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, 1997
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 /X/ No / /
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K.
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.
The registrant meets the conditions set forth in General Instruction I(1)(a) and
(b) of Form 10-K and is therefore filing this Form 10-K with reduced disclosure
format.
<PAGE>
PART I
ITEM 1. BUSINESS
Overview
Farm Family Casualty Insurance Company (referred to herein as the "Company"
or "Farm Family Casualty") 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 ("Farm Family Life"), an affiliate of the Company. 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 it serves. These agents generally sell insurance products primarily
for the Company and Farm Family Life. 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.
The Company also offers 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 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 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.
2
<PAGE>
Related Party Transactions
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 (see "Relationship with Farm Bureaus"). Many
of the directors of the Company are also directors or executive officers of the
state Farm Bureau organizations in the ten states in which the Company operates.
The operations of the Company are closely related with those of its
affiliates, Farm Family Life and United Farm Family Insurance Company ("United
Farm Family"). The affiliated companies operate under similar Boards 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 Farm Family Life 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 Farm Family Life. 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 Farm Family Life, as
applicable, at cost. In 1995, the parties shared expenses under a similar
expense sharing agreement. For each of the years ended December 31, 1997 and
1996, 61% and 63%, respectively, of aggregate operating expenses totaling $29.4
million and $30.7 million, respectively, were allocated to the Company, under
the Expense Sharing Agreement. For the year ended December 31, 1995, 61% of
aggregate operating expenses totaling $26.7 million was allocated to the Company
under a similar expense sharing arrangement.
The Company and Farm Family Life 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 Farm Family Life. Annual
rent under the Lease Agreement was approximately $760,000, $712,000, and
$687,000 for each of the years ended December 31, 1997, 1996, and 1995,
respectively.
The Company and United Farm Family are parties to a service
agreement dated July 25, 1988 (the "Service Agreement") pursuant to which the
Company provides United Farm Family 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 Farm
Family with certain personnel, property, equipment and facilities for its
operations. For each of the years ended December 31, 1997, 1996, and 1995, Farm
Family Casualty charged United Farm Family approximately $0.5 million, $0.7
million, and $0.8 million, respectively, in direct and allocated expenses and
overhead under the Service Agreement.
Prior to January 1, 1998, the Company's reinsurance program included
reinsurance agreements with United Farm Family. In accordance with the
provisions of these reinsurance agreements, premiums earned, losses, and
expenses ceded by the Company to United Farm Family were as follows:
<TABLE>
<CAPTION>
($ in thousands) 1997 1996 1995
---- ---- ----
<S> <C> <C> <C>
Premiums earned $8,960 $9,334 $9,238
Losses 8,922 7,049 6,447
Expenses 846 446 199
----------------------------------------------------
Net $ (808) $1,839 $2,592
----------------------------------------------------
</TABLE>
The Company terminated all reinsurance agreements with United Farm Family
effective December 31, 1997. However, United Farm Family retains liability for
covered losses arising from occurrences prior to the termination date. Effective
January 1, 1998, the Company's retention on a per risk basis will increase from
$100,000 to $300,000 and all reinsurance coverage will be provided solely by
non-affiliated reinsurers.
3
<PAGE>
The Company is a party to Membership List Purchase Agreements with each of
the state Farm Bureaus in the ten states in which it conducts business. 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. The Membership List Purchase Agreements are for six years
commencing on January 1, 1996. For the years ended December 31, 1997 and 1996,
the Company paid a total of $600,000 and $571,000, respectively, to the Farm
Bureaus pursuant to the Membership List Purchase Agreements. For the year ended
December 31, 1995 the Company paid $547,000 to the Farm Bureaus under
substantially similar Membership List Purchase Agreements in effect for 1995.
Products
The Company offers a variety of property and casualty insurance products
primarily designed to meet the unique insurance needs of its agricultural
clients and the general insurance needs of the rural and suburban communities in
which it does business. Many policyholders have more than one policy with the
Company, most commonly, a property policy (such as a Special Farm Package or
homeowners policy) and an automobile policy.
The following table sets forth by product the direct premiums written by the
company for the periods indicated:
<TABLE>
<CAPTION>
($ in millions) Year Ended December 31,
-----------------------
% of % of % of
1997 Total 1996 Total 1995 Total
----- ----- ----- ----- ----- -----
<S> <C> <C> <C> <C> <C> <C>
Personal Automobile* $62.3 36.9% $50.0 34.2% $46.5 34.2%
Special Farm Package 38.4 22.8% 35.9 24.5% 34.0 25.0%
Commercial Automobile* 26.1 15.5% 24.1 16.5% 22.7 16.7%
Workers' Compensation 11.3 6.7% 9.7 6.5% 9.1 6.7%
Businessowners 9.0 5.3% 7.6 5.2% 6.6 4.9%
Homeowners 7.7 4.6% 6.1 4.2% 5.2 3.8%
Umbrella 4.8 2.9% 4.6 3.1% 4.4 3.2%
Commercial General Liability 4.1 2.4% 3.9 2.7% 3.4 2.5%
Special Home Package 3.1 1.8% 2.9 2.0% 2.8 2.1%
Fire, Allied, Inland Marine 1.3 0.8% 1.2 0.8% 1.0 0.7%
Products Liability 0.4 0.2% 0.3 0.2% 0.2 0.1%
Pollution 0.2 0.1% 0.1 0.1% 0.1 0.1%
-------------------------------------------------------------
Total $168.7 100.0% $146.4 100.0% $136.0 100.0%
-------------------------------------------------------------
</TABLE>
*Includes $6.3 million of assigned risk automobile for personal automobile
and $0.7 million of assigned risk auto for commercial automobile
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.
In October 1997, the Company began marketing the Country Estate program, a
specialized version of the Special Farm Package. The Country Estate program
covers rural residents where agricultural exposures are present, but
agribusiness is not the main source of income for the household.
4
<PAGE>
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's businessowners product (based on the industry
standard policy form) is designed 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 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 $5.0 million. The Company does not generally seek
to market its excess liability policies unless it also writes an underlying
liability policy.
Commercial General Liability. The Company writes an industry standard
commercial general liability policy which is generally marketed in connection
with the Special Farm Package or, as an accommodation to policyholders in
connection with the commercial automobile policy. The commercial general
liability policy is generally not written apart from these other policies. The
policy is usually written by the Company for unique business situations, such as
horse breeding and training facilities and certain landscaper risks, which do
not meet the criteria for liability coverage under a businessowners or Special
Farm Package policy. The policy insures businesses against third party liability
from accidents occurring on their premises or arising out of their operations or
products. Most of the Company's products liability line is written as part of
the commercial general liability product.
Pollution. The Company writes a small number of pollution liability
policies covering specified farm risks on a "claims-made" basis. The policy
insures against losses incurred from third party liability, including bodily
injury and property damages, for pollution incidents, such as those caused from
pesticides, fertilizers, herbicides and manure piles. An "extended reporting
period" option is available under certain circumstances which allows for claim
reporting after the policy expiration. As of December 31, 1997, the Company had
approximately 222 pollution policies in force.
5
<PAGE>
Marketing
The following table sets forth the Company's direct written premiums by
state for the periods indicated:
<TABLE>
<CAPTION>
Year Ended December 31,
-----------------------
($ in millions) % of % of % of
1997 Total 1996 Total 1995 Total
----- ----- ----- ----- ----- -----
<S> <C> <C> <C> <C> <C> <C>
New York $61.5 36.5% $56.5 38.6% $53.2 39.1%
New Jersey 44.5 26.3% 33.1 22.6% 28.3 20.8%
Massachusetts 12.9 7.7% 10.3 7.0% 10.5 7.7%
Connecticut 11.0 6.5% 9.8 6.7% 9.1 6.7%
West Virginia 9.1 5.4% 8.1 5.5% 7.8 5.7%
Maine 6.7 4.0% 6.8 4.7% 6.9 5.1%
New Hampshire 6.5 3.8% 6.7 4.6% 6.8 5.0%
Vermont 5.8 3.5% 5.7 3.9% 5.3 3.9%
Delaware 5.8 3.4% 5.0 3.4% 4.4 3.3%
Rhode Island 4.9 2.9% 4.4 3.0% 3.7 2.7%
--------- --------- ---------- --------- -------- ---------
$168.7 100.0% $146 .4 100.0% $136.0 100.0%
--------- --------- ---------- --------- -------- ---------
</TABLE>
As of December 31, 1997, the Company marketed its property and casualty
insurance products in its ten state region through approximately 189 primarily
exclusive agents, 13 independent agents and 12 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. Almost all of the Company's agents 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 Farm Family Life. In 1997, agent compensation was comprised
entirely of 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. Farm Family Life has
entered into similar membership list purchase agreements with each of the Farm
Bureaus.
6
<PAGE>
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. Claims for New York private passenger
assigned risk business are handled by outside claim adjusting firms which
specialize in this line of business.
Reinsurance
Reinsurance Ceded
The Company's reinsurance arrangements are generally placed with
non-affiliated reinsurers through reinsurance brokers. In addition, through
December 31, 1997, certain reinsurance coverages were also placed directly with
United Farm Family (see "Related Party Transactions"). Prior to January 1, 1998,
the largest net per risk exposure retained by the Company on any one individual
property or casualty risk was $100,000. Property and casualty risks in excess of
$100,000 were covered on an excess of loss basis up to $300,000 per risk by
United Farm Family, prior to January 1, 1998. Effective January 1, 1998, the
largest net per risk exposure retained by the Company on any one individual
property or casualty risk is $300,000. Per risk property losses in excess of
$300,000 but less than $4 million are reinsured on an excess of loss basis by
unaffiliated reinsurers. 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. Prior to January 31, 1998 the Company reinsured 95% of
its umbrella liability losses (including a 5% quota share participation by
United Farm Family) under $1 million per loss on a quota share basis and 100% of
umbrella liability losses in excess of $1 million up to $5 million per loss by
unaffiliated reinsurers. Effective January 1, 1998, umbrella losses per
occurrence in excess of $300,000 but less than $2 million are covered on an
excess of loss basis with unaffiliated reinsurers. In addition, the Company
reinsures 100% of its umbrella liability losses in excess of $2 million up to $5
million per loss with unaffiliated reinsurers. Facultative coverage is available
for property risks in excess of $4 million per risk, casualty risks in excess of
$1 million, and umbrella losses in excess of $5 million.
7
<PAGE>
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. Prior to January 1, 1998, United Farm
Family was 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, 1997, 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").
The Company terminated all reinsurance agreements with United Farm Family
effective December 31, 1997. However, United Farm Family retains liability for
covered losses arising from occurrences prior to the termination date. Effective
January 1, 1998, all reinsurance agreements will be provided solely by
non-affiliated reinsurers. Consequently, the Company's net retention on all
risks will increase from $100,000 to $300,000 for the 1998 year. In addition,
the Company purchased an aggregate stop loss which provides $12.5 million of
coverage excess of 66% loss ratio for the 1998 year.
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 assumed an insignificant amount of
reinsurance covering substandard automobile policies from United Farm Family
through December 31, 1997. For the year ended December 31, 1997, the Company
earned premiums of $7.0 million under various voluntary proportional and
non-proportional reinsurance agreements. In addition, the Company has a
retrocessional reinsurance program covering the Company's assumed business,
which is placed with unaffiliated reinsurers and provides for recovery of 95% of
losses over $1 million up to a maximum of $4 million per occurrence and 75% of
losses over $4 million up to a maximum of $6 million.
Loss and Loss Adjustment Expense ("LAE") Reserves
The Company's reserve for losses is an estimate of the unpaid amount, as of
December 31, of the losses incurred in both the current year and all prior
years. The LAE reserve is an estimate of the unpaid expenses required to settle
losses incurred in both the current year and all prior years. The Company is
required to maintain reserves for payment of estimated loss and LAE for both
reported claims and claims which have been incurred but not yet reported. The
ultimate liability incurred by the company may be different from current reserve
estimates.
Adjustments in aggregate reserves, if any, are reflected in the operating
results of the period during which such adjustments are made. Although claims
for which reserves are established may not be paid for many years, reserves for
losses and LAE are not discounted, except for certain lifetime workers'
compensation indemnity reserves where the reserves are discounted at 3.5%.
