm Family for shared expenses.
F-17
Currently, Farm Family Life and its wholly owned subsidiary, United Farm
Family, prepare their financial statements in accordance with statutory
accounting practices. Such practices vary significantly from generally accepted
accounting practices. The following financial information was derived from the
statutory basis financial statements for Farm Family Life and United Farm Family
as of and for the year ended December 31, 1996:
<TABLE>
<CAPTION>
Total Statutory Net
($ in thousands) Assets Surplus Income
- ---------------- ------ ------- ------
<S> <C> <C> <C>
Farm Family Life . $721,129 $ 74,081 $ 8,111
United Farm Family 31,378 13,571 2,134
</TABLE>
11. Dividends to Stockholders and Statutory Financial Information
The Company is restricted by law as to the amount of dividends it can pay
to stockholders without the approval of regulatory authorities.
Net income and surplus of the Company, as determined in accordance with
statutory accounting practices are as follows:
<TABLE>
<CAPTION>
($ in thousands) 1996 1995 1994
---- ---- ----
<S> <C> <C> <C>
Net income $7,221 $6,735 $3,196
Surplus 83,194 55,916 42,870
</TABLE>
The National Association of Insurance Commissioners ("NAIC") has adopted
risk based capital ("RBC") requirements that require insurance companies to
calculate and report information under a risk-based formula which measures
statutory capital and surplus needs based on a regulatory definition of risk in
a company's mix of products and its balance sheet. The implementation of RBC is
not expected to affect the operations of the Company since its Total Adjusted
Capital exceeds the threshold level of regulatory action, as defined by the
NAIC.
12. Commitments, Contingencies and Uncertainties
The Company is party to numerous legal actions arising in the normal course
of business. Management believes that resolution of these legal actions will not
have a material adverse effect on its consolidated financial condition.
Catastrophes are an inherent risk in the property and casualty insurance
industry and could produce significant adverse fluctuations in the Company's
results of operations and financial condition. Since the Company operates
primarily within the Northeastern U.S., it is subject to a concentration of risk
within this geographic region. For the years ended December 31, 1996, 1995 and
1994, approximately 61%, 60% and 58%, respectively, of the Company's direct
written premiums were derived from policies written in the states of New York
and New Jersey. The Company uses its reinsurance program to mitigate the impact
on net income of large or unusual losses and loss adjustment expense activity.
However, the Company is required by law to participate in a number of
involuntary reinsurance pools and such pools may from time to time experience
deficits which could result in losses to the Company.
The Company is a party to a Membership List Purchase Agreement with each of
the state Farm Bureaus in the ten states in which it conducts business. The
Membership List Purchase Agreements are for six years commencing on January 1,
1996. For the year ended December 31, 1996, the Company paid a total of $571,000
to the Farm Bureaus pursuant to the Membership List Purchase Agreements. For the
years ended December 31, 1995 and 1994, the Company paid $547,000 and $516,000,
respectively, to the Farm Bureaus under substantially similar Membership List
Purchase Agreements in effect for such periods.
Pursuant to an agreement between the Company and its agents and agency
managers, subject to certain conditions including length of service and
profitability, certain agents and agency managers are eligible to receive
monthly extended earnings payments for a period of up to eight years subsequent
to the termination of their association with the Company. Historically, such
payments have been funded from commissions earned on the agent's or agency
manager's book of business subsequent to the termination of the agent's
association with the Company in accordance with the Company's agreement with the
successor agents and agency managers. In the event that such commissions are
insufficient to fund the extended earnings payments, the Company would be
responsible for such payments. The aggregate outstanding amount of the extended
earnings payments which former agents and agency managers are entitled to
receive for a period of up to eight years subsequent to December 31, 1996 is
$3,341,000.
F-18
13. Extraordinary Item and Non-Recurring Expenses
During 1996, the Company incurred expenses of $1,543,000 related to the
demutualization of Farm Family Mutual which the Company has identified as an
extraordinary item. These expenses consisted primarily of printing, postage, and
legal costs.
Pursuant to the Statement of Financial Accounting Standards No. 87,
"Employers' Accounting for Pensions", the Company recorded a non-recurring
expense, net of an income tax benefit of $405,000, of $752,000, for the
Company's share of the costs of a voluntary early retirement program offered to
certain eligible employees in 1996. Eligibility for the program was based on age
and years of service.
