-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, IWuABhUe85mPlbQnb9ig3kC2AM0Iqd7bj0tBnAuc0yhLIEi8WGiZG0UMJ2rJOvk0 pxPEYexNuyz94BX9+YWbUA== 0000940180-96-000162.txt : 19960620 0000940180-96-000162.hdr.sgml : 19960620 ACCESSION NUMBER: 0000940180-96-000162 CONFORMED SUBMISSION TYPE: POS AM PUBLIC DOCUMENT COUNT: 2 FILED AS OF DATE: 19960619 SROS: NYSE FILER: COMPANY DATA: COMPANY CONFORMED NAME: FARM FAMILY HOLDINGS INC CENTRAL INDEX KEY: 0001013564 STANDARD INDUSTRIAL CLASSIFICATION: [] IRS NUMBER: 141789227 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: POS AM SEC ACT: 1933 Act SEC FILE NUMBER: 333-04446 FILM NUMBER: 96582768 BUSINESS ADDRESS: STREET 1: PO BOX 656 CITY: ALBANY STATE: NY ZIP: 12201 BUSINESS PHONE: 5184315000 MAIL ADDRESS: STREET 1: PO BOX 656 CITY: ALBANY STATE: NY ZIP: 12201 POS AM 1 POST-EFFECTIVE AMEND NO. 2 AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON JUNE 19, 1996 REGISTRATION NO. 333-4446 - ------------------------------------------------------------------------------- - ------------------------------------------------------------------------------- SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 ------------ POST-EFFECTIVE AMENDMENT NO. 2 TO FORM S-1 REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933 ------------ FARM FAMILY HOLDINGS, INC. (Exact name of Registrant as specified in its charter) DELAWARE 6719 14-1789227 (State or other jurisdiction of incorporation or organization) (Primary Standard Industrial Classification Code Number) (I.R.S. Employer Identification Number) FARM FAMILY HOLDINGS, INC. P.O. BOX 656 ALBANY, NY 12201-0656 (518) 431-5000 (Address, including zip code, and telephone number, including area code, of Registrant's principal offices) ------------ VICTORIA M. STANTON EXECUTIVE VICE PRESIDENT, GENERAL COUNSEL AND SECRETARY FARM FAMILY HOLDINGS, INC. P.O. BOX 656 ALBANY, NY 12201-0656 (518) 431-5000 (Name, address, including zip code, and telephone number, including area code, of agents for service) ------------ Copies to: LARS BANG-JENSEN PETER J. GORDON LEBOEUF, LAMB, GREENE & MACRAE, L.L.P. SIMPSON THACHER & BARTLETT 125 WEST 55TH STREET 425 LEXINGTON AVENUE NEW YORK, NY 10019 NEW YORK, NY 10017 (212) 424-8000 (212) 455-2000 APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC: As soon as practicable after this Registration Statement becomes effective. If any of the securities being registered on this Form are to be offered on a delayed or continuous basis pursuant to Rule 415 under the Securities Act of 1933, check the following box. [_] If this Form is filed to register additional securities for an offering pursuant to Rule 462(b) under the Securities Act, please check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. [_] If this Form is a post-effective amendment filed pursuant to Rule 462(c) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. [_] If delivery of the prospectus is expected to be made pursuant to Rule 434, please check the following box. [_] - ------------------------------------------------------------------------------- - ------------------------------------------------------------------------------- FARM FAMILY HOLDINGS, INC. (CROSS-REFERENCE SHEET PURSUANT TO ITEM 501(B) OF REGULATION S-K SHOWING LOCATION IN PROSPECTUS OF INFORMATION REQUIRED BY ITEMS IN FORM S-1)
FORM S-1 ITEM LOCATION IN PROSPECTUS ------------- ---------------------- 1. Forepart of the Registration Statement and Outside Front Cover Page of Facing Page; Cross Reference Prospectus............................... Sheet; Outside Front Cover Page of Prospectus 2. Inside Front and Outside Back Cover Pages Inside Front and Outside Back of Prospectus............................ Cover Pages of Prospectus 3. Summary Information, Risk Factors and Ratio of Earnings to Fixed Charges....... Outside Front Cover Page of Prospectus; Prospectus Summary; Risk Factors; The Company; Business 4. Use of Proceeds.......................... Prospectus Summary; Use of Proceeds 5. Determination of Public Offering Price... Outside Front Cover Page of Prospectus; Prospectus Summary; The Reorganization; Underwriting 6. Dilution................................. Not Applicable 7. Selling Security Holders................. Not Applicable 8. Plan of Distribution..................... Outside Front Cover Page of Prospectus; Prospectus Summary; The Reorganization; Underwriting 9. Description of Securities to be Prospectus Summary; Risk Registered............................... Factors; The Reorganization; Option to Acquire Life Company; Description of Capital Stock; Underwriting 10. Interests of Named Experts and Counsel... Not Applicable 11. Information with Respect to the Outside Front Cover Page of Registrant............................... Prospectus; Prospectus Summary; Risk Factors; The Company; The Reorganization; Option to Acquire Life Company; Dividend Policy; Capitalization; Selected Consolidated Financial Data; Management's Discussion and Analysis of Financial Condition and Results of Operations; Business; Management; Certain Relationships and Related Transactions; Stock Ownership of Management; Description of Capital Stock; Shares Eligible for Future Sale; Schedules 12. Disclosure of Commission Position on Indemnification for Securities Act Liabilities.............................. Not Applicable
SUBJECT TO COMPLETION JUNE 19, 1996 PROSPECTUS 2,470,000 SHARES FARM FAMILY HOLDINGS, INC. COMMON STOCK [COMPANY LOGO APPEARS HERE] ($.01 PAR VALUE) All of the shares of Common Stock (the "Common Stock") of Farm Family Holdings, Inc., a Delaware corporation (the "Holding Company"), offered hereby (the "Shares") are being offered by the Holding Company (the "Public Offering"). The Shares constitute some or, if the over-allotment option is exercised in full, all of the shares of Common Stock that were not subscribed for in a subscription offering that expired on June 12, 1996 (the "Subscription Offering," and together with the Public Offering, the "Offerings"). The Holding Company received subscriptions at $21.00 per share (the "Subscription Price") for 163,980 shares of Common Stock in the Subscription Offering (the "Subscription Shares"). The Shares are being offered in connection with a plan of reorganization and conversion (the "Plan") pursuant to which Farm Family Mutual Insurance Company ("Farm Family Mutual") will convert from a New York mutual property and casualty insurance company to a New York stock property and casualty insurance company and become a wholly owned subsidiary of the Holding Company (the "Reorganization," as defined herein). In addition to the Shares and the Subscription Shares, an estimated 2,249,728 shares of Common Stock will be issued in the Reorganization to certain Eligible Policyholders and Participating Surplus Note Holders (as such terms are defined herein) in exchange for certain of their existing interests in Farm Family Mutual. The Subscription Shares were offered to certain Eligible Policyholders and Participating Surplus Note Holders in accordance with the preemptive rights provided to them under the Plan. See "The Reorganization." Prior to the earlier of (i) the Public Offering or (ii) the effective date of the Reorganization (the "Effective Date"), there will be no public market for the Common Stock of the Holding Company. It is currently anticipated that the price to public in the Public Offering (the "Public Offering Price") will be in the range of $20.00 to $22.00 per Share. See "Underwriting" for information relating to the factors considered in determining the Public Offering Price. Generally, if the Public Offering Price is less than the Subscription Price, the number of Subscription Shares to be issued to subscribers in the Subscription Offering will be increased, and if the Public Offering Price is greater than the Subscription Price, subscribers for Subscription Shares in the Subscription Offering will not be required to pay any additional amounts for such shares, nor will there be any adjustment in the number of Subscription Shares issued to them. As a result, the Public Offering Price may be greater than the effective price per share for subscribers in the Subscription Offering. See "The Reorganization--Subscription Offering and Public Offering." The Common Stock has been approved for listing on the New York Stock Exchange under the symbol "FFH," subject to official notice of issuance. SEE "RISK FACTORS" BEGINNING ON PAGE 10 FOR A DISCUSSION OF CERTAIN FACTORS THAT SHOULD BE CAREFULLY CONSIDERED BY PROSPECTIVE PURCHASERS. THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE. - --------------------------------------------------------------------------------
PRICE TO UNDERWRITING PROCEEDS TO PUBLIC DISCOUNT COMPANY(1) Per Share..................................... $ $ $ Total(2)...................................... $ $ $ - --------------------------------------------------------------------------------
(1) Before deducting expenses of the offering payable by the Holding Company, estimated to be $ . (2) The Holding Company has granted the Underwriters an option, exercisable within 30 days after the date hereof, to purchase up to an aggregate of 366,020 additional shares of Common Stock at the Price to Public, less Underwriting Discount, solely to cover over-allotments, if any. If the Underwriters exercise such option in full, the total Price to Public, Underwriting Discount and Proceeds to the Holding Company will be $ , $ and $ , respectively. See "Underwriting." The Shares are offered subject to receipt and acceptance by the Underwriters, to prior sale and to the Underwriters' right to reject any order in whole or in part and to withdraw, cancel or modify the offer without notice. It is expected that delivery of the Shares will be made at the office of Salomon Brothers Inc, Seven World Trade Center, New York, New York, or through the facilities of The Depository Trust Company, on or about , 1996. - ----------------------- SALOMON BROTHERS INC - ----------------------------------------------------------------- The date of this Prospectus is , 1996. Information contained herein is subject to completion or amendment. A registration statement relating to these securities has been filed with the Securities and Exchange Commission. These securities may not be sold nor may offers to buy be accepted prior to the time the registration statement becomes effective. This prospectus shall not constitute an offer to sell or the solicitation of an offer to buy nor shall there be any sale of these securities in any State in which such offer, solicitation or sale would be unlawful prior to registration or qualification under the securities laws of any such State. IN CONNECTION WITH THE PUBLIC OFFERING, THE UNDERWRITERS MAY OVER-ALLOT OR EFFECT TRANSACTIONS WHICH STABILIZE OR MAINTAIN THE MARKET PRICE OF THE COMMON STOCK AT A LEVEL ABOVE THAT WHICH MIGHT OTHERWISE PREVAIL IN THE OPEN MARKET. SUCH TRANSACTIONS MAY BE EFFECTED ON THE NEW YORK STOCK EXCHANGE, IN THE OVER- THE-COUNTER MARKET OR OTHERWISE. SUCH STABILIZING, IF COMMENCED, MAY BE DISCONTINUED AT ANY TIME. ---------------- After the consummation of the Reorganization, the Holding Company will be the holding company of a wholly owned New York insurance company subsidiary. The laws of the State of New York will prohibit any person from acquiring control of the Holding Company, and thus indirect control of such subsidiary, without the prior approval of the New York Superintendent of Insurance (the "Superintendent"). Control will be presumed to exist where any person, directly or indirectly, owns, controls, holds with the power to vote, or holds proxies representing 10% or more of the outstanding voting stock of the Holding Company, unless the Superintendent, upon application, determines otherwise. ---------------- THE NEW YORK STATE INSURANCE DEPARTMENT RECOGNIZES ONLY STATUTORY ACCOUNTING PRACTICES FOR DETERMINING AND REPORTING THE FINANCIAL CONDITION AND RESULTS OF OPERATIONS OF AN INSURANCE COMPANY, FOR DETERMINING ITS SOLVENCY UNDER THE NEW YORK INSURANCE LAW, AND FOR DETERMINING WHETHER ITS FINANCIAL CONDITION WARRANTS THE PAYMENT OF A DIVIDEND TO ITS STOCKHOLDERS. NO CONSIDERATION IS GIVEN BY THE DEPARTMENT TO FINANCIAL STATEMENTS PREPARED IN ACCORDANCE WITH GENERALLY ACCEPTED ACCOUNTING PRINCIPLES IN MAKING SUCH DETERMINATIONS. ---------------- FOR NORTH CAROLINA INVESTORS: THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE COMMISSIONER OF INSURANCE FOR THE STATE OF NORTH CAROLINA, NOR HAS THE COMMISSIONER OF INSURANCE RULED UPON THE ACCURACY OR ADEQUACY OF THIS DOCUMENT. ---------------- AVAILABLE INFORMATION The Holding Company has filed with the Securities and Exchange Commission (the "Commission") a Registration Statement on Form S-1 (together with all amendments, exhibits, schedules and supplements thereto, the "Registration Statement") under the Securities Act of 1933, as amended (the "Securities Act"), and the rules and regulations promulgated thereunder, with respect to the shares of Common Stock offered in the Offerings. This Prospectus, which constitutes a part of the Registration Statement, does not contain all the information set forth in the Registration Statement. For further information with respect to the Holding Company and the shares of Common Stock offered hereby, reference is made to the Registration Statement. Any interested party may inspect the Registration Statement, without charge, at the public reference facilities maintained by the Commission at Room 1024, 450 Fifth Street, N.W., Washington, D.C. 20549 and at its regional offices located at Citicorp Center, 500 West Madison Street, Suite 1400, Chicago, Illinois 60661 and Seven World Trade Center, Suite 1300, New York, New York 10048. Copies of such material may be obtained from the Public Reference Section of the Commission at 450 Fifth Street, N.W., Room 1024, Washington, D.C. 20549 at prescribed rates. The statements or descriptions herein concerning any agreement or other document referred to herein are summaries only. Where such agreement or other document is an exhibit to the Registration Statement, reference is made to such exhibit for a full statement of the provisions thereof. The Holding Company is subject to the information reporting requirements of the Securities Exchange Act of 1934, as amended. The Holding Company intends to furnish its stockholders with annual reports containing consolidated financial statements audited by its independent certified public accountants. 2 PROSPECTUS SUMMARY Pursuant to the Plan, Farm Family Mutual will convert from a New York mutual property and casualty insurance company to a New York stock property and casualty insurance company, Farm Family Casualty Insurance Company ("FFCIC"), and become a wholly owned subsidiary of the Holding Company. Following the Reorganization, the only significant assets of the Holding Company will be the capital stock of FFCIC acquired in the Reorganization and the net proceeds of the Offerings retained by the Holding Company and not contributed to FFCIC. See "The Reorganization." The Holding Company has an option to acquire Farm Family Life Insurance Company, a New York stock life insurance company (the "Life Company"). See "Option to Acquire Life Company." For purposes of this Prospectus, the terms "Farm Family" and the "Company" refer, at all times prior to the Effective Date, to Farm Family Mutual and its subsidiaries, including the Holding Company, and at all times on and after the Effective Date, to the Holding Company and its subsidiaries, including FFCIC. The term "FFCIC" refers to Farm Family Mutual before the Effective Date and FFCIC on and after the Effective Date. The following summary is qualified in its entirety by the more detailed information and consolidated financial statements (including the notes thereto) appearing elsewhere in this Prospectus. All financial information set forth herein is presented in accordance with generally accepted accounting principles ("GAAP"), unless otherwise noted. See "Glossary of Selected Insurance Terms" for definitions of certain items used in this Prospectus. THE COMPANY Farm Family 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. 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 the Life Company, an affiliate of Farm Family owned by Farm Bureau organizations. The Company believes that the distinctive focus of Farm Family and its agents on meeting the specialized insurance needs of rural communities has provided the Company with the knowledge and experience to adapt to changes in the demographics of its markets and in the nature of agricultural related businesses. In addition to insuring those engaged in agricultural pursuits such as dairy, vegetable and fruit farming, the Company insures a wide range of other businesses related to agriculture, such as distributors of agricultural products, horse breeding and training facilities, landscapers, nurseries, florists, wineries and growers of specialty products. In recent years, the Company has also introduced businessowners products for certain retail and contractor businesses and for owners of apartment and office buildings, as well as a homeowners product. The Company markets its insurance products through more than 200 Farm Family agents and field managers, who are located in the rural and suburban communities served by the Company. These agents generally sell insurance products only for the Company and the Life Company. The Company believes that Farm Family's name recognition, policyholder loyalty and policyholder satisfaction with agent relationships and claim service, as well as its Farm Bureau relationship, are important considerations in new customer referrals, cross-selling of additional insurance products and policyholder retention. The Company's principal strategy is to maintain its focus on meeting many of the specialized insurance needs of Northeastern rural and suburban communities. The Company's flagship product, the Special Farm Package, is a flexible product 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 3 to leverage its local reputation, agency force, knowledge and experience to expand its product offerings to a wider variety of customers in rural and suburban communities. In addition, the Company will continue to seek to facilitate and expedite sales, underwriting and policy administration functions through the expanded use of local service centers and computer networking communications with the home office. The Company believes that its ability to adapt to changes in its targeted markets is demonstrated by the growth of its earned premiums over the past five years from approximately $85.3 million in 1991 to $116.9 million in 1995, an increase of $31.6 million, or 37.1%. Total assets and policyholders' equity as of March 31, 1996 were $276.7 million and $71.1 million, respectively. As of March 31, 1996, approximately 96.1% of the Company's cash and invested assets consisted of investment grade securities. See "Management's Discussion and Analysis of Financial Condition and Results of Operations" and "Business-- Investments." Farm Family is closely affiliated with the Farm Bureaus in the ten states in which the Company operates (collectively, the "Farm Bureaus"). Farm Family has the exclusive endorsement of the Farm Bureaus to market property and casualty insurance in these states. Farm Family was originally organized through the efforts of certain of these Farm Bureaus, and substantially all of the directors of the Company are associated with Farm Bureau organizations in the Northeast. The Farm Bureaus are non-profit agricultural organizations that are affiliated with the American Farm Bureau Federation, the nation's largest general farm organization with over four million members. The Farm Bureaus have traditionally sought to advance the interests of the agricultural community. As a matter of policy, which the Company plans to continue after the Effective Date, and as set forth in FFCIC's bylaws, membership in state or county Farm Bureau organizations is generally a prerequisite for the issuance or renewal of any policy by FFCIC except in the case of policies issued in the residual market or to employees of the Company and its affiliates. Potential policyholders not engaged in agricultural businesses can generally purchase associate memberships in the Farm Bureaus. As of March 31, 1996, approximately 70% of the over 70,000 Farm Bureau members in the ten states in which the Company operates had policies issued by FFCIC. See "Risk Factors--Relationships with Farm Bureaus and Life Company; Potential Conflicts of Interest," "Business--Relationship with Farm Bureaus" and "Certain Relationships and Related Transactions." THE REORGANIZATION On February 14, 1996, the Board of Directors of FFCIC (the "FFCIC Board") adopted the Plan, pursuant to Section 7307 of the New York Insurance Law, whereby Farm Family Mutual will convert from a mutual property and casualty insurance company to a stock property and casualty insurance company and become a wholly owned subsidiary of the Holding Company (the "Reorganization"). The Plan was amended by the FFCIC Board on April 23, 1996 to effect certain minor modifications, primarily of a technical and clarifying nature. The principal purposes of the Reorganization are to improve the Company's access to the capital markets and to raise capital to permit FFCIC to expand and develop its business in the rural and suburban areas in which FFCIC currently operates. Under the Plan, Eligible Policyholders (as defined in the Plan) will receive either shares of Common Stock of the Holding Company or cash based on the amount of net premiums they have paid to Farm Family Mutual during the three- year period preceding November 1, 1995. In addition, holders of Surplus Notes (as defined herein) electing to surrender such notes in the Reorganization will receive shares of Common Stock or cash in exchange for such notes based on the principal amount of the Surplus Notes outstanding on the Effective Date plus accrued and unpaid interest thereon. The Plan provides that if the Public Offering closes on the Effective Date, Eligible Policyholders allocated fewer than 25 shares of common stock of FFCIC ("FFCIC Common Stock") under the Plan will receive cash in lieu of shares of Common Stock. The Plan also provides that if the Public Offering does not close on the Effective Date, such Eligible Policyholders may receive cash or shares of Common Stock at the election of the Company. The Company may borrow funds from a bank or other unaffiliated lender for the purpose of making such cash payments to Eligible Policyholders allocated fewer than 25 shares of FFCIC Common Stock if the Public Offering does not close on the Effective Date. 4 Following a public hearing on the Plan on April 2, 1996, the Superintendent issued an opinion and decision approving the Plan on May 1, 1996, upon finding that the Plan does not violate the New York Insurance Law, is not inconsistent with law, is fair and equitable and is in the best interests of the policyholders of FFCIC and the public. On June 17, 1996, the Plan was approved by the policyholders of Farm Family Mutual, by the affirmative vote of 93% of the policyholders voting on the Plan at a special meeting of policyholders (the "Special Meeting"). On the date hereof, the effectiveness of the Plan is contingent upon (i) the FFCIC Board declaring the Plan effective and (ii) the opinion of the Company's special tax counsel as originally delivered in connection with the Plan being confirmed as of the Effective Date. The Plan provides that the Effective Date shall be such date as is determined by the FFCIC Board, which may not be later than 180 days after the date of the Special Meeting without the approval of the Superintendent. The Plan provides that each Eligible Policyholder that will be issued shares of Common Stock in the Reorganization (a "Subscription Policyholder") and each holder of a Surplus Note that elected to receive shares of Common Stock in the Reorganization (a "Participating Surplus Note Holder") generally will have, for a period of three years following the Effective Date, a preemptive right to purchase a proportionate amount of any new issue of shares of Common Stock of the Holding Company. Pursuant to the Plan, 3,000,000 shares of Common Stock were offered to Subscription Policyholders and Participating Surplus Note Holders in the Subscription Offering prior to the Public Offering made through this Prospectus. The Subscription Offering expired on June 12, 1996. A total of 163,980 Subscription Shares were subscribed for in the Subscription Offering at the Subscription Price of $21.00 per share by Subscription Policyholders and Participating Surplus Note Holders who exercised their preemptive rights under the Plan. Generally, if the Public Offering Price is less than the Subscription Price, the effective price per share paid by subscribers for Subscription Shares in the Subscription Offering shall be the Public Offering Price and additional shares of Common Stock will be issued to such subscribers to offset the effect of such price difference, and if the Public Offering Price is greater than the Subscription Price, subscribers for Subscription Shares in the Subscription Offering will not be required to pay any additional amounts for such shares, nor will there be any adjustment in the number of Subscription Shares issued to them. The shares of Common Stock not subscribed for in the Subscription Offering are being offered to the public in the Public Offering made through this Prospectus. The Board of Directors of the Holding Company (the "Holding Company Board") may, at any time prior to the Effective Date, elect to cancel or rescind the Subscription Offering, and consequently not to hold the Public Offering, without withdrawing the Plan. See "The Reorganization." RELATIONSHIP WITH LIFE COMPANY; OPTION AGREEMENT The Life Company was established in 1953 by certain Farm Bureaus to provide life insurance products for Farm Bureau members principally in the Northeast. All of the issued and outstanding shares of capital stock of the Life Company are owned by Farm Bureau organizations and their affiliates in the Northeast. Substantially all of the directors and executive officers of the Company are also directors and executive officers of the Life Company. In addition, most of the Company's agents and employees also perform similar functions for the Life Company. While Farm Family Mutual and the Life Company considered the possibility, as part of the Reorganization, of bringing these two companies under a common ownership structure, the achievement of such common ownership prior to the Effective Date was not practical due, in part, to the difficulty of valuing the Life Company. The Life Company's financial statements are currently prepared only in accordance with statutory principles prescribed or permitted by the Insurance Department of the State of New York (the "New York Insurance Department"). The Company believes that such financial statements do not provide an adequate basis to determine an appropriate fair market valuation for the Life Company. Financial statements prepared according to GAAP for the Life Company are not expected to be available until after the Effective Date. The Holding Company has entered into the Option Purchase Agreement, dated February 14, 1996, with the shareholders of the Life Company (the "Option Purchase Agreement"), pursuant to which the Holding Company has, for a two- 5 year period commencing on the Effective Date, the option to acquire the Life Company in exchange for shares of the Holding Company's capital stock, subject to certain conditions, which include the approval by the stockholders of the Holding Company and applicable regulatory authorities. The exercise price under the Option Purchase Agreement will be payable by the Holding Company to the Life Company shareholders in shares of Common Stock and, at the option of such shareholders, in up to $6 million stated value of shares of Series A Preferred Stock (as defined herein). There will be no preemptive rights with respect to any shares of capital stock of the Holding Company issued to shareholders of the Life Company upon exercise of the Option Purchase Agreement. If the Company does not exercise its option under the Option Purchase Agreement to acquire the Life Company, conflicts of interest may exist as it is anticipated that the Company and the Life Company will continue to have separate ownership, while maintaining substantially identical management and continuing to share the same agency force, most employees and office facilities. See "Risk Factors-- Relationships with Farm Bureaus and Life Company; Potential Conflicts of Interest" and "Option To Acquire Life Company." The Life Company principally sells term, traditional whole life and universal life products, in addition to single and flexible premium deferred annuities, single premium immediate annuities, and disability income insurance products, and operates in the same ten states as Farm Family through a common distribution system. The Life Company's revenues and net income, calculated on the basis of statutory accounting practices, for the year ended December 31, 1995 were $141.7 million and $12.0 million, respectively, and for the three months ended March 31, 1996 were $31.6 million and $1.5 million, respectively. At March 31, 1996, the Life Company's total assets and total capital and surplus, calculated on the basis of statutory accounting practices, were $692.1 million and $63.4 million, respectively. As of March 31, 1996, approximately $7.4 million of the Life Company's total surplus, as reflected on statutory financial statements, constituted shareholders' surplus. In the year ended December 31, 1995 and the three months ended March 31, 1996, net income available to shareholders was $3.4 million and $0.6 million, respectively. The Life Company requested that the New York Insurance Department approve the reallocation of a portion of its unassigned surplus to shareholders' surplus. The New York Insurance Department has advised the Life Company that it will not object to the retroactive reallocation of "a portion of policyholders' surplus to the shareholder account," provided such reallocation is carried out within applicable statutory limitations and that the amount reallocated can be demonstrated as not having any undue negative effect on participating policyholders. As a result, a portion of the Life Company's unassigned surplus may be reallocated to shareholders' surplus. The Life Company's determination as to whether and to what extent it will retroactively reallocate a portion of unassigned surplus to shareholders' surplus will depend upon, among other factors, actuarial determinations and considerations, the decision of the Board of Directors of the Life Company to make such reallocation, the approval of the Life Company's shareholders and the review of such reallocation by the New York Insurance Department. See "Option to Acquire Life Company." See "Risk Factors--Relationships with Farm Bureaus and Life Company; Potential Conflicts of Interest," "--Effect of Exercise of Option to Acquire Life Company," "Option to Acquire Life Company," "Business--Relationship with Farm Bureaus" and "Certain Relationships and Related Transactions." 6 THE OFFERINGS Common Stock offered by the Holding Company in the Public Offering...... 2,470,000 shares(/1/) Common Stock to be distributed in the Reorganization.................. 2,249,728 shares(/2/) Common Stock subscribed for in the Subscription Offering............... 163,980 shares(/3/) Common Stock to be outstanding after the Effective Date.................. 4,883,708 shares(/1/)(/2/) Use of proceeds to the Holding Company from the Offerings.......... It is anticipated that the proceeds to the Company from the Public Offering together with the proceeds from the Subscription Offering of $3,443,580 will be applied as follows: (i) approximately $16.0 million will be used to make cash payments to certain Eligible Policyholders; (ii) $1.2 million will be used to make cash payments to certain holders of Surplus Notes; (iii) approximately $3.6 million will be used to pay expenses incurred in the Reorganization (including the expenses of the Offerings); (iv) approximately $20.0 million will be contributed to FFCIC to increase its capital; and (v) the remainder will be retained by the Holding Company for general corporate purposes. See "Use of Proceeds." Dividend policy...................... The Holding Company does not intend to pay dividends in the foreseeable future. See "Dividend Policy." Listing.............................. The Common Stock has been approved for listing on the New York Stock Exchange, subject to official notice of issuance. New York Stock Exchange Symbol....... FFH - -------- (1) Assumes that the Underwriters' over-allotment option is not exercised. See "The Reorganization" and "Underwriting." The number of shares of Common Stock offered in the Public Offering may be decreased if the number of Subscription Shares to be issued in the Subscription Offering is increased because the Public Offering Price is less than the Subscription Price. See "The Reorganization--Subscription Offering and Public Offering." (2) Includes 2,236,616 shares of Common Stock to be issued in the Reorganization to certain Eligible Policyholders. Assumes that, for purposes of calculating the Outstanding Note Amount (as defined herein), the Effective Date will be July 31, 1996 and that, accordingly, 13,112 shares of Common Stock will be issued to Participating Surplus Note Holders in the Reorganization in exchange for their Surplus Notes. See "The Reorganization--The Plan--Payment of Consideration to Eligible Policyholders and Holders of Surplus Notes." (3) The number of Subscription Shares to be issued in the Subscription Offering may be increased if the Public Offering Price is less than the Subscription Price. See "The Reorganization--Subscription Offering and Public Offering." 7 SUMMARY CONSOLIDATED FINANCIAL DATA The following table sets forth certain consolidated financial data for FFCIC and its subsidiaries prior to the Reorganization. The consolidated statement of income data set forth below for the years ended December 31, 1993, 1994 and 1995 and the consolidated balance sheet data at December 31, 1994 and 1995 are derived from the consolidated financial statements of FFCIC appearing elsewhere herein, which have been audited by Coopers & Lybrand L.L.P., independent auditors, whose report thereon appears elsewhere herein. The consolidated statement of income data for the years ended December 31, 1991 and 1992 and for the three months ended March 31, 1995 and 1996 and the consolidated balance sheet data at December 31, 1991, 1992 and 1993 and at March 31, 1995 and 1996 are derived from the unaudited consolidated financial statements of FFCIC. The Company believes that such unaudited financial data fairly reflect the consolidated results of operations and the consolidated financial condition of FFCIC for such periods. This data should be read in conjunction with the Consolidated Financial Statements, and notes thereto and other financial information, as well as "Management's Discussion and Analysis of Financial Condition and Results of Operations," included elsewhere herein. See Note 11 in "Notes to Consolidated Financial Statements" for a discussion of the principal differences between GAAP and statutory accounting practices, and for a reconciliation of consolidated net income and policyholders' equity, as reported in conformity with GAAP, with consolidated statutory net income and statutory capital and surplus, as determined in accordance with statutory accounting practices, as prescribed or permitted by the New York Insurance Department.