8
<PAGE>
The following table provides a reconciliation of beginning and ending loss
and LAE reserve balances of the Company for each of the years in the three year
period ended December 31, 1997.
<TABLE>
Reconciliation of Liability for Loss
and Loss Adjustment Expenses
<CAPTION>
($ in thousands)
For the years ended December 31,
--------------------------------
1997 1996 1995
---- ---- ----
Reserves for losses and loss adjustment expenses at the
<S> <C> <C> <C>
beginning of the year $141,220 $ 137,978 $ 127,954
Less: Reinsurance recoverables and receivables 26,837 28,655 28,230
---------- ---------- ----------
Net reserves for losses and loss adjustment expenses at
beginning of year 114,383 109,323 99,724
---------- ---------- ----------
Provision for losses and loss adjustment expenses for claims occurring
in:
Current year 107,273 100,418 88,366
Prior years (3,972) (5,441) (5,182)
---------- ---------- ----------
Total incurred losses and loss adjustment expenses 103,301 94,977 83,184
---------- ---------- ----------
Loss and loss adjustment expenses payments for claims occurring in:
Current year 49,858 50,122 40,519
Prior years 40,258 39,795 33,066
---------- ---------- ----------
Total payments 90,116 89,917 73,585
---------- ---------- ----------
Net reserves for losses and loss adjustment expenses at end of
year 127,568 114,383 109,323
Add: Reinsurance recoverables and receivables 29,054 26,837 28,655
---------- ---------- ----------
Reserves for losses and loss adjustment expenses at end of year $156,622 $141,220 $137,978
---------- ---------- ----------
</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 1996 to be $150,000 was first reserved in 1988
at $100,000, the $50,000 deficiency (actual loss minus original estimate) would
be included in the cumulative deficiency in each of the years 1989 through 1995
shown below. This table presents development data by calendar year and does not
relate the data to the year in which the accident actually occurred. Conditions
and trends that have affected the development of these reserves in the past may
not necessarily recur in the future.
9
<PAGE>
The following table sets forth the development of loss and loss adjustment
expenses reserves of the Company for the ten-year period ended December 31,
1997:
<TABLE>
Analysis of Loss and Loss Adjustment Expense Development
<CAPTION>
($ in thousands)
Year Ended December 31 1987 1988 1989 1990 1991 1992 1993 1994 1995 1996 1997
----- ----- ----- ----- ----- ----- ------ ------ ----- ----- -----
Reserves for Losses
and Loss
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Adjustment Expenses $53,126 $65,543 $78,339 $94,135 $110,135 $117,497 $123,477 $127,954 $137,978 $141,220 $156,622
Reinsurance Recoverable
on upaid losses (5,468) (7,126) (11,784) (22,123) (25,048) (24,463) (28,761) (28,230) (28,655) (26,837) (29,054)
--------------------------------------------------------------------------------------------------------
Reserves for Losses
and Loss Adjustment
Expenses, Net 47,658 58,417 66,555 72,012 85,087 93,034 94,716 99,724 109,323 114,383 127,568
--------------------------------------------------------------------------------------------------------
Reserves, Net,
Reestimated as of:
One year later 50,145 57,932 69,036 76,786 84,514 91,561 88,296 94,542 104,649 110,411
Two years later 50,572 63,348 72,478 76,442 84,305 89,666 82,876 87,592 101,561
Three years later 53,540 65,399 72,926 76,832 83,960 86,876 81,556 84,840
Four years later 55,303 65,842 73,130 77,879 82,750 85,204 79,139
Five years later 55,445 66,289 74,599 77,375 81,690 83,875
Six years later 56,018 68,298 74,391 76,811 80,487
Seven years later 57,751 68,370 74,578 76,080
Eight years later 58,323 68,678 73,993
Nine years later 58,754 68,010
Ten years later 58,077
Cumulative Redundancy
(Deficiency) (10,419) (9,593) (7,438) (4,068) 4,600 9,159 15,577 14,884 7,762 3,972
----------------------------------------------------------------------------------------------
Cumulative Amount of
Reserves Paid Through:
One year later 21,931 23,852 29,587 29,446 32,708 36,692 34,439 33,066 39,795 40,258
Two years later 33,879 40,454 46,469 47,392 53,455 57,236 49,867 53,121 59,671
Three years later 42,838 51,147 57,838 60,737 65,951 66,127 62,138 64,023
Four years later 48,480 57,239 65,803 67,401 70,176 73,409 67,865
Five years later 51,216 62,168 68,950 68,634 74,752 76,434
Six years later 54,644 64,421 68,652 71,697 76,266
Seven years later 55,794 63,815 71,075 72,820
Eight years later 55,313 65,940 72,038
Nine years later 57,174 66,735
Ten years later 57,800
</TABLE>
Prior to 1991, 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,
1997 of $14.9 million, $7.8 million and $4.0 million for the December 31, 1994,
1995 and 1996 reserves, respectively, were primarily attributable to favorable
development of IBNR and case reserves for personal automobile, commercial
automobile, automobile physical damage, and workers' compensation claims.
10
<PAGE>
<TABLE>
<CAPTION>
Year Ended December 31,
-----------------------
($ in thousands) 1997 1996 1995
----- ----- ----
Reserve for unpaid losses and loss adjustment expenses:
<S> <C> <C> <C>
Gross liability $156,622 $141,220 $137,978
Reinsurance recoverable 29,054 26,837 28,655
------------------------------------------
Net liability $127,568 $114,383 $109,323
------------------------------------------
One year later:
Gross reestimated liability $131,121 $126,779
Reestimated reinsurance recoverable 20,710 22,130
-----------------------------
Net reestimated liability $110,411 $104,649
-----------------------------
Two years later:
Gross reestimated liability $118,039
Reestimated reinsurance recoverable 16,478
--------------
Net reestimated liability $101,561
--------------
</TABLE>
The Company believes that its reserves at December 31, 1997 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. Since 1995, the Company has
significantly reduced its holdings of non-investment grade fixed maturity
securities and improved the overall credit quality of its invested assets.
At December 31, 1997, the Company had cash and invested assets with an
aggregate carrying value of $276.9 million. The Company primarily invests in
high quality fixed maturity securities and to a lesser extent, equity
securities. At December 31, 1997, 94.1% of the Company's total cash and invested
assets consisted of fixed maturities, 3.5% consisted of cash and short-term
investments, 1.6% consisted of equity securities, and the remainder consisted of
mortgage loans and other invested assets.
Prior to September 1, 1997, the Company exclusively managed its invested
assets internally. During 1997, the Company retained the services of a
professional asset management firm, specializing in the management of
investments for insurance companies, to supplement its internal capabilities and
improve upon the management of its invested assets. Investment activities are
subject to oversight by management of the Company as well as an Investment
Committee of the Board of Directors.
The Company actively manages and monitors its exposure to credit risk.
Invested assets are reviewed regularly for credit quality. Investments which
have experienced payment delinquencies, adverse changes in credit ratings or
deterioration in the financial condition of the borrower, or which have
otherwise been identified as having potential adverse credit implications are
placed on a credit watch report. Securities placed on the credit watch list are
reviewed by management and the investment committee on a regular basis. At
December 31, 1997, the Company had identified eight securities, with an
aggregate carrying value of $9.9 million on the credit watch report. None of
these securities were considered non-performing or in default. In addition, the
Company's holdings of NAIC Class 3 through 6 bonds, generally considered
non-investment grade, were $8.4 million or 3.2% of its fixed maturity portfolio,
at December 31, 1997. 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 average duration and average maturity of the Company's fixed maturity
investments as of December 31, 1997 were approximately 4.2 and 9.5 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.
11
<PAGE>
For the year ended December 31, 1997, compared with the prior year, the
amortized cost of the Company's cash and invested assets increased 13.0% to
$265.7 million, primarily as a result of the cash flow from the Company's
operations. For the years ended December 31, 1997, 1996 and 1995, the Company's
net investment income, average cash and invested assets and return on average
cash and invested assets were as follows:
<TABLE>
<CAPTION>
Years Ended December 31,
------------------------
($ in millions) 1997 1996 1995
---- ---- ----
<S> <C> <C> <C>
Net investment income $17.5 $15.6 $14.3
Average cash and invested assets $245.8 $212.0 $187.8
Return on average cash and invested assets 7.1% 7.4% 7.6%
</TABLE>
The reduction in the return on average cash and invested assets during 1997
is primarily attributable to an overall reduction in the prevailing interest
rate environment during 1996 and 1997 compared to earlier years, as well as an
increase in the Company's investment in tax exempt investments which should
improve the Company's after tax investment returns.
The following table sets forth certain information concerning the Company's
investments:
<TABLE>
<CAPTION>
($ in thousands) December 31, 1997 December 31, 1996
Type of Investment Amortized Market Amortized Market
Cost Value(3) Cost Value(3)
Available For Sale Portfolio:
Fixed Maturities(1)
United States government and
<S> <C> <C> <C> <C>
government agencies and authorities $11,504 $11,973 $11,017 $11,305
States, municipalities and political subdivisions 51,166 54,007 42,568 43,950
Public utilities 26,180 26,484 26,244 26,233
All other corporate bonds 127,056 132,416 109,241 111,643
Mortgage-backed securities 18,516 19,195 9,676 10,342
Redeemable preferred stock 7,161 7,557 8,096 8,277
--------------------------------------------------
Total Fixed Maturities 241,583 251,632 206,841 211,750
Equity securities 3,363 4,521 2,546 7,908
--------------------------------------------------
Total Available for Sale 244,946 256,153 209,387 219,658
--------------------------------------------------
Held to Maturity Portfolio:
Fixed Maturities(2)
States, municipalities and political subdivisions 4,603 4,683 5,423 5,482
All other corporate bonds 4,252 4,511 4,359 4,491
--------------------------------------------------
Total Held to Maturity 8,855 9,194 9,782 9,973
--------------------------------------------------
Mortgage loans(1) 1,660 1,660 1,745 1,745
Short-term investments(1) 3,835 3,835 1,982 1,982
Other Invested Assets(1) 553 553 748 748
--------------------------------------------------
Total Investments $259,849 $271,395 $223,644 $234,106
--------------------------------------------------
</TABLE>
- ------------
(1) Fixed maturities (bonds, redeemable preferred stocks and mortgage-backed
securities) and equity securities in the Available for Sale Portfolio are
carried at market value in the consolidated financial statements of the
Company. Mortgage loans, cash and short-term investments and other invested
assets are carried at cost, which approximates market value.
(2) Fixed maturities in the Held to Maturity Portfolio are carried at amortized
cost.
(3) The Company primarily obtains market value information through the pricing
service offered by Interactive Data Corporation. Market values are also
obtained, to a lesser extent, from various brokers who provide price
quotes.
The Company's investments in fixed maturity securities are composed
primarily of intermediate-term, investment grade securities. The table
below contains additional information concerning the investment ratings of
the Company's fixed maturity investments at December 31, 1997.
12
<PAGE>
<TABLE>
<CAPTION>
Amortized Market
Type/Ratings of Investment(1) Cost Value Percentage(4)
----------------------------- ---- ----- -------------
($ in Thousands)
Available for Sale Portfolio:(2)
<S> <C> <C> <C>
U.S. Government and Agencies $14,917 $15,886 6.3%
AAA 44,394 46,182 18.4%
AA 33,267 34,286 13.6%
A 70,647 74,434 29.6%
BBB 73,455 76,566 30.4%
------------------------------------------------
Total BBB or Better 236,680 247,354 98.3%
BB 1,836 1,831 0.7%
B and Below 3,067 2,447 1.0%
------------------------------------------------
Total Available for Sale $241,583 $251,632 100.0%
------------------------------------------------
Held to Maturity Portfolio:(3)
AAA $ 3,005 $ 3,074 33.4%
AA 1,000 1,078 11.7%
A 4,850 5,042 54.9%
BBB - - 0.0%
------------------------------------------------
Total BBB or Better 8,855 9,194 100.0%
BB - - 0.0%
B and Below - - 0.0%
------------------------------------------------
Total Held to Maturity $8,855 $9,194 100.0%
------------------------------------------------
</TABLE>
(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, 1997 was 4.0%.
(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.