F-19
<PAGE>
FARM FAMILY CASUALTY INSURANCE COMPANY AND SUBSIDIARY
INDEX TO FINANCIAL STATEMENT SCHEDULES
Year Ended December 31, 1996
The following additional financial statement schedules are furnished herewith
pursuant to the requirements of Form 10-K.
Page
----
Schedule I Summary of Investments -
Other than Investments in Related Parties S-2
Schedule IV Reinsurance S-3
Schedule VI Supplemental Information Concerning
Property - Casualty Insurance Operations S-4
S-1
<PAGE>
<TABLE>
FARM FAMILY CASUALTY INSURANCE COMPANY AND SUBSIDIARY
SCHEDULE 1 - SUMMARY OF INVESTMENTS
OTHER THAN INVESTMENTS IN RELATED PARTIES
DECEMBER 31, 1996
($ in thousands)
Amortized Balance Sheet
<CAPTION>
Type of Investment Cost Fair Value Carrying Value
- ------------------ ---- ---------- --------------
<S> <C> <C> <C>
Available for sale
- ------------------
Fixed maturities:
United States Government and government agencies ................... $ 11,017 $ 11,305 $ 11,305
States, municipalities and political subdivisions .................. 42,568 43,950 43,950
Public utilities ................................................... 26,244 26,233 26,233
Corporate .......................................................... 109,241 111,643 111,643
Mortgage-backed .................................................... 9,676 10,342 10,342
Redeemable preferred stock ......................................... 8,095 8,277 8,277
----- ----- -----
Total fixed maturities ............................................. 206,841 211,750 211,750
------- ------- -------
Equity securities:
Common stocks:
Public utilities ................................................... 1,219 1,314 1,314
Banks, trusts and insurance companies .............................. 244 5,490 5,490
Industrial and miscellaneous ....................................... 1,083 1,104 1,104
----- ----- -----
Total equity securities ............................................ 2,546 7,908 7,908
----- ----- -----
Total available for sale ........................................... 209,387 219,658 219,658
======= ======= =======
Held to maturity
- ----------------
States, municipalities and political subdivisions .................. 5,423 5,482 5,423
Corporate .......................................................... 4,359 4,491 4,359
----- ----- -----
Total held to maturity ............................................. 9,782 9,973 9,782
===== ===== =====
Mortgage loans on real estate ...................................... 1,745 1,745 1,745
Short-term investments ............................................. 1,982 1,982 1,982
Other invested assets .............................................. 748 748 748
--- --- ---
Total investments .................................................. $223,644 $234,106 $233,915
======== ======== ========
</TABLE>
S-2
<PAGE>
<TABLE>
FARM FAMILY CASUALTY INSURANCE COMPANY AND SUBSIDIARY
SCHEDULEIV - REINSURANCE
($ in Thousands)
<CAPTION>
Earned Premiums
---------------- Percentage
Ceded to Assumed of Amount
Gross Other From Other Assumed to
Amount Companies Companies Net Amount Net
------ --------- --------- ---------- ---
<S> <C> <C> <C> <C> <C>
Year Ended December 31, 1996
Property/Casualty Insurance $142,794 $ 18,945 $ 6,931 $130,780 5.3%
Year Ended December 31, 1995
Property/Casualty Insurance 131,717 21,333 6,552 116,936 5.6%
Year Ended December 31, 1994
Property/Casualty Insurance 117,384 23,608 7,690 101,466 7.6%
</TABLE>
S-3
<PAGE>
<TABLE>
FARM FAMILY CASUALTY INSURANCE COMPANY AND SUBSIDIARY
SCHEDULE VI
SUPPLEMENTAL INFORMATION CONCERNING CONSOLIDATED
PROPERTY-CASUALTY INSURANCE OPERATIONS
($ in thousands)
<CAPTION>
Claims
& Claim
Reserve for Adjustment
Unpaid Expense
Claims Incurred Amortization Paid Claims
Deferred & Claim Discount Net Related to of Deferred and Claim
Acquisition Adjustment if any Unearned Earned Investment Current Prior Acquisition Adjustment Premium
Costs Expenses Deducted Premiums Premiums Income Year Year Costs Expenses Written
Affiliation with
Registrant
- ---------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Year Ended
December 31, 1996
Property and