THREE MONTHS YEAR ENDED DECEMBER 31, ENDED MARCH 31, ---------------------------------------- --------------- 1991 1992 1993 1994 1995 1995 1996 ------ ------ ------ ------ ------ ------- ------- (DOLLARS IN MILLIONS, EXCEPT PER SHARE DATA) STATEMENT OF INCOME DATA: Revenues: Premiums.............. $ 85.3 $ 90.0 $ 96.7 $101.5 $116.9 $ 27.9 $ 31.7 Net investment income. 12.8 12.9 13.8 13.2 14.3 3.5 3.9 Net realized 1.0 1.0 (0.2) 1.3 0.9 -- -- investment gains (losses)................ Other income.......... 0.2 0.5 0.7 0.7 0.9 0.2 0.2 ------ ------ ------ ------ ------ ------- ------- Total revenues...... 99.3 104.4 111.0 116.7 133.0 31.6 35.8 ------ ------ ------ ------ ------ ------- ------- Losses and Expenses: Losses and loss 74.3 72.1 73.2 82.7 83.2 19.2 25.7 adjustment expenses..... Underwriting expenses. 23.7 24.0 26.8 28.8 34.9 8.2 8.8 Interest and other 0.3 0.3 0.3 0.3 0.3 0.1 0.1 expense................. ------ ------ ------ ------ ------ ------- ------- Total losses and 98.3 96.4 100.3 111.8 118.4 27.5 34.6 expenses................ ------ ------ ------ ------ ------ ------- ------- Income before federal 1.0 8.0 10.7 4.9 14.6 4.1 1.2 income taxes and extraordinary item...... Federal income tax 0.4 1.8 3.1 1.4 5.0 1.2 0.4 expense................. ------ ------ ------ ------ ------ ------- ------- Income before 0.6 6.2 7.6 3.5 9.6 2.9 0.8 extraordinary item...... Extraordinary item-- -- -- -- -- -- -- 0.5 Reorganization expenses. ------ ------ ------ ------ ------ ------- ------- Net income............. $ 0.6 $ 6.2 $ 7.6 $ 3.5(/1/) $ 9.6 $ 2.9 $ 0.3(/1/) ====== ====== ====== ====== ====== ======= ======= BALANCE SHEET DATA (AT PERIOD END): Total investments(/2/). $150.2 $160.8 $177.7 $170.6 $207.9 $180.5 $202.3 Total assets........... 204.4 221.5 244.1 243.1 278.3 253.5 276.7 Long-term debt......... 2.8 2.8 2.8 2.7 2.7 2.7 2.7 Total liabilities...... 163.8 175.0 183.6 190.1 204.1 194.6 205.6 Total equity(/2/)...... 40.6 46.5 60.5 53.0 74.2 58.9 71.1 ANALYTICAL DATA (UNAUDITED): Net income per $ 0.21 $ 2.07 $ 2.53 $ 1.18 $ 3.20 $ 0.97 $ 0.10 share(/3/).............. Book value per 13.54 15.48 20.17 17.66 24.72 19.63 23.70 share(/2/)(/3/).........
8
THREE MONTHS YEAR ENDED DECEMBER 31, ENDED MARCH 31, -------------------------------------- ---------------- 1991 1992 1993 1994 1995 1995 1996 ------ ------ ------ ------ ------ ------- ------- (DOLLARS IN MILLIONS, EXCEPT PER SHARE DATA) GAAP RATIOS: Loss and Loss 87.1% 80.2% 75.7% 81.5% 71.1% 68.8% 81.2% Adjustment Expense Ratio(/4/).............. Underwriting Expense 27.8% 26.6% 27.7% 28.4% 29.8% 29.5% 27.7% Ratio(/5/).............. Combined Ratio(/6/).... 114.9% 106.8% 103.4% 109.9% 100.9% 98.3% 108.9% STATUTORY DATA (AT PERIOD END): Statutory Combined 115.2% 106.0% 104.2% 108.9% 101.0% 100.3% 107.2% Ratio................... Statutory Surplus...... $ 29.5 $ 33.5 $ 39.1 $ 42.9 $ 55.9 $ 45.2 $ 57.7 Ratio of annual statutory net written premiums to statutory surplus..... 2.75x 2.73x 2.52x 2.46x 2.16x 2.45x 2.15x
- -------- (1) While the Company regularly experiences losses from storm and weather related events, net income for the year ended December 31, 1994 and the three months ended March 31, 1996 was adversely affected by unusually high losses and loss adjustment expenses believed to be storm and weather related, which aggregated $7.9 million and $6.9 million, respectively. See "Management's Discussion and Analysis of Financial Condition and Results of Operations." (2) Due to the adoption by the Company on December 31, 1993 of Statement of Financial Accounting Standards ("SFAS") No. 115, "Accounting for Certain Investments in Debt and Equity Securities," total investments and policyholders' equity were adjusted to reflect changes in market value, which resulted in an increase of $6.8 million, a reduction of $11.1 million and an increase of $11.7 million as of December 31, 1993, 1994 and 1995, respectively, and an increase of $3.0 million and a decrease of $3.4 million as of March 31, 1995 and 1996, respectively. (3) Gives effect in all periods to the allocation in the Reorganization of 3,000,000 shares of Common Stock to Eligible Policyholders. (4) Calculated by dividing losses and loss adjustment expenses by premiums. (5) Calculated by dividing underwriting expenses by premiums. (6) The sum of the Loss and Loss Adjustment Expense Ratio and the Underwriting Expense Ratio. 9 RISK FACTORS Prospective investors in the Shares offered hereby should consider carefully the matters set forth below as well as other information set forth in this Prospectus. CATASTROPHE LOSS EXPOSURES As an insurer of property risks, Farm Family's operating results and financial condition may be significantly affected by the number and severity of natural disasters and other events such as hurricanes, earthquakes, tornadoes, wind, hail, fires, severe winter weather and explosions. The geographic concentration of Farm Family's business may increase its exposure to the risk of catastrophic losses. Farm Family markets its insurance products primarily in the Northeast and writes significant amounts of property coverages in areas exposed to the risk of losses from hurricanes (chiefly southern New York, including Long Island, eastern New Jersey and southern Connecticut) and severe winter storms. Farm Family maintains reinsurance coverage to mitigate the effect of losses from catastrophes. Farm Family has purchased reinsurance for catastrophic property losses for 1996, under which Farm Family reinsures 95% of losses per occurrence over $6.0 million up to a maximum of $51.0 million and approximately 79% of the losses between $3.0 million and $6.0 million per occurrence. To a limited extent, Farm Family is also exposed to the risk of catastrophic losses on books of property business reinsured by the Company in other geographic areas of the United States. As of March 31, 1996, Farm Family's aggregate loss exposure for reinsurance assumed was $11.2 million. The occurrence of catastrophic events from time to time could have a material adverse effect on the Company's operating results and financial condition. See "--Geographic Concentration of Business," "Management's Discussion and Analysis of Financial Condition and Results of Operations" and "Business--Reinsurance." ADEQUACY OF LOSS RESERVES Farm Family is required to maintain reserves to cover its estimated ultimate liability for losses and loss adjustment expenses ("LAE") with respect to reported and unreported claims incurred. Reserves are estimates involving actuarial and statistical projections at a given time of what the Company expects to be the cost of the ultimate settlement and administration of claims based on facts and circumstances then known, predictions of future events, estimates of future trends in claims severity and judicial theories of liability, legislative activity and other variable factors, such as inflation. The Company's overall reserve practice provides for ongoing claims evaluation and adjustment (if necessary) based on the development of related data and other relevant information pertaining to such claims. Loss and LAE reserves, including reserves for claims which have been incurred but not yet reported, are adjusted no less than quarterly, and in some instances more frequently. The uncertainties of estimating insurance reserves are greater for certain types of property and casualty insurance lines written by the Company, particularly workers' compensation and other liability coverages, because a longer period of time may elapse before a definitive determination of ultimate liability may be made and because of the changing judicial and political climates relating to these types of claims. In addition, the Company's occurrence-based policies written before 1987 typically did not have an exclusion for environmental losses. The Company believes, based on its experience to date, that it has minimal exposure to such environmental losses and, as such, it maintains de minimis reserves with respect to these losses. The establishment of appropriate reserves is an inherently uncertain process and there can be no assurance that ultimate losses will not materially exceed Farm Family's loss reserves. To the extent that reserves prove to be inadequate in the future, the Company would have to increase such reserves and incur a charge to earnings in the period such reserves are increased, which could have a material adverse effect on the Company's results of operations and financial condition. See "Business--Loss and LAE Reserves." A.M. BEST RATING Ratings assigned by A.M. Best Company, Inc. ("A.M. Best") are an important factor influencing the competitive position of insurance companies. A.M. Best ratings are based upon factors of concern to 10 policyholders and are not directed toward the protection of investors. As such, the Company's A.M. Best rating is not intended to provide a basis for the purchase of Shares hereunder. A.M. Best affirmed an "A-" (Excellent) rating (its fourth highest out of 15 rating categories) for Farm Family Mutual in April 1996. There can be no assurance that FFCIC will be able to maintain the current rating. The Company believes that its business is sensitive to ratings and that a rating downgrade may affect its ability to underwrite new business and to assume reinsurance. As a result, if FFCIC were to experience a rating downgrade, the Company's business and results of operations could be materially adversely affected. See "Business--A.M. Best Rating." VARIABILITY OF OPERATING RESULTS The operating results of property and casualty insurers, including Farm Family, are subject to significant variability due to a number of factors, including extreme weather conditions and natural disasters, regulation, competition, judicial trends, changes in the investment and interest rate environment and general economic conditions. The Company's operating results may also be affected by changes in supply and demand for property and casualty insurance and reinsurance, which have historically been subject to significant fluctuations. Because of these and other factors, historic results of operations may not be indicative of future operations. See "Management's Discussion and Analysis of Financial Condition and Results of Operations." GEOGRAPHIC CONCENTRATION OF BUSINESS All premiums directly written by Farm Family are generated in Connecticut, Delaware, Maine, Massachusetts, New Hampshire, New Jersey, New York, Rhode Island, Vermont and West Virginia. For the years ended December 31, 1993, 1994 and 1995 and for the three months ended March 31, 1996, 38.8%, 38.5%, 39.1% and 37.5%, respectively, of the Company's direct written premiums were derived from policies written in New York and, for the same periods, 19.0%, 19.6%, 20.8% and 21.5%, 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. The revenues and profitability of the Company may be significantly affected by prevailing economic, regulatory, demographic and other conditions in New York, New Jersey and the other states in which the Company operates. See "--Catastrophe Loss Exposures" and "Business--Marketing." COMPETITION The property and casualty insurance market is highly competitive. Farm Family competes with stock insurance companies, mutual companies, local cooperatives and other underwriting organizations. Certain of these competitors have substantially greater financial, technical and operating resources than the Company. 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, rather than the use of agents paid on a commission basis as the Company does, or other methods. See "Business--Competition." RELATIONSHIPS WITH FARM BUREAUS AND LIFE COMPANY; POTENTIAL CONFLICTS OF INTEREST Farm Family is closely affiliated with the Farm Bureaus, and substantially all of the Company's directors are associated with Farm Bureau organizations. The Company has various financial arrangements and interrelationships with the Farm Bureaus, including the membership list purchase agreements. See "Business--Relationship with Farm Bureaus" and "Certain Relationships and Related Transactions--Farm Bureaus." Because a substantial portion of the Company's business is concentrated in a relatively small number of states, a significant change in or the termination of the Company's relationship with the Farm Bureaus in certain of these states could have a material adverse effect on the Company's results of operations and financial condition. In addition, the Farm Bureaus and their affiliates own all the outstanding shares of common stock of the Life Company. Substantially all of the directors and executive officers of the Company are also directors and executive officers of the Life Company. The Company and the Life Company have substantially identical management, share the same agency force and most employees, and utilize common office facilities. Most administrative and operating expenses are allocated between the two companies pursuant to an expense sharing 11 agreement. If the Company does not exercise its option under the Option Purchase Agreement to acquire the Life Company, it is anticipated that the Company and the Life Company will continue to have separate ownership, while maintaining substantially identical management and continuing to share the same agency force, most employees and office facilities. In addition, the Company places certain reinsurance coverages with United Farm Family Insurance Company, a wholly owned subsidiary of the Life Company ("United"). See "Certain Relationships and Related Transactions--Life Company" and "Option to Acquire Life Company." In view of the substantial relationships among the Company, the Farm Bureaus, the Life Company and United, conflicts of interest are likely to exist with respect to, including, without limitation, existing and future business dealings, the Company's underwriting practices and policies, the relative commitment of time and energy by the executive officers and other employees to the respective businesses of the Company and the Life Company, potential acquisitions of businesses or properties (including the exercise by the Company of its option to acquire the Life Company), the issuance of additional securities, the election of new or additional directors and the payment of dividends by the Company. The Company has not instituted any formal plan or arrangement to address potential conflicts of interest that may exist with the Farm Bureaus or with the Life Company. There can be no assurance that any conflicts of interest will be resolved in favor of the Company. Under Delaware and New York law, a person who is a director of both the Company and the Life Company owes fiduciary duties to both corporations and their respective shareholders. As a result, persons who are directors of the Company and the Life Company are required to exercise their fiduciary duties in light of what they believe to be best for each of the companies and its shareholders. See "Certain Relationships and Related Transactions." EFFECT OF EXERCISE OF OPTION TO ACQUIRE LIFE COMPANY Pursuant to the Option Purchase Agreement, the exercise price for the shares of common stock of the Life Company is payable by the Holding Company in shares of Common Stock and, at the option of the shareholders of the Life Company, in up to $6 million stated value of shares of Series A Preferred Stock, par value $.01 per share (the "Series A Preferred Stock"), of the Holding Company. Each share of Series A Preferred Stock will be entitled to one vote per share and cumulative dividends will be payable quarterly in cash on each share at a rate equal to 8% per annum. The Series A Preferred Stock will be subject to mandatory redemption by the Company, on the date following the twentieth anniversary of the issuance date, and optional redemption on and after the tenth anniversary of the issuance date. Each share of Series A Preferred Stock may be redeemed, at the option of the Holding Company, in cash or in shares of Common Stock. The Holding Company's decision whether to redeem shares of Series A Preferred Stock in cash or in shares will depend on its financial condition and other circumstances at that time, including its liquidity. Purchasers of Shares in the Public Offering may experience dilution to the extent that the Holding Company issues new shares of Common Stock or Series A Preferred Stock to the shareholders of the Life Company. The number of shares of the Holding Company's capital stock that will be issued to shareholders of the Life Company and the extent of dilution experienced by shareholders of the Holding Company will depend on the valuation of the Life Company. Such valuation may be significantly influenced by the possible reallocation of a portion of unassigned surplus of the Life Company to shareholders' surplus. Depending on the valuation of the Life Company, including any such reallocation, certain shareholders of the Life Company may become significant shareholders of the Holding Company upon the exercise of the option to acquire the Life Company. In addition, the market price of the Shares may be affected by the issuance of new shares of Common Stock or Series A Preferred Stock to the shareholders of the Life Company. See "Option to Acquire Life Company." POTENTIAL LIABILITY FOR ENVIRONMENTAL AND POLLUTION RISKS Since 1987, the Company has implemented a standard environmental and pollution exclusion in some of its commercial liability and property policies, including its Special Farm Package product. However, the Special Farm Package contains a limited coverage endorsement for above-ground environmental and pollution liabilities. Also, the industry standard personal and commercial automobile and homeowners policies do not contain environmental and pollution exclusions. The Company has paid no material claims arising from environmental 12 and pollution related liabilities with respect to policies written either before or after 1987. The Company does not believe that any pending claims or administrative or judicial proceedings arising from environmental and pollution related liabilities will have a material adverse effect on the Company's financial condition, and is not aware of any material threatened claims or administrative or judicial proceedings arising from such liabilities. However, there can be no assurance that the Company's exposure to environmental and pollution liabilities with respect to policies written either before or after 1987 will not have a material adverse effect on the Company's results of operations or financial condition. EFFECT OF REGULATION Farm Family 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 and agents, (v) approving accounting methods and methods of setting loss and expense reserves, (vi) setting requirements for and limiting the types and amounts of investments, (vii) establishing requirements for the filing of annual statements and other financial reports, (viii) conducting periodic statutory examinations of the affairs of insurance companies, (ix) approving proposed changes in control and (x) limiting the amount of dividends that may be paid without prior regulatory approval. Such regulation and supervision are primarily for the benefit and protection of policyholders and not for the benefit of investors. The insurance regulatory structure has been subject to increased scrutiny in recent years by the National Association of Insurance Commissioners (the "NAIC"), federal and state legislative bodies and state regulatory authorities. Various new regulatory standards have been adopted in recent years. No assurance can be given that future legislation or regulatory changes will not adversely affect the business and results of operations of Farm Family. "See "Business--Regulation." Adverse legislative and regulatory activity constraining Farm Family's ability adequately to price automobile, workers' compensation and other insurance coverages may occur in the future. In recent years, insurers have been under pressure from certain state regulators, legislators and special interest groups to reduce, freeze or set rates at levels which may not correspond with underlying costs. In addition, 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 (assigned risk plans and mandatory pools) which provide certain insurance coverages (most notably automobile insurance coverages) to consumers who are otherwise unable to obtain such coverages from private insurers. The Company's participation in such residual market mandatory pools resulted in the Company recognizing net losses of $428,000 and $763,000 in 1993 and 1995, respectively, a net gain of $275,000 in 1994, and net gains of $9,000 and $309,000 for the three months ended March 31, 1995 and 1996, respectively. Residual market premium rates for automobile insurance have generally been inadequate. The mandatory state residual market automobile assigned risk plans in which the Company participates resulted in the Company recognizing net losses of approximately $1.1 million, $0.7 million and $2.5 million during the years ended December 31, 1993, 1994 and 1995, respectively, and net losses of $0.5 million and $0.6 million for the three months ended March 31, 1995 and 1996, respectively. 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 business and results of operations. In addition, the Company generally markets its insurance products to customers in predominantly rural and suburban areas, due in large part to its historical relationships with the Farm Bureaus and the agricultural community. Political and regulatory pressures could conceivably require the Company to write more insurance in urban areas, which could adversely affect the Company's results of operations. See "Business--Regulation." EFFECT OF HOLDING COMPANY STRUCTURE Because the operations of the Holding Company following the Reorganization will be conducted through its subsidiary, FFCIC, the Holding Company will be dependent upon dividends and other payments from FFCIC for funds to meet its obligations. The New York Insurance Law regulates the distribution of dividends and other payments by FFCIC to the Holding Company. See "Business-- Regulation--Restrictions on Dividends." Such 13 restrictions or any subsequently imposed restrictions may in the future affect the Holding Company's ability to pay debt, expenses and cash dividends to its stockholders. See "Dividend Policy" and "Business--Regulation." STATUS OF AGENTS AS INDEPENDENT CONTRACTORS Farm Family regards its agents and agent field managers as independent contractors rather than as employees of the Company and, as such, the Company does not withhold federal or state income taxes, make federal or state unemployment insurance payments (except as noted below) or provide workers' compensation insurance with respect to such agents and agent field managers. A determination by federal or state taxing authorities that the classification of these agents and agent field managers as independent contractors is improper for tax purposes could materially adversely affect the Company and its results of operations. The Company's treatment of its agents and agent field managers as independent contractors has not been challenged to date by the Internal Revenue Service (the "Service") for federal tax purposes or by state tax authorities. The classification of the Company's agents and agent field managers as independent contractors for state unemployment insurance purposes has been challenged by the New York State Department of Labor. Following an initial unfavorable administrative determination as to its liability for such state unemployment insurance in New York, the Company began making payments for New York State unemployment insurance under protest and made an administrative appeal of such determination. PREEMPTIVE RIGHTS OF SUBSCRIPTION POLICYHOLDERS AND PARTICIPATING SURPLUS NOTE HOLDERS Pursuant to the Plan, for a period of three years from the Effective Date Subscription Policyholders and Participating Surplus Note Holders have preemptive rights to participate in any new issuance of Common Stock, other than the issuance of Shares in the Public Offering and the issuance of shares of Common Stock in connection with the Option Purchase Agreement. Purchasers of Shares in the Public Offering who are not Subscription Policyholders or Participating Surplus Note Holders will not have any preemptive rights. REINSURANCE CONSIDERATIONS Farm Family's insurance operations rely on the use of reinsurance arrangements to limit and manage the amount of risk retained by the Company, to stabilize its underwriting results and increase its underwriting capacity. The availability and cost of reinsurance are subject to prevailing market conditions and may vary significantly over time. No assurance can be given that reinsurance will continue to be available to the Company in the future at commercially reasonable rates. While the Company seeks to obtain reinsurance with coverage limits that it believes are appropriate for the risk exposures assumed, there can be no assurance that losses experienced by the Company will be within the coverage limits of the Company's reinsurance treaties. The Company also is subject to credit risk with respect to its reinsurers since the ceding of risk to its reinsurers does not relieve the Company of its liability to its insureds. 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. See "Business-- Reinsurance." OBSTACLES TO CHANGES IN CONTROL; CERTAIN ANTI-TAKEOVER EFFECTS After the consummation of the Reorganization, the Holding Company will be the holding company of FFCIC, a New York insurance company subsidiary. As a result, New York insurance law will prohibit any person from acquiring control of the Holding Company, and thus indirect control of its wholly owned subsidiary, without the prior approval of the Superintendent. Control will be presumed to exist where any person, directly or indirectly, owns, controls, holds the power to vote, or holds proxies representing 10% or more of the outstanding voting stock of the Holding Company, unless the Superintendent, upon application, determines otherwise. Any person seeking to acquire a controlling interest of the Holding Company would therefore face regulatory obstacles which may delay, defer or prevent an acquisition that a stockholder might consider to be in its best interest. 14 The Holding Company, through certain provisions of its Certificate of Incorporation (the "Certificate") and its bylaws (the "Bylaws"), has also created obstacles which may delay, defer or prevent a takeover attempt. Such provisions may also adversely affect prevailing market prices for the Common Stock. These provisions, among other things, (i) divide the Holding Company Board into three classes, which will serve for staggered three-year terms, (ii) provide that a director of the Holding Company may be removed only for cause and only by the affirmative vote of the holders of a majority of the outstanding securities eligible to vote on such matters, (iii) provide that only the Holding Company Board, its Chairman, or the President of the Holding Company may call special meetings of the stockholders, (iv) eliminate the ability of the stockholders to take any action without a meeting, and (v) provide that the stockholders may amend or repeal the Bylaws or any of the foregoing provisions of the Certificate only by a vote of two-thirds of the votes of the holders of all outstanding securities eligible to vote on such matters. In addition, the Bylaws establish certain advance notice procedures for nomination of candidates for election as directors and for stockholder proposals to be considered at stockholders' meetings. See "Description of Capital Stock" and "Business--Regulation." SHARES ELIGIBLE FOR FUTURE SALE All shares of Common Stock distributed in the Reorganization, the Subscription Offering or the Public Offering that are not held by affiliates of Farm Family will be eligible for immediate resale in the public market without restriction. The Company estimates that less than 1% of its Common Stock will be held by affiliates of the Company on the Effective Date (without taking into account any possible purchases of Shares by affiliates in the Public Offering). As part of the Reorganization, over 35,000 Farm Family Mutual policyholders will receive a total of 2,236,616 shares of Common Stock in exchange for certain policyholder membership interests. There can be no assurance that these policyholders, or any other holders of Common Stock, will not seek to sell their shares of Common Stock following the Effective Date. Sales of substantial amounts of Common Stock, or the perception that such sales could occur, could adversely affect prevailing market prices for the Common Stock. See "The Reorganization" and "Shares Eligible for Future Sale." NO PRIOR MARKET FOR COMMON STOCK Prior to the earlier of (i) the Public Offering or (ii) the Effective Date, there will be no public market for the Common Stock. Although the Common Stock has been approved for listing on the New York Stock Exchange, subject to official notice of issuance, there can be no assurance that an active trading market for the Common Stock will develop or be sustained. The Public Offering Price will be determined through negotiations between the Company and the representative of the Underwriters, and may not be indicative of the market price for the Common Stock after the Effective Date. There can be no assurance that purchasers of Shares in the Public Offering will be able to resell the Shares at or above the Public Offering Price. See "Underwriting." 15 THE COMPANY Farm Family is a specialized property and casualty insurer of farms, other generally related businesses and residents of rural and suburban communities in Delaware, New Jersey, New York, West Virginia and all of the New England states. Established in 1955 to meet certain insurance needs of Farm Bureau 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 the Life Company, an affiliate of Farm Family owned by Farm Bureau organizations. The Company believes that the distinctive focus of Farm Family and its agents on meeting the specialized insurance needs of rural communities has provided the Company with the knowledge and experience to adapt to changes in the demographics of its markets and in the nature of agricultural related businesses. In addition to insuring those engaged in agricultural pursuits such as dairy, vegetable and fruit farming, the Company insures a wide range of other businesses related to agriculture, such as distributors of agricultural products, horse breeding and training facilities, landscapers, nurseries, florists, wineries and growers of specialty products. In recent years, the Company has also introduced businessowners products for certain retail and contractor businesses and for owners of apartment and office buildings, as well as a homeowners product. The Company markets its insurance products through more than 200 Farm Family agents and field managers, who are located in the rural and suburban communities served by the Company. These agents generally sell insurance products only for the Company and the Life Company. The Company believes that Farm Family's name recognition, policyholder loyalty and policyholder satisfaction with agent relationships and claim service, as well as its Farm Bureau relationship, are important considerations in new customer referrals, cross-selling of additional insurance products and policyholder retention. Farm Family is closely affiliated with the Farm Bureaus in the ten states in which the Company operates. Farm Family has the exclusive endorsement of the Farm Bureaus to market property and casualty insurance in these states. Farm Family was originally organized through the efforts of certain of these Farm Bureaus, and substantially all of the directors of the Company are associated with Farm Bureau organizations in the Northeast. The Farm Bureaus are non- profit agricultural organizations that are affiliated with the American Farm Bureau Federation, the nation's largest general farm organization with over four million members. The Farm Bureaus have traditionally sought to advance the interests of the agricultural community. As a matter of policy, which the Company plans to continue after the Effective Date, and as set forth in FFCIC's bylaws, membership in state or county Farm Bureau organizations is a prerequisite for the issuance or renewal of any policy by FFCIC except in the case of policies issued in the residual market or to employees of the Company and its affiliates. Potential policyholders not engaged in agricultural businesses can generally become associate members of the Farm Bureaus. As of March 31, 1996, approximately 70% of the over 70,000 Farm Bureau members in the ten states in which the Company operates had policies issued by FFCIC. See "Risk Factors--Relationships with Farm Bureaus and Life Company; Potential Conflicts of Interest," "Business--Relationship with Farm Bureaus" and "Certain Relationships and Related Transactions." The Holding Company is a Delaware corporation which was formed in February 1996 solely for the purpose of becoming a holding company for FFCIC upon the Effective Date. FFCIC is licensed as a property and casualty insurer in Connecticut, Delaware, Maine, Massachusetts, New Hampshire, New Jersey, New York, Rhode Island, Vermont and West Virginia. FFCIC has three direct and indirect subsidiaries engaged in insurance agency and brokerage businesses in the Northeastern United States, including Rural Agency and Brokerage, Inc., a New York corporation which is a wholly owned direct subsidiary of FFCIC, and its subsidiaries (collectively, "Rural Agency"). The Company's principal executive offices are located at 344 Route 9W, Glenmont, New York 12077; its telephone number is (518) 431-5000. 16 THE REORGANIZATION The following summary description of the Reorganization, including the Plan, is qualified in its entirety by reference to the Plan, a copy of which is filed as an exhibit to the Registration Statement of which this Prospectus forms a part. THE PLAN On February 14, 1996, the FFCIC Board adopted the Plan, pursuant to Section 7307 of the New York Insurance Law, whereby Farm Family Mutual will convert from a mutual property and casualty insurance company to a stock property and casualty insurance company and become a wholly owned subsidiary of the Holding Company. The Plan was amended by the FFCIC Board on April 23, 1996 to effect certain minor modifications, primarily of a technical and clarifying nature. The Reorganization will involve principally the following actions: on the Effective Date, Farm Family Mutual will convert from a mutual property and casualty insurance company to a stock property and casualty insurance company pursuant to Section 7307 of the New York Insurance Law; the Policyholder Interests (as defined herein) in Farm Family Mutual will be extinguished (the extinguishment of Policyholder Interests will not, however, affect the insurance coverage under the Company's policies); Eligible Policyholders will receive either shares of Common Stock of the Holding Company or cash as compensation for the extinguishment of their Policyholder Interests in Farm Family Mutual; holders of Surplus Notes electing to exchange such notes may receive shares of Common Stock or cash in exchange for their Surplus Notes; FFCIC will change its name from Farm Family Mutual Insurance Company to Farm Family Casualty Insurance Company; subscribers for Subscription Shares in the Subscription Offering will be entitled to receive such Subscription Shares; purchasers of Shares in the Public Offering will be entitled to receive such Shares. Purpose The principal purposes of the Reorganization are to improve the Company's access to the capital markets and to raise capital to permit FFCIC to expand and develop its business in the rural and suburban areas in which FFCIC currently underwrites property and casualty risks. As part of the Reorganization, the Holding Company will become the holding company of FFCIC and its subsidiaries. This structure affords increased flexibility in raising additional capital in the form of debt and equity financings and provides the opportunity to pursue growth, either internally or through acquisitions. Such capital will enable FFCIC to increase its statutory surplus and underwrite additional business. The conversion of Farm Family Mutual to a stock property and casualty insurance company will provide Eligible Policyholders with shares of Common Stock or cash as compensation for the extinguishment of their otherwise illiquid Policyholder Interests in Farm Family Mutual and holders of Surplus Notes electing to exchange such notes in the Reorganization, with shares of Common Stock or cash in exchange for their Surplus Notes. Approval of the Plan On November 1, 1995, Farm Family Mutual submitted an application to the Superintendent for permission to convert from a domestic mutual insurance company into a domestic stock insurance company pursuant to Section 7307 of the New York Insurance Law. Pursuant to the provisions of Section 7307 of the New York Insurance Law, the Superintendent (i) ordered an examination of Farm Family Mutual as of June 30, 1995, which was submitted to the Superintendent and filed as a public document on February 9, 1996 (the "Examination Report") and (ii) appointed an appraiser to appraise the value of Farm Family Mutual as of June 30, 1995, as adjusted for any significant subsequent developments through December 31, 1995, which appraisal was submitted to the Superintendent and filed as a public document on February 14, 1996 (the "Appraisal Report"). 