13
<PAGE>
The table below sets forth the maturity profile of the Company's fixed maturity
investments as of December 31, 1997:
<TABLE>
<CAPTION>
Maturity Amortized Cost(1) Market Value(2) Percentage
-------- ----------------- --------------- ----------
Available for Sale:
<S> <C> <C> <C>
1 year or less $ 5,501 $ 5,581 2.2%
More than 1 year through 3 years 11,089 11,461 4.6%
More than 3 years through 5 years 20,723 21,399 8.5%
More than 5 years through 10 years 138,913 143,404 57.0%
More than 10 years through 15 years 26,105 27,842 11.1%
More than 15 years through 20 years 8,127 8,506 3.4%
More than 20 years 12,609 14,244 5.6%
Mortgage backed securities 18,516 19,195 7.6%
---------------------------------------------------------
Total $241,583 $251,632 100.0%
---------------------------------------------------------
Held to Maturity:
1 year or less $ 155 $ 156 1.7%
More than 1 year through 3 years 294 297 3.2%
More than 3 years through 5 years 232 232 2.5%
More than 5 years through 10 years 4,534 4,741 51.6%
More than 10 years through 15 years 3,640 3,768 41.0%
More than 15 years through 20 years - - -
More than 20 years - - -
---------------------------------------------------------
Total $ 8,855 $ 9,194 100.0%
---------------------------------------------------------
</TABLE>
(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
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 Farm Family Life. Information systems equipment expenses are shared by
the Company and Farm Family Life pursuant to the Expense Sharing Agreement (see
"Related Party Transactions").
Many of the Company's existing computer programs use only two digits to
identify a year in the date field. These programs were designed and developed
without considering the impact of the upcoming change in the century. If not
corrected, many of these computer applications could fail or create erroneous
results by or at the Year 2000. The Year 2000 issue affects virtually all
companies and organizations . Therefore, the Company must also coordinate with
other entities with which it interacts to ensure these entities are also
14
<PAGE>
addressing the Year 2000 issue. If not successfully addressed, the Year 2000
issue could have material adverse consequences on the Company. The Company has
an on-going, enterprise-wide project to address its Year 2000 issue. During
1998, the Company will perform system-wide testing to support its plan of having
policy administration systems Year 2000 compliant by December 31, 1998. Year
2000 work on remaining systems will continue through 1999. In addition, the
Company has contacted other entities on which it relies to process and support
its business. The Company will react to their plans to achieve Year 2000
compliance and will adjust operations as required. The Company believes it will
successfully address its Year 2000 issue without material adverse consequences
to the Company. However, there can be no assurance that other entities with
which the Company interacts will achieve Year 2000 compliance or that the
failure by such entities to achieve Year 2000 compliance would not have a
material adverse effect on the Company.
A.M. Best Rating
A.M. Best, which rates insurance companies based on factors of concern to
policyholders, currently assigns a Best's Rating of "A" (Excellent), its third
highest rating category, to the Company. A.M. Best assigns "A" or "A-" ratings
to companies which, in its opinion, have demonstrated excellent overall
performance when compared to the standards established by A.M. Best. Companies
rated "A" or "A-" have a strong ability to meet their obligations to
policyholders over a long period of time. In evaluating a company's financial
and operating performance, A.M. Best reviews the company's profitability,
leverage and liquidity, as well as the company's book of business, the adequacy
and soundness of its reinsurance, the quality and estimated market value of its
assets, the adequacy of its loss reserves, the adequacy of its surplus, its
capital structure, the experience and competency of its management and its
market presence. No assurance can be given that A.M. Best will not downgrade 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 insurance 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 the 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 most of its employees with Farm Family Life. As of
December 31, 1997, the total number of full time employees of the Company and
Farm Family Life was 391 employees in aggregate, of which 286 were employed in
the home office. Based on annual time studies, 66% of total employee expenses,
including salary expense, is currently allocated to the Company and 34% is
allocated to Farm Family Life 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,
15
<PAGE>
(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 have adopted 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, 1997,
the Company's total adjusted capital was $94.6 million, and the threshold
requiring the least regulatory attention was $27.7 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 1997, 1996 or 1995.
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 for the Company to maintain appropriate levels of
statutory capital and surplus, particularly in light of continuing scrutiny by
rating organizations and state insurance regulatory authorities, and to maintain
acceptable financial strength and claims-paying ability ratings; (v) the fact
that 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 inherent uncertainty in the economic environment may cause
the quality of the investments currently held in the Company's investment
portfolio to change; (ix) 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; (x)
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
16
<PAGE>
of these states could have a materially adverse effect on the Company's results
of operations and financial condition; and (xi) 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 within the meaning of the Private Securities Litigation Reform Act of
1995 that are based on management's current knowledge, expectations, estimates,
beliefs and assumptions. The forward-looking statements in this Report on Form
10-K include, but are not limited to, statements regarding the Company's ability
to successfully address its Year 2000 issue, statements regarding the Company's
dividend policy, statements regarding the Company's plans to redeem its
outstanding Surplus Notes, statements regarding the Company's ability to adapt
to changes in the demographics of its markets and in the nature of agricultural
related businesses, statements regarding the ability of the Company's
reinsurance arrangements to balance the geographical concentrations of the
Company's risks, statements regarding the Company's investment objectives and
expected rates of return, statements regarding the adequacy of the Company's
capital resources and other financial items, statements of the plans and
objectives of the Company or its management, statements of future economic
performance and assumptions underlying statements regarding the Company or its
business. Readers are hereby cautioned that certain events or circumstances
could cause actual results to differ materially from those estimated, projected,
or predicted. The forward-looking statements in this Report on Form 10-K are not
guarantees of future performance and are subject to a number of important risks
and uncertainties, many of which are outside the Company's control, that could
cause actual results to differ materially. These risks and uncertainties
include, but are not limited to, the results of operations of the Company,
factors relating to the Company's ability to successfully address its Year 2000
issue, the potential recision of the New York Insurance Department's conditional
approval to redeem the Company's Surplus Notes, exposure to catastrophic loss,
geographic concentration of loss exposure, general economic conditions and
conditions specific to the property and casualty insurance industry including
its cyclical nature, regulatory changes and conditions, rating agency policies
and practices, competitive factors, claims development and the impact thereof on
loss reserves and the Company's reserving policy, the adequacy of the Company's
reinsurance programs, developments in the securities markets and the impact
thereof on the Company's investment portfolio and other risk factors listed from
time to time in the Company's Securities and Exchange Commission Filings.
Accordingly, there can be no assurance that the actual results will conform to
the forward-looking statements in this Report on Form 10-K.
17
<PAGE>
<TABLE>
<CAPTION>
Executive Officers of the Registrant
Date First Elected
Officer of
Name Age Position Presently Held with Registrant Registrant
- --------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Philip P. Weber 49 President & Chief Executive Officer 1987
James J. Bettini 43 Executive Vice President - Operations 1990
Victoria M. Stanton 38 Executive Vice President, 1991
General Counsel and Secretary
Timothy A. Walsh 36 Executive Vice President - Finance 1996
William T. Conine 49 Senior Vice President - Information Services 1985
Stuart C. Henderson 42 Senior Vice President - Casualty Operations 1991
Dale E. Wyman 55 Senior Vice President - Marketing 1989
</TABLE>
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 or its Subsidiary in various executive or administrative capacities
for at least five years, except for the following:
Mr. Walsh has served as Executive Vice President - Finance & Treasurer of Farm
Family Holdings since December 1996 and Executive Vice President - Finance &
Treasurer of Farm Family Casualty since April 1997, as Executive Vice President
Finance of Farm Family Casualty from December 1996 to April 1997, and as
Treasurer of Farm Family Holdings from October 1996 to December 1996. Mr. Walsh
was Senior Vice President - Finance of Farm Family Casualty from March 1996 to
December 1996, and was previously Director of Corporate Development for Farm
Family Casualty from August 1995 to March 1996. Previously, Mr. Walsh was Vice
President, Finance & Chief Financial Officer with MPW Industrial Services, Inc.,
Columbus, OH, from April 1994 to August 1995, Corporate Controller of NSC
Corporation, Methuen, MA from July 1992 to April 1994 and Senior Manager at KPMG
Peat Marwick from July 1983 to July 1992. Mr. Walsh currently serves as a
director of MPW Industrial Services Group, Inc.
ITEM 2. PROPERTIES
The Company currently leases space for its home office in Glenmont, New
York from Farm Family Life. The lease agreement provides for the Company to pay
Farm Family Life an annual rental of approximately $760,000. 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, management believes that
resolution of these legal actions will not have a material adverse effect on the
Company's consolidated results of operations and financial condition. However,
given the uncertainties attendant to litigation, there can be no assurance that
the Company's consolidated results of operations and financial condition will
not be materially adversely affected by any threatened or pending litigation.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
Omitted pursuant to General Instruction I(2)(c) of Form 10-K
18
<PAGE>
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 $1.60 par common stock to Farm Family Holdings, Inc., on July 26, 1996 . All
of the Company's common stock is owned by Farm Family Holdings, Inc. There is no
market for the Company's common stock. No dividends were paid in 1997 on the
Company's common stock. As an insurance company domiciled in the state of New
York, the Company's dividend payments are restricted by New York state law. The
Company currently does not plan to pay dividends in the foreseeable future.
19
<PAGE>
ITEM 6. SELECTED FINANCIAL DATA
The following table sets forth certain consolidated financial data for the
Company and its subsidiary prior to and after the reorganization pursuant to the
Plan that took place during 1996. The consolidated statement of income data set
forth below for the years ended December 31, 1997, 1996, 1995, 1994 and 1993 and
the consolidated balance sheet data as of December 31, 1997, 1996, 1995 and 1994
are derived from the consolidated financial statements of the Company which have
been audited by Coopers & Lybrand L.L.P, independent auditors. The consolidated
balance sheet data as of December 31, 1993 is derived from the unaudited
consolidated financial statements of the Company. The Company believes that such
unaudited financial data fairly reflect the consolidated results of operations
and the consolidated financial condition of the Company for such periods. This
data should be read in conjunction with Item 7 Management's Discussion and
Analysis of Financial Condition and Results of Operations as well as Item 8
Financial Statements and Supplementary Data included elsewhere herein.
<TABLE>
<CAPTION>
($ in millions) Year Ended December 31,
--------------- -----------------------
Statement of Income Data: 1997 1996 1995 1994 1993
---- ---- ---- ---- ----
Revenues:
<S> <C> <C> <C> <C> <C>
Premiums $149.2 $130.8 $116.9 $101.5 $96.7
Net Investment Income 17.5 15.6 14.3 13.2 13.8
Net realized investment gains (losses) 5.4 (0.6) 0.9 1.3 (0.2)
Other Income(1) 1.0 0.9 0.9 0.7 0.7
-------------------------------------------------
Total Revenues 173.1 146.7 133.0 116.7 111.0
-------------------------------------------------
Losses and Expenses:
Losses and loss adjustment expenses 103.3 95.0 83.2 82.7 73.2
Underwriting expenses 40.4 37.6 34.9 28.8 26.8
Early retirement program expense - 1.2 - - -
Interest and other expense 0.4 0.5 0.3 0.3 0.3
-------------------------------------------------
Total losses and expenses 144.1 134.3 118.4 111.8 100.3
-------------------------------------------------
Income before federal income tax and extraordinary item 29.0 12.4 14.6 4.9 10.7
Federal income tax expense 9.9 3.8 5.0 1.4 3.1
-------------------------------------------------
Income before extraordinary item 19.1 8.6 9.6 3.5 7.6
Extraordinary item - Demutualization expense - 1.5 - - -
-------------------------------------------------
Net Income $19.1 $7.1 $9.6 $3.5 $7.6
-------------------------------------------------
Balance Sheet Data (at December 31):
Total investments(2) $271.1 $233.9 $207.9 $170.6 $177.7
Total assets 358.0 308.6 278.3 243.1 244.1
Long term debt 1.3 1.3 2.7 2.7 2.8
Total liabilities 237.8 208.2 204.1 190.1 183.6
Total equity(2) 120.2 100.4 74.2 53.0 60.5
GAAP Ratios:
Loss and loss adjustment expense ratio(3) 69.2% 72.6% 71.1% 81.5% 75.7%
Underwriting expense ratio(4) 27.1% 28.7% 29.8% 28.4% 27.7%
Combined ratio(5) 96.3% 101.3% 100.9% 109.9% 103.4%
Statutory Data:
Statutory Combined Ratio(6) 94.0% 101.8% 101.0% 108.9% 104.2%
Statutory Surplus $94.6 $83.2 $55.9 $42.9 $39.1
Ratio of annual written premiums to surplus -
statutory basis(7) 1.68x 1.61x 2.16x 2.46x 2.52x
</TABLE>
(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) The sum of the Loss and Loss Adjustment Expense Ratio and the ratio of
statutory underwriting expense divided by net written premium.