Casualty business $ 10,682 $141,220 $55,945 $130,780 $15,633 $100,418 $(5,441) $26,348 $89,917 $133,844
Year Ended
December 31, 1995
Property and
Casualty business 10,527 137,978 52,799 116,936 14,326 88,366 (5,182) 23,162 73,585 120,834
Year Ended
December 31, 1994
Property and
Casualty business 8,671 127,954 48,843 101,466 13,190 86,370 (3,690) 19,469 77,672 105,614
</TABLE>
S-5
<PAGE>
<TABLE>
EXHIBIT INDEX
FARM FAMILY CASUALTY INSURANCE COMPANY FORM 10-K
FOR THE YEAR ENDED DECEMBER 31, 1996
<CAPTION>
Sequential
Page Number
Exhibit Number Document Description
<S> <C>
*2.1 Plan of Reorganization and Conversion dated February 14,
1996 as amended by Amendment No. 1, dated April 23, 1996
10.2 Amended and Restated Expense Sharing Agreement, made effective
as of February 14, 1996, by and among Farm Family Casualty
Insurance Company, Farm Family Life Insurance Company and Farm
Family Holdings, Inc. incorporated by reference to Farm Family
Holdings, Inc. Form 10-K for the fiscal year ended December 31,
1996
*10.3 Indenture of Lease, made the 1st day of January 1988, between Farm
Family Life Insurance Company and Farm Family Mutual Insurance
Company as amended by the Amendment to
Lease, effective January 1, 1994
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. Form 10-K
for the fiscal year ended December 31, 1996
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. Form 10-K for the fiscal year ended December 31,
1996
*10.6 Excess Catastrophe Reinsurance Contract effective January 1,
1996, issued to Farm Family Mutual Insurance Company
*10.7 Assumption Agreement, commencing January 1, 1995, between
Farm Family Mutual Insurance Company and United Farm Family
Insurance Company
*10.8 Service Agreement, made effective as of July 25, 1988 by and
between Farm Family Mutual Insurance Company and United Farm
Family Insurance Company
*10.9 Form of Membership List Purchase Agreement between Farm Family
Mutual Insurance Company and each of the Farm Bureaus
*10.10 Farm Family Mutual Insurance Company 8% Subordinated Surplus
Certificate, as amended by Certificate of Amendment No. 1 and
Trust Indenture, dated as of December 29, 1976 relating to the 8%
Subordinated Surplus Certificates
*10.11 Farm Family Mutual Insurance Company 5% Debenture, as amended by
Certificate of Amendment, effective January 1, 1969, Certificate
of Amendment No. 2, effective January 1, 1979, Certificate of
Amendment No. 3 and Supplemental Trust Indenture, dated as of
August 25, 1955 Amending Trust Indenture, dates as of May 16, 1955
Relating to The 5% Debentures, as amended by Certificate of
Amendment, dated as of August 25, 1955, Certificate of Amendment
No. 2, dated as of August 25, 1955, Certificate of Amendment No. 3
dated as of August 25, 1955
E-1
<PAGE>
Sequential
Page Number
Exhibit Number Document Description
*10.12 Farm Family Mutual Insurance Company Officer Severance Pay Plan,
adopted effective August 1, 1994
*10.13 Farm Family Mutual Insurance Company Supplemental Employee
Retirement Plan, adopted as of January 1, 1994
10.17 Farm Family Supplemental Savings and Profit Sharing Plan effective
January 1, 1997 incorporated by reference to Farm Family Holdings,
Inc. Form 10-K for the fiscal year ended December 31, 1996
10.18 Tax Payment Allocation Agreement Farm Family Holdings, Inc. and
Subsidiary effective January 1, 1996 by and between Farm Family
Holdings, Inc. and Farm Family Casualty Insurance Company
incorporated by reference to Farm Family Holdings, Inc. Form 10-K
for the fiscal year ended December 31, 1996
21 Subsidiaries of the Registrant
*Incorporated by reference to Registration Statement No. 333-4446
</TABLE>
E-2
<PAGE>
FARM FAMILY CASUALTY INSURANCE COMPANY
EXHIBIT 21
SUBSIDIARIES OF THE REGISTRANT
Subsidiaries State
- ------------ -----
Rural Agency and Brokerage, Inc. ("RAB") is a wholly owned
subsidiary of Farm Family Casualty Insurance Company 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
E-3
<PAGE>
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 CASUALTY INSURANCE COMPANY
By: /s/ Philip P. Weber
----------------------------
Philip P. Weber, President
March 21, 1997
<PAGE>
<TABLE>
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.