17 The Examination Report covered an examination of Farm Family Mutual for the period January 1, 1990 through June 30, 1995 and, where deemed appropriate, transactions subsequent to the current examination period were reviewed. The Examination Report contains no material recommendations or comments. After receiving the Examination Report and Appraisal Report, the Superintendent granted permission to the board of directors of Farm Family Mutual to submit the Plan to the Superintendent. The Superintendent held a public hearing on the Plan on April 2, 1996 and on May 1, 1996, the Superintendent issued an opinion and decision approving the Plan. In the opinion and decision, the Superintendent found that the Plan does not violate the New York Insurance Law, is not inconsistent with law, is fair and equitable and is in the best interests of the policyholders of FFCIC and the public. On June 17, 1996, the policyholders of Farm Family Mutual approved the Plan, by the affirmative vote of 93% of the policyholders voting at the Special Meeting. Effective Date As of the date hereof, the effectiveness of the Plan is contingent upon (i) the FFCIC Board declaring the Plan effective and (ii) the opinion of the Company's special tax counsel as originally delivered in connection with the Plan being confirmed as of the Effective Date. The Plan provides that the Effective Date shall be such date as is determined by the FFCIC Board. The Effective Date may not be later than 180 days after the date of the Special Meeting without the approval of the Superintendent. Currently, it is expected that the Effective Date will occur concurrently with the closing of the Public Offering. See "--Amendment or Withdrawal." Payment of Consideration to Eligible Policyholders and Holders of Surplus Notes In exchange for Policyholder Interests in Farm Family Mutual, each Eligible Policyholder will receive consideration based on the allocation to such Eligible Policyholder of a number of allocable shares (rounded to the nearest whole share) of FFCIC Common Stock based upon the amount of net premiums paid to Farm Family Mutual by each Eligible Policyholder in respect of Eligible Policies that are In Effect (each, as defined in the Plan) at any time from (and including) November 1, 1992, to (but not including) November 1, 1995, in relation to the total amount of net premiums paid to Farm Family Mutual by all Eligible Policyholders in respect of Eligible Policies that are In Effect at any time during such period. Under the Plan, Policyholder Interests are defined as the rights of Policyholders (as defined in the Plan) of Farm Family Mutual arising under its charter and by-laws, the New York Insurance Law and otherwise, including, without limitation, the right to vote for directors and on other matters and to participate in any distribution of surplus on liquidation, but not including contractual rights arising under Policies (as defined in the Plan), including, without limitation, the right to be paid insurance benefits. Each holder of a note(s) issued by Farm Family Mutual pursuant to Section 1307 of the New York Insurance Law that is outstanding on both November 1, 1995 and on the Effective Date (each, a "Surplus Note") shall, on the Effective Date, generally be entitled at its option to exchange such Surplus Note(s), in whole but not in part, for an amount of cash or FFCIC Common Stock equal to the principal amount of the Surplus Note(s) outstanding on the Effective Date plus accrued and unpaid interest thereon (the "Outstanding Note Amount"). The number of whole shares of FFCIC Common Stock which a holder of a Surplus Note(s) will be entitled to receive upon such exchange will be equal to the Outstanding Note Amount divided by the Initial Stock Price (as defined herein) less any fraction thereof, which will be paid in cash. In the event that any holder of a Surplus Note(s) does not elect to exchange such note(s), such Surplus Note(s) will remain an obligation of FFCIC. On the Effective Date, the Plan provides that Farm Family Mutual shall issue to The Bank of New York, as transfer agent (the "Transfer Agent"), for the respective accounts of the Eligible Policyholders who are entitled to receive shares of FFCIC Common Stock and holders of Surplus Notes that will be issued shares of FFCIC Common Stock, a global certificate representing the aggregate number of shares of FFCIC Common Stock allocated to such Eligible Policyholders and Participating Surplus Note Holders in accordance with the Plan. The Transfer Agent shall, on behalf of the Eligible Policyholders and Participating Surplus Note Holders, transfer such shares to the Holding Company in exchange for an equal number of shares of Common Stock to be issued 18 by the Holding Company pursuant to the Plan. FFCIC shall surrender to the Holding Company, and the Holding Company shall cancel, for no consideration, all of the Common Stock previously issued by the Holding Company to Farm Family Mutual. The Plan provides that, as soon as reasonably practicable after the Effective Date, each Eligible Policyholder will be issued the number of shares of Common Stock allocated to such Eligible Policyholder or, under certain circumstances, will instead be paid cash. Any Eligible Policyholder that is not allocated at least one share of FFCIC Common Stock under the Plan will not receive any consideration in the Reorganization. In the event that the Public Offering does not close on the Effective Date, Eligible Policyholders allocated fewer than 25 allocable shares of FFCIC Common Stock may receive shares of Common Stock or cash, determined at the discretion of the FFCIC Board. In the event that the Public Offering closes on the Effective Date, Eligible Policyholders allocated fewer than 25 shares of FFCIC Common Stock, will receive cash. Cash will also be paid (in lieu of Common Stock) to each Eligible Policyholder, and to each holder of a Surplus Note(s) electing to exchange such note(s) for cash or FFCIC Common Stock, whose mailing address is located outside the United States or is an address at which mail is undeliverable or who resides in a jurisdiction of the United States with respect to which compliance with the securities laws would, in the opinion of FFCIC, as applicable, be onerous and impractical for reasons of cost or otherwise. The amount of consideration paid as cash to those Eligible Policyholders receiving cash will equal the number of shares allocated to such Eligible Policyholders multiplied by the Initial Stock Price. The Initial Stock Price means (i) in the event the Public Offering closes on the Effective Date, the Public Offering Price, (ii) in the event the Subscription Offering closes but the Public Offering does not close on the Effective Date, the bona fide determination of the price per share at which the Common Stock would trade in the public market on the Effective Date, made by the Company after consultation with its financial advisor, with the approval of the Superintendent, or (iii) in the event the Subscription Offering and the Public Offering do not close on the Effective Date, the bona fide determination of the price per share at which the Common Stock would trade in the public market on the Effective Date, made by the Company after consultation with its financial advisor, with the approval of the Superintendent. Preemptive Rights The Plan provides that for a period of three years after the Effective Date, each Subscription Policyholder and each Participating Surplus Note Holder will have a preemptive right under Section 7307(s) of the New York Insurance Law to purchase a proportionate amount of any new issue of shares of Common Stock of the Holding Company. Subscription Policyholders and Participating Surplus Note Holders may not transfer or assign the preemptive rights. Under the Plan, however, no Person (as defined in the Plan) will have a preemptive right under the Plan or Section 7307(s) of the New York Insurance Law to purchase any shares of Common Stock or Series A Preferred Stock issuable upon exercise of the option under the Option Purchase Agreement. See "Option to Acquire Life Company." Amendment or Withdrawal The Plan may be amended at any time by FFCIC before or after the Effective Date upon the affirmative vote of no less than a majority of the entire FFCIC Board and with the approval of the Superintendent. The Plan provides that FFCIC may withdraw the Plan at any time before the Effective Date upon the affirmative vote of not less than a majority of the entire FFCIC Board. The FFCIC Board currently intends to proceed with the Plan. Limitations on Compensation of Directors and Executive Officers For a period of five years after the Effective Date, FFCIC is prohibited from entering into any agreement with any officer or director of FFCIC or with any firm or corporation in which any such officer or director is pecuniarily interested, under which agreement FFCIC agrees to pay, for the acquisition of business, any commissions or other compensation which by the terms of such agreement varies with the amount of such business or with the earnings of FFCIC on such business. FFCIC shall, however, be permitted, during such five- year period, to pay fees to the Farm Bureaus in such amounts as are approved by the Superintendent. See "Business--Relationship with Farm Bureaus" and "Certain Relationships and Related Transactions." 19 SUBSCRIPTION OFFERING AND PUBLIC OFFERING Prior to the Public Offering made through this Prospectus, 3,000,000 shares of Common Stock were offered in the Subscription Offering in accordance with the preemptive rights provided under the Plan to Subscription Policyholders and Participating Surplus Note Holders. The Subscription Offering expired on June 12, 1996. Subscription Policyholders and Participating Surplus Note Holders subscribed for 163,980 Subscription Shares in the Subscription Offering at the Subscription Price of $21.00 per share. If the Initial Stock Price is less than the Subscription Price, the effective price per share paid by subscribers for Subscription Shares shall be the Initial Stock Price, and additional whole shares of Common Stock will be issued to such subscribers to offset the effect of such price difference. If the Initial Stock Price is more than the Subscription Price, such subscribers will not be required to pay any additional amounts for the Subscription Shares, nor will there be any adjustment in the number of shares issued to them. The Shares, which constitute the Subscription Shares not subscribed for in the Subscription Offering, are being offered to the public in the Public Offering made through this Prospectus. Under the Plan, on the Effective Date or as soon thereafter as reasonably practicable, the Holding Company will: (i) in the event that the Subscription Offering closes, issue the Subscription Shares subscribed for in the Subscription Offering; (ii) in the event that the Public Offering closes, issue and sell Shares pursuant to the Public Offering; (iii) issue shares of Common Stock or pay cash to Eligible Policyholders, on behalf of FFCIC; and (iv) issue shares of Common Stock or pay cash to the holders of Surplus Notes, on behalf of FFCIC. CANCELLATION OF THE SUBSCRIPTION OFFERING AND PUBLIC OFFERING The Holding Company Board may, at any time prior to the Effective Date, elect to cancel or rescind the Subscription Offering, and consequently not to hold the Public Offering, without withdrawing the Plan. The Subscription Offering will not be consummated in the event that (i) the Plan is withdrawn by the FFCIC Board or (ii) the FFCIC Board elects to proceed with the Plan but rescinds the Subscription Offering. FEDERAL INCOME TAX CONSEQUENCES General Discussion In the opinion of LeBoeuf, Lamb, Greene & MacRae, L.L.P. ("LeBoeuf, Lamb"), special tax counsel to Farm Family, the following paragraph sets forth the principal federal income tax consequences to Farm Family of the consummation of the Reorganization under current federal income tax law and administrative rulings of the Service. The opinion of special tax counsel is conditioned upon certain assumptions set forth therein, the receipt of certain representations from Farm Family, and certain other information, data and documents as LeBoeuf, Lamb deems necessary. Neither this summary nor the opinion of special tax counsel is binding on the Service and Farm Family has not sought a private letter ruling from the Service. Consequently, there can be no assurance that the Service will not challenge the conclusions set forth below. Subject to the matters discussed under "Possible Policyholder Dividend Treatment" below, the exchange by the Eligible Policyholders of their Policyholder Interests and the Participating Surplus Note Holders of their Surplus Notes for FFCIC Common Stock in connection with the conversion of Farm Family Mutual from a mutual to a stock insurance company and the subsequent transfer of the FFCIC Common Stock received by the Eligible Policyholders and the Participating Surplus Note Holders in the demutualization to the Holding Company in exchange for Common Stock and the sale of the shares of Common Stock pursuant to the Offerings will be treated under Sections 351 and 368 of the Code as tax-free transactions in which Farm Family will not realize any significant income or loss for federal income tax purposes. As a result of the Reorganization, the federal income tax attributes of FFCIC and the Holding Company, including their basis and holding period in 20 their assets, earnings and profits and tax accounting methods will not be significantly affected by the Reorganization. Possible Policyholder Dividend Treatment UNUM Life Insurance Company, a Maine life insurance company that demutualized in 1986 ("UNUM"), and UNUM Corporation, its holding company, claimed in a lawsuit against the Service in federal district court in the District of Maine that UNUM's distribution to its policyholders of stock and cash pursuant to its plan of demutualization should be treated as a policyholder dividend distribution, rather than as part of an exchange. If the distribution were treated for federal income tax purposes as a dividend distribution, UNUM would be entitled to a policyholder dividend deduction equal to the amount of cash and the fair market value of any stock distributed, and each policyholder receiving stock or cash would likely be treated for federal income tax purposes as if it had received a policyholder dividend equal to the amount of cash or the fair market value of the stock it received. On May 23, 1996, the federal district court rejected UNUM's refund claim and held that distributions of cash and stock to policyholders as part of UNUM's demutualization were not policyholder dividend distributions. It is not yet clear whether UNUM will appeal the federal district court's decision and FFCIC cannot predict the outcome of any appeal. FFCIC plans to treat and report the demutualization as described above under the caption "General Discussion." FFCIC, however, will continue to monitor the progress of the UNUM case as well as any other developments regarding the proper treatment of demutualization consideration for tax purposes. If FFCIC determines, based on a decision of an appellate court (if any) in the UNUM case that the distribution of consideration pursuant to the demutualization may be characterized as a policyholder dividend or the advice of tax counsel, that all or any portion of its distribution to the Eligible Policyholders pursuant to the demutualization should be treated for federal income tax purposes as a policyholder dividend, then it may claim a policyholder dividend deduction equal to all or some part of the cash or the fair market value of the FFCIC Common Stock distributed. The amount of this deduction for FFCIC could be substantial and may create a large net operating loss for FFCIC, thereby reducing the amount of federal income taxes payable by FFCIC. The treatment of all or part of the consideration received by an Eligible Policyholder in the demutualization as a dividend could also affect the tax consequences of the demutualization to Eligible Policyholders. In determining whether to claim a policyholder dividend deduction, FFCIC will take into account the requirements of law, the interests of FFCIC and the interests of the Eligible Policyholders. If FFCIC claims the policyholder dividend deduction, it is likely that the Service would challenge this position. In that event, the tax treatment of demutualization might not be resolved for a number of years and FFCIC cannot predict whether the deduction will ultimately be available or, if available, the amount thereof. 21 OPTION TO ACQUIRE LIFE COMPANY The following summary description of the Option Purchase Agreement is qualified in its entirety by reference to the Option Purchase Agreement, a copy of which is filed as an exhibit to the Registration Statement of which this Prospectus forms a part. The Life Company was established in 1953 by certain state Farm Bureaus to provide life insurance products for Farm Bureau members in the Northeast. All of the issued and outstanding capital stock of the Life Company is owned by Farm Bureau organizations and their affiliates. Although not under common ownership, Farm Family Mutual and the Life Company have substantially identical management, share the same agency force and most employees, and utilize common facilities. Substantially all of the directors and executive officers of the Company are also directors and executive officers of the Life Company. See "Risk Factors--Relationships with Farm Bureaus and Life Company; Potential Conflicts of Interest," "Business--Relationship with Farm Bureaus," and "Certain Relationships and Related Transactions." Farm Family Mutual and the Life Company considered the possibility, as part of the Reorganization, of bringing these two companies under a common ownership structure. The Life Company's financial statements are currently prepared only in accordance with statutory principles prescribed or permitted by the New York Insurance Department. The Company believes that such financial statements do not provide an adequate basis to determine an appropriate fair market valuation for the Life Company. Financial statements prepared according to GAAP for the Life Company are not expected to be available until after the Effective Date. The Holding Company has entered into the Option Purchase Agreement, pursuant to which the Holding Company has the right to acquire the Life Company in exchange for shares of the Holding Company's capital stock for a two-year period commencing on the Effective Date, unless extended for an additional year by agreement between the parties. The acquisition of the Life Company is subject to certain conditions, including the approval by the stockholders of the Holding Company and applicable regulatory authorities. The Company believes that the acquisition of the Life Company and resulting common ownership structure of Farm Family Mutual and the Life Company could be beneficial to all parties by perpetuating the operating efficiencies which the two companies currently enjoy, increased access to capital markets, diversifying earnings and increasing product capabilities. However, there can be no assurance that the Holding Company will exercise its option to acquire the Life Company or that the closing conditions will be satisfied. If the Company does not exercise its option under the Option Purchase Agreement to acquire the Life Company, conflicts of interest may exist as it is anticipated that the Company and the Life Company will continue to have separate ownership, while maintaining substantially identical management and continuing to share the same agency force, most employees and office facilities. See "Risk Factors--Relationships with Farm Bureaus and Life Company; Potential Conflicts of Interest." The Holding Company has not made a final determination as to whether it will exercise its option to acquire the Life Company under the Option Purchase Agreement. The Holding Company's decision to exercise the option will depend on, among other things, the exercise price for the Option Shares (as defined herein), an evaluation of the financial statements prepared in accordance with generally accepted accounting principles and prospects of the Life Company, the outcome of a vote by the Holding Company's stockholders and the receipt of applicable regulatory approvals. See Note 2 in "Notes to Consolidated Financial Statements." The Life Company principally sells term, traditional whole life and universal life products, in addition to single and flexible premium deferred annuities, single premium immediate annuities, and disability income insurance products and operates in the same ten states as Farm Family, through a common distribution system. As of December 31, 1995, approximately 97% of the Life Company's $3.3 billion of life insurance in force was derived from participating policies. In 1988, the Life Company formed United, which operates as a reinsurer for Farm Family Mutual and writes a small amount of substandard automobile coverage in New York. For the year ended December 31, 1995, United's direct written premiums were $105,253 and its reinsurance premiums assumed from Farm Family Mutual were $9.2 million. The Life Company has the exclusive endorsement of the Farm Bureaus to market life insurance products in its ten-state territory. 22 The table below sets forth selected financial data for the Life Company for the years ended December 31, 1993, 1994 and 1995, which data are derived from the audited statutory financial statements of the Life Company for the years ended December 31, 1993, 1994 and 1995. The selected financial data as of and for the three months ended March 31, 1995 and 1996 are derived from the unaudited statutory financial statements. All financial information of the Life Company in this Prospectus, including the selected financial data in the table below, has been prepared on the basis of statutory accounting practices prescribed or permitted by insurance regulatory authorities. Statutory accounting practices vary in certain material respects from GAAP applied to stock life insurance companies. Statutory accounting practices are primarily designed to reflect the ability of the insurer to satisfy its obligations to policyholders, contractholders and beneficiaries, whereas GAAP is primarily oriented toward the allocation of revenues, expenses and costs to financial reporting periods.
THREE MONTHS YEAR ENDED DECEMBER 31, ENDED MARCH 31, ----------------------- ---------------- 1993 1994 1995 1995 1996 ------- ------- ------- ------- ------- (IN MILLIONS) STATUTORY STATEMENT OF INCOME DATA: Premiums and annuity considerations(/1/)..... $ 83.7 $ 77.1 $ 79.7 $ 23.6 $ 15.0 Net investment in- come(/2/)............... 43.9 50.0 52.5(/3/) 12.4 13.8(/3/) Total revenues(/1/).... 143.7 137.8 141.7 38.4 31.6 Net income(/4/)........ 8.3 6.5 9.3 (0.8) 1.5 Statutory net income available to sharehold- ers(/5/)................ -- -- 3.4 -- 0.6 STATUTORY BALANCE SHEET DATA (AT PERIOD END): Total investments(/6/). $ 564.4 $ 615.0 $ 665.9 $ 628.0 $ 670.0 Total assets(/2/)(/7/). 587.1 635.7 687.7(/8/) 649.7 692.1(/8/) Total liabilities(/2/). 544.8 587.6 625.9 601.5 628.7 Capital and surplus: Common Stock......... 3.0 3.0 3.0 3.0 3.0 Paid-in and contrib- uted surplus............ 0.3 0.3 0.3 0.3 0.3 Unassigned funds or surplus................. 39.0 44.8 58.5 44.8 60.1 ------- ------- ------- ------- ------- Total capital and sur- plus.................... $ 42.3 $ 48.1 $ 61.8 $ 48.1 $ 63.4 ======= ======= ======= ======= ======= Portion of unassigned surplus allocated to shareholders............ $ 4.0 $ 4.0 $ 7.5(/9/) $ 4.0 $ 7.4(/1//0/)
- -------- (1) Premiums received on annuity products without life contingencies and certain universal life products are included in revenue for statutory purposes but are not recognized as revenue under GAAP. For statutory purposes, premiums and deposits are included as revenue when due. Under GAAP, revenues, excluding deposits, are recognized on an accrual basis as earned over the life of the policy. (2) Under GAAP, the assets, liabilities and results of operations of the Life Company's wholly owned subsidiary, United, would be consolidated with the assets, liabilities and results of operations, respectively, of the Life Company. However, under statutory accounting practices, the Life Company's investment in United is reflected under the equity method of accounting. As a result, the Life Company's assets reflect the net equity value of United, and the Life Company's net investment income reflects the net income or loss of United. (3) For the year ended December 31, 1995 and the three months ended March 31, 1996, the Life Company's investment in United accounted for $2.4 million and $0.5 million, respectively, of the Life Company's net investment income. For the year ended December 31, 1995, United's total revenues and net income were $11.3 million and $2.2 million, respectively. For the three months ended March 31, 1996, United's total revenues and net income were $2.8 million and $0.6 million, respectively. As of December 31, 1995 and March 31, 1996, United's total assets were $32.1 million and $28.8 million, respectively. (4) For statutory purposes, commissions and other costs incurred in connection with acquiring business (acquisition costs) are charged to operations in the year incurred. Under GAAP, such acquisition costs are deferred and amortized to match recognition of corresponding revenue and the unamortized deferred acquisition costs are included in total assets. Statutory accounting practices and GAAP use different assumptions in calculating future policyholders' benefits and different methods for calculating valuation allowances. (5) Under New York Insurance Law, no profits on participating policies and contracts in excess of the larger of ten percent of such profits, or fifty cents per year per thousand dollars of participating life insurance, other than group term insurance, in force at the end of the year, may inure to the benefit of shareholders. As a result of the $4.0 million limit on unassigned surplus allocated to shareholders, no income, in excess of dividends paid, was available to shareholders in 1993 and 1994. (6) For statutory purposes, fixed maturities are carried at amortized cost. Under GAAP, certain fixed maturities are carried at market value. (7) Deferred federal income taxes and statutory non-admitted assets are recognized under GAAP while mandatory securities valuation reserves are not. (8) As of December 31, 1995 and March 31, 1996, the Life Company's investment in United accounted for $15.8 million and $12.4 million, respectively, of the Life Company's total assets. (9) Includes $4.0 million allocated to shareholders' surplus as of January 1, 1995, $3.4 million of statutory net income available to shareholders for the year ended December 31, 1995, and other adjustments which net to $0.1 million consisting primarily of adjustments to surplus in accordance with statutory accounting practices. Does not reflect any retroactive reallocation of a portion of unassigned surplus to shareholders' surplus. (10) Includes $7.5 million allocated to shareholders' surplus as of January 1, 1996, $0.6 million of statutory net income available to shareholders for the three months ended March 31, 1996, and other adjustments which net to ($0.7 million) consisting primarily of adjustments to surplus in accordance with statutory accounting practices. Does not reflect any retroactive reallocation of a portion of unassigned surplus to shareholders' surplus. 23 Under the Option Purchase Agreement, shareholders of the Life Company have granted to the Holding Company the exclusive and irrevocable option to purchase all of such shares (the "Option Shares"). Such option may be exercised at any time up to the second anniversary of the Effective Date, unless extended to the third anniversary of the Effective Date upon the agreement of the parties to the Option Purchase Agreement. The exercise price for each Option Share will be the fair market value thereof, as of the exercise date, determined in accordance with specified valuation procedures and assumptions set forth in the Option Purchase Agreement by an investment banking firm of national standing selected by the Company and reasonably acceptable to the shareholders of the Life Company. The valuation procedures and assumptions set forth in the Option Purchase Agreement provide that the fair market value per Option Share will be based on the fully distributed, independent, public market value of the common stock of the Life Company as of the exercise date of the Option Purchase Agreement including any reallocation of participating policyholder surplus, without giving effect to the percentage ownership represented by the common stock being valued (individually or in the aggregate), the aggregate amount of the valuation of the Life Company or the relationship between the Life Company and FFCIC, including the Life Company's lack of stand-alone management, infrastructure or distribution system. In determining such value, the procedures also provide that consideration may be given to the trading value of the publicly traded common stock of comparable companies as well as any other valuation methods or criteria that are deemed relevant. Salomon Brothers Inc has been retained by the Company to provide investment banking advice, including a valuation of the Life Company, in connection with the Option Purchase Agreement. Salomon Brothers Inc will render to the Holding Company, at its request, an opinion as to the fairness, from a financial point of view, to the Holding Company of such exercise price for each Option Share. In the event that the Life Company shareholders do not agree with such determination, the Option Purchase Agreement provides for certain dispute resolution procedures pursuant to which one or two additional investment banking firms may be engaged to determine the fair market value of each Option Share and the exercise price shall generally be the average or, in certain cases, the median, of the fair market value determination provided by such firm or firms and the determination provided by Salomon Brothers Inc. The Holding Company will reserve shares of Common Stock under the Plan for issuance upon exercise of the option under the Option Purchase Agreement. In 1979, the shareholders of the Life Company adopted a resolution limiting the Life Company's unassigned surplus allocated to shareholders to $4.0 million. In 1995, the Life Company shareholders voted to remove the $4.0 million limit on unassigned surplus allocated to shareholders. The amount of unassigned surplus allocated to shareholders as of March 31, 1996 was $7.4 million. The Life Company requested that the New York Insurance Department approve the reallocation of a portion of its unassigned surplus to shareholders' surplus. The New York Insurance Department has advised the Life Company that it will not object to the retroactive reallocation of "a portion of policyholders' surplus to the shareholder account," provided such reallocation is carried out within applicable statutory limitations and that the amount reallocated can be demonstrated as not having any undue negative effect on participating policyholders. As a result, a portion of the Life Company's unassigned surplus may be reallocated to shareholders' surplus. The Life Company's determination as to whether and to what extent it will retroactively reallocate a portion of unassigned surplus to shareholders' surplus will depend upon, among other factors, actuarial determinations and considerations, the decision of the Board of Directors of the Life Company to make such reallocation, the approval of the Life Company's shareholders and the review of such reallocation by the New York Insurance Department. Any reallocation of unassigned surplus to shareholders' surplus will increase shareholders' equity under GAAP, which, in turn, will increase the valuation of the Life Company. Accordingly, the fair market value of the Life Company and the number of shares of Common Stock issued in connection with the acquisition if the option is exercised may increase significantly as a result of an increase in the Life Company's shareholders' equity under GAAP. To the extent that the Company issues additional shares of Common Stock as a result of such change in the valuation of the Life Company, subscribers for Shares in the Subscription Offering will experience additional dilution in their ownership interest and voting power in the Company. See "Risk Factors--Effect of Exercise of Option to Acquire Life Company." The decision by the New York Insurance Department not to object to the retroactive reallocation of unassigned surplus does not affect the Company's determination as to the "probability" of the 24 acquisition within the meaning of Rule 3.05 of Regulation S-X. See Note 2 in "Notes to Consolidated Financial Statements." The exercise price under the Option Purchase Agreement will be payable by the Holding Company to the Life Company shareholders in shares of Common Stock and, at the option of such shareholders, in up to $6 million stated value of shares of Series A Preferred Stock. The number of shares of Common Stock issued to the Life Company shareholders will be determined by the price of the Common Stock based on the average closing price per share of the Common Stock during the 20 trading days prior to the third business day preceding the closing of the Option Purchase Agreement (the "Option Purchase Closing"). The Series A Preferred Stock will have a stated value per share equal to the price per share of the Common Stock, as calculated above. The fair market value of a share of Series A Preferred Stock, as of the exercise date, will be determined in accordance with the valuation assumptions set forth in the Option Purchase Agreement by an investment banking firm of national standing mutually acceptable to the Company and the shareholders of the Life Company. It is anticipated that the Holding Company will use Salomon Brothers Inc to determine the fair market value of the Series A Preferred Stock. Preferential cumulative dividends will be payable quarterly in cash on each share of Series A Preferred Stock at a rate equal to 8% per annum. The Series A Preferred Stock will be subject to mandatory redemption by the Holding Company, on the date following the twentieth anniversary of the issuance date, and optional redemption by the Holding Company on and after the tenth anniversary of the issuance date, at its stated value plus all accrued and unpaid dividends. Each share of Series A Preferred Stock may be redeemed, at the option of the Holding Company in cash or in shares of Common Stock. The Holding Company's decision whether to redeem shares of Series A Preferred Stock in cash or in shares will depend on its financial condition and other circumstances at that time, including its liquidity. Each share of Series A Preferred Stock will be entitled to one vote per share in the election of directors and on all matters on which holders of Common Stock are entitled to vote. The Series A Preferred Stock will be subject to a liquidation preference per share equal to the stated value, plus all accrued and unpaid dividends. The Holding Company may, at its election, acquire the Option Shares pursuant to the exercise of the option for purposes of permitting the tax-free receipt by the Life Company shareholders of the Common Stock and Series A Preferred Stock to be received by them pursuant to the Option Purchase Agreement by either (i) a direct exchange of the Option Shares for Common Stock and Series A Preferred Stock or (ii) the merger of a wholly owned special purpose merger subsidiary of the Holding Company with and into the Life Company, with the Life Company being the surviving corporation. In the event of the enactment of a change to the Code that would be reasonably likely to render the receipt of the Series A Preferred Stock by the shareholders of the Life Company taxable, the Option Purchase Agreement provides that the Holding Company and the shareholders will negotiate in good faith to modify or amend the terms of the Series A Preferred Stock or the Option Purchase Agreement, in either case, to permit the tax-free receipt by the shareholders of the exercise price for the Option Shares. Pursuant to the Plan, no Person will have the preemptive right under the Plan or Section 7307(s) of the New York Insurance Law to purchase any shares of Common Stock or Series A Preferred Stock issuable to the shareholders of the Life Company upon exercise of the Option Purchase Agreement. The Option Purchase Closing is subject to certain conditions, including, among others, the conditions that: (i) the transactions contemplated thereby will have been approved by the affirmative vote of the holders of at least a majority of the outstanding shares of Common Stock; (ii) all required consents and approvals of governmental authorities, including any insurance regulatory authority, will have been obtained; (iii) the Holding Company shall have received an opinion, in form and substance reasonably acceptable to the Holding Company, from an investment banking firm of national standing as to the fairness, from a financial point of view, to the Holding Company of the transactions contemplated by the Option Purchase Agreement; (iv) following the exercise date, there shall not occur any event that has or is reasonably likely to have a material adverse effect on the Life Company and United taken as a whole; and (v) the bylaws of the Life Company shall have been amended to permit the Holding Company to acquire the Option Shares. The Option Purchase Agreement may be terminated at any time prior to the Option Purchase Closing by mutual agreement of the parties, or generally by either the Holding Company or a majority of the shareholders of the Life Company, if (a) the Effective Date has not occurred by December 31, 1997, or (b) the Option Purchase Closing has not occurred by the first anniversary of the date of exercise of the option. 25 USE OF PROCEEDS The proceeds to Farm Family from the sale of the Shares in the Public Offering (assuming a Public Offering Price of $21 per Share) are expected to be $48.2 million ($55.4 million if the Underwriters' over-allotment option is exercised in full) after deducting estimated underwriting discounts. In addition to the proceeds of the Public Offering, the Company received proceeds of $3.4 million in the Subscription Offering. The Company expects to apply the proceeds of the Offerings as follows: (i) approximately $16.0 million of such proceeds will be used to make cash payments to certain Eligible Policyholders as part of the Reorganization; (ii) $1.2 million of such proceeds will be used to make cash payments to certain holders of Surplus Notes; (iii) approximately $3.6 million of such proceeds will be used to pay expenses incurred in the Reorganization (including the expenses of the Offerings); (iv) $20.0 million of such proceeds will be contributed to FFCIC to increase its capital, which will permit FFCIC to expand and develop its business in rural and suburban communities; and (v) the remainder of such proceeds will be retained by the Holding Company for general corporate purposes. DIVIDEND POLICY Following the Effective Date, the Company currently intends to retain any earnings in order to develop its business and support the operations of FFCIC, and, as such, does not anticipate that it will pay any dividends to stockholders in the foreseeable future. The declaration and payment of dividends in the future are at the discretion of the Board of Directors of the Company, are subject to certain regulatory constraints and will depend upon, among other things, FFCIC's results of operations, financial condition, cash requirements, future prospects and other factors. The Holding Company will have no sources of funds for the payment of dividends other than net proceeds retained from the Offerings, if any, by the Holding Company and not contributed to FFCIC, dividends paid to it by FFCIC and any funds borrowed by the Holding Company. See "Business--Regulation-- Restrictions on Dividends." 26 CAPITALIZATION The following table sets forth the consolidated capitalization of Farm Family and its subsidiaries at March 31, 1996 (i) on an actual basis and (ii) as adjusted to reflect the Reorganization and the sale of shares of Common Stock in the Offerings, after deducting the estimated expenses of the Offerings and the initial application of the proceeds therefrom. The following table does not assume or reflect the exercise by the Company, after the Effective Date, of its option to acquire the Life Company. See "Use of Proceeds," "The Reorganization" and "Description of Capital Stock."