(7) Calculated by dividing statutory net written premiums for the period by
statutory surplus at the end of the period.
20
<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
("The Company"). The operations of the Company are also closely related with
those of its affiliates, Farm Family Life Insurance Company ("Farm Family Life")
and Farm Family Life's wholly owned subsidiary, United Farm Family Insurance
Company ("United Farm Family"). The Company is a wholly owned subsidiary of Farm
Family Holdings, Inc.. ("Farm Family Holdings").
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
The Company 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. 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 a state or county Farm Bureau organization is a
prerequisite for insurance coverage (except for employees of the Company and its
affiliates).
Operating Environment
The Company's operating results are subject to significant fluctuations from
period to period depending upon, among other factors, the frequency and severity
of losses from weather related and other catastrophic events, the effect of
competition and regulation on the pricing of products, changes in interest
rates, general economic conditions, tax laws and the regulatory environment. As
a condition of its license to do business in various states, the Company is
required to participate in a variety of mandatory residual market mechanisms
(including mandatory pools) which provide certain insurance (most notably
automobile insurance) to consumers who are otherwise unable to obtain such
coverages from private insurers. In all such states, residual market premium
rates are subject to the approval of the State Insurance Department. Residual
market premium rates for automobile insurance have generally been inadequate.
The amount of future losses or assessments from residual market mechanisms
cannot be predicted with certainty and could have a material adverse effect on
the Company's results of operations.
For the years ended December 31, 1997, 1996, and 1995, 36.5%, 38.6% and 39.1%,
respectively, of the Company's direct written premiums were derived from
policies written in New York and 26.3%, 22.6% and 20.8%, 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
21
<PAGE>
Company's results of operations may be significantly affected by weather
conditions, catastrophic events and regulatory developments in these two states
and in the Northeastern United States, generally.
Many of the Company's existing computer programs use only two digits to identify
a year in the date field. These programs were designed and developed without
considering the impact of the upcoming change in the century. If not corrected,
many of these computer applications could fail or create erroneous results by or
at the Year 2000. The Year 2000 issue affects virtually all companies and
organizations. Therefore, the Company must also coordinate with other entities
with which it interacts to ensure these entities are also addressing the Year
2000 issue. If not successfully addressed, the Year 2000 issue could have
material adverse consequences on the Company. The Company has an on-going,
enterprise-wide project to address its Year 2000 issue. During 1998, the Company
will perform system-wide testing to support its plan of having policy
administration systems Year 2000 compliant by December 31, 1998. Year 2000 work
on remaining systems will continue through 1999. In addition, the Company has
contacted other entities on which it relies to process and support its business.
The Company will react to their plans to achieve Year 2000 compliance and will
adjust operations as required. The Company believes it will successfully address
its Year 2000 issue without material adverse consequences to the Company.
However, there can be no assurance that other entities with which the Company
interacts will achieve Year 2000 compliance or that the failure by such entities
to achieve Year 2000 compliance would not have a material adverse effect on the
Company.
Products
The Special Farm Package is a flexible, multi-line package of insurance
coverages which the Company regards as its "flagship" product. For the year
ended December 31, 1997, 22.8% of the Company's total direct written premiums
were derived from the Special Farm Package product.
The Company concentrates on its primary products: personal and commercial
automobile, the Special Farm Package, businessowners, Special Home Package 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 1997, the Company continued the expense management initiatives it began
during 1996. The goal of the Company's expense management initiatives is to
continually review its cost structure and reduce or eliminate certain expenses.
Additionally, the Company seeks to tie expenses to operating results so that
expenses become increasingly more variable with the Company's profitability and
less fixed or volume sensitive. As a result, portions of the compensation for
agents, employees and management are influenced by the Company's operating
results. These programs help to align the Company's interests more directly with
those of its shareholders. As a result of these initiatives, as well as an
increase in the Company's premium revenue at a greater rate than its expenses,
the Company's underwriting expenses as a percentage of premium revenue were
reduced during 1997 to 27.1% compared to 28.7% for 1996.
Future Application of Accounting Standards
In June 1997, the Financial Accounting Standards Board issued Statement No. 130
"Comprehensive Income", ("Statement 130") which establishes standards for the
reporting and disclosure of comprehensive income and its components (revenues,
expenses, gains and losses). Statement 130 requires that all items that are
required to be recognized under accounting standards as components of
comprehensive income be reported in a financial statement that is displayed with
the same prominence as other financial statements. Statement 130 requires that
an enterprise (a) classify items of other comprehensive income by their nature
in a financial statement and (b) display the accumulated balance of other
comprehensive income separately from retained earnings and additional paid-in
capital in the equity section of a statement of financial position. Statement
130 is effective for the fiscal years beginning after December 15, 1997. The
Company will adopt Statement 130 in 1998.
22
<PAGE>
Results of Operations
The Year Ended December 31, 1997 Compared to the Year Ended December 31, 1996
Premiums
Premium revenue increased $18.4 million, or 14.1%, during the year ended
December 31, 1997 to $149.2 million from $130.8 million in 1996. The increase in
premium revenue in 1997 resulted from an increase of $18.2 million in earned
premiums on additional business directly written by the Company (principally in
New Jersey and New York) and an increase of $3.7 million in earned premiums
assumed by the Company, offset by an increase of $3.5 million in earned premium
ceded to reinsurers. The $18.2 million increase in earned premiums on additional
business directly written by the Company was primarily attributable to an
increase of $15.8 million, or 13.4%, in earned premiums from the Company's
primary products (personal and commercial automobile products other than
assigned risk automobile business, the Special Farm Package, businessowners
products, homeowners products, and Special Home Package), an increase of $1.0
million in earned premiums on workers' compensation business, an increase of
$0.5 million in earned premium from assigned risk automobile business, and an
increase of $0.9 million in earned premium from the Company's other products.
Premiums earned on personal automobile policies in the state of New Jersey
accounted for $6.5 million of the $18.2 million increase in earned premiums from
the Company's primary products. The number of policies in force of the Company's
primary products increased by 11.4% to approximately 127,000 in 1997 from
approximately 114,000 in 1996 and the average premium earned for each such
policy increased by 1.6% in 1997.
Net Investment Income
Net investment income increased $1.8 million, or 11.7%, to $17.4 million for the
year ended December 31, 1997 from $15.6 million in 1996. The increase in net
investment income was primarily the result of an increase in cash and invested
assets (at amortized cost) of approximately $37.9 million, or 17.6%. The
increase in average cash and invested assets was primarily attributable to the
investment of available operating cash flows during 1997. The return realized on
the Company's cash and invested assets was 7.1% in 1997 and 7.5% in 1996.
Net Realized Investment Gains (Losses)
Net realized investment gains were $5.4 million for the year ended December 31,
1997 compared to a loss of $0.6 million in 1996. The increase in realized
investment gains was primarily attributable a realized gain on the sale of a
common stock investment in 1997.
Losses and Loss Adjustment Expenses
Losses and loss adjustment expenses increased $8.3 million, or 8.8%, to $103.3
million for the year ended December 31, 1997 from $95.0 million in 1996. The
increase in losses and loss adjustment expenses was primarily attributable to
the overall growth in the Company's business. Loss and loss adjustment expenses
were 69.2% of premium revenue in 1997 compared to 72.6% of premium revenue in
1996. Losses and loss adjustment expenses believed to be weather related
aggregated $5.2 million in 1997 compared to $10.6 million in 1996.
Underwriting Expenses
Underwriting expenses increased $2.8 million, or 7.5%, to $40.4 million for the
year ended December 31, 1997 from $37.6 million for the same period in 1996. For
the year ended December 31, 1997, underwriting expenses were 27.1% of premium
revenue compared to 28.7% in 1996. The reduction in the Company's underwriting
expense ratio was primarily attributable to a smaller relative increase in
overhead expenses than in premium revenue for the period and the Company's
continued expense management initiatives which began in 1996.
Federal Income Tax Expense
Federal income tax expense increased $6.1 million to $9.9 million in 1997 from
$3.8 million in 1996. Federal income tax expense was 34.0% of income before
federal income taxes in 1997 compared to 30.4% in 1996. The increase in income
tax expense was primarily the result of the Company's increased premium volume
and favorable operating results during 1997.
Net Income
Net income increased $12.0 million to $19.1 million in 1997 from $7.1 million in
1996 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 in 1996, 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 tax in the last quarter of 1996.
23
<PAGE>
The Year Ended December 31, 1996 Compared to the 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 $19.9 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
24
<PAGE>
earnings of $0.8 million, net of income tax benefit of $0.4 million, in the last
quarter of 1996.
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.
At December 31, 1997, the Company's cash and invested assets, at amortized cost,
was $265.7 million, a $37.9 million increase from 1996. The increase is
primarily the result of the investment of operating cash flows. During 1997, the
Company continued to invest primarily in investment grade fixed maturities to
maintain the overall quality of its investment portfolio. Fixed maturity
securities, at amortized cost, rated as investment grade by the National
Association of Insurance Commissioners was $241.5 million, or 96.4% of its fixed
maturity portfolio, at December 31, 1997 compared to $210.3 million, or 97.1% of
its fixed maturity portfolio, at December 31, 1996. High yield corporate bonds
constituted most of the non-investment grade securities held by the Company as
of December 31, 1997 and 1996. The Company also increased its investments, at
amortized cost, in tax exempt bonds from $21.6 million in 1996 to $31.7 million
in 1997. The mortgage-backed securities held by the Company as of December 31,
1997 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, 1997 and 1996, the aggregate market value of the Company's fixed
maturity investments exceeded the aggregate amortized cost of such investments
by $10.4 million and $5.2 million, respectively.
The Company has in place an unsecured line of credit with a bank under which it
may borrow up to $7.0 million. At December 31, 1997, no amounts were outstanding
on the line of credit which has an annual interest rate equal to the bank's
prime rate. In addition, the Company's reinsurance intermediary has extended to
the Company a "Rapid Recovery Facility" under which the Company, at its option,
can receive cash advances of up to $7.7 million within 48 hours of experiencing
a catastrophic loss. There is no interest rate associated with this facility.
The Company did not utilize this facility in 1997, 1996 or 1995.
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 eight percent 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. Interest expense incurred by the Company on the Surplus Notes for the
years ended December 31, 1997, 1996 and 1995 was $102,000, $167,000 and
$216,000, respectively. The Company has received conditional approval from the
Insurance Department of the State of New York to redeem all of the Surplus Notes
outstanding, and plans to do so effective April 1, 1998. Principal and accrued
interest on the Surplus Notes as of April 1, 1998 will be approximately $1.4
million.
Net cash provided by operating activities was $32.9 million, $12.1 million, and
$16.4 million during the years ended December 31, 1997, 1996, and 1995,
respectively. The increase in net cash provided by operating activities in 1997
was primarily attributable to the increase in premiums collected, interest and
dividends received, and a reduction in losses paid relative to the increase in
premiums collected. The decrease in cash provided by operating activities in
1996 compared to 1995 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.
Net cash used in investing activities was $31.1 million, $30.3 million, and
$18.5 million during the years ended December 31, 1997, 1996, and 1995,
respectively. The decrease in net cash used in investing activities in 1997
resulted primarily from an increase in investment collections from fixed
maturities available for sale and proceeds from sales of equity securities. 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 net proceeds from the Company's initial public offering.
25
<PAGE>
Net cash provided by financing activities for the year ended December 31, 1996
of $19.9 million was the result of a Capital Contribution from the Company's
parent on July 26, 1996.