<S> <C> <C> <C>
President and CEO
/s/ Philip P. Weber (Principal Executive Officer) /s/ Arthur D. Keown, Jr. Director
- ------------------- ----------------------------- ------------------------ --------
Philip P. Weber March 6, 1997 Arthur D. Keown, Jr. March 6, 1997
Executive Vice President-Finance
(Principal Financial & Accounting
/s/ Timothy A. Walsh Officer) /s/ Daniel R. LaPointe Director
- -------------------- -------- ---------------------- --------
Timothy A. Walsh March 6, 1997 Daniel R. LaPointe March 6, 1997
/s/ Robert L. Baker Director /s/ John W. Lincoln Director
- ------------------- -------- ------------------- --------
Robert L. Baker March 6, 1997 John W. Lincoln March 6, 1997
/s/ Randolph L. Blackmer, Jr. Director /s/ Wayne A. Mann Director
- ----------------------------- -------- ----------------- --------
Randolph C. Blackmer, Jr. March 6, 1997 Wayne A. Mann March 6, 1997
/s/ Fred G. Butler, Sr. Director /s/ Frank W. Matheson Director
- ----------------------- -------- --------------------- --------
Fred G. Butler, Sr. March 6, 1997 Frank W. Matheson March 6, 1997
/s/ Joseph E. Calhoun Director /s/ Norma R. O'Leary Director
- --------------------- -------- -------------------- --------
Joseph E. Calhoun March 6, 1997 Norma R. O'Leary March 6, 1997
/s/ James V. Crane Director Director
- ------------------ -------- ------------------------ --------
James V. Crane March 6, 1997 John I. Rigolizzo, Jr. March 6, 1997
/s/ Stephen J. George Director /s/ Harvey T. Smith Director
- --------------------- -------- ------------------- --------
Stephen J. George March 6, 1997 Harvey T. Smith March 6, 1997
Director /s/ William M. Stamp, Jr. Director
- ------------------ -------- ------------------------- --------
Gordon H. Gowen March 6, 1997 William M. Stamp, Jr. March 6, 1997
/s/ Jon R. Greenwood Director /s/ Charles A. Wilfong Director
- -------------------- -------- ---------------------- --------
Jon R. Greenwood March 6, 1997 Charles A. Wilfong March 6, 1997
/s/ Clark W. Hinsdale III Director /s/ Tyler P. Young Director
- ------------------------- -------- ------------------ --------
Clark W. Hinsdale III March 6, 1997 Tyler P. Young March 6, 1997
/s/ Richard A. Jerome Director
- --------------------- --------
Richard A. Jerome March 6, 1997
</TABLE>
WARNING: THE EDGAR SYSTEM ENCOUNTERED ERROR(S) WHILE PROCESSING THIS SCHEDULE.
<TABLE> <S> <C>
<ARTICLE> 7
<CIK> 0000277269
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-END> DEC-31-1996
<DEBT-HELD-FOR-SALE> 211,750
<DEBT-CARRYING-VALUE> 9,782
<DEBT-MARKET-VALUE> 9,973
<EQUITIES> 7,908
<MORTGAGE> 1,745
<REAL-ESTATE> 0
<TOTAL-INVEST> 233,915
<CASH> 4,108
<RECOVER-REINSURE> 10,743
<DEFERRED-ACQUISITION> 10,682
<TOTAL-ASSETS> 308,610
<POLICY-LOSSES> 141,220
<UNEARNED-PREMIUMS> 55,945
<POLICY-OTHER> 9,081
<POLICY-HOLDER-FUNDS> 6,012
<NOTES-PAYABLE> 1,304
0
0
<COMMON> 3,606
<OTHER-SE> 90,801
<TOTAL-LIABILITY-AND-EQUITY> 308,610
130,780
<INVESTMENT-INCOME> 15,633
<INVESTMENT-GAINS> (640)
<OTHER-INCOME> 905
<BENEFITS> 94,977
<UNDERWRITING-AMORTIZATION> 37,593
<UNDERWRITING-OTHER> 0
<INCOME-PRETAX> 12,411
<INCOME-TAX> 3,770
<INCOME-CONTINUING> 8,641
<DISCONTINUED> 0
<EXTRAORDINARY> 1,543
<CHANGES> 0
<NET-INCOME> 7,098
<EPS-PRIMARY> 2.65
<EPS-DILUTED> 2.65
<RESERVE-OPEN> 137,978
<PROVISION-CURRENT> 100,418
<PROVISION-PRIOR> (5,441)
<PAYMENTS-CURRENT> 50,122
<PAYMENTS-PRIOR> 39,795
<RESERVE-CLOSE> 141,220
<CUMULATIVE-DEFICIENCY> 5,441
</TABLE>