AT MARCH 31, 1996 ------------------------- AS ADJUSTED FOR THE REORGANIZATION AND THE ACTUAL OFFERINGS(/1/) --------- -------------- (IN THOUSANDS) Surplus Notes............. 2,698.0 1,325.5 --------- ---------- Total Debt.............. 2,698.0 1,325.5 --------- ---------- Equity: Preferred stock, $.01 par value, 1,000,000 shares authorized and no shares issued and outstanding............ -- -- Common stock, $.01 par value, 10,000,000 shares authorized, 1,000 shares and 4,883,708 shares issued and outstanding, actual and as adjusted for the Reorganization and the Offerings.............. -- 48.8 Additional paid-in capital................... -- 98,359.9(/2/) Net unrealized investment gains.......... 5,627.0 5,627.0 Minimum pension liability................. (118.0) (118.0) Retained earnings....... 65,586.0 -- --------- ---------- Total equity............ 71,095.0 103,917.7 --------- ---------- Total capitalization.... $73,793.0 $105,243.2 ========= ==========
- -------- (1) Reflects the issuance of shares of Common Stock in the Reorganization to certain Eligible Policyholders and Participating Surplus Note Holders and cash payments to other Eligible Policyholders and holders of Surplus Notes who elected to redeem such Surplus Notes for cash. See "The Reorganization." Gives effect to the sale of 163,980 Subscription Shares at the Subscription Price of $21. Assumes that the Public Offering Price is $21 per share and that the Underwriters' over-allotment option is not exercised. See "Underwriting." (2) Reflects estimated expenses of the Reorganization of $3.1 million expected to be incurred after March 31, 1996. 27 SELECTED CONSOLIDATED FINANCIAL DATA The following table sets forth certain consolidated financial data for FFCIC and its subsidiaries prior to the Reorganization. The consolidated statement of income data set forth below for the years ended December 31, 1993, 1994 and 1995 and the consolidated balance sheet data at December 31, 1994 and 1995 are derived from the consolidated financial statements of FFCIC appearing elsewhere herein, which have been audited by Coopers & Lybrand L.L.P., independent auditors, whose report thereon appears elsewhere herein. The consolidated statement of income data for the years ended December 31, 1991 and 1992 and for the three months ended March 31, 1995 and 1996 and the consolidated balance sheet data at December 31, 1991, 1992 and 1993 and at March 31, 1995 and 1996 are derived from the unaudited consolidated financial statements of FFCIC. The Company believes that such unaudited financial data fairly reflect the consolidated results of operations and the consolidated financial condition of FFCIC for such periods. This data should be read in conjunction with the Consolidated Financial Statements, and notes thereto and other financial information, as well as "Management's Discussion and Analysis of Financial Condition and Results of Operations," included elsewhere herein. See Note 11 in "Notes to Consolidated Financial Statements" for a discussion of the principal differences between GAAP and statutory accounting practices, and for a reconciliation of consolidated net income and policyholders' equity, as reported in conformity with GAAP, with consolidated statutory net income and statutory capital and surplus, as determined in accordance with statutory accounting practices, as prescribed or permitted by the New York Insurance Department.
THREE MONTHS YEAR ENDED DECEMBER 31, ENDED MARCH 31, ---------------------------------------- --------------- 1991 1992 1993 1994 1995 1995 1996 ------ ------ ------ ------ ------ ------- ------- (DOLLARS IN MILLIONS, EXCEPT PER SHARE DATA) STATEMENT OF INCOME DATA: Revenues: Premiums............. $ 85.3 $ 90.0 $ 96.7 $101.5 $116.9 $ 27.9 $ 31.7 Net investment income.................. 12.8 12.9 13.8 13.2 14.3 3.5 3.9 Net realized investment gains (losses)................ 1.0 1.0 (0.2) 1.3 0.9 -- -- Other income......... 0.2 0.5 0.7 0.7 0.9 0.2 0.2 ------ ------ ------ ------ ------ ------- ------- Total revenues...... 99.3 104.4 111.0 116.7 133.0 31.6 35.8 ------ ------ ------ ------ ------ ------- ------- Losses and Expenses: Losses and loss adjustment expenses..... 74.3 72.1 73.2 82.7 83.2 19.2 25.7 Underwriting expenses................ 23.7 24.0 26.8 28.8 34.9 8.2 8.8 Interest and other expense................. 0.3 0.3 0.3 0.3 0.3 0.1 0.1 ------ ------ ------ ------ ------ ------- ------- Total losses and expenses................ 98.3 96.4 100.3 111.8 118.4 27.5 34.6 ------ ------ ------ ------ ------ ------- ------- Income before federal income taxes and extraordinary item................. 1.0 8.0 10.7 4.9 14.6 4.1 1.2 Federal income tax expense................. 0.4 1.8 3.1 1.4 5.0 1.2 0.4 ------ ------ ------ ------ ------ ------- ------- Income before extraordinary item...... 0.6 6.2 7.6 3.5 9.6 2.9 0.8 Extraordinary item-- Reorganization expenses. -- -- -- -- -- -- 0.5 ------ ------ ------ ------ ------ ------- ------- Net income............ $ 0.6 $ 6.2 $ 7.6 $ 3.5(/1/) $ 9.6 $ 2.9 $ 0.3(/1/) ====== ====== ====== ====== ====== ======= ======= BALANCE SHEET DATA (AT PERIOD END): Total investments(/2/)........ $150.2 $160.8 $177.7 $170.6 $207.9 $ 180.5 $ 202.3 Total assets.......... 204.4 221.5 244.1 243.1 278.3 253.5 276.7 Long-term debt........ 2.8 2.8 2.8 2.7 2.7 2.7 2.7 Total liabilities..... 163.8 175.0 183.6 190.1 204.1 194.6 205.6 Total equity(/2/)..... 40.6 46.5 60.5 53.0 74.2 58.9 71.1 ANALYTICAL DATA (UNAUDITED): Net income per share(/3/).............. $ 0.21 $ 2.07 $ 2.53 $ 1.18 $ 3.20 $ 0.97 $ 0.10 Book value per share(/2/)(/3/)......... 13.54 15.48 20.17 17.66 24.72 19.63 23.70
28
THREE MONTHS YEAR ENDED DECEMBER 31, ENDED MARCH 31, --------------------------------- --------------- 1991 1992 1993 1994 1995 1995 1996 ----- ----- ----- ----- ----- ------- ------- (DOLLARS IN MILLIONS, EXCEPT PER SHARE DATA) GAAP RATIOS: Loss and Loss Adjustment Expense Ratio(/4/)........ 87.1% 80.2% 75.7% 81.5% 71.1% 68.8% 81.2% Underwriting Expense Ratio(/5/)................ 27.8% 26.6% 27.7% 28.4% 29.8% 29.5% 27.7% Combined Ratio(/6/)..... 114.9% 106.8% 103.4% 109.9% 100.9% 98.3% 108.9% STATUTORY DATA (AT PERIOD END): Statutory Combined Ratio..................... 115.2% 106.0% 104.2% 108.9% 101.0% 100.3% 107.2% Statutory Surplus....... $29.5 $33.5 $39.1 $42.9 $55.9 $ 45.2 $ 57.7 Ratio of annual statutory net written premiums to statutory surplus...... 2.75x 2.73x 2.52x 2.46x 2.16x 2.45x 2.15x
- -------- (1) While the Company regularly experiences losses from storm and weather related events, net income for the year ended December 31, 1994 and the three months ended March 31, 1996 was adversely affected by unusually high losses and loss adjustment expenses believed to be storm and weather related, which aggregated $7.9 million and $6.9 million, respectively. See "Management's Discussion and Analysis of Financial Condition and Results of Operations." (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 policyholders' equity were adjusted to reflect changes in market value, which resulted in an increase of $6.8 million, a reduction of $11.1 million and an increase of $11.7 million as of December 31, 1993, 1994 and 1995, respectively, and an increase of $3.0 million and a decrease of $3.4 million as of March 31, 1995 and 1996, respectively. (3) Gives effect in all periods to the allocation of 3,000,000 shares of Common Stock to Eligible Policyholders in the Reorganization. (4) Calculated by dividing losses and loss adjustment expenses by premiums. (5) Calculated by dividing underwriting expenses by premiums. (6) The sum of the Loss and Loss Adjustment Expense Ratio and the Underwriting Expense Ratio. 29 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. GENERAL Farm Family 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 Delaware, New Jersey, New York, West Virginia and all of the New England states. In addition, the Company's wholly owned subsidiary, Rural Agency, places insurance coverages not underwritten by the Company for the Company's policyholders. The operations of the Company are also closely related with those of its affiliates, the Life Company and the Life Company's wholly owned subsidiary, United. The Company's premium revenue is a function of changes in average premium per policy and the growth in the number of policies. Premium rates are regulated by the state insurance departments in the states in which the Company operates. See "Business--Regulation." Membership in the state Farm Bureau organizations is a prerequisite for voluntary insurance coverage (except for employees of the Company and its affiliates). Associate Farm Bureau memberships are generally available for an annual fee to persons not engaged in agricultural businesses. All of the Company's insurance policies are currently written on a participating basis, although for several years the Company has paid dividends only on certain of its workers' compensation policies. Subsequent to the Effective Date, only these workers' compensation policies will continue to be written on a participating basis. The operating results of companies in the property and casualty insurance industry have historically been subject to fluctuations due to competition, economic conditions and various other factors. Factors affecting results of operations of the industry include price competition and aggressive marketing which historically have resulted in higher combined loss and expense ratios. Because of the nature of the property and casualty industry, it is difficult to predict future trends in the industry's overall combined losses and profitability. The Company's operating results are subject to significant fluctuations from period to period depending upon, among other factors, the frequency and severity of losses from weather related and other catastrophic events, the effect of competition and regulation on the pricing of products, changes in interest rates, general economic conditions, tax laws and the regulatory environment. As a condition of its license to do business in various states, the Company is required to participate in a variety of mandatory residual market mechanisms (including mandatory pools) which provide certain insurance (most notably automobile insurance) to consumers who are otherwise unable to obtain such coverages from private insurers. 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, 1993, 1994 and 1995 and for the three months ended March 31, 1996, 38.8%, 38.5%, 39.1% and 37.5%, respectively, of the Company's direct written premiums were derived from policies written in New York and, for the same periods, 19.0%, 19.6%, 20.8% and 21.5%, 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 New York and New Jersey and, more generally, in the Northeastern United States, the Company's results of operations may be significantly affected by weather conditions, catastrophic events and regulatory developments in these two states and in the Northeastern United States generally. 30 The Special Farm Package is a flexible, multi-line package of insurance coverage which the Company regards as its "flagship" product. For the year ended December 31, 1995, approximately 25% of the Company's total direct premiums written were derived from the Special Farm Package product. The Company concentrates on the Special Farm Package and its other established major product lines and, increasingly, on its businessowners and homeowners products. 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 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 environments in which the Company operates. Since 1987, the Company has implemented a standard environmental and pollution exclusion in some of its commercial liability and property policies, including its Special Farm Package product. However, the Special Farm Package contains a limited coverage endorsement for above-ground environmental and pollution liabilities. The industry standard personal and commercial automobile and homeowners policies do not contain an exclusion from environmental and pollution risks. The Company also writes a small number of claims made pollution liability policies. The Company does not believe that any pending claims or administrative or judicial proceedings arising from environmental and pollution related liabilities will have a material adverse effect on the Company's financial condition, and is not aware of any material threatened claims or administrative or judicial proceedings arising from such liabilities. See "Risk Factors--Potential Liability for Environmental and Pollution Risks." RESULTS OF OPERATIONS Three Months Ended March 31, 1996 Compared to Three Months Ended March 31, 1995 Premiums. Premium revenue increased $3.8 million, or 13.7%, during the three months ended March 31, 1996 to $31.7 million from $27.9 million for the same period in 1995. The increase in premium revenue in 1996 resulted from an increase of $3.1 million in earned premiums on additional business directly written by the Company and an increase of $0.8 million in earned premiums retained by the Company and not ceded to reinsurers, which were partially offset by a decrease of $0.1 million in earned premiums assumed. The $3.1 million increase in earned premiums on additional business directly written by the Company was primarily attributable to an increase of $2.2 million, or 8.8%, 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 the Special Home Package) and to an increase of $0.4 million in earned premiums on assigned risk business. The number of policies in force related to the Company's primary products increased by 7.6% to approximately 106,000 as of March 31, 1996 from approximately 99,000 as of March 31, 1995 and the average premium earned for each such policy increased by 1.1% during the three months ended March 31, 1996 compared to the same period in 1995. The $0.8 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 amount of earned premiums ceded by the Company were reduced without a change in the terms of the coverages provided by such agreements. Net Investment Income. Net investment income increased $0.4 million, or 10.1%, to $3.9 million for the three months ended March 31, 1996 from $3.5 million for the same period 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 $13.4 million, or 7.3%. The return realized on the Company's cash and invested assets was 7.8% for the three months ended March 31, 1996 and 7.7% for the same period in 1995. Net Realized Investment Gains. Net realized investment gains were $63,000 for the three months ended March 31, 1996 and $61,000 for the same period in 1995. 31 Losses and Loss Adjustment Expenses. Losses and loss adjustment expenses increased $6.6 million, or 34.3%, to $25.7 million for the three months ended March 31, 1996 from $19.1 million for the same period in 1995. Loss and loss adjustment expenses were 81.2% of premium revenue for the three months ended March 31, 1996 compared to 68.8% of premium revenue for the same period in 1995. The increase in the loss and loss adjustment expense ratio was primarily attributable to the severity and frequency of weather-related losses experienced in the Northeastern United States during the three months ended March 31, 1996. Losses and loss adjustment expenses believed to be storm and weather related aggregated $6.9 million for the three months ended March 31, 1996 compared to $0.9 million for the same period in 1995. Underwriting Expenses. Underwriting expenses increased $0.6 million, or 7.0%, to $8.8 million for the three months ended March 31, 1996 from $8.2 million for the same period in 1995. For the three months ended March 31, 1996, underwriting expenses were 27.7% of premium revenue compared to 29.5% for the same period in 1995. The reduction in the Company's underwriting expense ratio for the three months ended March 31, 1996 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 $0.8 million to $0.4 million for the three months ended March 31, 1996 from $1.2 million for the same period in 1995. Federal income tax expense was 32.5% of income before federal income tax expense for the three months ended March 31, 1996 compared to 29.0% for the same period in 1995. The increase in the Company's effective federal income tax rate was primarily attributable to reductions in tax exempt interest income and dividend income during the three months ended March 31, 1996. Net Income. Net income decreased $2.6 million to $0.3 million for the three months ended March 31, 1996 from $2.9 million for the same period in 1995 primarily as a result of the foregoing factors and the impact of $0.5 million of expenses related to the Reorganization which the Company has identified as an extraordinary item. Year Ended December 31, 1995 Compared to Year Ended December 31, 1994 Premiums. Premium revenue increased $15.5 million, or 15.2%, during the year ended December 31, 1995 to $116.9 million from $101.5 million in 1994. The increase in premium revenue in 1995 resulted from an increase of $14.3 million in earned premiums on additional business directly written by the Company (principally in New York and New Jersey) and an increase of $2.3 million in earned premiums retained by the Company and not ceded to reinsurers, which were partially offset by a decrease of $1.1 million in earned premiums assumed. The $14.3 million increase in earned premiums on additional business directly written by the Company was primarily attributable to an increase of $10.8 million, or 11.1%, in earned premiums from the Company's primary products (personal and commercial automobile products other than assigned risk business, the Special Farm Package, businessowners products, homeowners products, and the Special Home Package) and to an increase of $1.8 million in earned premiums on assigned risk business. The number of policies in force related to the Company's primary products increased by 8.4% to approximately 105,000 in 1995 from approximately 97,000 in 1994 and the average premium earned for each such policy increased by 2.5% in 1995. The $2.3 million increase in earned premiums retained by the Company was primarily the result of a change in the terms of certain of the Company's reinsurance agreements pursuant to which both the amount of earned premiums ceded by the Company and the ceding commissions received by the Company were reduced. The $1.1 million decrease in earned premiums assumed was attributable to a reduction in premiums assumed from mandatory pools as a result of the depopulation of such pools. Net Investment Income. Net investment income increased $1.1 million, or 8.6%, to $14.3 million for the year ended December 31, 1995 from $13.2 million in 1994. The increase in net investment income was primarily the result of an increase in cash and invested assets (at amortized cost) of approximately $17.2 million, or 9.6%. The return realized on the Company's cash and invested assets was 7.6% in both 1995 and 1994. 32 Net Realized Investment Gains. Net realized investment gains were $0.9 million for the year ended December 31, 1995 compared to $1.3 million in 1994. Losses and Loss Adjustment Expenses. Losses and loss adjustment expenses increased $0.5 million, or 0.6%, to $83.2 million for the year ended December 31, 1995 from $82.7 million in 1994. The increase in losses and loss adjustment expenses was primarily attributable to the overall growth in the Company's business and was significantly offset by a reduction in the loss and LAE ratio. Loss and loss adjustment expenses were 71.1% of premium revenue in 1995 compared to 81.5% of premium revenue in 1994. The decrease in the loss and LAE ratio in 1995 was primarily attributable to improved loss ratios on the Company's personal and commercial automobile lines and to a decline in the frequency and severity of weather related property losses in 1995 as compared with 1994. Losses and loss adjustment expenses believed to be storm and weather related aggregated $5.2 million in 1995 compared to $7.9 million in 1994. To a much lesser extent, a decrease in the loss and LAE ratio on assumed reinsurance also contributed to the decrease in the Company's overall loss and LAE ratio during 1995. Underwriting Expenses. Underwriting expenses increased $6.1 million, or 21.0%, to $34.9 million for the year ended December 31, 1995 from $28.8 million in 1994. For the year ended December 31, 1995, underwriting expenses were 29.8% of premium revenue compared to 28.4% in 1994. A reduction in 1994 of $2.2 million in amounts accrued for the Company's share of the deficit of the New Jersey Market Transition Facility, a residual market mandatory pool, had a favorable impact on the Company's underwriting expense ratio in that year. Without taking into account the effect of this reduction, underwriting expenses in 1994 would have been 30.5% of premium revenue. Federal Income Tax Expense. Federal income tax expense increased $3.6 million to $5.0 million in 1995 from $1.4 million in 1994. Federal income tax expense was 34.2% of income before federal income tax expense in 1995 compared to 29.1% in 1994. The increase in the Company's effective federal income tax rate was primarily attributable to the increase in income before federal income tax expense, certain expenses related to the Reorganization and reductions in tax exempt interest income in 1995. Net Income. Net income increased $6.1 million to $9.6 million in 1995 from $3.5 million in 1994 primarily as a result of the foregoing factors. Year Ended December 31, 1994 Compared to Year Ended December 31, 1993 Premiums. Premium revenue increased $4.8 million, or 5.0%, during the year ended December 31, 1994 to $101.5 million from $96.7 million in 1993. The increase in premium revenue in 1994 resulted from an increase of $8.5 million in earned premiums on additional business directly written by the Company, which was offset by a decrease of $2.0 million in earned premiums assumed from mandatory pools as a result of the depopulation of such pools and by an increase of $1.7 million in earned premiums ceded to reinsurers (related to the increase in direct written premiums). The $8.5 million increase in earned premiums on additional business directly written by the Company was primarily attributable to an increase of $8.4 million, or 9.4%, in earned premiums from the sale of the Company's primary products. The number of policies in force related to the Company's primary products increased by 8.5% to approximately 97,000 in 1994 and the average premium earned for each such policy increased by 1.0% in 1994. Net Investment Income. Net investment income decreased $0.6 million, or 4.8%, to $13.2 million for the year ended December 31, 1994 from $13.8 million in 1993. The decrease in net investment income was primarily the result of losses of $0.5 million (primarily related to certain limited partnership investments) recognized by the Company during 1994. The return realized on cash and invested assets (at amortized cost) declined to 7.5% in 1994 from 8.4% in 1993, the effect of which was offset in part by an increase in cash and invested assets of $10.6 million or 6.3%. 33 Net Realized Investment Gains. Net realized investment gains (losses) were $1.3 million for the year ended December 31, 1994 compared to ($0.2 million) in 1993. The net realized investment losses in 1993 were primarily the result of an approximately $1.9 million realized loss recognized by the Company in 1993 on a non-investment grade fixed maturity security which was deemed to be permanently impaired, offset in part by realized investment gains on the sale of other investments. Losses and Loss Adjustment Expenses. Losses and loss adjustment expenses increased $9.5 million, or 12.9%, to $82.7 million for the year ended December 31, 1994 from $73.2 million in 1993, primarily as a result of the overall growth in the Company's business and an increase in the loss and LAE ratio. The loss and LAE ratio increased to 81.5% in 1994 from 75.7% in 1993. The increase in the loss and LAE ratio was primarily attributable to an increase in property losses as a result of wind and ice storms in the Northeast during 1994. Losses and loss adjustment expenses believed to be storm and weather related aggregated $7.9 million in 1994 compared to $4.6 million in 1993. Underwriting Expenses. Underwriting expenses increased $2.0 million, or 7.3%, to $28.8 million for the year ended December 31, 1994 from $26.8 million in 1993. For the year ended December 31, 1994, underwriting expenses were 28.4% of premium revenue compared to 27.7% in 1993. The increase in the Company's underwriting expense ratio in 1994 was primarily attributable to a change in the Company's casualty reinsurance agreement with United and, to a lesser extent, increases in certain overhead expenses related to the overall increase in the Company's business, which was offset in part by the $2.2 million reduction in 1994 in amounts accrued for the Company's share of the deficit of the New Jersey Market Transition Facility. Federal Income Tax Expense. Federal income tax expense decreased $1.7 million to $1.4 million in 1994 from $3.1 million in 1993 due primarily to the decline in income before federal income tax expense. Federal income tax expense as a percentage of income before federal income tax expense was relatively unchanged in 1994 from 1993 at approximately 29.0%. Net Income. Net income decreased $4.1 million to $3.5 million in 1994 from $7.6 million in 1993 primarily as a result of the foregoing factors. LIQUIDITY AND CAPITAL RESOURCES Historically, the principal sources of the Company's cash flow have been premiums, investment income, maturing investments and proceeds from sales of invested assets. In addition to the need for cash flow to meet operating expenses, the liquidity requirements of the Company relate primarily to the payment of losses and loss adjustment expenses. The short- and long-term liquidity requirements of the Company vary because of the uncertainties regarding the settlement dates for liabilities for unpaid claims and because of the potential for large losses, either individually or in the aggregate. During 1995, the Company reduced its holdings of non-investment grade fixed maturities to improve the overall quality of its investment portfolio and in response to recommendations by A.M. Best. The aggregate carrying value of fixed maturity securities rated as non-investment grade by the NAIC was reduced from $17.3 million, or 10.8% of its fixed maturity portfolio, at December 31, 1994 to $10.8 million, or 5.6% of it fixed maturity portfolio, at December 31, 1995. High yield corporate bonds constituted most of the non- investment grade securities held by the Company as of December 31, 1995. As a result of the reduction in holdings of certain non-investment grade securities, the Company anticipates that future investment yields may be lower than they otherwise would be. Less than 1.0% of the Company's investment portfolio consists of investments in mortgage-backed securities. The average duration and average stated maturity of the Company's fixed maturity investment portfolio is approximately seven and eleven years, respectively. The mortgage-backed securities held by the Company as of December 31, 1995 were primarily U.S. Government agency or agency-backed pass-through securities. The Company currently has no investments in such derivative financial instruments as futures, forwards, swaps or options 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 34 interest as well as other factors. As of December 31, 1995, the aggregate market value of the Company's fixed maturity investments exceeded the aggregate amortized cost of such investments by $10.2 million. As of December 31, 1994, the aggregate amortized cost of the Company's fixed maturity investments exceeded the aggregate market value of such investments by $8.1 million. See "Business--Investments." The Company has in place an unsecured line of credit with Key Bank of New York under which it may borrow up to $2.0 million. At April 15, 1996, no amounts were outstanding on this line of credit, which has an annual interest rate equal to the bank's prime rate. In addition, at April 15, 1996, the Company had $2.7 million principal amount of Surplus Notes outstanding. The Surplus Notes bear interest at the rate of eight percent per annum and have no maturity date. The principal and interest on the Surplus Notes are repayable only with the approval of the Superintendent. Pursuant to the Plan, the holders of the Surplus Notes will generally have the option to exchange the Surplus Notes for cash or shares of Common Stock in the Holding Company, or they may elect to continue to hold such Surplus Notes. Net cash provided by operating activities was $0.9 million and $4.8 million during the three months ended March 31, 1996 and 1995, respectively, and was $16.4 million, $8.6 million, and $5.6 million during the years ended December 31, 1995, 1994, and 1993, respectively. The decrease in net cash provided by operating activities during the three months ended March 31, 1996 compared to the same period in 1995 was primarily attributable to the decrease in net income and an increase in payments for losses and loss adjustment expenses and certain expenses related to the Reorganization. The increase in net cash provided by operating activities in 1995 was primarily attributable to the increase in net income and a decrease in payments for losses and loss adjustment expenses during 1995 compared to 1994. The increase in net cash provided by operating activities in 1994 was primarily attributable to a reduction in reinsurance receivables during 1994 compared to 1993. Net cash provided by investing activities was $0.5 million during the three months ended March 31, 1996 and net cash used in investing activities was $5.3 million during the three months ended March 31, 1995. Net cash used in investing activities was $18.5 million, $7.7 million, and $7.2 million during the years ended December 31, 1995, 1994 and 1993, respectively. The increase in net cash provided by investing activities during the three months ended March 31, 1996 compared to the same period in 1995 primarily resulted from the net decrease in the Company's short-term investments. The increase in net cash used in investing activities in 1995 as compared to 1994 resulted from the net increase in cash available from the Company's operations during 1995 and a corresponding increase in investments in short-term investments and fixed maturities. The Company purchases reinsurance in part to mitigate the effect of large or unusual losses and loss expense activity. See "Business--Reinsurance." As a condition of writing business in certain states, the Company participates in a number of mandatory pools and the Company may incur losses to the extent such pools experience deficits in the future. See "Business--Regulation." The principal source of liquidity for the Holding Company will be dividend payments received from FFCIC. The New York Insurance Law regulates the distribution of dividends and other payments to the Holding Company by the Company. See "Business--Regulation." Such restrictions or any subsequently imposed restrictions may in the future affect the Holding Company's liquidity. Depending on the amount of proceeds from the Offerings and loan terms available to the Holding Company, the Holding Company may borrow additional funds in undetermined amounts to make cash payments to certain Eligible Policyholders and certain holders of Surplus Notes as part of the Reorganization, to pay Holding Company expenses and to make a capital contribution to FFCIC. It is anticipated that the Holding Company will have in place a line of credit with an unaffiliated lender prior to the Effective Date under which the Company could borrow such funds. Any net proceeds of the Offerings retained by the Holding Company will be used for general corporate purposes. 35 BUSINESS OVERVIEW Farm Family 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 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 the Life Company. The Company markets its insurance products through more than 200 Farm Family agents and field managers who are located in the rural and suburban communities served by the Company. These agents generally sell insurance products only for the Company and the Life Company. The Company believes that the distinctive focus of Farm Family and its agents on meeting the specialized insurance needs of rural communities has provided the Company with the knowledge and experience to adapt to changes in the demographics of its markets and in the nature of agricultural related businesses. In addition to insuring those engaged in agricultural pursuits such as dairy, vegetable and fruit farming, the Company insures a wide range of other businesses related to agriculture, such as distributors of agricultural products, horse breeding and training facilities, landscapers, nurseries, florists, wineries and growers of specialty products. In recent years, the Company has also introduced businessowners products for certain retail and contractor businesses and for owners of apartment and office buildings, as well as a homeowners product. The Company's principal strategy is to maintain its focus on meeting many of the specialized insurance needs of Northeastern rural and suburban communities. The Company's flagship product, the Special Farm Package, is a flexible product 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 rural and suburban communities. In addition, the Company will continue to seek to facilitate and expedite sales, underwriting and policy administration functions through the expanded use of local service centers and computer networking communications with the home office. LINES OF BUSINESS The following table sets forth by line of business the direct premiums written by Farm Family for the periods indicated:
THREE MONTHS YEAR ENDED DECEMBER 31, ENDED MARCH 31, ---------------------------------------- --------------- % OF % OF % OF % OF 1993 TOTAL 1994 TOTAL 1995 TOTAL 1996 TOTAL ------ ----- ------ ----- ------ ----- ------- -------- (DOLLARS IN MILLIONS) Automobile Liability(/1/).......... $ 37.3 33.5% $ 41.6 34.1% $ 47.5 35.0% $ 12.6 35.5% Fire & Allied Lines..... 21.6 19.5 22.7 18.7 23.4 17.1 5.6 15.7 Automobile Physical Damage(/1/)............. 17.7 15.9 18.9 15.5 21.7 15.9 5.7 16.1 Other Liability......... 12.9 11.6 14.3 11.7 15.5 11.4 3.8 10.7 Workers' Compensation... 8.3 7.5 8.1 6.7 9.1 6.7 3.0 8.4 Inland Marine........... 6.4 5.7 6.8 5.5 6.9 5.1 1.7 4.8 Commercial Multi-peril.. 3.8 3.4 5.3 4.3 6.6 4.9 1.8 5.1 Homeowners Multi-peril.. 3.0 2.7 4.1 3.3 5.1 3.8 1.3 3.7 Products Liability...... 0.2 0.2 0.2 0.2 0.2 0.1 0.0 0.0 ------ ----- ------ ----- ------ ----- ------- ------- Total................. $111.2 100.0% $122.0 100.0% $136.0 100.0% $ 35.5 100.0% ====== ===== ====== ===== ====== ===== ======= =======
- -------- (1) Premium data for automobile liability include $3.8 million, $4.3 million, $6.0 million and $1.4 million and for auto physical damage include $0.6 million, $0.5 million, $0.6 million and $0.1 million, in each case, of direct premiums written by Farm Family under certain mandatory state residual market assigned risk plans for the years ended December 31, 1993, 1994 and 1995 and the three months ended March 31, 1996, respectively, which represented, in the aggregate, approximately 3.9%, 4.0%, 4.9% and 4.2%, respectively, of Farm Family's total direct premiums written for such periods. See "--Regulation" and "Risk Factors--Effect of Regulation." 36 Automobile Liability and Automobile Physical Damage. Automobile liability coverage insures individuals and businesses against claims resulting from bodily injury and property damage. Automobile physical damage coverage insures individuals and businesses against claims resulting from property damage to an insured's vehicle. Fire & Allied Lines. Fire and allied lines cover first party losses arising from fire and related perils, including extended perils coverage, vandalism and malicious mischief. These coverages are usually written under the Special Farm Package, and provide fire and extended perils coverage to farm residences and outbuildings, machinery, tools, animals and other personal and business property. Farm Family also writes a small number of standard fire policies. Other Liability. The other liability line primarily includes Farm Family's liability coverages other than automobile, workers' compensation, commercial multi-peril, homeowners multi-peril and products liability. Other liability coverage generally includes personal, farm and business liability coverage under Farm Family's Special Farm Package, Special Home Package, commercial general liability, umbrella liability and pollution liability products. See "--Products." Workers' Compensation. Workers' compensation coverage insures employers against employee medical and indemnity claims resulting from injuries related to work as well as third party employer's liability. Of the ten states in which the Company operates, Farm Family's workers' compensation policy is not presently sold in Maine, Massachusetts, Rhode Island and West Virginia. Workers' compensation is viewed by the Company as an accommodation line, which generally is sold in conjunction with a Special Farm Package or a businessowners policy. Inland Marine. Inland marine coverage insures business and personal property, such as machines, equipment and farm produce. The Company's coverages in this line of business are principally related to large equipment, farm produce in general and farm produce while in storage. Commercial Multi-peril. Commercial multi-peril coverage insures businesses for damages arising from property and liability claims, including third party liability from accidents occurring on their premises or arising out of their operations or from the sale of products. It also insures business property for damage, such as that caused by fire, wind, hail, water damage, theft and vandalism. Most of Farm Family's commercial multi-peril policies are written under the Company's businessowners product for artisan contractors. Homeowners Multi-peril. Homeowners multi-peril coverage insures individuals for losses to their residences and personal property, such as those caused by fire, wind, hail, water damage, theft and vandalism, and against third party liability claims. Farm Family's homeowners policy is an industry standard policy for the rural and suburban homeowner, which provides for several optional endorsements. Products Liability. Farm Family also writes a small amount of a products liability line as part of its commercial general liability product. PRODUCTS Farm Family 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. 37 The following table sets forth by product the direct premiums written by Farm Family for the periods indicated:
THREE MONTHS YEAR ENDED DECEMBER 31, ENDED MARCH 31, ----------------------------------------- ---------------- % OF % OF % OF % OF 1993 TOTAL 1994 TOTAL 1995 TOTAL 1996 TOTAL ------ ----- ------ ------ ------ ----- ------- -------- (DOLLARS IN MILLIONS) Personal Automobile..... $ 36.8 33.1% $ 40.3 33.0% $ 46.6 34.2% $ 12.2 34.5% Special Farm Package.... 30.8 27.7 32.7 26.8 34.0 25.0 8.3 23.4 Commercial Automobile... 18.2 16.4 20.2 16.6 22.7 16.7 6.1 17.2 Workers' Compensation... 8.3 7.5 8.1 6.6 9.1 6.7 3.0 8.5 Businessowners.......... 3.8 3.4 5.3 4.3 6.6 4.9 1.8 5.1 Homeowners.............. 3.0 2.7 4.1 3.4 5.1 3.8 1.3 3.7 Umbrella................ 3.4 3.1 4.2 3.4 4.4 3.2 1.1 3.1 Commercial General Liability............... 2.8 2.5 3.0 2.5 3.4 2.5 0.8 2.1 Special Home Package.... 2.9 2.6 2.8 2.3 2.8 2.1 0.7 1.8 Fire, Allied, Inland Marine.................. 0.9 0.8 1.0 0.8 1.0 0.7 0.2 0.6 Products Liability...... 0.2 0.2 0.2 0.2 0.2 0.1 -- -- Pollution............... 0.1 0.1 0.1 0.1 0.1 0.1 -- -- ------ ----- ------ ----- ------ ----- ------- ------- Total................. $111.2 100.0% $122.0 100.0% $136.0 100.0% $ 35.5 100.0% ====== ===== ====== ===== ====== ===== ======= =======
Personal Automobile. Personal automobile is Farm Family's largest product. The Company's industry standard policies are generally marketed in conjunction with Farm Family's other products, such as the Special Farm Package, the businessowners policy or the homeowners policy. As of March 31, 1996, Farm Family had approximately 41,300 personal automobile policies in force. Special Farm Package. The Special Farm Package, developed in 1980, is a flexible, multi-line package of insurance coverages which Farm Family 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. The largest number of Special Farm Package policies written by Farm Family are for dairy, beef, horse, general farming and vegetable risks. Policyholders may select property damage coverages for specific peril groups, such as fire, wind, hail, water damage, theft and vandalism. Business and personal liability coverage insures policyholders against third party liability from accidents occurring on their premises or arising out of their operations or from their products. The Special Farm Package policy contains a limited liability extension of pollution-type coverage for damages caused to third persons or their crops resulting from above-ground, off-premises contamination, such as overspray of fertilizers and pesticides. For the three months ended March 31, 1996, approximately 90%, 91% and 47% of Farm Family's fire and allied lines, inland marine and other liability premiums, respectively, were written under the Special Farm Package policy. As of March 31, 1996, Farm Family had approximately 25,000 Special Farm Package policies in force. Commercial Automobile. Commercial automobile is Farm Family's third largest product. The Company's industry standard policies are generally marketed in conjunction with the Special Farm Package or the businessowners policy. As of March 31, 1996, Farm Family had approximately 16,000 commercial automobile insurance policies in force. Workers' Compensation. Farm Family generally does not seek to market or write its workers' compensation policy apart from a Special Farm Package or a businessowners policy. As of March 31, 1996, approximately 87.5% of Farm Family's in force workers' compensation policies were written in connection with Special Farm Package, businessowners, commercial multi-peril or homeowners policies. 38 Businessowners. Farm Family introduced a businessowners product (based on the industry standard policy form) in 1990 to meet the needs of small businesses within its rural and suburban markets. Direct written premiums for this product have grown from $0.1 million in 1991 to $6.6 million in 1995. 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. Farm Family also issues a small number of industry standard commercial multi-peril policies to selected risks that do not meet the eligibility requirements for the businessowners product. As of March 31, 1996, approximately 63% of the approximately 5,100 in force businessowners policies were issued to contractors and 37% were issued to property based mercantile risks. Special Home Package and Homeowners Policy. The Special Home Package was developed in 1980 as a companion product for the Special Farm Package policy. Farm Family'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 Farm Family 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. As of March 31, 1996, Farm Family had approximately 7,400 Special Home Package policies in force and approximately 15,800 homeowners policies in force. Umbrella Liability. Farm Family writes commercial and personal line excess liability policies covering business, farm and personal liabilities of Farm Family's 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. Farm Family does not generally seek to market its excess liability policies unless it also writes an underlying liability policy. Commercial General Liability. Farm Family 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 Farm Family 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 Farm Family's products liability line is written as part of the commercial general liability product. Pollution. Farm Family 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 March 31, 1996, Farm Family had approximately 300 pollution policies in force. 39 MARKETING The following table sets forth Farm Family's direct written premiums by state for the periods indicated:
THREE MONTHS YEAR ENDED DECEMBER 31, ENDED MARCH 31, ---------------------------------------- ---------------- % OF % OF % OF % OF 1993 TOTAL 1994 TOTAL 1995 TOTAL 1996 TOTAL ------ ----- ------ ----- ------ ----- ------- -------- (DOLLARS IN MILLIONS) New York................ $ 43.1 38.8% $ 47.0 38.5% $ 53.2 39.1% $ 13.3 37.5% New Jersey.............. 21.2 19.0 23.9 19.6 28.3 20.8 7.6 21.5 Massachusetts........... 9.2 8.3 10.1 8.3 10.5 7.7 3.4 9.5 Connecticut............. 7.5 6.7 8.2 6.7 9.1 6.7 2.4 6.7 West Virginia........... 6.7 6.0 7.3 6.0 7.8 5.7 1.9 5.2 Maine................... 6.6 5.9 6.7 5.5 6.9 5.1 1.5 4.3 New Hampshire........... 6.7 6.0 6.7 5.5 6.8 5.0 1.6 4.5 Vermont................. 4.5 4.1 5.0 4.1 5.3 3.9 1.4 4.1 Delaware................ 3.5 3.2 4.1 3.4 4.4 3.3 1.4 3.8 Rhode Island............ 2.2 2.0 3.0 2.4 3.7 2.7 1.0 2.9 ------ ----- ------ ----- ------ ----- ------- ------- Total................. $111.2 100.0% $122.0 100.0% $136.0 100.0% $ 35.5 100.0% ====== ===== ====== ===== ====== ===== ======= =======
As of May 31, 1996, Farm Family marketed its property and casualty insurance products in its ten-state region through approximately 187 full-time agents, 13 field managers and ten associate field managers. Many of Farm Family'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. Farm Family's agents generally market and write the full range of Farm Family's products. In addition to marketing Farm Family's property and casualty insurance products, the Company's agency force also markets life insurance products for the Life Company and may also act as brokers for Rural Agency. The Company believes that the breadth of products available to its agents through Farm Family, the Life Company and Rural Agency is important in allowing the agents to meet all of the unique insurance needs of rural and suburban communities. Agents generally place insurance exclusively for the Company, the Life Company and Rural Agency. Farm Family emphasizes personal contact between its agents and the policyholders. The Company believes that Farm Family's 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 Farm Family's relationship with the Farm Bureaus in its target markets promotes Farm Family name recognition and new customer referrals among Farm Bureau members. See "--Relationship with Farm Bureaus." Farm Family's policies are marketed exclusively through its agency force. The Company depends upon its agency force to produce new business and to provide customer service. The agency force also serves as an important source of information about the needs of the rural and suburban communities served by Farm Family. This information is utilized by Farm Family to develop new products and new product features. Agent compensation is comprised entirely of fixed commissions, office expense allowances and incentive bonuses. Commissions as a percentage of premiums written for new and renewal business range from 3.0% to 13.5% depending upon the type of insurance product sold. An office expense allowance program enables agents whose premium writings of certain products exceed $200,000 to earn additional compensation intended to assist in paying office expenses. Incentive bonuses are based upon the loss ratio on an agent's book of business. Incentive bonuses paid in 1995 constituted up to 13.7%, and averaged 3.1%, of an agent's compensation paid in 1995. As of May 31, 1996, Farm Family's agents were supervised and supported by a network of 13 field managers and ten associate field managers, who also have principal responsibility for recruiting and training new 40 agents. Field managers are compensated in accordance with commission overwrite formulas based on the commissions received by their agents. Farm Family and the field managers have instituted training programs which provide both technical training about the products and sales training on how to market insurance products. Field managers seek to recruit agents with some prior knowledge of agricultural and related businesses. Farm Family generally does not recruit agents with previous insurance experience. The average length of agent service with the Company for Farm Family agents as of March 31, 1996 was 7.95 years. The following table sets forth certain information with respect to Farm Family's agency force for each of the periods indicated:
AVERAGE NUMBER OF NUMBER OF YEARS OF TOTAL NUMBER NEW AGENTS' SERVICE PERIOD OF AGENTS(/1/) AGENTS(/1/) WITH COMPANY(/2/) - ------ -------------- ----------- ----------------- As of Year Ended December 31, 1990.............................. 175 21 8.36 As of Year Ended December 31, 1991.............................. 184 32 7.92 As of Year Ended December 31, 1992.............................. 169 23 7.98 As of Year Ended December 31, 1993.............................. 186 26 8.12 As of Year Ended December 31, 1994.............................. 179 32 7.93 As of Year Ended December 31, 1995.............................. 189 31 8.05 As of Three Months Ended March 31, 1996.............................. 187 6 7.95
- -------- (1) Does not include associate agents, field managers and associate field managers. (2) Calculated based upon the length of relationship with the Company for all agents as of the end of each period. In 1993, Farm Family began to convert several local agency offices into service centers in order to increase its local market presence and to expedite policy administration functions by allowing agents to provide certain application and policy modification processing directly from the field. As of May 6, 1996, Farm Family had established or begun developing 23 service centers within its ten-state region. As of the same date, 20 service centers process policy modifications for personal and commercial automobile products and 11 of these service centers process new personal and commercial automobile and homeowners policy applications. Agents are permitted to rent space and utilize a computer network and secretarial support teams in the service center. The Company believes that its service centers will aid its marketing efforts and enable agents to provide more efficient services to policyholders. Increasingly, field managers maintain local offices at the service centers. Farm Family's agents may also serve as brokers for Rural Agency, which represents other unaffiliated insurance companies. Rural Agency was established in 1970 by Farm Family to provide policyholders with access to products not written by Farm Family. Business placed through Rural Agency is principally comprised of specialty business not written by Farm Family, such as motorcycle, snowmobile, animal mortality, boiler and machinery, bond and crop insurance. All agents can access the Company's data networks from their personal computers. This connection enables Farm Family's agents, among other things, to access policy and claim information for each customer. Agents use the network to direct their service activities and assess account profitability. In addition, Farm Family provides personal computer software which allows agents to rate and illustrate each of the Company's major lines of business. RELATIONSHIP WITH FARM BUREAUS Farm Family was organized through the efforts of certain Farm Bureaus, and the Company's 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 41 with over four million members, which has traditionally sought to advance the interests of the agricultural community. It has historically been the practice of the Farm Bureau organizations to establish or sponsor farm-oriented and member-controlled insurance companies to provide insurance for their members. Farm Family 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 Farm Family are associated with Farm Bureau organizations in the Northeast. Farm Family 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 Farm Family's products. In exchange for these rights, Farm Family 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 Farm Family's ten- state region. See "Certain Relationships and Related Transactions." The Life Company has entered into similar membership list purchase agreements with each of the Farm Bureaus. Farm Family advertises its products in state and local Farm Bureau publications, for which it pays advertising fees to the Farm Bureaus, and participates in meetings and shows sponsored by Farm Bureau organizations. Such participation typically consists of purchasing booth space at such meetings and shows to market Farm Family's products. In general, Farm Family will not issue a policy in the voluntary market to anyone (other than an employee) who is not a member of a county or state Farm Bureau organization. Policyholders are also required to maintain such membership to renew a policy. Annual Farm Bureau membership fees generally range from $40 to $300, depending upon the county and state in which the member resides and the type of membership. Annual associate membership fees for members not engaged in agricultural pursuits generally range from $40 to $100. There can be no assurance that Farm Family's policy of generally providing new and renewal insurance policies in the voluntary market exclusively to Farm Bureau members will not be subject to challenge in the future by state insurance departments or other regulatory authorities. Substantially all of Farm Family's directors are officers and/or directors of the Farm Bureaus. Following the Offerings, it is expected that substantially all of the members of the FFCIC Board and of the Holding Company Board will continue to be affiliated with Farm Bureau organizations. The Company believes that this affiliation provides management with the opportunity to better assess the present and future needs of its target market and to cultivate better relations with Farm Bureau leaders and members. See "Risk Factors--Relationships with Farm Bureaus and Life Company; Potential Conflicts of Interest." UNDERWRITING Farm Family seeks to write its commercial and personal lines risks by evaluating loss experience and underwriting profitability with consistently applied standards. Farm Family maintains information on all aspects of its business which is routinely reviewed by the Company's staff of 14 underwriters in relationship to product line profitability. Farm Family's underwriters generally specialize by agency territory. Specific information is monitored with regard to individual insureds which is used to assist Farm Family in making decisions about policy renewals or modifications. The Company's underwriters have an average of over ten years of experience as underwriters. Farm Family concentrates on its established major product lines and, increasingly, on its businessowners and homeowners policies. It generally does not pursue the development of products with risk profiles with which 42 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. Farm Family believes its extensive knowledge of local markets in its region is a key element in its underwriting process. Farm Family has developed an approach to underwriting new and renewal business which allows for more limited intervention by the Company's underwriters for certain lines of business, such as personal automobile, which fall within pre-established guidelines. Risks falling outside of such preestablished guidelines are referred to a staff underwriter. Farm Family relies on information provided by its local agents, who, subject to certain guidelines, also act as field underwriters and pre-screen policy applicants. The agents have the authority to sell and bind insurance coverages in accordance with pre-established guidelines. Agents' underwriting results are monitored and on occasion agents with historically poor loss ratios have had their binding authority removed until more profitable underwriting results were achieved. CLAIMS Claims on insurance policies written by Farm Family are usually investigated and settled by one of the Company's staff claims adjusters, located in nine field offices. As of March 31, 1996, the Company's claim staff included 54 claims adjusters and managers. Farm Family'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 Farm Family'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. Liability claims reserved at $25,000 or above, property claims reserved at $50,000 or above and, generally, other litigated and serious claims are reported to the home office for supervision. In high volume areas, claims for certain lines of business will be assigned to field claim staff who specialize by line of business. Specialized units exist at the home office for no-fault automobile and workers' compensation claims, as well as subrogation. Farm Family 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. Farm Family engages independent appraisers and adjusters to evaluate and settle claims as claims volume or specialized needs require. Farm Family contracts with an outside claims administration firm to administer all claims with respect to its New York assigned risk personal automobile policies which the Company is required to write. See "--Regulation--Assigned Risks and Mandatory Pools." Recently, Farm Family has attempted to minimize claims costs by encouraging the use of alternative dispute resolution procedures, principally arbitration and mediation, for disputed claims or claim amounts. Litigated claims are assigned to outside counsel, which counsel are monitored by staff claims personnel. REINSURANCE Reinsurance Ceded In accordance with insurance industry practice, Farm Family reinsures a portion of its exposure and pays to the reinsurers a portion of the premiums received on all policies reinsured. Insurance is ceded principally to reduce net liability on individual risks, to mitigate the effect of individual loss occurrences (including catastrophic losses), to stabilize underwriting results and to increase Farm Family's underwriting capacity. Although reinsurance does not legally discharge the ceding insurer from primary liability for the full amount of the policies ceded, the assuming reinsurer is liable to the extent of the coverage ceded. Farm Family determines 43 the amount and scope of reinsurance coverage to purchase each year based upon Farm Family's evaluation of the risks accepted, consultations with reinsurance brokers and on market conditions, including the availability and pricing of reinsurance. For the year ended December 31, 1995, Farm Family ceded to reinsurers $21.4 million of earned premiums, $9.2 million of which was ceded to United. For the three months ended March 31, 1996, Farm Family ceded to reinsurers $4.3 million of earned premiums, $2.3 million of which was ceded to United. Farm Family's reinsurance arrangements are generally placed directly with non-affiliated reinsurers through reinsurance brokers, principally E.W. Blanch & Co., Inc. In addition, certain reinsurance coverages are also placed directly with United, a wholly owned subsidiary of the Life Company. See "Certain Relationships and Related Transactions." The largest net per risk exposure retained by Farm Family on any one individual property or casualty risk is $100,000. Property and casualty risks in excess of $100,000 are covered on an excess of loss basis up to $250,000 and $300,000, respectively, per risk by United. Per risk property losses in excess of $250,000 but less than $4 million are reinsured on an excess of loss basis by unaffiliated reinsurers. Facultative coverage is available for certain property risks in excess of $4 million per risk. Casualty losses per risk in excess of $300,000 but less than $1 million (which is generally the limit of liability under all of 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. Farm Family reinsures 95% of its umbrella liability losses (including a 5% quota share participation by United) under $1 million per loss on a quota share basis and 100% of umbrella liability losses in excess of $1 million up to $5 million per loss by unaffiliated reinsurers. Catastrophic reinsurance serves to protect the ceding insurer from significant aggregate loss exposure arising from a single event such as windstorm, hail, tornado, hurricane, earthquake, riot, freezing temperatures or other extraordinary events. Farm Family has purchased reinsurance for catastrophic property losses for 1996, under which Farm Family reinsures 95% of losses per occurrence over $6 million up to a maximum of $51 million and approximately 79% of the losses between $3 million and $6 million per occurrence. Farm Family retains the first $3 million of losses per occurrence under its property catastrophe program. United is a participant in Farm Family's property catastrophe reinsurance program and assumes 2% of losses per occurrence between $11 million and $51 million and approximately 16% of losses between $3 million and $6 million. The availability and cost of reinsurance are subject to prevailing market conditions and may vary significantly over time. In the event that reinsurance is not available to Farm Family on reasonable terms, Farm Family may be required to increase the amount of its net exposure to losses or reduce its premium writings. The following table sets forth certain information relating to Farm Family's six largest reinsurers for the year ended December 31, 1995:
PERCENTAGE OF EARNED TOTAL PREMIUMS A.M. BEST REINSURANCE REINSURER CEDED RATING PREMIUMS CEDED - --------- ---------- --------- -------------- United Farm Family Insurance Company........ $9,237,325 A- 43.2% Signet Star Reinsurance Company............. 2,791,034 A 13.0 Kemper Reinsurance Company.................. 2,789,777 A- 13.0 Continental Casualty Company................ 2,569,853 A 12.0 Folksamerica Reinsurance Company............ 1,150,089 A 5.4 Vesta Fire Insurance Corporation............ 276,670 A 1.3
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 Farm Family. As of December 31, 1995, 44 approximately 96.1% of the Company's reinsurance program (excluding mandatory pools) was provided by reinsurers which were rated "A-" (Excellent) or above by A.M. Best. In June 1995, Farm Family terminated its excess casualty reinsurance agreement with American Agricultural Insurance Company to reduce administrative and financial costs associated with the reinsurance arrangement. The reinsurance arrangement was commuted for casualty and workers' compensation risks for accident years 1980 to 1988 and prior to 1975. As a result of the termination of this arrangement, Farm Family does not have reinsurance in effect for any casualty and workers' compensation losses for accident years 1980 to 1988 and prior to 1975. The Company received approximately $1.8 million in cash as a result of the termination of this arrangement and established additional net loss reserves of approximately $1.7 million for any casualty and worker's compensation losses for accident years 1980 to 1988 and prior to 1975. Also, separate reinsurance agreements with American Agricultural Insurance Company continue to remain in effect for property and umbrella risks for those accident years. Reinsurance Assumed Farm Family 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. Farm Family also assumes an insignificant amount of reinsurance covering substandard automobile policies from United. For the year ended December 31, 1995 and the three months ended March 31, 1996, Farm Family earned premiums of $1.3 million and $0.4 million, respectively, under various excess of loss and pro rata reinsurance agreements. Farm Family generally retrocedes 50% of all assumed reinsurance to United. As of March 31, 1996, Farm Family's aggregate loss exposure for reinsurance assumed was $11.2 million. For the years ended December 31, 1994 and 1995, Farm Family incurred losses of $758,000 and $318,000, respectively, and for the three months ended March 31, 1995 and 1996 incurred losses of $63,000 and $208,000, respectively, from companies which it reinsures under its assumed reinsurance programs agreements. Farm Family's assumed reinsurance includes both mandatory and voluntary business. The mandatory reinsurance assumed consists of automobile and workers' compensation residual market mandatory pools. Participation in mandatory pools is required as a condition of licensing in the states. The amount of reinsurance assumed from these mandatory pools is determined by the Company's share of the voluntary market for the line of business written by these pools. Generally, the mandatory pools produce an operating loss from year to year, which will vary based on the market conditions for the lines of business in each of the states where the pools operate. The mandatory pools produced net losses of $428,000 and $763,000 for the years ended December 31, 1993 and 1995, respectively, and net gains of $275,000 for the year ended December 31, 1994 and $9,000 and $309,000 for the three months ended March 31, 1995 and 1996, respectively. LOSS AND LAE RESERVES Loss reserves are estimates of what an insurer expects to pay claimants. LAE reserves are estimates of an insurer's expenses to settle claims incurred, including legal and other fees, and the general expenses of administering the claims adjustment process. Farm Family is required to maintain reserves for payment of estimated loss and LAE for both reported claims ("Case Reserves") and claims which have been incurred but not yet reported ("IBNR"). The ultimate liability incurred by Farm Family may be different from current reserve estimates. Reserves for reported losses are established on either a judgment or formula basis, depending on the type of the loss. The judgment reserve amounts are set on a per case basis by the claims staff based on the facts and circumstances of each case, the type of claim and the expectation of damages. Farm Family's claim staff regularly monitors the adequacy of judgment reserves on a case by case basis and changes the amount of such reserves as necessary. The formula reserves, determined by the actuarial staff, are based on historical paid loss 45 data for similar claims with provisions for trend changes, such as those caused by inflation. The formula reserve is a fixed amount for each claim of a given type. Loss and LAE reserves for claims that have been incurred but not reported are estimated by the Company's actuarial staff based on many variables including historical and statistical information, inflation, legal developments, economic conditions, general trends in claim severity and frequency and other factors that could affect the adequacy of loss reserves. IBNR reserves provide for the late reporting of claims, reopened claims and inadequate case reserves. The Company's overall reserve practice provides for ongoing claims evaluation and adjustment (if necessary) based on the development of related data and other relevant information pertaining to such claims. Loss and LAE reserves, including IBNR reserves, are adjusted no less than quarterly, and in some instances more frequently. Farm Family employs an actuary who is a fellow of the Casualty Actuarial Society to supervise the Company's actuarial staff in the determination of reserves. In addition, Farm Family's reserves are certified on an annual basis by an outside actuary, as required by insurance regulatory authorities. Adjustments in aggregate reserves, if any, are reflected in the operating results of the period during which such adjustments are made. Although claims for which reserves are established may not be paid for several years, reserves for losses and LAE are not discounted, except for certain lifetime workers' compensation indemnity reserves where the reserves are discounted at 3.5%. The following table provides a reconciliation of beginning and ending loss and LAE reserve balances of Farm Family for the years ended December 31, 1993, 1994 and 1995 and for the three months ended March 31, 1996 as computed in accordance with GAAP. RECONCILIATION OF LIABILITY FOR LOSS AND LOSS ADJUSTMENT EXPENSES
YEAR ENDED DECEMBER 31, THREE MONTHS --------------------------- ENDED MARCH 31, 1993 1994 1995 1996 -------- -------- -------- --------------- (IN THOUSANDS) Reserves for losses and loss ad- justment expenses at the beginning of pe- riod............................. $117,497 $123,477 $127,954 $137,978 Less: Reinsurance recoverables and receivables...................... 24,463 28,761 28,230 28,655 -------- -------- -------- -------- Net reserves for losses and loss adjustment expenses at beginning of period.. 93,034 94,716 99,724 109,323 -------- -------- -------- -------- Add: Provision for losses and loss adjustment expenses for claims occurring in: The current year............... 73,114 86,370 88,366 28,160 Prior years.................... 99 (3,690) (5,182) (2,438) -------- -------- -------- -------- Total incurred losses and loss adjustment expenses.............. 73,213 82,680 83,184 25,722 -------- -------- -------- -------- Less: Loss and loss adjustment ex- penses payments for claims occurring in: The current year............... 34,839 43,232 40,519 7,013 Prior years.................... 36,692 34,440 33,066 15,449 -------- -------- -------- -------- Total.......................... 71,531 77,672 73,585 22,462 -------- -------- -------- -------- Net reserves for losses and loss adjustment expenses at end of period........ 94,716 99,724 109,323 112,583 Add: Reinsurance recoverables and receivables...................... 28,761 28,230 28,655 27,736 -------- -------- -------- -------- Reserves for losses and loss ad- justment expenses at end of period........ $123,477 $127,954 $137,978 $140,319 ======== ======== ======== ========
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 46 "Cumulative Amount of Reserves Paid Through" show the cumulative amounts paid related to the reserve as of the end of each subsequent year. The data presented under the caption "Reserves, Net, Reestimated as of" show the original recorded reserve as adjusted as of the end of each subsequent year to reflect the cumulative amounts paid and all other facts and circumstances discovered during each such year. The line "Cumulative Redundancy (Deficiency)" reflects the difference between the latest reestimated reserve amount and the reserve amount as originally established. In evaluating the information in the table below, it should be noted that each amount includes the effects of all changes in amounts of prior periods. For example, if a loss determined in 1993 to be $150,000 was first reserved in 1985 at $100,000, the $50,000 deficiency (actual loss minus original estimate) would be included in the cumulative deficiency in each of the years 1985 through 1992 shown below. This table presents development data by calendar year and does not relate the data to the year in which the accident actually occurred. Conditions and trends that have affected the development of these reserves in the past may not necessarily recur in the future. The following table sets forth the development of loss and loss adjustment expense reserves of Farm Family for the ten-year period ended December 31, 1995: ANALYSIS OF LOSS AND LOSS ADJUSTMENT EXPENSE DEVELOPMENT
YEAR ENDED DECEMBER 31 1985 1986 1987 1988 1989 1990 1991 1992 1993 1994 1995 - ----------- ------ ------ ------- ------ ------- ------- ------- ------- ------- ------- ------- (DOLLARS IN THOUSANDS) Reserves for Losses and Loss Adjustment Expenses............ 32,960 41,718 53,126 65,543 78,339 94,135 110,135 117,497 123,477 127,954 137,978 Reinsurance Recoverable on Unpaid Losses....... (4,957) (5,053) (5,468) (7,126) (11,784) (22,123) (25,048) (24,463) (28,761) (28,230) (28,655) ------ ------ ------- ------ ------- ------- ------- ------- ------- ------- ------- Reserves for Losses and Loss Adjustment Expenses, Net....... 28,003 36,665 47,658 58,417 66,555 72,012 85,087 93,034 94,716 99,724 109,323 ------ ------ ------- ------ ------- ------- ------- ------- ------- ------- ------- Reserves, Net, Reestimated as of: One year later...... 30,240 37,961 50,145 57,932 69,036 76,786 84,514 91,561 88,296 94,542 Two years later..... 30,718 38,047 50,572 63,348 72,478 76,442 84,305 89,666 82,876 Three years later... 30,242 39,057 53,540 65,399 72,926 76,832 83,960 86,876 Four years later.... 30,922 39,981 55,303 65,842 73,130 77,879 82,752 Five years later.... 30,467 41,097 55,445 66,289 74,599 77,375 Six years later..... 30,885 41,088 56,018 68,298 74,391 Seven years later... 31,272 41,072 57,751 68,370 Eight years later... 31,390 42,622 58,323 Nine years later.... 32,318 42,759 Ten years later..... 32,317 Cumulative Redundancy (Deficiency)........ (4,314) (6,094) (10,665) (9,953) (7,836) (5,363) 2,335 6,158 11,840 5,182 ------ ------ ------- ------ ------- ------- ------- ------- ------- ------- Cumulative Amount of Reserves Paid Through: One year later...... 13,918 16,621 21,931 23,852 29,587 29,446 32,708 36,692 34,439 33,066 Two years later..... 20,647 26,294 33,879 40,454 46,469 47,392 53,455 57,236 49,867 Three years later... 25,709 31,636 42,838 51,147 57,838 60,737 65,951 66,127 Four years later.... 28,008 35,838 48,480 57,239 65,803 67,401 70,176 Five years later.... 29,810 38,588 51,216 62,168 68,950 68,634 Six years later..... 30,590 39,836 54,644 64,423 68,652 Seven years later... 31,527 40,920 55,794 63,815 Eight years later... 32,217 41,693 55,313 Nine years later.... 32,663 41,116 Ten years later..... 32,269
47 Prior to 1990, Farm Family 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, Farm Family reviewed and revised its process for estimating reserves for losses and LAE, and in recent years Farm Family has generally experienced overall redundancies. The redundancies at December 31, 1995 of $6.2 million, $11.8 million and $5.2 million for the December 31, 1993, 1994 and 1995 loss 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.