Effective December 31, 1997, the Company revised its reinsurance program. The
Company's reinsurance agreement with its affiliate, United Farm Family, was
terminated effective December 31, 1997. As a result, the Company's retention per
claim under its current reinsurance program will increase from $100,000 to
$300,000 in 1998. In addition, the Company entered into an agreement which
provides reinsurance protection within certain dollar limits for losses in
excess of a predetermined ratio of losses to earned premiums. This agreement
covers all direct and assumed voluntary business as well as mandatory residual
market mechanisms. The Company's reinsurance program is structured to partially
mitigate the impact of large or unusual losses as well as the aggregation of
smaller, more frequent losses on liquidity and operating results.
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 the Company's independent auditors.
26
<PAGE>
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
Omitted pursuant to General Instruction I(2)(c) of Form 10-K
ITEM 11. EXECUTIVE COMPENSATION
Omitted pursuant to General Instruction I(2)(c) of Form 10-K
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
Omitted pursuant to General Instruction I(2)(c) of Form 10-K
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Omitted pursuant to General Instruction I(2)(c) of Form 10-K
27
<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 27.
2. An "Index to Financial Statement Schedules" has been filed
as a part of this report beginning on page 47.
3. Exhibits
An "Exhibit Index" has been filed as a part of this Report
beginning on page 51 hereof and is incorporated herein by
reference.
(b) Reports on Form 8-K:
None
28
<PAGE>
FARM FAMILY CASUALTY INSURANCE COMPANY AND SUBSIDIARY
INDEX TO FINANCIAL STATEMENTS
Year Ended December 31, 1997
Report of Independent Accountants 30
Consolidated Balance Sheets as of December 31, 1997 and 1996 31
Consolidated Statements of Income for the Years Ended
December 31, 1997, 1996 and 1995 32
Consolidated Statements of Stockholder's Equity for the Years Ended
December 31, 1997, 1996 and 1995 33
Statements of Consolidated Cash Flows for the Years Ended
December 31, 1997, 1996 and 1995 34
Notes to Consolidated Financial Statements 35-48
29
<PAGE>
Report of Independent Accountants
To the Shareholder and Board of Directors
Farm Family Casualty Insurance Company
We have audited the accompanying 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, 1997 and 1996, and the
consolidated results of their operations and their cash flows for each of the
three years in the period ended December 31, 1997 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, 1998
30
<PAGE>
<TABLE>
FARM FAMILY CASUALTY INSURANCE COMPANY & SUBSIDIARY
Consolidated Balance Sheets
($ in thousands)
<CAPTION>
- ----------------------------------------------------------------------------------------------------------------------
As of December 31, 1997 1996
- ----------------------------------------------------------------------------------------------------------------------
ASSETS
Investments:
Fixed Maturities
<S> <C> <C>
Available for sale, at fair value
(Amortized cost: $241,583 in 1997 and $206,841 in 1996 ) $251,632 $211,750
Held to maturity, at amortized cost
(Fair value: $9,194 in 1997 and $9,973 in 1996) 8,855 9,782
Equity securities
Available for sale, at fair value (Cost: $3,363 in 1997 and $2,546 in 1996) 4,521 7,908
Mortgage loans 1,660 1,745
Other invested assets 553 748
Short-term investments 3,835 1,982
-------------------------------
Total investments 271,056 233,915
-------------------------------
Cash 5,812 4,108
Insurance receivables:
Reinsurance receivables 12,343 10,743
Premiums receivable 28,141 22,663
Deferred acquisition costs 12,613 10,682
Accrued investment income 5,251 4,709
Deferred income tax asset, net 1,495 1,531
Prepaid reinsurance premiums 2,043 1,944
Receivable from affiliates, net 17,985 16,489
Other assets 1,238 1,826
-------------------------------
Total Assets $357,977 $308,610
-------------------------------
LIABILITIES AND STOCKHOLDER'S EQUITY
Liabilities:
Reserves for losses and loss adjustment expenses $156,622 $141,220
Unearned premium reserve 66,069 55,945
Reinsurance premiums payable 2,564 641
Accrued expenses and other liabilities 11,280 9,081
Debt 1,268 1,304
-------------------------------
Total liabilities 237,803 208,191
-------------------------------
Stockholder's equity:
Common Stock $1.60 par value 3,200,000 shares authorized,
2,253,878 shares issued and outstanding 3,606 3,606
Additional paid in capital 84,125 84,125
Retained earnings 25,159 6,012
Net unrealized investment gains 7,284 6,676
Total stockholder's equity 120,174 100,419
-------------------------------
Total Liabilities and Stockholder's Equity $357,977 $308,610
-------------------------------
See accompanying notes to Consolidated Financial Statements.
</TABLE>
31
<PAGE>
<TABLE>
FARM FAMILY CASUALTY INSURANCE COMPANY & SUBSIDIARY
Consolidated Statements of Income
($ in thousands)
<CAPTION>
- --------------------------------------------------------------------------------------------------------------------
Year Ended December 31 1997 1996 1995
- --------------------------------------------------------------------------------------------------------------------
Revenues:
<S> <C> <C> <C>
Premiums $149,220 $130,780 $116,936
Net investment income 17,468 15,633 14,326
Realized investment gains (losses), net 5,406 (640) 912
Other income 1,019 905 840
------------------------------------------
Total revenues 173,113 146,678 133,014
------------------------------------------
Losses and Expenses:
Losses and loss adjustment expenses 103,301 94,977 83,184
Underwriting expenses 40,410 37,593 34,902
Early retirement program expense - 1,157 -
Interest expense 102 167 216
Dividends to policyholders 282 373 122
------------------------------------------
Total losses and expenses 144, 095 134,267 118,424
------------------------------------------
Income before federal income tax expense and extraordinary item 29,018 12,411 14,590
Federal income tax expense 9,871 3,770 4,984
------------------------------------------
Income before extraordinary item 19,147 8,641 9,606
Extraordinary item - demutualization expenses - 1,543 -
------------------------------------------
Net income $19,147 $7,098 $9,606
------------------------------------------
See accompanying notes to Consolidated Financial Statements.
</TABLE>
32
<PAGE>
<TABLE>
FARM FAMILY CASUALTY INSURANCE COMPANY AND SUBSIDIARY
Consolidated Statements of Stockholder's Equity
($ in thousands)
<CAPTION>
- -----------------------------------------------------------------------------------------------------------------------
Year Ended December 31 1997 1996 1995
- -----------------------------------------------------------------------------------------------------------------------
Common stock
<S> <C> <C> <C>
Balance, beginning of year $ 3,606 $ - $ -
Common stock issued - 3,606 -
------------------------------------
Balance, end of year 3,606 3,606 -
------------------------------------
Additional paid in capital
Balance, beginning of year 84,125 - -
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 84,125 -
------------------------------------
Retained earnings
Balance, beginning of year 6,012 65,284 55,678
Net income 19,147 7,098 9,606
Demutualization of Farm Family Mutual - (66,370) -
------------------------------------
Balance, end of year 25,159 6,012 65,284
------------------------------------
Net unrealized appreciation (depreciation) of investments
Balance, beginning of year 6,676 8,998 (2,701)
Change in unrealized appreciation (depreciation), net 608 (2,322) 11,699
------------------------------------
Balance, end of year 7,284 6,676 8,998
------------------------------------
Minimum pension liability adjustment
Balance, beginning of year - (118) -
Minimum pension liability adjustment - 118 (118)
------------------------------------
Balance, end of year - - (118)
------------------------------------
Total Stockholder's Equity $120,174 $100,419 $74,164
------------------------------------
See accompanying notes to Consolidated Financial Statements.
</TABLE>
33
<PAGE>
<TABLE>
FARM FAMILY CASUALTY INSURANCE COMPANY AND SUBSIDIARY
Statements of Consolidated Cash Flows
<CAPTION>
($ in thousands)
- -----------------------------------------------------------------------------------------------------------------------
Year ended December 31 1997 1996 1995
- -----------------------------------------------------------------------------------------------------------------------
CASH FLOWS FROM OPERATING ACTIVITIES:
<S> <C> <C> <C>
Net income $19,147 $7,098 $9,606
--------------------------------------
Adjustments to reconcile net income to net cash provided by operating
activities:
Realized investment (gains) losses (5,406) 640 (912)
Amortization of bond discount 347 134 62
Deferred income taxes (284) (497) 581
Extraordinary item - demutualization expense - 1,543 -
Changes in:
Reinsurance receivables (1,600) 3,030 1,254
Premiums receivable (5,478) (872) (3,062)
Deferred acquisition costs (1,931) (155) (1,856)
Accrued investment income (542) (449) (213)
Prepaid reinsurance premiums (100) (80) (58)
Receivable from affiliates, net (1,496) (2,629) (3,293)
Other assets 588 (57) 742
Reserves for losses and loss adjustment expenses 15,402 3,242 10,024
Unearned premium reserve 10,124 3,146 3,956
Reinsurance premiums payable 1,923 (1,994) (1,394)
Accrued expenses and other liabilities 2,190 1,587 1,001
--------------------------------------
Total adjustments 13,737 6,589 6,832
--------------------------------------
Net cash provided by operating activities before extraordinary item 32,884 13,687 16,438
Extraordinary item - demutualization expense - (1,543) -
--------------------------------------
Net cash provided by operating activities 32,884 12,144 16,438
--------------------------------------
CASH FLOWS FROM INVESTING ACTIVITIES
Proceeds from sales:
Fixed maturities available for sale 8,019 5,670 28,466
Other invested assets - 144 -
Equity securities 6,257 - -
Investment collections:
Fixed maturities available for sale 16,435 9,405 15,435
Fixed maturities held to maturity 904 2,561 514
Mortgage loans 85 77 68
Investment purchases:
Fixed maturities available for sale (59,667) (51,050) (58,339)
Fixed maturities held to maturity - - (1,598)
Equity securities (1,294) (2,042) -
Change in short-term investments, net (1,853) 4,550 (3,519)
Change in other invested assets (30) 344 480
--------------------------------------
Net cash used in investing activities (31,144) (30,341) (18,493)
--------------------------------------
CASH FLOWS FROM FINANCING ACTIVITIES
Capital contribution - Common Stock - 3,606 -
Capital contribution - Paid in Capital - 16,321 -
Principal payments on debt (36) (32) (42)
--------------------------------------
Net cash provided by (used in) financing activities (36) 19,895 (42)
--------------------------------------
Net increase (decrease) in cash 1,704 1,698 (2,097)
Cash, beginning of year 4,108 2,410 4,507
--------------------------------------
Cash, end of year $5,812 $4,108 $2,410
--------------------------------------
See accompanying notes to Consolidated Financial Statements.
</TABLE>
34
<PAGE>
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 ("the Company")
The Company is a wholly owned subsidiary of Farm Family Holdings, Inc.
("Farm Family Holdings"). 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.
Investments classified as held to maturity on the Company's
consolidated balance sheets consist primarily of private placements.
Fixed maturities which may be sold prior to their contractual maturity
are classified as available for sale and are carried at fair value on
the Company's consolidated balance sheets. The difference between
amortized cost and fair value of fixed maturities classified as
available for sale, net of deferred income taxes, is reflected as a
component of stockholders' equity.
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 stockholders' 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 by the effective yield method based on estimated
principal repayments. Realized investment gains and losses are
determined on a specific identification basis.
Income Taxes:
The income tax provision is calculated under the liability method.
Deferred income tax assets and liabilities are recorded based on the
difference between the financial statement and tax bases of assets and
liabilities and the enacted tax rates. The principal assets and
liabilities giving rise to such differences are reserves for losses and
35
<PAGE>
loss adjustment expenses, unearned premiums, and deferred acquisition
costs. Deferred income taxes also arise from unrealized investment
gains or losses on equity securities and fixed maturities classified as
available for sale.
Property-Liability Insurance Accounting:
Premiums are deferred and earned on a pro rata basis over the terms of
the respective policies. Amounts paid for ceded reinsurance premiums
are reported as prepaid reinsurance premiums and amortized over the
remaining contract period in proportion to premium. Premiums receivable
are 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"). As part of the Plan, Farm Family Holdings was formed and
the policyholders received approximately 2,237,000 shares of Farm
Family Holdings common stock and $11,735,000 in cash in exchange for
their membership interests 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 net
proceeds of $3,427,000 for approximately 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 $1,371,000
plus accrued interest thereon.
36
<PAGE>
3. Investments
The amortized cost, fair value and gross unrealized gains and losses of
available for sale securities and held to maturity securities at
December 31, 1997 and 1996 are as follows:
<TABLE>
<CAPTION>
($ in thousands)
1997 Gross
---- Amortized Unrealized Fair
Available for Sale Cost Gains Losses Value
------------------ ---- ----- ------ -----
Fixed maturities:
<S> <C> <C> <C> <C>
U.S. Government & Agencies $11,504 $469 $ ---- $11,973
States, Municipalities & Political Subdivisions 51,166 2,846 5 54,007
Corporate 153,236 6,364 700 158,900
Mortgage-backed Securities 18,516 679 ---- 19,195
Redeemable Preferred Stock 7,161 404 8 7,557
-------------------------------------------------
Total fixed maturities 241,583 10,762 713 251,632
Equity securities 3,363 1,212 54 4,521
-------------------------------------------------
Total Available for Sale $244,946 $11,974 $767 $256,153
-------------------------------------------------
Held to Maturity
Fixed maturities:
States, Municipalities & Political Subdivisions $4,603 $80 $ ---- $4,683
Corporate 4,252 259 ---- 4,511
-------------------------------------------------
Total Held to Maturity $8,855 $339 $ ---- $9,194
-------------------------------------------------
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 8,095 277 95 8,277
-------------------------------------------------
Total fixed maturities 206,841 6,728 1,819 211,750
Equity securities 2,546 5,431 69 7,908
-------------------------------------------------
Total Available for Sale $209,387 $12,159 $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 $9,973
-------------------------------------------------
</TABLE>
37
<PAGE>
The table below presents the amortized cost and fair value of fixed
maturities at December 31, 1997, by contractual maturity. Actual
maturities may differ from contractual maturities as a result of
prepayments.
<TABLE>
<CAPTION>
($ in thousands) Available Held to
for Sale Maturity
------------- -------------
Amortized Fair Amortized Fair
Cost Value Cost Value
---- ----- ---- -----
<S> <C> <C> <C> <C>
Due in one year or less $5,501 $5,581 $155 $156
Due after one year through five years 31,812 32,860 526 529
Due after five years through ten years 138,913 143,404 4,534 4,741
Due after ten years 46,841 50,592 3,640 3,768
-------------------------- -------------------------
223,067 232,437 8,855 9,194
Mortgage-backed securities 18,516 19,195 ---- ----
-------------------------- -------------------------
Total $241,583 $251,632 $8,855 $9,194
-------------------------- -------------------------
</TABLE>
Unrealized investment gains and losses on fixed maturities classified
as available for sale and equity securities included in policyholders'
equity at December 31, 1997 are as follows:
<TABLE>
<CAPTION>
($ in thousands) Cost/ Net
Amortized Fair Gross Unrealized Unrealized
Cost Value Gains (Losses) Gains
---- ----- ----- -------- -----
<S> <C> <C> <C> <C> <C>
Fixed maturities available for sale $241,583 $251,632 $10,762 $ 713 $10,049
Equity securities 3,363 4,521 1,212 54 1,158
----------------------------------------------------------------
Total $244,946 $256,153 $11,974 $ 767 $11,207
---------------------------------------------------
Deferred income taxes (3,923)
-------------
Total $7,284
-------------
</TABLE>
The change in unrealized appreciation (depreciation) of investments
included in stockholders' equity for the years ended December 31, 1997,
1996 and 1995 was as follows:
<TABLE>
<CAPTION>
($ in thousands) 1997 1996 1995
---- ---- ----
<S> <C> <C> <C>
Fixed maturities available for sale $5,141 $(4,586) $17,197
Equity securities (4,204) 950 802
Other invested assets ---- 63 (63)
----------------------------------------
937 (3,573) 17,936
Deferred income taxes (329) 1,251 (6,237)
----------------------------------------
$ 608 $ (2,322) $11,699
----------------------------------------
</TABLE>
38
<PAGE>
The components of net investment income are as follows:
<TABLE>
<CAPTION>
($ in thousands)
1997 1996 1995
---- ---- ----
<S> <C> <C> <C>
Interest on fixed maturities $17,498 $15,492 $14,561
Dividends from equity securities 152 53 19
Interest on mortgage loans 154 169 180
Interest on short-term investments 277 386 315
Other, net 25 ---- (406)
-----------------------------------
Total investment income 18,106 16,100 14,669
Investment expense (638) (467) (343)
-----------------------------------
Net investment income $17,468 $15,633 $14,326
-----------------------------------
</TABLE>
A summary of realized investment gains (losses), net as follows:
<TABLE>
<CAPTION>
($ in thousands)
1997 1996 1995
---- ---- ----
<S> <C> <C> <C>
Fixed maturities $(149) $(567) $912
Equity securities 5,780 ---- ----
Other invested assets (225) (73) ----
-----------------------------------
$5,406 $ (640) $912
-----------------------------------
</TABLE>
4. Fair Value of Financial Instruments
The estimated fair value of financial instruments has been determined
using available market information and appropriate valuation
methodologies. The estimated fair value of financial instruments are
not necessarily indicative of the amounts the Company might pay or
receive in actual market transactions. Potential taxes and other
transaction costs have not been considered in estimating fair value. As
a number of the Company's significant assets (including deferred
acquisition costs, and deferred income taxes) and liabilities
(including reserves for losses and loss adjustment expenses) are not
considered financial instruments, the disclosures that follow do not
reflect the fair value of the Company as a whole.
The following table presents the carrying value and fair value of the
Company's financial instruments at December 31, 1997 and 1996.
<TABLE>
<CAPTION>
1997 1996
------------- ------------
Carrying Fair Carrying Fair
($ in thousands) Value Value Value Value
----- ----- ----- -----
Assets
------
<S> <C> <C> <C> <C>
Fixed maturities $260,487 $260,826 $221,532 $221,723
Equity securities 4,521 4,521 7,908 7,908
Mortgage loans 1,660 1,660 1,745 1,745
Cash and short-term investments 9,647 9,647 6,090 6,090
Premiums receivable, net 28,141 28,141 22,663 22,663
Receivable from affiliates, net 17,985 17,985 16,489 16,489
Accrued investment income and other assets 6,489 6,489 6,535 6,535
Liabilities
-----------
Accrued expenses and other liabilities 11,280 11,280 9,081 9,081
Debt 1,268 1,268 1,304 1,304
</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.
39
<PAGE>
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.
5. Reinsurance
The Company assumes and cedes insurance to participate in the
reinsurance market, geographically diversify its exposure to
catastrophic losses, limit maximum losses and minimize exposure on
large risks (see Note 12). 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, 1997 and 1996, 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) 1997 1996 1995
---- ---- ----
Premiums written
<S> <C> <C> <C>
Direct $168,707 $146,408 $135,963
Assumed 13,091 6,462 6,261
Ceded to United Farm Family (8,959) (9,336) (9,237)
Ceded to non-affiliates (13,594) (9,690) (12,153)
---------------------------------------
Premiums written, net of reinsurance $159,245 $133,844 $120,834
---------------------------------------
Premiums earned
Direct $160,988 $142,794 $131,717
Assumed 10,686 6,931 6,552
Ceded to United Farm Family (8,960) (9,334) (9,238)
Ceded to non-affiliates (13,494) (9,611) (12,095)
---------------------------------------
Premiums earned, net of reinsurance $149,220 $130,780 $116,936
---------------------------------------
Losses and loss adjustment expenses incurred
Direct $113,569 $99,954 $91,176
Assumed 6,970 4,630 4,658
Ceded to United Farm Family (9,705) (7,277) (6,604)
Ceded to non-affiliates (7,533) (2,330) (6,046)
---------------------------------------
Losses and loss adjustment expenses incurred,
net of reinsurance $103,301 $94,977 $83,184
---------------------------------------
</TABLE>
Effective December 31, 1997, the Company revised its reinsurance
program. The Company's reinsurance agreement with its affiliate, United
Farm Family, was terminated effective December 31, 1997. As a result,
the Company's retention per claim under its current reinsurance program
will increase from $100,000 to $300,000.
40
<PAGE>
6. Income Taxes
The components of the deferred income tax assets and liabilities at
December 31, 1997 and 1996 are as follows:
<TABLE>
<CAPTION>
($ in thousands)
Deferred Income Tax Assets 1997 1996
-------------------------- ---- ----
<S> <C> <C>
Reserves for losses and loss adjustment expenses $5,124 $4,423
Unearned premium reserve 4,476 3,774
Accrued expenses and other liabilities 955 789
Investments 133 148
---------------------------------
Total deferred income tax assets 10,688 9,134
---------------------------------
Deferred Income Tax Liabilities
Deferred acquisition costs 4,414 3,739
Unrealized investment gains, net 3,923 3,595
Other assets 856 269
---------------------------------
Total deferred income tax liabilities 9,193 7,603
---------------------------------
Net deferred income tax asset $1,495 $1,531
---------------------------------
</TABLE>
There was no valuation allowance for deferred income tax assets as of
December 31, 1997 or 1996. In assessing the realization of deferred tax
assets, management considers whether it is more likely than not that
the deferred tax assets will be realized. Management primarily
considered the existence of taxable income in the carryback period in
making this assessment and believes the benefits of the deductible
differences recognized as of December 31, 1997 and 1996 will ultimately
be realized.
The components of income tax expense (benefit) are as follows:
<TABLE>
<CAPTION>
($ in thousands) Year Ended December 31,
-----------------------
1997 1996 1995
---- ---- ----
<S> <C> <C> <C>
Current $10,155 $4,268 $4,403
Deferred (284) (498) 581
---------------------------------------
Total income tax expense $9,871 $3,770 $4,984
---------------------------------------
</TABLE>
The Company paid income taxes of $9,962,000, $4,592,000, and $3,952,000
in 1997, 1996 and 1995 respectively.
A reconciliation of the differences between the Company's effective tax
rates and the United States federal income tax rates follows:
<TABLE>
<CAPTION>
Year Ended December 31,
-----------------------
($ in thousands) % of % of % of
Pretax Pretax Pretax
1997 Income 1996 Income 1995 Income
---- ------ ---- ------ ---- ------
<S> <C> <C> <C> <C> <C> <C>
Income tax provision at prevailing rates $10,156 35.00% $4,243 34.19% $5,006 34.31%
Tax effect of:
Tax exempt interest income (380) (1.31) (107) (.86) (11) (.08)
Dividends received deduction (157) (0.54) (156) (1.26) (148) (1.01)
Other, net 252 0.87 (210) (1.69) 137 .94
----------------------------------------------------------
Federal income tax expense $9,871 34.02% $3,770 30.38% $4,984 34.16%
----------------------------------------------------------
</TABLE>
41
<PAGE>
7. Reserves for Losses and Loss Adjustment Expenses
As described in Note 1, the Company establishes reserves for losses and
loss adjustment expenses on reported and incurred but not reported
claims of insured losses. The establishment of appropriate reserves for
losses and loss adjustment expenses is an inherently uncertain process
and the ultimate cost may vary materially from the recorded amounts.
Reserve estimates are regularly reviewed and updated, using the most
current information. Any resulting adjustments, which may be material,
are reflected in current operations.
The following table provides a reconciliation of beginning and ending
liability balances for reserves for losses and loss adjustment expenses
for the years ended December 31, 1997, 1996 and 1995.
<TABLE>
<CAPTION>
Year Ended December 31,
-----------------------
1997 1996 1995
---- ---- ----
($ in thousands)
Reserves for losses and loss adjustment
<S> <C> <C> <C>
expenses at beginning of year $141,220 $137,978 $127,954
Less reinsurance recoverables and receivables 26,837 28,655 28,230
-------------------------------------
Net reserves for losses and loss adjustment
expenses at beginning of year 114,383 109,323 99,724
-------------------------------------
Incurred losses and loss adjustment expenses:
Provision for insured events of current year 107,273 100,418 88,366
Decrease in provision for
insured events of prior years (3,972) (5,441) (5,182)
-------------------------------------
Total incurred losses and loss adjustment expenses 103,301 94,977 83,184
-------------------------------------
Payments:
Losses and loss adjustment expenses
attributable to insured events of current year 49,858 50,122 40,519
Losses and loss adjustment expenses
attributable to insured events of prior years 40,258 39,795 33,066
-------------------------------------
Total payments: 90,116 89,917 73,585
-------------------------------------
Net reserves for losses and loss
adjustment expenses at end of year 127,568 114,383 109,323
Plus reinsurance recoverables and receivables 29,054 26,837 28,655
-------------------------------------
Reserves for losses and loss adjustment
expenses at end of year $156,622 $141,220 $137,978
-------------------------------------
</TABLE>
The Company does not discount reserves for losses and loss adjustment
expenses except for certain lifetime workers' compensation indemnity
reserves it assumes from mandatory pools. The amount of such discounted
reserves was $3,986,000 (net of a discount of $1,229,000), $4,184,000
(net of a discount of $1,185,000), and $4,754,000 (net of a discount of
$1,192,000) for December 31, 1997, 1996 and 1995, respectively.