YEAR ENDED DECEMBER 31, -------------------------- 1993 1994 1995 -------- -------- -------- (IN THOUSANDS) Reserve for unpaid losses and loss adjustment expenses: Gross liability.................................. $123,477 $127,954 $137,978 Reinsurance recoverable.......................... 28,761 28,230 28,655 -------- -------- -------- Net liability.................................... $ 94,716 $ 99,724 $109,323 ======== ======== ======== One year later: Gross reestimated liability...................... $106,175 $112,245 Reestimated reinsurance recoverable.............. 17,879 17,703 -------- -------- Net reestimated liability........................ $ 88,296 $ 94,542 ======== ======== Two years later: Gross reestimated liability...................... $ 94,587 Reestimated reinsurance recoverable.............. 11,711 -------- Net reestimated liability........................ $ 82,876 ========
Since 1987, Farm Family has implemented a standard environmental and pollution exclusion in some of its commercial liability and property policies, including the Special Farm Package. However, the Special Farm Package contains a limited coverage endorsement for above-ground environmental and pollution liabilities. Also, the industry standard personal and commercial automobile and homeowners policies do not contain an exclusion from environmental and pollution risks. Farm Family also writes a small number of claims made pollution liability policies. Farm Family has paid no material claims arising from environmental and pollution related liabilities with respect to policies written either before or after 1987. See "Risk Factors--Potential Liability for Environmental and Pollution Risks." The Company believes that Farm Family's reserves at December 31, 1995 are adequate. Conditions and trends that have historically affected Farm Family'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 Farm Family's financial condition and results of operations. INVESTMENTS An important component of the operating results of Farm Family has been the return on invested assets. Farm Family's investment objective is to maximize current yield while maintaining safety of capital together with adequate liquidity for its insurance operations. In an effort to improve the quality and safety of its investments, Farm Family embarked on a plan in 1995 to reduce significantly its holdings of non-investment grade fixed maturity securities. Farm Family manages all of its investments internally and does not employ an investment manager or advisor. Investment decisions and guidelines are made and implemented by the Company's investment department under the supervision of an investment committee comprised of members of the board of directors. 48 In addition, Farm Family maintains a Credit Watch Committee comprised of the Chief Executive Officer, the Chief Financial Officer and the Senior Vice President for Investments in order to monitor securities which have experienced late payments, adverse changes in credit rating or financial condition of the borrower or any modifications of terms. At March 31, 1996, Farm Family had four investments totalling $6.9 million on the Credit Watch Report, of which none were considered non-performing or in default. Farm Family reduced its holdings of NAIC Class 3 through 6 bonds, generally considered non-investment grade, from $17.3 million, or 10.8% of its fixed maturity portfolio, as of December 31, 1994 to $7.7 million, or 4.0% of its fixed maturity portfolio, as of March 31, 1996. Due to uncertainties in the economic environment, however, it is possible that the quality of investments currently held in Farm Family's investment portfolio may change. The following table sets forth certain information concerning Farm Family's investments:
AT DECEMBER 31, 1994 AT DECEMBER 31, 1995 AT MARCH 31, 1996 -------------------- -------------------- -------------------- AMORTIZED MARKET AMORTIZED MARKET AMORTIZED MARKET TYPE OF INVESTMENT COST VALUE(/3/) COST VALUE(/3/) COST VALUE(/3/) - ------------------ --------- ---------- --------- ---------- --------- ---------- (IN MILLIONS) AVAILABLE FOR SALE PORTFOLIO: Fixed Maturities(/1/) United States government and government agencies and authorities.... $ 20.2 $ 20.2 $ 22.7 $ 24.2 $ 19.4 $ 20.3 States, municipalities and political subdivisions....... 19.6 18.9 21.9 23.5 22.3 22.9 Public utilities...... 15.6 15.0 21.9 23.1 27.5 27.8 All other corporate bonds................... 99.3 92.8 104.1 109.2 107.4 109.4 Mortgage-backed securities.............. 1.9 2.0 1.1 1.2 1.0 1.1 ------ ------ ------ ------ ------ ------ Total Fixed Maturities.............. 156.6 148.9 171.7 181.2 177.6 181.5 ------ ------ ------ ------ ------ ------ Equity securities....... 0.3 3.9 0.3 4.7 0.3 5.1 Mortgage loans.......... 1.9 1.9 1.8 1.8 1.8 1.8 Cash and short-term investments............. 7.5 7.5 8.9 8.9 4.4 4.4 Other Invested Assets... 1.6 1.6 1.2 1.2 1.0 1.0 ------ ------ ------ ------ ------ ------ Total Available for Sale.................... 167.9 163.8 183.9 197.8 185.1 193.8 ------ ====== ------ ------ ------ ------ HELD TO MATURITY PORTFOLIO: Fixed Maturities(/2/) States, municipalities and political subdivisions....... 4.7 4.7 5.9 6.3 5.8 5.9 All other corporate bonds................... 6.6 6.2 6.5 6.8 6.4 6.4 ------ ------ ------ ------ ------ ------ Total Held to Maturity................ 11.3 10.9 12.4 13.1 12.2 12.3 ====== ====== ====== ====== ====== ====== Total Investments... $179.2 $174.7 $196.3 $210.9 $197.3 $206.1 ====== ====== ====== ====== ====== ======
- -------- (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. 49 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 Farm Family's fixed maturity investments at March 31, 1996:
AMORTIZED MARKET TYPE/RATINGS OF INVESTMENT(/1/) COST VALUE PERCENTAGE(/4/) - ------------------------------- --------- ------ --------------- (DOLLARS IN MILLIONS) AVAILABLE FOR SALE PORTFOLIO:(/2/) U.S. Government and Agencies................... $ 19.4 $ 20.3 11.2% AAA............................................ 12.0 12.6 6.9 AA............................................. 21.0 20.9 11.5 A.............................................. 53.9 55.8 30.8 BBB............................................ 64.2 65.2 35.9 ------ ------ ----- Total BBB or Better.......................... 170.5 174.8 96.3 ------ ------ ----- BB............................................. 4.1 4.0 2.2 B and Below.................................... 3.0 2.7 1.5 ------ ------ ----- Total Available for Sale..................... $177.6 $181.5 100.0% ====== ====== ===== HELD TO MATURITY PORTFOLIO:(/3/) U.S. Government and Agencies................... -- -- -- AAA............................................ $ 3.1 $ 3.2 26.0% AA............................................. 1.5 1.6 13.0 A.............................................. 6.3 6.3 51.2 BBB............................................ -- -- -- ------ ------ ----- Total BBB or Better.......................... 10.9 11.1 90.2 ------ ------ ----- BB............................................. 1.3 1.2 9.8 B and Below.................................... -- -- -- ------ ------ ----- Total Held to Maturity....................... $ 12.2 $ 12.3 100.0% ====== ====== =====
- -------- (1) The ratings set forth in this table are based on the ratings, if any, assigned by Standard & Poor's Corporation ("S&P"). If S&P's ratings were unavailable, the equivalent ratings supplied by Moody's Investors Services, Inc., Fitch Investors Service, Inc. or the NAIC were used where available. The percentage of securities that were not assigned a rating by S&P at March 31, 1996 was 6.3%. (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. 50 The table below sets forth the maturity profile of Farm Family's fixed maturity investments as of March 31, 1996 (substituting average life for mortgage-backed securities):
MATURITY AMORTIZED COST(/1/) MARKET VALUE(/2/) PERCENTAGE - -------- ------------------- ----------------- ---------- (DOLLARS IN MILLIONS) AVAILABLE FOR SALE: 1 year or less................ $ 0.3 $ 0.3 0.2% More than 1 year through 3 years......................... 11.9 11.9 6.6 More than 3 years through 5 years......................... 12.2 12.7 7.0 More than 5 years through 10 years......................... 70.3 71.0 39.1 More than 10 years through 15 years......................... 40.1 40.4 22.3 More than 15 years through 20 years......................... 13.5 13.8 7.6 More than 20 years............ 20.1 21.6 11.9 Mortgage-backed securities.... 9.2 9.8 5.3 ------ ------ ----- Total....................... $177.6 $181.5 100.0% ====== ====== ===== HELD TO MATURITY: 1 year or less................ $ 0.1 $ 0.1 0.8% More than 1 year through 3 years......................... 1.1 1.1 8.9 More than 3 years through 5 years......................... 0.4 0.4 3.3 More than 5 years through 10 years......................... 5.1 5.1 41.5 More than 10 years through 15 years......................... 4.5 4.5 36.6 More than 15 years through 20 years......................... 1.0 1.1 8.9 More than 20 years............ 0.0 0.0 0.0 ------ ------ ----- Total....................... $ 12.2 $ 12.3 100.0% ====== ====== =====
- -------- (1) Fixed maturities 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. 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. The average duration and average maturity of Farm Family's fixed maturity investments as of March 31, 1996 were approximately 7 and 11 years, respectively. As a result, the market value of the Company's investments may fluctuate significantly in response to changes in interest rates. In addition, the Company may also be likely to experience investment losses to the extent its liquidity needs require the disposition of fixed maturity securities in unfavorable interest rate environments. For the year ended December 31, 1995, compared with the prior year, the amortized cost of Farm Family's cash and invested assets increased 9.6% to $196.4 million. As a result of the reduction in holdings of certain non- investment grade securities, the Company anticipates that future investment yields may be lower than they otherwise would be. Farm Family's net investment income, average cash and invested assets and return on average cash and invested assets for the three years ended December 31, 1993, 1994 and 1995 and the three months ended March 31, 1995 and 1996 were as follows:
THREE MONTHS YEAR ENDED DECEMBER 31, ENDED MARCH 31, ------------------------- ---------------- 1993 1994 1995 1995 1996 ------- ------- ------- ------- ------- (DOLLARS IN MILLIONS) Net investment income............. $ 13.8 $ 13.2 $ 14.3 $ 3.5 $ 3.9 Average cash and invested assets.. 165.3 173.9 187.8 181.6 196.9 Return on average cash and invested assets................... 8.4% 7.6% 7.6% 7.7% 7.8%
51 INFORMATION SERVICES Farm Family's automated information processing capabilities are supported by centralized computer systems and a network of personal computers linking the 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 Farm Family'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 Farm Family's information services equipment, including the centralized computer systems and computer network, is owned by the Life Company. Information systems expenses are shared by Farm Family and the Life Company pursuant to an agreement. See "Certain Relationships and Related Transactions--Life Company--Expense Sharing Agreement." A.M. BEST RATING A.M. Best, which rates insurance companies based on factors of concern to policyholders, currently assigns an "A-" (Excellent) rating (its fourth highest rating category) to Farm Family Mutual. 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" and "A-" have a strong ability to meet their obligations to policyholders over a long period of time. In evaluating a company's financial and operating performance, A.M. Best reviews the company's profitability, leverage and liquidity, as well as the company's book of business, the adequacy and soundness of its reinsurance, the quality and estimated market value of its assets, the adequacy of its loss reserves, the adequacy of its surplus, its capital structure, the experience and competency of its management and its market presence. No assurance can be given that A.M. Best will not reduce Farm Family Mutual's current rating in the future. See "Risk Factors--A.M. Best Rating" and "Business--Investments." COMPETITION The property and casualty insurance market is highly competitive. Farm Family competes with stock insurance companies, mutual companies, local cooperatives and other underwriting organizations. Certain of these competitors have substantially greater financial, technical and operating resources than Farm Family. 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 Farm Family 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 Farm Family does. In addition to price, competition in the lines of business written by the Company is based on quality of the products, quality and speed of service (including claims service), financial strength, ratings, distribution systems and technical expertise. REGULATION General Farm Family is regulated by government agencies in the states in which it does business. Such regulation usually includes (i) regulating premium rates and policy forms, (ii) setting minimum capital and surplus requirements, (iii) regulating guaranty fund assessments and residual markets, (iv) licensing companies, adjusters and agents, (v) approving accounting methods and methods of setting statutory loss and expense reserves, (vi) setting requirements for and limiting the types and amounts of investments, (vii) establishing requirements for the filing of annual statements and other financial reports, (viii) conducting periodic statutory examinations of the affairs of insurance companies, (ix) approving proposed changes in control and (x) limiting the amount of dividends that may be paid without prior regulatory approval. Such regulation and supervision are primarily for the benefit and protection of policyholders and not for the benefit of investors. 52 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. Assigned Risk Plans and Mandatory Pools As a condition to writing automobile insurance in many states, insurers are required to provide automobile insurance pursuant to assigned risk plans at premium rates which are determined by the insurance departments of the various states. Historically, such premium rates have been inadequate. In most states, assigned risk business is shared among insurance companies under legislatively mandated arrangements whereby residual market applicants are divided and assigned to reinsurers in proportion to the amount of automobile insurance business written by such insurers in the voluntary market. The Company's direct written premiums from such assigned risk plans for the years ended December 31, 1993, 1994 and 1995 were $4.4 million, $4.8 million and $6.6 million, respectively, and $1.2 million and $1.5 million for the three months ended March 31, 1995 and 1996, respectively. The mandatory state residual market automobile assigned risk plans in which the Company participates resulted in the Company recognizing net losses of approximately $1.1 million, $0.7 million and $2.5 million for the years ended December 31, 1993, 1994 and 1995, respectively, and $0.5 million and $0.6 million for the three months ended March 31, 1995 and 1996, respectively. In addition, the Company participates in various state-sponsored mandatory pools which are established to provide automobile and worker's compensation insurance for consumers who are unable to obtain insurance in the voluntary insurance market. The Company shares in the results of these mandatory pools on a pro rata basis based on its relative premiums for voluntary business written for these coverages within such states. As a result of the Company's participation in such mandatory pools, net income for the years ended December 31, 1993, 1994 and 1995 decreased by $0.4 million, increased by $0.3 million and decreased by $0.8 million, respectively, and increased by approximately $9,000 and $0.3 million for the three months ended March 31, 1995 and 1996, respectively. Assessments Related to Insolvency Funds and Associations Most states require admitted property and casualty insurers to become members of insolvency funds or associations which were established to protect policyholders against the insolvency of such insurers. Members of the fund or association must contribute to the payment of certain claims made against insolvent insurers. Maximum contributions required by law in any one year vary between 1% and 2% of annual premiums written by a member in that state. The Company's assessments incurred from guaranty funds were approximately $415,000, $788,000 and $480,000 for the years ended December 31, 1993, 1994 and 1995, respectively, and were approximately $100,000 and $55,000 for the three months ended March 31, 1995 and 1996, respectively. Most of these payments are recoverable through future policy surcharges and premium tax reductions. Risk-Based Capital State insurance departments have adopted a new 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" 53 of RBC. Based on calculations made by Farm Family, the risk-based capital level for FFCIC exceeds a level that would trigger regulatory attention. At December 31, 1995, FFCIC's RBC was $55.4 million, and the threshold requiring the least regulatory attention was $22.5 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. FFCIC did not have any ratios which varied from the "usual value" range in 1995, 1994 or 1993. Holding Company Act In addition to the regulatory oversight of FFCIC, Farm Family is also subject to regulation under Article 15 of the New York Insurance Law (the "Holding Company Law"). The Holding Company Law contains certain reporting requirements including those requiring the ultimate parent company of a New York insurance company to file information relating to its capital structure, ownership, and financial condition and the general business operations of its insurance subsidiary. The Holding Company Law contains special reporting and prior approval requirements with respect to transactions among affiliates. Restrictions on Dividends FFCIC is subject to various state statutory and regulatory restrictions, generally applicable to each insurance company in New York, which limit the amount of dividends or distributions by an insurance company to its stockholders. The New York Insurance Law regulates the distribution of dividends and other payments to the Holding Company by FFCIC. Under the applicable New York statute, a property and casualty stock insurance company may not declare or distribute dividends except out of statutorily defined earned surplus and may not declare or distribute a dividend, without prior regulatory approval, if such dividend, together with all dividends declared or distributed by it during the next preceding 12 months, exceeds the lesser of (i) 10% of its surplus to policyholders as shown by its last statement on file with the Superintendent, or (ii) 100% of its statutorily defined adjusted net investment income during the same period. Additional dividends are payable only upon receiving prior regulatory approval. Such restrictions or any additional subsequently imposed restrictions may in the future affect the Holding Company's ability to pay debt, expenses and cash dividends to its stockholders. Future dividends from FFCIC may also be limited by business considerations. Insurance Regulation Concerning Change or Acquisition of Control FFCIC is a domestic property and casualty insurance company organized under the New York Insurance Law. The New York Insurance Law provides that the acquisition or change of "control" of a domestic insurer or of any person that controls a domestic insurer cannot be consummated without notice to and the prior approval of the Superintendent. A person seeking to acquire control, directly or indirectly, of a domestic insurance company or of any person controlling a domestic insurance company must generally file with the Superintendent an application for change of control containing certain information required by statute and published regulations and provide a copy of such application to the domestic insurer. In New York, control is generally presumed to exist if any person, directly or indirectly, owns, controls, holds with the power to vote or holds proxies representing 10% or more of the voting securities of any other person. Such requirements may deter, delay or prevent certain transactions that could be advantageous to the stockholders of Farm Family. 54 In addition, many state insurance regulatory laws contain provisions that require pre-notification to state agencies of a change in control of a non- domestic admitted insurance company in that state. While such pre-notification statutes do not authorize the state agency to disapprove the change of control, such statutes do authorize issuance of a cease and desist order with respect to non-domestic admitted insurers doing business in that state if certain conditions exist such as undue market concentration. LEGAL PROCEEDINGS Farm Family is subject to litigation in the normal course of business. Based upon information presently available to it, the Company does not consider any threatened or pending litigation to be material. However, given the uncertainties attendant to litigation, there can be no assurance that the Company's results of operations and financial condition will not be materially adversely affected by any threatened or pending litigation. PROPERTIES Farm Family currently leases space for its home office in Glenmont, New York from the Life Company. The lease provides for the Company to pay the Life Company an annual rental of approximately $629,216. The lease expires on December 31, 1998. See "Certain Relationships and Related Transactions--Life Company--Lease Agreement." EMPLOYEES The Company shares most of its employees with the Life Company. As of March 31, 1996, the total number of full time employees of the Company and the Life Company was 417 employees in aggregate, of which 311 employees were employed in the home office. Based on annual time studies, 61% of total employee expenses, including salary expense, is currently allocated to the Company and 39% is allocated to the Life Company and United. See "Certain Relationships and Related Transactions--Life Company--Expense Sharing Agreement." None of these employees are covered by a collective bargaining agreement, and the Company believes that its employee relations are good. 55 MANAGEMENT Information regarding the directors and executive officers of the Company is provided as follows. Substantially all directors are directors of both the Holding Company and FFCIC. Except where indicated otherwise, all executive officer positions are held at the Holding Company.
NAME AGE POSITION - ---- --- -------- William M. Stamp, Jr.... 56 Chairman of the Board of Directors; President of FFCIC and Director(/3/) John W. Lincoln......... 57 Vice Chairman of the Board of Directors; First Vice President of FFCIC and Director(/2/)(/3/) Philip P. Weber......... 47 President and Chief Executive Officer; Executive Vice President and Chief Executive Officer of FFCIC James J. Bettini........ 41 Executive Vice President--Operations; Senior Vice President--Operations of FFCIC Charles E. Simon........ 51 Executive Vice President and Treasurer; Senior Vice President and Chief Financial Officer of FFCIC Victoria M. Stanton..... 36 Executive Vice President, General Counsel and Secretary; Senior Vice President, General Counsel and Secretary of FFCIC William T. Conine....... 47 Senior Vice President--Information Services of FFCIC Stuart C. Henderson..... 40 Senior Vice President--Casualty Operations of FFCIC David M. Neville........ 58 Senior Vice President--Human Resources of FFCIC Raymond A. Osterhout.... 51 Senior Vice President--Investments of FFCIC Timothy A. Walsh........ 34 Senior Vice President--Finance of FFCIC Dale E. Wyman........... 53 Senior Vice President--Marketing of FFCIC Robert L. Baker......... 46 Director(/1/) Randolph C. Blackmer, Jr...................... 55 Director(/1/)(/2/) Fred G. Butler, Sr...... 67 Director(/3/) Joseph E. Calhoun....... 61 Director(/3/) James V. Crane.......... 35 Director Stephen J. George....... 56 Director(/3/) Gordon H. Gowen......... 69 Director(/3/) Jon R. Greenwood........ 42 Director(/1/) Clark W. Hinsdale III... 40 Director(/2/)(/3/) Richard A. Jerome....... 47 Director Arthur D. Keown, Jr..... 50 Director(/3/) Daniel R. LaPointe...... 58 Director(/3/) Wayne A. Mann........... 63 Director(/1/) John P. Moskos.......... 45 Director(/2/)(/3/) Norma R. O'Leary........ 62 Director(/3/) John I. Rigolizzo, Jr... 43 Director Harvey T. Smith......... 51 Director Howard T. Sprow......... 76 Director(/1/) Richard D. Tryon........ 72 Director Charles A. Wilfong...... 38 Director(/1/) Tyler P. Young.......... 36 Director
- -------- (1) Serves on the Audit Committee of the Holding Company Board. (2) Serves on the Compensation Committee of the Holding Company Board. (3) Serves on the Executive Committee of the Holding Company Board. 56 The directors and executive officers of the Holding Company are listed above. Directors are elected by the stockholders to staggered three-year terms subject to the provisions of the Bylaws. The Holding Company Board appoints the Holding Company's officers, who serve until the meeting of the Holding Company Board following the next annual meeting of stockholders or until their successors are appointed and qualified. The Holding Company Board has established an Audit Committee consisting of six directors, none of whom is an officer or employee of the Holding Company. The Audit Committee recommends to the Holding Company Board the selection of independent certified public accountants to audit annually the books and records of the Holding Company, reviews the activities and the reports of the independent certified public accountants and reports the results of such reviews to the Holding Company Board. The Audit Committee also considers the adequacy of the Holding Company's internal controls and internal auditing methods and procedures. The Holding Company Board has also established a Compensation Committee consisting of four directors, none of whom is an employee of the Holding Company, which, as authorized by the Holding Company Board, makes recommendations to the Holding Company Board with respect to the administration of the salaries, bonuses and other compensation to be paid to the Holding Company's officers. The Holding Company Board has also established an Executive Committee consisting of eleven directors, which, to the extent authorized by the Holding Company Board, exercises all the powers and authority of the Holding Company Board in the management of the business and affairs of the Holding Company. BIOGRAPHICAL INFORMATION FOR DIRECTORS AND EXECUTIVE OFFICERS Traditionally, Farm Bureau officers have been nominated and elected to directorships with FFCIC and the Life Company. WILLIAM M. STAMP, JR. has been a Director and Chairman of the Holding Company Board since February 1996. His term as a Director will expire in 1999. Mr. Stamp has also served as President of FFCIC since 1987 and as a Director of FFCIC since 1975. Upon the Effective Date, Mr. Stamp will become Chairman of the FFCIC Board. Mr. Stamp is President and a Director of Rhode Island Farm Bureau Federation, Inc. Mr. Stamp has been a farmer and President of Stamp Farm Enterprises, Inc., a greenhouse and sweet corn farming operation, since 1956. JOHN W. LINCOLN has been a Director and Vice Chairman of the Holding Company Board since February 1996. His term as a Director will expire in 1997. Mr. Lincoln has also served as First Vice President of FFCIC since 1996 and as a Director of FFCIC since 1984. Upon the Effective Date, Mr. Lincoln will become Vice Chairman of the FFCIC Board. Mr. Lincoln is President and a Director of New York Farm Bureau, Inc. Mr. Lincoln has owned and operated a dairy farm since 1961. PHILIP P. WEBER has been President and Chief Executive Officer of the Holding Company since February 1996. Mr. Weber has also served as Executive Vice President and Chief Executive Officer of FFCIC since January 1991. Upon the Effective Date, Mr. Weber will become President and Chief Executive Officer of FFCIC. Mr. Weber has been employed by FFCIC in various capacities since June 1987 and held various agent and agency manager positions with FFCIC from 1980 to 1987. JAMES J. BETTINI has been Executive Vice President--Operations of the Holding Company since February 1996. Mr. Bettini has also served as Senior Vice President--Operations of FFCIC since January 1991 and will become Executive Vice President--Operations of FFCIC on the Effective Date. Mr. Bettini has been employed by FFCIC in various capacities since July 1979. CHARLES E. SIMON has been Executive Vice President and Treasurer of the Holding Company since February 1996. Mr. Simon has also served as Senior Vice President and Chief Financial Officer of FFCIC since July 1987 and will become Executive Vice President--Strategic Development of FFCIC upon the Effective Date. Mr. Simon has been employed by FFCIC in various capacities since October 1972. 57 VICTORIA M. STANTON has been Executive Vice President, General Counsel and Secretary of the Holding Company since February 1996. Ms. Stanton has also served as Senior Vice President, General Counsel and Secretary of FFCIC since March 1993 and will become Executive Vice President, General Counsel and Secretary of FFCIC upon the Effective Date. Ms. Stanton was Senior Vice President and General Counsel of FFCIC from July 1992 to March 1993 and Corporate Counsel of FFCIC from April 1991 to July 1992. Ms. Stanton was previously an attorney with McNamee, Lochner, Titus & Williams, P.C., Albany, New York, from 1989 to 1991, and with Rogers & Wells, New York, New York, from 1987 to 1989. WILLIAM T. CONINE has been Senior Vice President--Information Services of FFCIC since December 1989. Mr. Conine has been employed by FFCIC in various capacities since June 1975. STUART C. HENDERSON has been Senior Vice President--Casualty Operations of FFCIC since March 1996. Mr. Henderson was Senior Vice President--Claims of FFCIC from March 1993 to March 1996 and Vice President--Claims Counsel of FFCIC from April 1991 to March 1993 and has been employed by FFCIC in various capacities since May 1986. DAVID M. NEVILLE has been Senior Vice President--Human Resources of FFCIC since January 1993. Mr. Neville was Vice President--Human Resources of FFCIC from January 1990 to January 1993 and has been employed by FFCIC in various capacities since February 1973. Mr. Neville was previously employed by FFCIC from September 1964 to April 1968. RAYMOND A. OSTERHOUT has been the Senior Vice President--Investments of FFCIC since January 1991 and was Vice President--Investments of FFCIC from October 1987 to January 1991. TIMOTHY A. WALSH has been the Senior Vice President--Finance of FFCIC since March 1996. Mr. Walsh was Director of Corporate Development for FFCIC from August 1995 to March 1996. Mr. Walsh was previously Vice President, Finance & Chief Financial Officer with MPW Industrial Services, Inc., Columbus, Ohio, from April 1994 to August 1995, Corporate Controller of NSC Corporation, Methuen, Massachusetts, from July 1992 to April 1994 and a Senior Manager at KPMG Peat Marwick from July 1983 to July 1992. DALE E. WYMAN has been Senior Vice President--Marketing of FFCIC since January 1991. Mr. Wyman was Vice President--Marketing of FFCIC from September 1989 to January 1991 and held various agent and agency manager positions with FFCIC from November 1975 to September 1989. ROBERT L. BAKER has been a Director of the Holding Company since February 1996. His term as a Director will expire in 1997. Mr. Baker has also served as a Director of FFCIC since 1988. Mr. Baker is First Vice President and a Director of Delaware Farm Bureau, Inc. Mr. Baker has been a farmer and Treasurer of Baker Farms, Inc. since 1972. RANDOLPH C. BLACKMER, JR. has been a Director of the Holding Company since February 1996. His term as a Director will expire in 1999. Mr. Blackmer has also served as a Director of FFCIC since 1984. Mr. Blackmer is First Vice President and a Director of Connecticut Farm Bureau Association, Inc. Mr. Blackmer has been a self-employed farmer since 1966 and has been President of Ag Service, Inc and of Blackmer Farm since 1975. FRED G. BUTLER, SR. has been a Director of the Holding Company since February 1996. His term as a Director will expire in 1999. Mr. Butler has also served as a Director of FFCIC since 1981. Mr. Butler is President and a Director of West Virginia Farm Bureau, Inc. Mr. Butler has been a self- employed dairy farmer since 1956 and has been owner and President of Wright Motors, Inc., a used car dealership, since 1965. JOSEPH E. CALHOUN has been a Director of the Holding Company since February 1996. His term as a Director will expire in 1998. Mr. Calhoun has also served as a Director of FFCIC since 1990. Mr. Calhoun is President and a Director of Delaware Farm Bureau, Inc. Mr. Calhoun has owned and operated Joseph E. Calhoun Farms since 1953. 58 JAMES V. CRANE has been a Director of the Holding Company since February 1996. His term as a Director will expire in 1997. Mr. Crane has also served as a Director of FFCIC since 1994. Mr. Crane is Vice President and a Director of Maine Farm Bureau Association. Mr. Crane has been a farmer and manager of Crane Bros., Inc. since 1983. STEPHEN J. GEORGE has been a Director of the Holding Company since February 1996. His term as a Director will expire in 1999. Mr. George has also served as a Director of FFCIC since 1989. Mr. George has been a self-employed farmer in the greenhouse and nursery business since 1965. GORDON H. GOWEN has been a Director of the Holding Company since February 1996. His term as a Director will expire in 1998. Mr. Gowen has also served as a Director of FFCIC since 1991. Mr. Gowen previously served as a Director of FFCIC from 1978 to 1980. Mr. Gowen is President and a Director of New Hampshire Farm Bureau Federation. Mr. Gowen has been a self-employed farmer since 1957. JON R. GREENWOOD has been a Director of the Holding Company since February 1996. His term as a Director will expire in 1998. Mr. Greenwood has also served as a Director of FFCIC since 1995. Mr. Greenwood is Vice President and a Director of New York Farm Bureau, Inc. Mr. Greenwood has been a self- employed farmer since 1978. CLARK W. HINSDALE III has been a Director of the Holding Company since February 1996. His term as a Director will expire in 1997. Mr. Hinsdale has also served as a Director of FFCIC since 1993. Mr. Hinsdale is President and a Director of Vermont Farm Bureau, Inc. Mr. Hinsdale has been a self-employed farmer, a self-employed land planner and real estate broker since 1983. RICHARD A. JEROME has been a Director of the Holding Company since February 1996. His term as a Director will expire in 1999. Mr. Jerome has also served as a Director of FFCIC since 1995. Mr. Jerome is a Director of New York Farm Bureau, Inc. Mr. Jerome has been a self-employed farmer since 1972. ARTHUR D. KEOWN, JR. has been a Director of the Holding Company since February 1996. His term as a Director will expire in 1999. Mr. Keown has also served as a Director of FFCIC since 1993. Mr. Keown is President and a Director of Massachusetts Farm Bureau Federation, Inc. Mr. Keown has been a self-employed farmer since 1967. DANIEL R. LAPOINTE has been a Director of the Holding Company since February 1996. His term as a Director will expire in 1999. Mr. LaPointe has also served as a Director of FFCIC since 1987. Mr. LaPointe is President and a Director of Maine Farm Bureau Association. Mr. LaPointe has been a self-employed farmer since 1960. WAYNE A. MANN has been a Director of the Holding Company since February 1996. His term as a Director will expire in 1997. Mr. Mann has also served as a Director of FFCIC since 1994. Mr. Mann is First Vice President and a Director of New Hampshire Farm Bureau Federation. Mr. Mann is a retired air force officer and pilot and has been a self-employed farmer since 1980. JOHN P. MOSKOS has been a Director of the Holding Company since February 1996. His term as a Director will expire in 1998. Mr. Moskos has been Senior Vice President, Corporate Banking of Fleet Bank since January 1996. Mr. Moskos was previously employed by Chase Manhattan Bank N.A. in various capacities from 1973 to 1995, including serving as a Regional President and Senior Lending Officer and a Division Executive. NORMA R. O'LEARY has been a Director of the Holding Company since February 1996. Her term as a Director will expire in 1998. Ms. O'Leary has also served as a Director of FFCIC since 1983. Ms. O'Leary is President and a Director of Connecticut Farm Bureau Association, Inc. Ms. O'Leary has been a self-employed farmer since 1952. 59 JOHN I. RIGOLIZZO, JR. has been a Director of the Holding Company since February 1996. His term as a Director will expire in 1998. Mr. Rigolizzo has also served as a Director of FFCIC since 1995. Mr. Rigolizzo is President and a Director of New Jersey Farm Bureau. Mr. Rigolizzo has been a farm employee of Johnny Boy Farms, Inc. since 1975. HARVEY T. SMITH has been a Director of the Holding Company since February 1996. His term as a Director will expire in 1998. Mr. Smith has also served as a Director of FFCIC since 1994. Mr. Smith is First Vice President and a Director of Vermont Farm Bureau. Mr. Smith has been a self-employed farmer since 1972. HOWARD T. SPROW has been a Director of the Holding Company since February 1996. His term as a Director will expire in 1997. Mr. Sprow is an attorney and has been Senior Counsel to Whiteman Osterman & Hanna, Albany, New York since November 1992 and was Professor of Law, Albany Law School of Union University from July 1980 until 1990; he is at present Professor of Law Emeritus. Previously, Mr. Sprow was Of Counsel to the law firm of Crane & MacKrell, Albany, New York from August 1990 to November 1992, Partner at the law firm of Rogers & Wells, New York, New York from January 1977 to June 1980 and General Counsel, Vice President--Corporate and Public Affairs and Secretary of Merrill Lynch, Pierce, Fenner & Smith, Incorporated and Merrill Lynch & Co., Inc., New York from May 1970 to December 1976. RICHARD D. TRYON has been a Director of the Holding Company since February 1996. His term as a Director will expire in 1998. Mr. Tryon previously served as a Director of FFCIC from 1988 to 1996. Mr. Tryon is a Director of Massachusetts Farm Bureau Federation, Inc. Mr. Tryon has been a self-employed farmer since 1946. CHARLES A. WILFONG has been a Director of the Holding Company since February 1996. His term as a Director will expire in 1997. Mr. Wilfong has also served as a Director of FFCIC since 1991. Mr. Wilfong is Vice President and a Director of West Virginia Farm Bureau, Inc. Mr. Wilfong has been a farmer and Partner of Wilfong Farms since 1976. TYLER P. YOUNG has been a Director of the Holding Company since February 1996. His term as a Director will expire in 1997. Mr. Young has also served as a Director of FFCIC since 1995. Mr. Young is Vice President and a Director of Rhode Island Farm Bureau Federation, Inc. Mr. Young has been a farmer and Manager of Ferolbink Farms, Inc. since 1984. DIRECTORS' COMPENSATION All of the directors of the Holding Company, except John P. Moskos, Howard T. Sprow and Richard D. Tryon, are also directors of FFCIC, the Life Company and United. The Chairman of the Board (the same individual for each company) and the Vice Chairman of the Board (also the same individual for each company) receive an annual retainer of $10,000 and $4,500, respectively. All other directors receive $3,000. Directors also receive a daily fee of $500 for meetings of the boards of directors of the companies, $250 per meeting of a board committee and $250 per day for attendance at other company functions. Directors are reimbursed for reasonable travel and other expenses of attending meetings of the boards of directors and board committees and other functions. Fees and expenses paid to directors are allocated among the companies pursuant to expense sharing arrangements. See "Certain Relationships and Related Transactions--Life Company" and "--United." EXECUTIVE COMPENSATION The following table sets forth information regarding the compensation of the Chief Executive Officer and the four other most highly compensated executive officers of the Company for the fiscal year ended December 31, 1995. The figures below represent the aggregate compensation paid to such executive officers by the Company, the Life Company and United. Under expense sharing arrangements among the Company, the Life Company and United, 46% of such aggregate compensation expense in 1995 was charged to the Company, 46% 60 was charged to the Life Company and 8% was charged to United. See "Certain Relationships and Related Transactions--Life Company--Expense Sharing Agreement." SUMMARY COMPENSATION TABLE
ANNUAL COMPENSATION ----------------------------- NAME AND OTHER ANNUAL ALL OTHER PRINCIPAL POSITION SALARY BONUS COMPENSATION COMPENSATION - ------------------ -------- ------- ------------ ------------ Philip P. Weber............... $240,000 $ 0 $ -- (/1/) $1,449(/2/) President and Chief Executive Officer Charles E. Simon.............. 152,550 0 17,384(/3/) 4,599(/4/) Executive Vice President and Treasurer Victoria M. Stanton........... 118,000 11,150 13,643(/5/) 4,377(/6/) Executive Vice President, General Counsel and Secretary James J. Bettini.............. 114,500 10,000 14,898(/5/) 4,271(/7/) Executive Vice President-- Operations Dale E. Wyman................. 112,000 0 11,650(/5/) 1,309(/8/) Senior Vice President-- Marketing of FFCIC
- -------- (1) Does not include certain compensation in the form of perquisites and other personal benefits provided to Mr. Weber for his services to the Company during 1995, the aggregate value of which did not exceed 10% of total annual salary and bonus. (2) Represents a contribution by the Company to Mr. Weber's account of $240 under the Farm Family Employee "Savings Plus" Plan (the "Savings Plus Plan"), and a group term life insurance premium of $1,209 paid by the Company for the benefit of Mr. Weber, of which $696 was taxable income. (3) Includes a car allowance of $8,640 and gasoline credit card payments of $4,434 paid by the Company. (4) Represents a contribution by the Company to Mr. Simon's account of $3,390 under the Savings Plus Plan, and a group term life insurance premium of $1,209 paid by the Company for the benefit of Mr. Simon, of which $1,152 was taxable income. (5) Includes a car allowance of $8,640 paid by the Company. (6) Represents a contribution by the Company to Ms. Stanton's account of $3,244 under the Savings Plus Plan, and a group term life insurance premium of $1,133 paid by the Company for the benefit of Ms. Stanton, of which $245 was taxable income. (7) Represents a contribution by the Company to Mr. Bettini's account of $3,175 under the Savings Plus Plan, and a group term life insurance premium of $1,096 paid by the Company for the benefit of Mr. Bettini, of which $365 was taxable income. (8) Represents a contribution by the Company to Mr. Wyman's account of $240 under the Savings Plus Plan, and an insurance premium of $1,069 paid by the Company for the benefit of Mr. Wyman, of which $1,002 was taxable income. SEVERANCE PLAN Each of the officers of FFCIC and the Life Company is eligible for severance benefits under the companies' joint Officer Severance Pay Plan (the "Severance Plan") when such officer's employment is terminated under defined qualifying conditions, which include, but are not limited to, certain sales of assets or mergers or other corporate reorganizations involving the companies. Under the Severance Plan, the companies will pay to a qualifying officer severance benefits generally equal to the greater of (i) one week's salary for each year of 61 service with the companies or (ii) 24 months salary in the case of the Chief Executive Officer, 12 months salary in the case of a Senior Vice President and 6 months salary in the case of any other officer. PENSION BENEFITS Substantially all salaried employees of the Company, including executive officers, are eligible to receive pension benefits under the Farm Family Employee Retirement Plan (the "Retirement Plan"), which is a qualified defined benefit retirement plan under the Employee Retirement Income Security Act of 1974, as amended. Federal legislation limits the amount of pension benefits that can be paid and compensation that can be recognized under a tax-qualified retirement plan. The Company has adopted a non-qualified unfunded retirement plan, the Farm Family Supplemental Employee Retirement Plan (the "SERP"), for the payment of those benefits at retirement that cannot be paid from the Retirement Plan. The practical effect of the SERP is to provide for the calculation of retirement benefits on a uniform basis for all employees. Benefit payments under the Retirement Plan and the SERP are allocated between the Company and the Life Company pursuant to an expense sharing agreement. See "Certain Relationships and Related Transactions--Life Company--Expense Sharing Agreement." The table below illustrates the approximate annual retirement benefits which would be payable at age 65 under the Retirement Plan and, if applicable, under the SERP.