8. Debt
At December 31, 1997, debt consists of $293,000 of debentures and
$975,000 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
$104,000, $279,000 and $217,000 for the years ended December 31, 1997,
1996 and 1995, respectively. The Company has received conditional
approval from the Insurance Department of the State of New York to
redeem all of the outstanding debentures and subordinated certificates
and plans to do so effective April 1, 1998. Principal and accrued
interest on the Surplus Notes, as of April 1, 1998 will be
approximately $1,395,000.
At December 31, 1997, the Company had available a line of credit with a
bank for $7,000,000. There were no amounts outstanding on the line of
credit at December 31, 1997.
42
<PAGE>
9. Benefits Plans
Pension Plan:
The Company and Farm Family Life sponsor a qualified multi-employer
noncontributory defined benefit pension plan covering substantially all
of the Company's and Farm Family Life's full-time employees who meet
the eligibility requirements. Benefits under the pension plan are
primarily based upon the employee's length of service and the
employee's average compensation for certain periods during the last
years of employment. The Company's funding policy for its defined
benefit pension plan is to make annual contributions in accordance with
accepted actuarial cost methods subject to regulatory funding
limitations. Effective January 1, 1997, the Company and Farm Family
Life froze benefits available through the defined benefit plan. In
addition, the Company implemented a voluntary early retirement program
in the fourth quarter of 1996 (see Note 13).
The net pension expense for the plan is as follows:
<TABLE>
<CAPTION>
Year Ended December 31,
-----------------------
($ in thousands) 1997 1996 1995
---- ---- ----
<S> <C> <C> <C>
Service cost $ ---- $869 $708
Interest cost on projected benefit obligation 1,429 1,411 1,384
Actual return on plan assets (1,502) (854) (1,844)
Net amortization (deferral) 73 (447) 632
Voluntary early retirement program ---- 2,069 ----
---------------------------------------
Total pension expense $ ---- $3,048 $880
---------------------------------------
</TABLE>
The Company incurred no net periodic pension expense in 1997 due to the
freezing of the plan. 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 and 1995 was $607,000
and $537,000, respectively. In addition, the Company's portion of the
expense related to the voluntary early retirement program was
$1,155,000 for 1996.
Assumptions used in the determination of pension obligations and assets
were:
<TABLE>
<CAPTION>
Year Ended December 31,
-----------------------
1997 1996 1995
---- ---- ----
<S> <C> <C> <C>
Weighted-average discount rate 7.00% 7.00% 6.40%
Rate of increase in compensation levels 4.00% 4.00% 3.40%
Expected long-term rate of return on plan assets 8.00% 8.00% 8.00%
</TABLE>
Since benefits under the plan were frozen as of January 1, 1997, the
rate of increase in compensation levels assumption for 1997 is 0.00%.
43
<PAGE>
The following table summarizes the funded status of the pension plan:
<TABLE>
<CAPTION>
As of December 31,
------------------
1997 1996
---- ----
($ in thousands)
Actuarial present value of benefit obligations:
<S> <C> <C>
Vested $20,785 $21,075
Nonvested --- ---
--------------------------------
Accumulated benefit obligation 20,785 21,075
Effect of projected future salary increases on past service --- ---
--------------------------------
Projected benefit obligation 20,785 21,075
Plan assets at fair value 19,026 18,881
--------------------------------
Projected benefit obligation in excess of plan assets $(1,759) $(2,194)
--------------------------------
</TABLE>
Plan assets primarily consist of cash, U.S. government securities,
municipal and corporate debt instruments, common stock mutual funds,
and an insurance group annuity contract.
The accrued pension liability of the plan was as follows:
<TABLE>
<CAPTION>
As of December 31,
------------------
1997 1996
---- ----
($ in thousands)
<S> <C> <C>
Projected benefit obligation in excess of plan assets $(1,759) $(2,194)
Unrecognized prior service asset --- ---
Unrecognized net gain from past
experience different from that assumed --- ---
Unrecognized net asset at transition --- ---
Minimum liability adjustment --- ---
-------------------------------
Accrued pension liability $(1,759) $(2,194)
-------------------------------
</TABLE>
Incentive Savings Plans:
The Company and Farm Family Life sponsor employee incentive savings
plans which are qualified under Section 401 of the Internal Revenue
Code. Under the provisions of these plans, employees may contribute up
to 15% of their eligible compensation, with up to 6% being eligible for
matching contributions from the Company. In 1997, the Company
contributed to the plans a matching contribution of 50% of the first 6%
of eligible compensation deferred by each eligible employee and, as a
percentage of each employee's eligible compensation, a regular
contribution of 3%, a profit sharing contribution of 3% and a money
purchase contribution of 3%. The profit sharing contribution and a
portion of the matching contributions made by the Company in 1997 were
discretionary. In 1997, the Company established a non qualified
unfunded supplemental plan for those employees whose compensation
exceeds the Internal Revenue Code compensation limits for qualified
plans. The Company's expense associated with the plans was $1,082,000,
$182,000 and $138,000 in 1997, 1996 and 1995, respectively. In 1995 and
1996, the Company contributed 1% of eligible compensation (up to $240
per employee) to the plan for all eligible employees.
Postretirement Benefits Other Than Pensions:
The Company and Farm Family Life provide life insurance benefits for
retired employees meeting certain age and length of service
requirements. The Company's postretirement benefit plan is currently
unfunded and noncontributory. Benefits under the postretirement benefit
plan are provided by a group term life insurance policy.
44
<PAGE>
Net periodic postretirement benefit expense for the years ended
December 31, 1997, 1996, and 1995 included the following:
<TABLE>
<CAPTION>
1997 1996 1995
---- ---- ----
($ in thousands)
<S> <C> <C> <C>
Service cost $26 $27 $37
Interest cost 66 63 73
Return on assets ---- ---- ----
Amortization of transition obligation 47 47 47
Amortization of unrecognized net gain (1) ---- ----
Voluntary early retirement program ---- 41 ----
---------------------------------
Total net periodic postretirement benefit expense $138 $178 $157
---------------------------------
</TABLE>
The Company's portion of net periodic postretirement benefit expense
was $79,000 for the year ended December 31, 1997 and $66,000 for the
years ended December 31, 1996 and 1995. The Company's portion of the
voluntary early retirement program expense in 1996 was $22,000.
The following table presents the plan's accumulated postretirement
benefit obligation as of December 31, 1997 and 1996 reconciled with the
plan's funded status and the amount recognized in the Company's
consolidated balance sheets:
<TABLE>
<CAPTION>
Year Ended December 31,
-----------------------
($ in thousands) 1997 1996
---- ----
Accumulated postretirement benefit obligation:
<S> <C> <C>
Retirees $(492) $(487)
Other fully eligible plan participants (221) (182)
Other active plan participants (276) (293)
-----------------------------
Obligation at year-end (989) (962)
Plan assets --- ---
-----------------------------
Funded status (989) (962)
Unrecognized transition obligation 759 805
Unrecognized net loss (105) (95)
-----------------------------
Accrued postretirement benefit liability at year-end $(335) $(252)
-----------------------------
</TABLE>
The discount rate used to determine the accumulated postretirement
benefit obligation was 7.0% at December 31, 1997 and 1996.
45
<PAGE>
10. Related Party Transactions
The operations of the Company are closely related with those of Farm
Family Life and Farm Family Life's wholly owned subsidiary, United Farm
Family. The affiliated Companies operate under similar Boards of
Directors and have similar senior management. The affiliated Companies
share home office premises, branch office facilities, data processing
equipment, certain personnel and other operational expenses. Expenses
are shared based on each Company's estimated level of usage. The gross
shared expenses and the Company's share of such expenses is summarized
below:
<TABLE>
<CAPTION>
($ in thousands)
Year Ended December 31,
1997 1996 1995
---- ---- ----
<S> <C> <C> <C>
Gross Shared Expenses $29,364 $30,689 $26,650
Company's Share:
Amount $17,944 $19,379 $16,182
Percentage 61% 63% 61%
</TABLE>
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 on the debentures held by Farm Family Life.
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 of
$63,000, $191,000, and $2,000 during the years ended December 31, 1997,
1996 and 1995, respectively. Effective December 31, 1997, the Company
has terminated the reinsurance agreements with United Farm Family. 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 Life and United Farm Family for shared expenses.
11. Dividends and Statutory Financial Information
The New York Insurance Law regulates the distribution of dividends and
other payments to Farm Family Holdings by the Company. As of December
31, 1997, the maximum amount of dividends that can be paid by the
Company without the prior approval of the New York State Insurance
Department is $1.9 million.
Net income and surplus of Farm Family Casualty, as determined in
accordance with statutory accounting practices are as follows:
<TABLE>
<CAPTION>
($ in thousands) 1997 1996 1995
---- ---- ----
<S> <C> <C> <C>
Net income $17,081 $7,221 $6,735
Surplus 94,592 83,194 55,916
</TABLE>
The National Association of Insurance Commissioners ("NAIC") requires
insurance companies to calculate and report risk based capital
information under a set of formulas which measure statutory capital and
surplus needs based on a regulatory definition of the risks in a
company's mix of products and its balance sheet. As of December 31,
1997, Farm Family Casualty's total capital exceeds the threshold level
of regulatory action, as defined by the NAIC.
46
<PAGE>
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. The
Company is subject to a concentration of risk within the Northeastern
United States. For the years ended December 31, 1997, 1996 and 1995,
approximately 63%, 61% and 60%, respectively, of the Company's direct
premiums were written in the states of New York and New Jersey. As a
result of the concentration of the Company's business in the states of
New York and New Jersey, and more generally, in the Northeastern
United States, the Company's results of operations may be
significantly affected by weather conditions, catastrophic events and
regulatory developments in these two states and in the Northeastern
United States, despite the Company's reinsurance program designed to
mitigate the impact of these factors.
As a condition of its license to do business in various states, the
Company is required to participate in a variety of mandatory residual
market mechanisms (including mandatory pools) which provide certain
insurance (most notably automobile insurance) to consumers who are
otherwise unable to obtain such coverages from private insurers. The
amount of future losses and assessments from residual market mechanisms
can not be predicted with certainty and could have a material adverse
effect on the Company's future results of operations.
Pursuant to agreements between the Company and its agents and agency
managers, 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,
1997 is $4,168,000.
The Company is a party to Membership List Purchase Agreements with each
of the state Farm Bureaus in the ten states in which it conducts
business. The Membership List Purchase Agreements are for six years
commencing on January 1, 1996. For the years ended December 31, 1997
and 1996, the Company paid a total of $600,000 and $571,000,
respectively, to the Farm Bureaus pursuant to the Membership List
Purchase Agreements. For the year ended December 31, 1995 the Company
paid $547,000 to the Farm Bureaus under substantially similar
Membership List Purchase Agreements in effect for 1995.
At December 31, 1997, the Company had $1,422,000 of outstanding letters
of credit. These letters of credit are issued to insurance companies
that Farm Family Casualty has assumed reinsurance from and are
domiciled in states where Farm Family Casualty is not licensed or
authorized as a reinsurer.
Many of the Company's existing computer programs use only two digits to
identify a year in the date field. These programs were designed and
developed without considering the impact of the upcoming change in the
century. If not corrected, many of these computer applications could
fail or create erroneous results by or at the Year 2000. The Year 2000
issue affects virtually all companies and organizations. Therefore, the
Company must also coordinate with other entities with which it
interacts to ensure these entities are also addressing the Year 2000
issue. If not successfully addressed, the Year 2000 issue could have
material adverse consequences on the Company. The Company has an
on-going, enterprise-wide project to address its Year 2000 issue.