YEARS OF SERVICE AVERAGE ANNUAL -------------------------------------------- COMPENSATION 15 20 25 30 35 - ------------- -------- -------- -------- -------- -------- $100,000......................... $ 30,000 $ 40,000 $ 50,000 $ 60,000 $ 60,000 150,000......................... 45,000 60,000 75,000 90,000 90,000 200,000......................... 60,000 80,000 100,000 120,000 120,000 250,000......................... 75,000 100,000 125,000 150,000 150,000 300,000......................... 90,000 120,000 150,000 180,000 180,000 350,000......................... 105,000 140,000 175,000 210,000 210,000 400,000......................... 120,000 160,000 200,000 240,000 240,000
For the purpose of calculating retirement benefits, a participant's average annual compensation ("Average Annual Compensation") shall be equal to a participant's compensation during the five calendar years (out of the last ten calendar years of employment) for which the participant's compensation was highest, divided by five. Compensation, as used to calculate retirement benefits, means the aggregate of the amounts listed in the Summary Compensation Table under the captions "Salary," "Bonus" and "Other Annual Compensation," and the portion of the amount listed under the caption "All Other Compensation" which corresponds to the part of the group term life insurance premium, if any, paid by the Company which is taxable as income to the participant in the Retirement Plan. For the fiscal year ended December 31, 1995, the compensation covered by the Farm Family Employee Retirement Plan for Mr. Weber, Ms. Stanton and Mr. Bettini was approximately $256,000, $143,000 and $140,000, respectively. The credited years of service as of December 31, 1995 for Mr. Weber, Mr. Simon, Ms. Stanton, Mr. Bettini and Mr. Wyman were 16.0, 23.4, 5.0, 17.0 and 12.9, respectively. The annual pension benefit under the Farm Family Employee Retirement Pension Plan and, when applicable, the SERP, equals 2.0% of Average Annual Compensation, multiplied by years of service (not to exceed 30 years). Benefits under the Retirement Plan and the SERP are not subject to Social Security or other offset amounts. 62 CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS LIFE COMPANY Option Purchase Agreement Under the Option Purchase Agreement, the shareholders of the Life Company have granted to the Holding Company the exclusive and irrevocable option to purchase the Option Shares. Such option may be exercised at any time up to the second anniversary of the Effective Date, unless extended to the third anniversary of the Effective Date upon the agreement of the parties to the Option Purchase Agreement. The exercise price for each Option Share will be the fair market value thereof, as of the exercise date, determined in accordance with specified valuation procedures and assumptions set forth in the Option Purchase Agreement by an investment banking firm of national standing selected by the Holding Company and reasonably acceptable to the shareholders of the Life Company. The valuation procedures and assumptions set forth in the Option Purchase Agreement provide that the fair market value per Option Share will be based on the fully distributed, independent, public market value of the common stock of the Life Company as of the exercise date of the Option Purchase Agreement including any reallocation of participating policyholder surplus, without giving effect to the percentage ownership represented by the common stock being valued (individually or in the aggregate), the aggregate amount of the valuation of the Life Company or the relationship between the Life Company and FFCIC, including the Life Company's lack of stand-alone management, infrastructure or distribution system. In determining such value, the procedures also provide that consideration may be given to the trading value of the publicly traded common stock of comparable companies as well as any other valuation methods or criteria that are deemed relevant. Salomon Brothers Inc has been retained by the Company to provide investment banking advice, including a valuation of the Life Company, in connection with the Option Purchase Agreement. Salomon Brothers Inc will render to the Holding Company, at its request, an opinion as to the fairness, from a financial point of view, to the Holding Company of such exercise price for each Option Share. In the event that the Life Company shareholders do not agree with such determination, the Option Purchase Agreement provides for certain dispute resolution procedures pursuant to which one or two additional investment banking firms may be engaged to determine the fair market value of each Option Share and the exercise price shall generally be the average or, in certain cases, the median, of the fair market value determination provided by such firm or firms and the determination provided by Salomon Brothers Inc. The exercise price under the Option Purchase Agreement will be payable by the Holding Company to the Life Company shareholders in shares of Common Stock and, at the option of such shareholders, in up to $6 million stated value of shares of Series A Preferred Stock. The Holding Company will reserve shares of Common Stock under the Plan for issuance upon exercise of the option under the Option Purchase Agreement. In addition, the Life Company requested that the New York Insurance Department approve the reallocation of a portion of its unassigned surplus to shareholders' surplus. The New York Insurance Department has advised the Life Company that it will not object to the retroactive reallocation of "a portion of policyholders' surplus to the shareholder account," provided such reallocation is carried out within applicable statutory limitations and that the amount reallocated can be demonstrated as not having any undue negative effect on participating policyholders. As a result, a portion of the Life Company's unassigned surplus may be reallocated to shareholders' surplus. The Life Company's determination as to whether and to what extent it will retroactively reallocate a portion of unassigned surplus to shareholders' surplus will depend upon, among other factors, actuarial determinations and considerations, the decision of the Board of Directors of the Life Company to make such reallocation, the approval of the Life Company's shareholders and the review of such reallocation by the New York Insurance Department. Any reallocation of unassigned surplus to shareholders' surplus will increase shareholders' equity under GAAP, which, in turn, will increase the valuation of the Life Company. Accordingly, the fair market value of the Life Company and the number of shares of Common Stock issued in connection with the acquisition if the option is exercised may increase significantly as a result of an increase in the Life Company's shareholders' equity under GAAP. To the extent that the Company issues additional shares of Common Stock as a result of such change in the valuation of the Life Company, subscribers for Shares in the Subscription Offering will experience additional dilution in their ownership interest 63 and voting power in the Company. See "Risk Factors--Effect of Exercise of Option to Acquire Life Company." See "Option to Acquire Life Company" for a description of the terms of the Option Purchase Agreement. If the Company does not exercise its option under the Option Purchase Agreement to acquire the Life Company, conflicts of interest may exist as it is anticipated that the Company and the Life Company will continue to have separate ownership, while maintaining substantially identical management and continuing to share the same agency force, most employees and office facilities. The Holding Company has not made a final determination as to whether it will exercise its option to acquire the Life Company under the Option Purchase Agreement. The Holding Company's decision to exercise the option will depend on, among other things, the exercise price for the Option Shares, an evaluation of the financial statements prepared in accordance with generally accepted accounting principles and prospects of the Life Company, the outcome of a vote by the Holding Company's shareholders and the receipt of applicable regulatory approvals. See "Risk Factors--Relationships with Farm Bureaus and Life Company; Potential Conflicts of Interest," "--Effect of Exercise of Option to Acquire Life Company," and "Business--Relationship with Farm Bureaus." Expense Sharing Agreement The Company and the Life Company are parties to an expense sharing agreement, effective as of January 1, 1996 (the "Expense Sharing Agreement"), pursuant to which shared expenses for goods, services and facilities are allocated between the Company and the Life Company. Under the Expense Sharing Agreement, expenses are allocated in accordance with applicable provisions of the New York Insurance Law and regulations promulgated thereunder. Direct expenses are charged as incurred to the Company and the Life Company, as applicable, at cost. Shared expenses relating to (i) salaries and expenses for directors, officers and employees (including employee benefits and payroll taxes), (ii) joint office space (excluding home office space rented by Farm Family pursuant to the Lease Agreement (as defined herein), (iii) depreciation and costs relating to fixed assets and (iv) general expenses are allocated between the Company and the Life Company on a pro rata basis based upon internally prepared ratios derived from weighted time studies periodically conducted for the purpose of quantifying the efforts of directors, officers and employees as applied to each of the Company and the Life Company. See "-- Lease Agreement" below for a description of the terms of the Lease Agreement. Expenses relating to advertising, conferences and meetings are allocated between the Company and the Life Company on a pro rata basis based upon the ratio of direct written premiums of the Company and the Life Company to the aggregate amount of such premiums as reported in the annual statements of each company filed with the New York Insurance Department. Expenses relating to electronic data processing services are allocated on a pro rata basis based upon the estimated actual hours of use. The Expense Sharing Agreement provides that it will remain in effect until terminated by mutual consent of the parties or by either party upon at least 60 days prior written notice. The methods of expense allocation used in the Expense Sharing Agreement may be modified and adjusted by mutual agreement of the parties as necessary or appropriate to reflect fairly and equitably the actual incidence of cost incurred by the Company and the Life Company. All amounts due under the Expense Sharing Agreement are determined at the end of each month on the basis of accounting principles and practices prescribed by the New York Insurance Department. For the years ended December 31, 1993, 1994 and 1995, 56%, 60% and 61%, respectively, of aggregate operating expenses totalling $23.8 million, $23.8 million and $26.7 million, respectively, were allocated to Farm Family under a similar expense sharing arrangement. For the three months ended March 31, 1995 and 1996, 61% and 66%, respectively, of aggregate operating expenses totalling $6.7 million and $7.2 million, respectively, were allocated to Farm Family under expense sharing arrangements. Lease Agreement Farm Family and the Life Company are parties to the Lease Agreement, dated July 1, 1988, as amended by the Amendment to Lease Agreement, effective January 1, 1994 (as so amended, the "Lease Agreement"), pursuant to which Farm Family leases home office space in Glenmont, New York from the Life Company. 64 Annual rent under the Lease Agreement was $491,000, $629,000 and $687,000 for the years ended December 31, 1993, 1994 and 1995, respectively, and is subject to adjustment annually based upon the adjustment in the Rental Equivalence Measure of the United States Department of Labor Cost-of-Living Index. Under the terms of the Lease Agreement, Farm Family also pays, as additional rent, 50.50% of any increase in taxes and expenses in excess of 10% above the base year in the next lease year and in any single year thereafter. In the event that the taxes or expenses in any subsequent lease year are less than the taxes or expenses in the base year by 10% or more the Life Company will pay to Farm Family 50.50% of such reduction in taxes or expenses as exceed 10% of the base year, and in the case of taxes, 50.50% of any reduction in excess of 10% in any single year thereafter, or in the case of expenses, 8.28% of any reduction in excess of 10% in any single year thereafter. The Lease Agreement terminates on December 31, 1998. UNITED Per Risk Reinsurance Agreement Farm Family and United are parties to the Underlying Multi-Line Per Risk Reinsurance Contract, effective January 1, 1995, as amended by Addendum No. 1, effective January 1, 1996 (as so amended, the "Per Risk Reinsurance Agreement"). Under the Per Risk Reinsurance Agreement, United reinsures the excess liability which accrues to Farm Family under its policies in force at the effective date or issued or renewed on or after such date, and classified by Farm Family as: (i) property business: fire and allied lines, homeowners (property perils only), mobile homeowners (property perils only), farmowners (property perils only), commercial multiple peril (property perils only), inland marine and earthquake; and (ii) casualty business: automobile liability (including no-fault, uninsured and underinsured motorists and garage liability), homeowners (liability perils only), mobile homeowners (liability perils only), farmowners (liability perils only), commercial multiple peril (liability perils only), general liability and workers' compensation (including employers liability and occupational disease written in connection therewith). The agreement specifically excludes reinsurance coverage for certain risks, including, among others, nuclear risks and loss or damage caused by or resulting from war. Pursuant to the terms of the Per Risk Reinsurance Agreement, Farm Family retains and is liable for the first $100,000 of ultimate net loss in respect of any one risk, each loss, for any property business, and United is liable up to $150,000 on any one risk, each loss, for the amount by which such ultimate net loss exceeds $100,000. Farm Family retains and is liable for the first $100,000 of ultimate net loss (whether involving any one or any combination of the casualty business, covered under the agreement, regardless of the number of policies under which such loss is payable or the number of different interests insured) arising out of each occurrence in respect of the casualty business, and United is liable, up to $200,000 per occurrence, for the amount by which such ultimate net loss exceeds $100,000. "Ultimate net loss" is generally defined in the Per Risk Reinsurance Agreement as the sum (including loss in excess of Reinsured Policy limits, extra contractual obligations and any LAE) paid or payable by Farm Family in settlement of claims and in satisfaction of judgments rendered on account of such claims, after deduction of all salvage, recoveries and claims on inuring insurance or reinsurance. Under the Per Risk Reinsurance Agreement, as of January 1, 1996, Farm Family pays to United 7.0% of its net earned premiums in respect of the reinsured policies. Net earned premiums includes Farm Family's gross earned premiums, less the earned portion of premiums, if any, ceded by Farm Family for reinsurance which inures to the benefit of the agreement. The Per Risk Reinsurance Agreement only applies to the portion of insurance or reinsurance that Farm Family retains net for its own account (prior to deduction of any underlying reinsurance specifically permitted under the agreement). The agreement provides that Farm Family and United may exercise at any time and from time to time, the right to offset any balances, on account of premiums or on account of losses or otherwise, due from one party to the other under the terms of the agreement. The Per Risk Reinsurance Agreement may be terminated by United or Farm Family on any December 31, upon not less than 90 days prior written notice. For the year ended December 31, 1995, net earned premiums ceded by Farm Family to United under the Per Risk Reinsurance Agreement were $8.0 million. For the years ended December 31, 1993 and 1994, net 65 earned premiums ceded by Farm Family to United under a reinsurance contract containing substantially similar terms were $8.0 million and $8.6 million, respectively, and for the three months ended March 31, 1995 and 1996 were $1.8 million and $1.9 million, respectively. Umbrella Reinsurance Agreement Under the Umbrella Quota Share Reinsurance Contract, effective January 1, 1995, as amended by Addendum No. 1, effective January 1, 1995 (as so amended, the "Umbrella Reinsurance Agreement"), issued to Farm Family by the Subscribing Reinsurer(s) Executing the Interests and Liabilities Agreement(s) Attached thereto, Farm Family cedes to United 5% of its net liability retained under its policies in force at the effective date or issued or renewed on or after that date, and classified by Farm Family as umbrella liability (including personal, commercial and/or farm umbrella) in respect of the first $1 million of coverage issued. The agreement specifically excludes reinsurance coverage for certain risks, including, among others, reinsurance assumed, business derived from pools or associations, nuclear risks, certain professional liability policies, most directors and officers liability, errors and omissions, most liquor liability, seepage and/or pollution liability, certain manufacturing, production and other risks for natural or artificial fuel gas, butane, propane or petroleum gases or gasoline, asbestos removal, manufacturing and asbestos related activities. Under the Umbrella Reinsurance Agreement, Farm Family retains 10% of its net liability, for the first $1 million of reinsurance coverage under the agreement and cedes to the reinsurers 90% of its net liability, subject to a maximum cession of 90% of $1 million for any one policy, any one coverage. Farm Family pays to United 5% of its net written premiums for the first $1 million of coverage under policies subject to the agreement. Net written premiums include Farm Family's gross written premiums, less cancellations and return premiums, and less premiums, if any, ceded by Farm Family for reinsurance which inures to the benefit of the agreement. The Umbrella Reinsurance Agreement will continue in force until terminated by either party on any December 31, upon not less than 90 days prior notice. For the year ended December 31, 1995, net written premiums ceded by Farm Family to United under the Umbrella Reinsurance Agreement were $0.2 million and for the three months ended March 31, 1995 and 1996 were $0.04 million and $0.04 million, respectively. For the years ended December 31, 1993 and 1994, net written premiums ceded by Farm Family to United under a reinsurance contract containing substantially similar terms were $0.1 million and $0.2 million, respectively. Catastrophe Reinsurance Contract Under the Excess of Catastrophe Reinsurance Contract, effective January 1, 1996 (the "Catastrophe Reinsurance Contract"), issued to Farm Family by the Subscribing Reinsurer(s) Executing the Interests and Liabilities Agreement(s) Attached thereto, United assumes 2% of losses per occurrence between $11 million and $51 million and approximately 16% of losses between $3 million and $6 million. Under the Catastrophe Reinsurance Contract, the reinsurers (including United) reinsure the excess liability which accrues to Farm Family under its reinsured policies in force at the effective date or issued or renewed on or after such date and classified by Farm Family as fire and allied lines, homeowners (property perils only), mobile homeowners (property perils only), farmowners (property perils only), commercial multiple peril (property perils only), automobile physical damage (excluding collision), inland marine and earthquake business. The agreement specifically excludes reinsurance coverage for certain risks, including, among others, nuclear risks and losses, business derived from certain pools, associations and syndicates, excess of loss reinsurance assumed by Farm Family, most reinsurance assumed by Farm Family under obligatory reinsurance agreements, insurance on growing or standing crops (excluding produce, plants or flowers inside greenhouses), and Difference in Conditions insurance (as defined therein) and similar kinds of insurance which provides coverage for losses from, among others, flood, surface water, waves and tidal water or waves (except when covering property in transit or otherwise written as inland marine coverage, farm machinery and/or livestock insured under farmowners policies), earthquake, landslide, subsidence or other earth movement, or resulting from war. 66 Farm Family retains and is liable for the first amount of "ultimate net loss" (as defined in the Catastrophe Reinsurance Contract), shown as the "Company's Retention" (being $3 million) as set forth in Schedule A to the Agreement, arising out of each loss occurrence (as defined therein). The reinsurers are then liable, as respects each excess layer, for 95% of the ultimate net loss of either (i) the reinsurer's per occurrence limits which are $3 million, $5 million, $10 million and $30 million for the first, second, third and fourth layers, respectively, or (ii) the reinsurer's annual limits which are $6 million, $10 million, $20 million and $60 million, for each such layer, respectively. In addition to its initial retention for each loss occurrence, Farm Family retains, net and unreinsured elsewhere, 5% of the excess ultimate net loss for the first, second, third and fourth layers. Farm Family pays to the reinsurers, including United, 1.11%, 1.07%, 1.43% and 2.47% of its net earned premiums for the first, second, third and fourth layer of excess reinsurance, respectively, subject to certain annual minimum premium amounts. Net earned premiums are defined to include Farm Family's gross earned premiums for the classes of business subject to the agreement, less only the earned portion of premiums, if any, ceded by Farm Family for reinsurance which inures to the benefit of the agreement. The Catastrophe Reinsurance Contract only applies to the portion of insurance or reinsurance that Farm Family retains net for its own account (prior to deduction of an underlying reinsurance specifically permitted under the agreement). The agreement terminates on December 31, 1996. For the years ended December 31, 1993, 1994 and 1995, net earned premiums ceded by Farm Family to United were $0.03 million, $0.03 million and $0.11 million, respectively, and for the three months ended March 31, 1995 and 1996 were $0.05 million and $0.03 million, respectively, under a reinsurance contract containing substantially similar terms. Assumption Agreement Farm Family and United are parties to the Assumption Agreement, commencing January 1, 1995 (the "Assumption Agreement"), pursuant to which Farm Family retrocedes to United 50% of its assumed reinsurance obligations for each year during the term of the agreement, other than its assumed reinsurance obligations from the Mutual Atomic Energy Reinsurance Pool and from the National Workers' Compensation Reinsurance Pool/Massachusetts Workers' Compensation Reinsurance Pool, of which it retrocedes to United 33% and 12%, respectively. The Assumption Agreement has a one-year term and automatically renews for successive one-year terms unless terminated by either party upon ten days prior written notice. For the year ended December 31, 1995, premiums retroceded to United under the Assumption Agreement were $0.9 million and for the three months ended March 31, 1995 and 1996 were $0.3 million and $0.3 million, respectively. For the years ended December 31, 1993 and 1994, premiums of $0.8 million and $1.0 million, respectively, were retroceded to United under a substantially identical unwritten reinsurance assumption arrangement. Service Agreement Farm Family and United are parties to the Service Agreement, dated July 25, 1988 (the "Service Agreement"), pursuant to which Farm Family provides United with certain administrative and special services necessary for its operations, including, but not limited to, claims management, underwriting, accounting, tax and auditing, investment management, and functional support services, such as actuarial services, telecommunications services and electronic data processing and legal services. Under the Service Agreement, Farm Family also provides United with certain personnel, property, equipment and facilities for its operations. The Service Agreement is subject to certain provisions of the New York Insurance Law and regulations promulgated thereunder. Farm Family receives a fee for its services and facilities provided to United under the Service Agreement equal to all direct and allocable expenses, reasonably and equitably determined to be attributable to United by Farm Family, plus a reasonable charge for overhead, as agreed to from time to time by the parties. The basis used by Farm Family for determining expenses allocable to United under the Service Agreement may be modified and adjusted by mutual agreement where necessary or appropriate to reflect fairly and equitably the actual incidence of cost incurred by Farm Family on behalf of United. The Service Agreement will remain in effect until terminated in whole or in part by mutual agreement of the parties or by either party upon at least 30 days prior written notice. For the years ended December 31, 1993, 67 1994 and 1995, United incurred approximately $0.5 million, $0.5 million and $0.8 million, respectively, and for the three months ended March 31, 1995 and 1996 approximately $0.1 million and $0.2 million, respectively, in direct and allocated expenses and overhead under the Service Agreement. FARM BUREAUS Membership List Purchase Agreement Farm Family is a party to a separate Membership List Purchase Agreement, commencing on January 1, 1996, with each of the Farm Bureaus. The Life Company has also entered into a Membership List Purchase Agreement with each of the Farm Bureaus, also commencing on January 1, 1996. Pursuant to each Membership List Purchase Agreement, on or before January 1, 1996, and annually thereafter for the term of each agreement, each Farm Bureau provides to Farm Family mailing lists of all Farm Bureau members who are in good standing. Under the terms of each agreement, Farm Family has agreed to pay, commencing on or about March 1, 1996, a fee to each Farm Bureau during the term of each agreement, including any renewals thereof, of $7.50 for each member of the Farm Bureau as reported on the Annual Membership Census of the American Farm Bureau Federation. Under the terms of each Membership List Purchase Agreement, the membership list, including all of the information included therein, at all times remains the property of the Farm Bureau, and Farm Family has acquired no proprietary interest in the mailing list. Farm Family and its agents are permitted to use the Farm Bureau membership list for purposes of marketing Farm Family's insurance products to the Farm Bureau members. In addition, under each Membership List Purchase Agreement, each Farm Bureau is prohibited, without Farm Family's prior written consent, from releasing its membership list to any third party or from promoting or endorsing the sale of other insurers' products, except, in each case, the Life Company. Under each Membership List Purchase Agreement, each Farm Bureau sublicenses to Farm Family the American Farm Bureau Federation's service marks for Farm Bureau and FB. The rights granted to Farm Family under the sublicense from the American Farm Bureau Federation permit Farm Family also to use the service marks through Rural Agency, which is a party to each agreement for this purpose. The sublicense is subject to certain terms and conditions regarding the use and display of such marks, as well as approval and revocation by the Board of Directors of the American Farm Bureau Federation. Farm Family is permitted to use the service marks in connection with the promotion and sale of its insurance products within each of the ten states in which it operates. Each Membership List Purchase Agreement also provides that the nature and quality of all insurance products offered or sold by Farm Family must meet or exceed the standards required by applicable state laws and regulations and must be appropriate for the needs of Farm Bureau members. Each Farm Bureau, either acting alone or at the direction of the American Farm Bureau Federation, has the right to revoke Farm Family's right to use the service marks and each Farm Bureau's other names and logos in the event that, in the judgment of such Farm Bureau and/or the American Farm Bureau Federation, the level or the nature and quality of the insurance products offered and sold by Farm Family is not appropriate for the needs of Farm Bureau members. Farm Family's sublicense to use the service marks may not be assigned by Farm Family without the prior written consent of the American Farm Bureau Federation. The term of each Membership List Purchase Agreement is for six years commencing on January 1, 1996. Each agreement is automatically renewed for successive one-year terms, unless either party provides at least 60 days prior written notice of its intention not to renew the agreement. For the years ended December 31, 1993, 1994 and 1995, Farm Family paid $101,933, $516,488 and $547,418, respectively, to the Farm Bureaus, in the aggregate, under substantially similar Membership List Purchase Agreements in effect for such periods. 68 STOCK OWNERSHIP OF MANAGEMENT The following table sets forth certain information regarding beneficial ownership of the shares of Common Stock as of the Effective Date by (i) each person who the Company believes will own beneficially more than 5% of the outstanding shares of Common Stock, (ii) each director or nominee for director of the Holding Company, (iii) each executive officer named in the table contained under the caption "Management--Executive Compensation" above and (iv) all executive officers and directors of the Holding Company as a group. The Company does not believe that any person will beneficially own more than 5%, nor that any executive officer, director, nominee for director or all executive officers and directors as a group will beneficially own more than 1%, of the shares of Common Stock (not including any shares that may be purchased by such persons in the Public Offering) as of the Effective Date. The number of shares of Common Stock beneficially owned by each person listed below is based upon the number of shares each such person will receive as an Eligible Policyholder under the Plan, the number of shares that such person has elected to receive as a holder of a Surplus Note and the number of shares which such person has subscribed for in the Subscription Offering. Except as noted below, each person listed in the table will have sole investment and voting power with respect to the shares held by such person.