During 1998, the Company will perform system-wide testing to support
its plan of having policy administration systems Year 2000 compliant by
December 31, 1998. Year 2000 work on remaining systems will continue
through 1999. In addition, the Company has contacted other entities on
which it relies to process and support its business. The Company will
react to their plans to achieve Year 2000 compliance and will adjust
operations as required. The Company believes it will successfully
address its Year 2000 issue without material adverse consequences to
the Company. However, there can be no assurance that other entities
with which the Company interacts will achieve Year 2000 compliance or
that the failure by such entities to achieve Year 2000 compliance would
not have a material adverse effect on the Company.
47
<PAGE>
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
$752,000, for the Company's share of the costs of a voluntary early
retirement program offered to certain eligible employees in 1996.
Eligibility for the program was based on age and years of service.
14. Future Application of Accounting Standards
In June 1997, the Financial Accounting Standards Board issued Statement
No. 130 "Comprehensive Income", ("Statement 130") which establishes
standards for the reporting and disclosure of comprehensive income and
its components (revenues, expenses, gains and losses). Statement 130
requires that all items that are required to be recognized under
accounting standards as components of comprehensive income be reported
in a financial statement that is displayed with the same prominence as
other financial statements. Statement 130 requires that an enterprise
(a) classify items of other comprehensive income by their nature in a
financial statement and (b) display the accumulated balance of other
comprehensive income separately from retained earnings and additional
paid-in capital in the equity section of a statement of financial
position. Statement 130 is effective for the fiscal years beginning
after December 15, 1997. The Company will adopt Statement 130 in 1998.
48
<PAGE>
FARM FAMILY CASUALTY INSURANCE COMPANY AND SUBSIDIARY
INDEX TO FINANCIAL STATEMENT SCHEDULES
Year Ended December 31, 1997
The following additional financial statement schedules are furnished herewith
pursuant to the requirements of Form 10-K.
<TABLE>
<CAPTION>
Page
----
<S> <C> <C>
Schedule I Summary of Investments - Other than Investments in Related Parties 48
Schedule IV Reinsurance 49
Schedule VI Supplemental Information Concerning
Property - Casualty Insurance Operations 50
</TABLE>
49
<PAGE>
<TABLE>
FARM FAMILY CASUALTY INSURANCE COMPANY AND SUBSIDIARY
SCHEDULE 1 - SUMMARY OF INVESTMENTS
OTHER THAN INVESTMENTS IN RELATED PARTIES
DECEMBER 31, 1997
($ in thousands)
<CAPTION>
Amortized Balance Sheet
Type of Investment Cost Fair Value Carrying Value
Available for sale
Fixed maturities:
<S> <C> <C> <C>
United States Government and government agencies $11,504 $11,973 $11,973
States, municipalities and political subdivisions 51,166 54,007 54,007
Public utilities 26,180 26,484 26,484
Corporate 127,056 132,416 132,416
Mortgage-backed 18,516 19,195 19,195
Redeemable preferred stock 7,161 7,557 7,557
------------------------------------------------
Total fixed maturities 241,583 251,632 251,632
------------------------------------------------
Equity securities:
Common stocks:
Public utilities 1,219 1,693 1,693
Banks, trusts and insurance companies 169 320 320
Industrial and miscellaneous 1,975 2,508 2,508
------------------------------------------------
Total equity securities 3,363 4,521 4,521
Total available for sale 244,946 256,153 256,153
------------------------------------------------
Held to maturity
States, municipalities and political subdivisions 4,603 4,683 4,603
Corporate 4,252 4,511 4,252
------------------------------------------------
Total held to maturity 8,855 9,194 8,855
------------------------------------------------
Mortgage loans on real estate
Short-term investments 1,660 1,660 1,660
Other invested assets 3,835 3,835 3,835
553 553 553
------------------------------------------------
Total investments $259,849 $271,395 $271,056
------------------------------------------------
</TABLE>
50
<PAGE>
FARM FAMILY CASUALTY INSURANCE COMPANY AND SUBSIDIARY
SCHEDULE IV
REINSURANCE
($ in Thousands)
<TABLE>
<CAPTION>
Earned Premiums
Percentage
Ceded to Assumed of Amount
Gross Other from Other Net Assumed
Amount Companies Companies Amount to Net
--------------------------------------------------------------------
Year Ended December 31, 1997
<S> <C> <C> <C> <C> <C>
Property/Casualty Insurance $160,988 $22,454 $10,686 $149,220 7.2%
Year Ended December 31, 1996
Property/Casualty Insurance 142,794 18,945 6,931 130,780 5.3
Year Ended December 31, 1995
Property/Casualty Insurance 131,717 21,333 6,552 116,936 5.6
</TABLE>
51
<PAGE>
FARM FAMILY CASUALTY INSURANCE COMPANY AND SUBSIDIARY
SCHEDULE VI
SUPPLEMENTAL INFORMATION CONCERNING CONSOLIDATED
PROPERTY-CASUALTY INSURANCE OPERATIONS
($ in thousands)
<TABLE>
<CAPTION>
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, 1997
Property and
Casualty business $ 12,613 $156,622 $66,069 $149,220 $17,468 $107,273 $(3,972) $28,794 $90,116 $159,245
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
</TABLE>
52
<PAGE>
<TABLE>
EXHIBIT INDEX
FARM FAMILY CASUALTY INSURANCE COMPANY FORM 10-K
FOR THE YEAR ENDED DECEMBER 31, 1997
<CAPTION>
Sequential
Exhibit Number Document Description Page Number
- -------------- --------------------
<S> <C> <C>
*2.1 Plan of Reorganization and Conversion dated February 14, 1996 as amended by
Amendment No. 1, dated April 23, 1996
3.1 Restated Charter of Farm Family Casualty Insurance Company (Incorporated by
reference to Farm Family Casualty Insurance Company Form 10-Q for the quarter ended
September 30, 1997)
3.2 Bylaws of Farm Family Casualty Insurance Company as amended and restated on July 26,
1996 and as amended up to and including February 13, 1997 (Incorporated by reference
to Farm Family Casualty Insurance Company Form 10-Q for the quarter ended September
30, 1997)
**10.2 Amended and Restated Expense Sharing Agreement, made effective as of February 14,
1996, by and among Farm Family Mutual Insurance Company, Farm Family Life Insurance
Company and Farm Family Holdings, Inc.
*10.3 Indenture of Lease, made the 1st day of January 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.
1997 Form 10-K for the year ended December 31, 1996),
Addendum No. 4, effective January 1, 1997 (Incorporated by
reference to Farm Family Holdings, Inc. Form 10-Q for the
quarter ended March 31, 1997), and Termination Addendum,
effective December 31, 1997 (Incorporated by reference to
Farm Family Holdings, Inc. Form 10-K for the year ended
December 31, 1997)
10.5 Umbrella Quota Share Reinsurance Contract, effective January 1, 1995, issued to Farm
Family Mutual Insurance Company and United Farm Family Insurance Company, as amended
by Addendum No. 1, effective January 1, 1995 (Incorporated by reference to
Registration Statement No. 333-4446), and Addendum No. 2 effective July 26, 1996
(Incorporated by reference to Farm Family Holdings, Inc. 1997 Form 10-K for the year
ended December 31, 1996), Addendum No. 3, effective January 1, 1997 (Incorporated by
reference to Farm Family Holdings, Inc. Form 10-Q for the quarter ended March 31,
1997), and Termination Addendum, effective January 1, 1998 (Incorporated by
reference to Farm Family Holdings, Inc. Form 10-K for the year ended December 31,
1997)
*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
53
<PAGE>
Sequential
Exhibit Number Document Description Page Number
- -------------- --------------------
10.9 Form of Membership List Purchase Agreement between Farm Family Mutual Insurance
Company and each of the Farm Bureaus (Incorporated by reference to Registration
Statement No. 333-4446) as amended by Amendment No. 1 to Membership List Purchase
Agreements effective July 26 1996 (Incorporated by reference to Farm Family
Holdings, Inc. Form 10-Q for the quarter ended March 31, 1997)
*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 26, 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
10.12 Farm Family Life Insurance Company, Farm Family Casualty Insurance Company, Farm
Family Holdings, Inc. Officer Severance Pay Plan Effective July 29, 1997
(Incorporated by reference to Farm Family Holdings, Inc. Form 10-Q for the quarter
ended September 30, 1997)
*10.13 Farm Family Mutual Insurance Company Supplemental Employee Retirement Plan, adopted
as of January 1, 1994
10.17 Farm Family Supplemental Profit Sharing and Money Purchase Plan effective January 1,
1997 (Incorporated by reference to Farm Family Holdings, Inc. Form 10-K for the year
ended December 31, 1997)
**10.18 Tax Payment Allocation Agreement effective January 1, 1996 by and between Farm
Family Holdings, Inc. and Farm Family Casualty Insurance Company
10.19 Excess Catastrophe Reinsurance Contract issued to Farm Family Casualty Insurance
Company effective January 1, 1997 (Incorporated by reference to Farm Family
Holdings, Inc. Form 10-Q for the quarter ended March 31, 1997)
21 Subsidiaries of the Registrant 55
</TABLE>
*Incorporated by reference to Registration Statement No. 333-4446
**Incorporated by reference to Farm Family Holdings, Inc. Form 10-K for the year
ended December 31, 1996
54
<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
55
<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 25,1998
56
<PAGE>
SIGNATURES
Pursuant to the requirements of Securities Exchange Act of 1934, this report has
been signed below by the following persons on behalf of the Registrant and in
the capacities and on the dates indicated.
<TABLE>
<S> <C> <C> <C>
President and CEO
/s/ Philip P. Weber (Principal Executive Officer) /s/ Richard A. Jerome Director
- -------------------------------- ---------------------------
Philip P. Weber February 26, 1998 Richard A. Jerome February 26, 1998
Executive Vice President - Finance &
Treasurer
/s/ Timothy A. Walsh (Principal Financial & Accounting /s/ Arthur D. Keown, Jr. Director
Officer)
- -------------------------------- ---------------------------
Timothy A. Walsh February 26, 1998 Arthur D. Keown, Jr. February 26, 1998
/s/ Robert L. Baker Director /s/ John W. Lincoln Director
- -------------------------------- ---------------------------
Robert L. Baker February 26, 1998 John W. Lincoln February 26, 1998
/s/ Randolph C. Blackmer, Jr. Director /s/ Wayne A. Mann Director
- -------------------------------- ---------------------------
Randolph C. Blackmer, Jr. February 26, 1998 Wayne A. Mann February 26, 1998
Director Director
- -------------------------------- ---------------------------
Fred G. Butler, Sr. February 26, 1998 Frank W. Matheson February 26, 1998
/s/ Joseph E. Calhoun Director /s/ John P. Moskos Director
- -------------------------------- ---------------------------
Joseph E. Calhoun February 26, 1998 John P. Moskos February 26, 1998
/s/ Jonathan M. Carpentar Director /s/ Norma R. O'Leary Director
- -------------------------------- ---------------------------
Jonathan M. Carpentar February 26, 1998 Norma R. O'Leary February 26, 1998
/s/ James V. Crane Director /s/ John I. Rigolizzo, Jr. Director
- -------------------------------- ---------------------------
James V. Crane February 26, 1998 John I. Rigolizzo, Jr. February 26, 1998
/s/ Sandra A. George Director /s/ Howard T. Sprow Director
- -------------------------------- ---------------------------
Sandra A. George February 26, 1998 Howard T. Sprow February 26, 1998
/s/ Stephen J. George Director /s/ William M. Stamp, Jr. Director
- -------------------------------- ---------------------------
Stephen J. George February 26, 1998 William M. Stamp, Jr. February 26, 1998
/s/ Gordon H. Gowen Director /s/ Charles A. Wilfong Director
- -------------------------------- ---------------------------
Gordon H. Gowen February 26, 1998 Charles A. Wilfong February 26, 1998
/s/ Jon R. Greenwood Director /s/ Tyler P. Young Director
- -------------------------------- ---------------------------
Jon R. Greenwood February 26, 1998 Tyler P. Young February 26, 1998
/s/ Clark W. Hinsdale III Director
- --------------------------------
Clark W. Hinsdale III February 26, 1998
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<NAME> Farm Family Casualty Insurance Company
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