NUMBER OF SHARES OF COMMON STOCK NAME BENEFICIALLY OWNED(/1/) - ---- ----------------------- William M. Stamp, Jr............................... 442(/2/)(/3/) John W. Lincoln.................................... 151(/2/)(/4/) Philip P. Weber.................................... 202(/5/) James J. Bettini................................... 120(/6/) Charles E. Simon................................... 195 Victoria M. Stanton................................ 73(/7/) Dale E. Wyman...................................... 129(/8/) Robert L. Baker.................................... 863(/2/)(/9/) Randolph C. Blackmer, Jr........................... 682(/2/)(/1//0/) Fred G. Butler, Sr................................. 87(/2/)(/1//1/) Joseph E. Calhoun.................................. 73(/2/)(/1//2/) James V. Crane..................................... 350(/2/)(/1//3/) Stephen J. George.................................. 0(/2/)(/1//4/) Gordon H. Gowen.................................... 801(/2/)(/1//5/) Jon R. Greenwood................................... 408(/2/)(/1//6/) Clark W. Hinsdale III.............................. 179(/2/)(/1//7/) Richard A. Jerome.................................. 50(/2/)(/1//8/) Arthur D. Keown, Jr................................ 174(/2/)(/1//9/) Daniel R. LaPointe................................. 62(/2/)(/2//0/) Wayne A. Mann...................................... 57(/2/)(/2//1/) John P. Moskos..................................... 0 Norma R. O'Leary................................... 1,029(/2/)(/2//2/) John I. Rigolizzo, Jr.............................. 27(/2/)(/2//3/) Harvey T. Smith.................................... 216(/2/)(/2//4/) Howard T. Sprow.................................... 0 Richard D. Tryon................................... 220(/2/)(/2//5/) Charles A. Wilfong................................. 0(/2/)(/2//6/) Tyler P. Young..................................... 27(/2/)(/2//7/) All directors and executive officers as a group (27 Persons)........................................... 6,488
- -------- (1) For purposes of calculating the Outstanding Note Amount, assumes that the Effective Date will be July 31, 1996. See "The Reorganization--The Plan-- Payment of Consideration to Eligible Policyholders and Holders of Surplus Notes." The number of Subscription Shares to be issued to each person may be increased if the Public Offering Price is less than the Subscription Price. See "The Reorganization--Subscription Offering and Public Offering." 69 (2) Excludes 2,215 shares estimated to be received by the Life Company and 102 shares estimated to be received by United. (3) Includes 129 shares as to which voting and investment power will be shared with Stamp Farm Enterprises, Inc. Excludes 375 shares estimated to be received by Rhode Island Farm Bureau Federation, Inc. (4) Includes 43 shares as to which voting and investment power will be shared with S. Anne Lincoln. Excludes 1,636 shares estimated to be received by New York Farm Bureau, Inc. (5) Represents shares as to which voting and investment power will be shared with Brenda Lee Weber. (6) Represents shares as to which voting and investment power will be shared with Marie C. Bettini. (7) Represents shares as to which voting and investment power will be shared with Randy M. Sweeney. (8) Represents shares as to which voting and investment power will be shared with Barbara Wyman. (9) Represents 33 shares as to which voting and investment power will be shared with Pamela M. Baker, 86 shares as to which voting and investment power will be shared with Delaware Produce Growers, Inc. and 744 shares as to which voting and investment power will be shared with Baker Farms, Inc. Excludes 60 shares estimated to be received by Delaware Farm Bureau, Inc. (10) Represents shares as to which voting and investment power will be shared with Myrtie I. Blackmer or Ag Services, Inc. Excludes 91 shares estimated to be received by Connecticut Farm Bureau Association, Inc. (11) Represents shares as to which voting and investment power will be shared with Norma Gene Butler. Excludes 3,404 shares estimated to be received by West Virginia Farm Bureau, Inc. (12) Represents shares as to which voting and investment power will be shared with Bessie J. Calhoun. Excludes 60 shares estimated to be received by Delaware Farm Bureau, Inc. (13) Represents shares as to which voting and investment power will be shared with Crane Bros., Inc. Excludes 312 shares estimated to be received by Maine Farm Bureau Association. (14) Excludes 848 shares estimated to be received by New Jersey Farm Bureau. (15) Includes 163 shares as to which voting and investment power will be shared with Elizabeth R. Gowen. Excludes 177 shares estimated to be received by New Hampshire Farm Bureau Federation. (16) Represents shares as to which voting and investment power will be shared with Linda R. Greenwood. Excludes 1,636 shares estimated to be received by New York Farm Bureau, Inc. (17) Excludes 371 shares estimated to be received by Vermont Farm Bureau, Inc. (18) Represents shares as to which voting and investment power will be shared with Mary Margaret Jerome. Excludes 1,636 shares estimated to be received by New York Farm Bureau, Inc. (19) Excludes 137 shares estimated to be received by Massachusetts Farm Bureau Federation. (20) Excludes 312 shares estimated to be received by Maine Farm Bureau Association. (21) Represents shares as to which voting and investment power will be shared with Ruth F. Mann. Excludes 177 shares estimated to be received by New Hampshire Farm Bureau Federation. (22) Excludes 91 shares estimated to be received by Connecticut Farm Bureau Association, Inc. (23) Represents shares as to which voting and investment power will be shared with Marita Rigolizzo. Excludes 848 shares estimated to be received by New Jersey Farm Bureau. (24) Includes 137 shares as to which voting and investment power will be shared with Donna G. Smith. Excludes 371 shares estimated to be received by Vermont Farm Bureau, Inc. (25) Includes 73 shares as to which voting and investment power will be shared with Barbara Tryon. Excludes 137 shares estimated to be received by Massachusetts Farm Bureau Federation. (26) Excludes 3,404 shares estimated to be received by West Virginia Farm Bureau, Inc. (27) Represents shares as to which voting and investment power will be shared with Karla K. Young. Excludes 375 shares estimated to be received by Rhode Island Farm Bureau Federation, Inc. 70 DESCRIPTION OF CAPITAL STOCK GENERAL The authorized capital stock of the Holding Company consists of (i) 10,000,000 shares of Common Stock, $.01 par value per share; and (ii) 1,000,000 shares of preferred stock (the "Preferred Stock"), the par value (not to be less than $.01 per share), rights, preferences and powers of which may be designated by the Holding Company Board. At present, there are 1,000 shares of Common Stock outstanding (all of which are issued to FFCIC) and no shares of Preferred Stock issued or outstanding. The following description of the capital stock of the Holding Company does not purport to be complete or to give full effect to Delaware statutory or common law and is, in all respects, qualified by reference to the applicable provisions of the Delaware General Corporation Law (the "DGCL"), and the Holding Company's Certificate and Bylaws. COMMON STOCK Holders of Common Stock are entitled to one vote for each share held on all matters submitted to a vote of stockholders and do not have cumulative voting rights. Accordingly, holders of a majority of the shares of Common Stock entitled to vote in any election of directors may elect all of the directors standing for election. Holders of Common Stock are entitled to receive ratably such dividends, if any, as may be declared by the Holding Company Board out of funds legally available therefor. Upon the liquidation, dissolution or winding up of the Holding Company, the holders of Common Stock are entitled to receive ratably the net assets of the Holding Company available after the payment of all debts and other liabilities. Holders of Common Stock have no preemptive, subscription, redemption or conversion rights except, as provided in the Plan and pursuant to Section 7307 of the New York Insurance Law, for the rights of Subscription Policyholders and Participating Surplus Note Holders to participate in new issuances of Common Stock for a period of three years from the Effective Date. All the outstanding shares of Common Stock are, and the shares of Common Stock to be sold by the Holding Company in the Offerings when issued and paid for will be, fully paid and non-assessable. See "The Reorganization--Subscription Offering and Public Offering." PREFERRED STOCK Shares of Preferred Stock of the Holding Company may be issued from time to time in one or more classes or series, each of which class or series shall have such distinctive designation or title as shall be fixed by the Holding Company Board prior to the issuance of any shares thereof. Each such class or series of Preferred Stock shall have such voting powers, full or limited, or no voting powers, and such preferences and relative, participating, optional or other special rights and such qualifications, limitations or restrictions thereof, as shall be stated in such resolution or resolutions providing for the issue of such class or series of Preferred Stock as may be adopted from time to time by the Holding Company Board prior to the issuance of any shares thereof pursuant to the authority expressly vested in it, all in accordance with the laws of the State of Delaware. If the shareholders of the Life Company elect under the Option Purchase Agreement to receive shares of Preferred Stock, the Holding Company Board will designate a certain number of shares of Preferred Stock as Series A Preferred Stock for issuance to such shareholders. See "Option to Acquire Life Company." The effects of the issuance of Preferred Stock upon the rights of holders of Common Stock might include restrictions on the rights of holders of Common Stock to receive dividends and payments upon liquidation, dilution of the voting power of the Common Stock to the extent that the Preferred Stock has voting rights and dilution of the equity interest of the Common Stock to the extent that the Preferred Stock is convertible into Common Stock. Issuance of Preferred Stock, while providing desirable flexibility in connection with possible acquisitions and other corporate purposes, could make it more difficult for a third party to acquire a majority of the outstanding shares of voting stock. Accordingly, the issuance of Preferred Stock may be used as an "anti-takeover" device without further action on the part of the stockholders of the Holding Company. 71 DELAWARE LAW AND CERTAIN CHARTER AND BYLAW PROVISIONS The following is a description of certain provisions of Delaware law and the Holding Company's Certificate and Bylaws. This summary does not purport to be complete and is qualified in its entirety by reference to the laws of Delaware, the Certificate and the Bylaws. The Holding Company is subject to the provisions of Section 203 of the DGCL. Section 203 prohibits a publicly held Delaware corporation from engaging in a "business combination" with an "interested stockholder" for a period of three years after the date of the transaction in which the person became an interested stockholder, unless the business combination is approved in a prescribed manner. A "business combination" includes mergers, asset sales and other transactions resulting in a financial benefit to the interested stockholder. Subject to certain exceptions, an "interested stockholder" is a person who, together with affiliates and associates, owns, or within three years did own, 15% of the corporation's voting stock. Certain provisions of the Certificate and the Bylaws could have an anti- takeover effect. These provisions are intended to enhance the likelihood of continuity and stability in the composition of the Holding Company Board and in the policies formulated by the Holding Company Board and to discourage certain types of transactions described below, which may involve an actual or threatened change of control of the Holding Company. The provisions are designed, for example, to reduce the vulnerability of the Holding Company to an unsolicited proposal for a takeover of the Holding Company that does not contemplate the acquisition of all of its outstanding shares or an unsolicited proposal for the restructuring or sale of all or part of the Holding Company. The provisions are also intended to discourage certain tactics that may be used in proxy fights. Classified Board of Directors The Certificate provides for the Holding Company Board to be divided into three classes of directors, with each class as nearly equal in number as possible, serving staggered three-year terms. As a result, approximately one- third of the Holding Company Board will be elected each year. The Holding Company Board believes that a classified board of directors will help to assure the continuity and stability of the Holding Company Board and the business strategies and policies of the Holding Company as determined by the Holding Company Board, because continuity and stability in the composition of the Holding Company Board and in the policies formulated by it will be enhanced by the staggered three-year terms. The classified board provisions could have the effect of discouraging a third party from making a tender offer or otherwise attempting to obtain control of the Holding Company, even though such an attempt might be beneficial to the Holding Company and its stockholders. In addition, the classified board provisions could delay stockholders who do not like the policies of the Holding Company Board from removing a majority of the Holding Company Board for two years. No Stockholder Action by Written Consent; Special Meetings The Certificate provides that stockholder action can only be taken at an annual or special meeting of stockholders and prohibits stockholder action by written consent in lieu of a meeting. The Bylaws provide that special meetings of stockholders may be called only by the Holding Company Board, its Chairman or the President of the Holding Company. Stockholders are not permitted to call a special meeting of stockholders or to require that the Holding Company Board call a special meeting. Advance Notice Procedures The Bylaws establish an advance notice procedure for stockholders to make nominations of candidates for election as directors or to bring other business before an annual meeting of stockholders of the Holding Company (the "Stockholder Notice Procedure"). The Stockholder Notice Procedure provides that only persons who are nominated by, or at the direction of, the Holding Company Board or by a stockholder who has given timely 72 written notice to the Secretary of the Holding Company prior to the meeting at which directors are to be elected, will be eligible for election as directors of the Holding Company. The Stockholder Notice Procedure also provides that at an annual meeting only such business may be conducted as has been brought before the meeting by, or at the direction of, the Holding Company Board or by a stockholder who has given timely written notice to the Secretary of the Holding Company of such stockholder's intention to bring such business before such meeting. Under the Stockholder Notice Procedure, for notice of stockholder nomination to be made at an annual meeting to be timely, such notice must be received at the principal executive offices of the Holding Company not less than 60 days nor more than 90 days prior to the first anniversary of the previous year's annual meeting (or if the date of the annual meeting is not within 30 days before or after such anniversary date, then, to be timely, notice must be received no later than the tenth day after notice of the meeting was mailed or after public announcement of the date of such meeting is first made). In addition, under the Stockholder Notice Procedure, a stockholder's notice to the Holding Company proposing to nominate a person for election as a director or relating to the conduct of business other than the nomination of directors must contain certain specified information. If the chairman of a meeting determines that business was not properly brought before the meeting, in accordance with the Stockholder Notice Procedure, such business shall not be discussed or transacted. Number of Directors; Removal; Filling Vacancies The Certificate provides that the Holding Company Board will consist of between thirteen and twenty-five members, the exact number to be fixed from time to time by resolution adopted by the directors of the Holding Company. The Holding Company Board currently consists of twenty-three directors. Further, subject to the rights of the holders of any series of Preferred Stock then outstanding, the Certificate authorizes the Holding Company Board to fill newly created directorships. Accordingly, this provision could prevent a stockholder from obtaining majority representation on the Holding Company Board by permitting the Holding Company Board to enlarge the Holding Company Board and fill the new directorships with its own nominees. A director so elected by the Holding Company Board holds office until the next election of the class for which such director has been chosen and until his successor is elected and qualified. Subject to the rights of the holders of any series of Preferred Stock then outstanding, the Certificate also provides that directors may be removed only for cause and only by the affirmative vote of holders of a majority of the outstanding shares of voting securities. The effect of these provisions is to preclude a stockholder from removing incumbent directors without cause and simultaneously gaining control of the Holding Company Board by filling the vacancies created by such removal with its own nominees. Indemnification The Certificate contains certain provisions permitted under the DGCL relating to the liability of directors. The provisions eliminate a director's liability for monetary damages for a breach of fiduciary duty, except in certain circumstances involving wrongful acts, such as the breach of a director's duty of loyalty or acts or omissions which involve intentional misconduct or a knowing violation of law. Further, the Certificate contains provisions providing indemnification to directors and officers to the fullest extent permitted by the DGCL. The Company believes that these provisions will assist the Company in attracting and retaining qualified individuals to serve as Directors. Bylaws The Certificate provides that the Bylaws are subject to adoption, amendment, alteration, repeal or rescission either by (a) a majority of the authorized number of directors or (b) the affirmative vote of the holders of not less than two-thirds of the outstanding shares of voting securities. This provision will make it more difficult for stockholders to make changes in the Bylaws by allowing the holders of a minority of the voting securities to prevent the holders of a majority of voting securities from amending the Bylaws. TRANSFER AGENT AND REGISTRAR The Transfer Agent and Registrar for the Common Stock is The Bank of New York. 73 SHARES ELIGIBLE FOR FUTURE SALE All shares of Common Stock distributed in the Reorganization, the Subscription Offering or the Public Offering will be immediately and freely tradeable by persons other than "affiliates" (as defined in rules promulgated under the Securities Act) of the Company without further registration or compliance with the time, volume, manner of sale and other limitations set forth in Rule 144 under the Securities Act. The Company estimates that less than 1% of its Common Stock will be held by affiliates of the Company on the Effective Date (without taking into account any possible purchases of Shares by affiliates in the Public Offering). Prior to the earlier of (i) the Public Offering or (ii) the Effective Date, there will be no public market for the Common Stock. As part of the Reorganization, over 35,000 Farm Family Mutual policyholders will receive a total of 2,236,616 shares of Common Stock in exchange for certain policyholder membership interests. There can be no assurance that these policyholders, or any other holders of Common Stock, will not seek to sell their shares of Common Stock following the Effective Date. No prediction can be made as to the effect, if any, such future sales of shares, or the availability of shares for such future sales, will have on the market price of the Common Stock prevailing from time to time. Sales of substantial amounts of Common Stock or the perception that such sales could occur, could adversely affect prevailing market prices for the Common Stock. 74 UNDERWRITING Subject to the terms and conditions set forth in the Underwriting Agreement (the "Underwriting Agreement") among the Company, FFCIC and the several Underwriters named below (the "Underwriters"), the Company has agreed to sell to each of the Underwriters named below, and each of the Underwriters, for whom Salomon Brothers Inc is acting as representative (the "Representative"), has severally agreed to purchase from the Company, the respective number of Shares set forth opposite its name below:
NUMBER UNDERWRITER OF SHARES ----------- --------- Salomon Brothers Inc............................................ --------- Total....................................................... 2,470,000 =========
In the Underwriting Agreement, the several Underwriters have agreed, subject to the terms and conditions set forth therein, that the obligations of the Underwriters are subject to certain conditions precedent and that the Underwriters will be obligated to purchase all of the Shares offered pursuant to this Prospectus (other than the shares of Common Stock covered by the Underwriters' over-allotment option described below) if any of the Shares are purchased. In the event of a default by any Underwriter, the Underwriting Agreement provides that, in certain circumstances, the purchase commitments of the non-defaulting Underwriters may be increased or the Underwriting Agreement may be terminated. The Company has been advised by the Representative that the Underwriters propose initially to offer the Shares directly to the public at the Public Offering Price set forth on the cover of this Prospectus, and to certain dealers at such price, less a concession not in excess of $ per Share. The Underwriters may allow, and such dealers may reallow, a concession not in excess of $ per Share to other dealers. After the Public Offering, such Public Offering Price and such concessions may be changed from time to time. The Underwriters have informed the Company that the Underwriters do not intend to confirm sales to any account over which they exercise discretionary authority. The Company has agreed, for a period of 180 days following the execution of the Underwriting Agreement, without the prior written consent of the Representative, not to offer, sell or contract to sell, or otherwise dispose of, directly or indirectly, or announce the offering of, any other shares of Common Stock or any securities convertible into, or exercisable or exchangeable for, shares of Common Stock other than: (i) the shares of Common Stock to be issued pursuant to the Plan; (ii) the shares of Common Stock to be issued in the Subscription Offering; and (iii) the shares of Common Stock to be issued pursuant to the Option Purchase Agreement if the option thereunder is exercised. The Company has granted to the several Underwriters an option, exercisable for the 30-day period after the date of this Prospectus, to purchase, severally and not jointly, up to an additional 366,020 shares of Common Stock at the same purchase price per share as the Underwriters shall pay for the Shares offered hereby. The Underwriters may exercise such option only for the purpose of covering over-allotments, if any, in the sale of the Shares. To the extent that the Underwriters exercise such option, each Underwriter will be committed, subject to certain conditions, to purchase a number of option shares proportionate to such Underwriter's initial commitment. The Underwriting Agreement provides that the Company and, subject to certain limitations, FFCIC will indemnify the Underwriters against certain liabilities, including liabilities under the Securities Act, or contribute to payments the Underwriters may be required to make in respect thereof. 75 The Shares have been approved for listing on the New York Stock Exchange, subject to official notice of issuance. Prior to the earlier of (i) the Effective Date or (ii) the Public Offering, there will be no public market for the Common Stock. The Public Offering Price will be determined by negotiation between the Representative and the Company. Among the factors to be considered in determining the Public Offering Price are the sales, cash flow, earnings and certain other financial and operating information of the Company in recent periods, the future prospects of the Company and its industry in general, certain ratios, market prices of securities and certain financial and operating information of companies engaged in activities similar to those of the Company, and the general condition of the securities market at the time of the Public Offering. There can be no assurance, however, that the price at which the Shares will sell in the public market after the Public Offering will not be lower than the price at which they were sold by the Underwriters. The Underwriters have from time to time performed various investment banking and financial advisory services for the Company and its affiliates, for which customary compensation has been received. LEGAL MATTERS The legality of the Shares offered hereby is being passed upon for Farm Family by LeBoeuf, Lamb, Greene & MacRae, L.L.P., a limited liability partnership including professional corporations, New York, New York. Certain legal matters in connection with the Public Offering will be passed on for the Underwriters by Simpson Thacher & Bartlett, a partnership which includes professional corporations, New York, New York. EXPERTS The Company's consolidated financial statements and financial statement schedules as of December 31, 1995 and 1994, and for the years ended December 31, 1993, 1994 and 1995, and the Holding Company's balance sheet as of February 29, 1996, included in this Prospectus and the Registration Statement have been included herein in reliance on the reports of Coopers & Lybrand L.L.P., independent public accountants, given on the authority of that firm as experts in accounting and auditing. 76 GLOSSARY OF SELECTED INSURANCE TERMS Acquisition costs............ Agents' or brokers' commissions, premium taxes, marketing, and certain underwriting expenses associated with the production of business. Annuities.................... Contracts that provide for the payment of periodic benefits at regular intervals beginning at a specified date and continuing for a specified period of time or for life. Annuities may be immediate, in which event periodic payments generally commence in the month following the issuance of the contract, or deferred, in which event periodic payments generally commence at a future date. Immediate annuities are single premium products backed by the general account of the issuing company. Deferred annuities can either accept a single premium or flexible, periodic premiums. Depending upon the specific product, the premiums can be deposited in a fixed account backed by the general account and be credited with interest at a rate which is generally reset annually; or under variable annuities all or a portion of the premiums can be allocated among one or more investment divisions of a separate account under which the investment risk is borne by the contractholder. Assumed reinsurance.......... Insurance or reinsurance transferred from another insurance or reinsurance entity. Cede......................... To transfer to an insurer or a reinsurer all or a part of the insurance or reinsurance written by an insurance or reinsurance entity. Claims-made coverage......... A policy that provides insurance with respect to claims reported during the policy period or any applicable extended reporting period. Clash coverage............... A form of excess of loss casualty reinsurance policy covering losses arising from a single set of circumstances covered by more than one primary policy. For example, if an insurer covers both motorists involved in an accident, clash cover would protect the insurer from suffering a loss in the full amount of both policies. Clash coverage would pay to the insurer a portion of the loss in excess of the coverage of one of the two policies. Combined ratio............... The sum of the expense ratio and the loss ratio, determined either in accordance with statutory accounting practices or GAAP. A combined ratio under 100% generally indicates an underwriting profit and a combined ratio over 100% generally indicates an underwriting loss. The extent by which the combined ratio deviates from 100% indicates relative underwriting profit or loss. Commercial multi-peril Insurance policies that provide comprehensive insurance.................... protection to businesses, including coverage for property damage from fire, lightning, windstorm and certain other perils, for losses from crime, and for liability for personal injury to others. Direct written premiums...... Total premiums written by an insurer other than premiums for reinsurance assumed by an insurer. 77 Earned premiums.............. The portion of net written premiums applicable to the expired period of policies. Expense ratio................ Under statutory accounting practices, the ratio of underwriting expenses to net written premiums. Fixed annuity................ Contract that provides for annuity premiums to be deposited in a fixed account backed by a general account and credited with interest at a rate which is generally reset annually. Fire insurance............... Insurance policies that provide coverage for damage to buildings and property resulting from fire, lightning, windstorm, hail and certain other perils. Gross premiums............... Net premiums plus operating expenses, commissions and other expenses. Homeowners insurance......... Insurance policies that provide coverage for damage to residences and their contents from a broad range of perils, including fire, lightning, windstorm and theft. These policies also cover liability of the insured arising from injury to other persons or their property while on the insured's property and under the specified conditions. Incurred losses.............. The sum of losses paid plus the change in the estimated liability for claims which have been reported but which have not been settled and claims which have occurred but have not yet been reported to the insurer. Insurance risks: preferred, standard, non-standard....... Categories of underwriting classifications for risk selection and pricing. The classifications consider the loss experience, the degree of hazard and loss frequency potential. Preferred risks have an absence of prior losses, low degrees of hazard, and/or low loss frequency potential. Standard risks have average loss experience, moderate degree of hazard and/or moderate loss frequency potential. Non-standard risks have above average loss experience, a higher degree of hazard and/or higher loss frequency potential. Loss adjustment expenses..... The expenses of settling claims, including legal and other fees and the general expenses of administering the claims adjustment process. Loss and LAE ratio........... Under statutory accounting practices, the ratio of incurred losses and loss adjustment expenses to earned premiums. Net earned premiums.......... The portion of written premiums that is recognized for accounting purposes as revenue during a period. Net premiums................. Gross premiums less return premiums and dividends paid. Net written premiums......... Gross premiums written and insured by an insurer less premiums ceded to reinsurers. Occurrence basis............. Policy coverage providing insurance for events occurring during the policy period but without regard for when the claim is reported. 78 Participating policy......... A policy which entitles the policyholder to participate in the divisible surplus of an insurance company to the extent dividends are apportioned thereon. Personal and commercial automobile insurance......... Insurance policies that provide protection against liability for bodily injury and property damage arising from automobile accidents, and provide protection against loss from damage to automobiles owned by the insured. Reinsurance.................. A procedure whereby an insurer remits or cedes a portion of the premiums to another insurer or reinsurer as payment to that insurer or reinsurer for assuming a portion of the related risk. Residual market.............. The market consisting of those persons (most frequently drivers seeking automobile insurance) who are unable to obtain insurance coverage in the voluntary market. Statutory accounting Recording transactions and preparing financial practices.................... statements in accordance with the rules and procedures prescribed or permitted by statute or regulatory authorities, generally reflecting a liquidating, rather than a going concern, concept of accounting. The principal differences between statutory accounting practices ("SAP") and GAAP for property and casualty insurance companies, the method by which the Company generally reports its financial results, are: (a) under SAP, certain assets that are not admitted assets are eliminated from the balance sheet; (b) under SAP, policy acquisition costs are expenses as incurred, while under GAAP, they are deferred and amortized over the term of the policies; (c) under SAP, no provision is made for deferred income taxes; and (d) under SAP, certain reserves are recognized which are not recognized under GAAP. Statutory capital and The sum remaining after all liabilities are surplus...................... subtracted from all assets, applying statutory accounting practices. This sum is regarded as financial protection to policyholders in the event an insurance company suffers unexpected or catastrophic losses. Term life insurance.......... Life insurance offering protection during a certain number of years, but expiring without policy cash value if the insured survives the stated period. Underwriting................. The process whereby an insurer reviews applications submitted for insurance coverage and determines whether it will accept all or part of the coverage being requested and what the applicable premiums should be. Underwriting also includes an ongoing review of existing policies and their pricing. Underwriting expenses........ The aggregate of policy acquisition costs and the portion of administrative, general and other expenses attributable to underwriting operations. Underwriting profit (loss)... The excess (deficiency), determined under statutory accounting practices, resulting from the difference between earned premiums and the sum of incurred losses, loss adjustment expenses and underwriting expenses. 79 Universal life insurance..... Life insurance which provides the policyholder, within certain limits established by the terms of the policy, with the ability to select premium levels and death benefits. Premiums in excess of specified charges are credited to the account value of the policy, which is credited with interest at a rate determined by the insurer subject to the minimum guaranteed crediting rate specified in the policy. The cost of insurance and administrative charges are deducted from the account value of the policy. Variable annuity............. Annuity in which premium payments are used to purchase accumulation units. The value of a unit fluctuates in accordance with the investment experience of a separate account; variable annuity contracts typically include a general account guaranteed interest investment option. At the time of the payment of benefits to the annuitant, the annuitant can generally elect from a number of payment options which provide either fixed or variable benefit payments. Voluntary market............. The market consisting of those persons whom insurance companies voluntarily choose to insure because such companies believe that they can do so profitably at competitive rates. Whole life insurance......... Life insurance that may be kept in force for a person's entire life by paying one or more premiums. The policy is paid for in one of three different ways: (i) ordinary life insurance (premiums are payable as long as the insured lives), (ii) limited payment life insurance (premiums are payable over a specified number of years) and (iii) single premium life insurance (a one time payment amount paid at the inception of the policy). Whole life insurance contracts also build up a policy cash value. Workers' compensation Insurance policies purchased by employers to insurance.................... provide benefits to employees for injuries sustained during employment and to protect employees from certain third party liability claims. The extent of coverage is established by the workers' compensation laws of each state. 80 INDEX TO FINANCIAL STATEMENTS
PAGE ---- FARM FAMILY MUTUAL INSURANCE COMPANY AND SUBSIDIARY Report of Independent Accountants........................................ F-2 Consolidated Balance Sheets at December 31, 1994 and 1995 (audited) and at March 31, 1996 (unaudited)........................................... F-3 Consolidated Statements of Income for the Years Ended December 31, 1993, 1994 and 1995 (audited) and for the Three Months Ended March 31, 1995 and 1996 (unaudited).................................................... F-4 Consolidated Statements of Policyholders' Equity for the Years Ended December 31, 1993, 1994 and 1995 (audited) and for the Three Months Ended March 31, 1995 and 1996 (unaudited)............................... F-5 Statements of Consolidated Cash Flows for the Years Ended December 31, 1993, 1994 and 1995 (audited) and for the Three Months Ended March 31, 1995 and 1996 (unaudited)............................................... F-6 Notes to Consolidated Financial Statements............................... F-7 FARM FAMILY HOLDINGS, INC. Report of Independent Accountants........................................ F-22 Balance Sheet at February 29, 1996....................................... F-23 Notes to Balance Sheet................................................... F-24
F-1 [LETTERHEAD OF COOPERS & LYBRAND L.L.P.] REPORT OF INDEPENDENT ACCOUNTANTS To the Board of Directors Farm Family Mutual Insurance Company We have audited the accompanying consolidated balance sheets of Farm Family Mutual Insurance Company and Subsidiary as of December 31, 1995 and 1994, and the related consolidated statements of income, policyholders' equity and cash flows for the three years in the period ended December 31, 1995. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these consolidated financial statements 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 consolidated financial statements referred to above presents fairly, in all material respects, the financial position of Farm Family Mutual Insurance Company and Subsidiary as of December 31, 1995 and 1994, and the results of their operations and their cash flows for each of the three years in the period ended December 31, 1995 in conformity with generally accepted accounting principles. As discussed in the accompanying notes to the consolidated financial statements, the Company changed its method of accounting for investments (Note 1) at December 31, 1993 and for postretirement benefits (Note 8) at January 1, 1995. As described in Note 2, the Company has adopted a plan of demutualization. Subject to certain approvals under the plan, the Company will convert to a stock property and casualty insurance company on the effective date of the plan. COOPERS & LYBRAND L.L.P. Albany, New York February 13, 1996 Coopers & Lybrand L.L.P. is a member of Coopers & Lybrand International, a limited liability association incorporated in Switzerland. F-2 FARM FAMILY MUTUAL INSURANCE COMPANY CONSOLIDATED BALANCE SHEETS ($ IN THOUSANDS)
DECEMBER 31, MARCH 31, ------------------ ----------- 1994 1995 1996 -------- -------- ----------- (UNAUDITED) ASSETS Investments Fixed Maturities Available for sale, at fair value (Amortized cost: $156,591 in 1994, $171,694 in 1995 and $177,632 at March 31, 1996)........... $148,889 $181,189 $181,476 Held to maturity, at amortized cost (Fair value: $10,948 in 1994, $13,100 in 1995 and $12,349 at March 31, 1996)....... 11,329 12,386 12,204 Equity securities Available for sale, at fair value (Cost: $334 in 1994, 1995 and at March 31, 1996)...... 3,944 4,746 5,147 Mortgage loans................................ 1,890 1,822 1,803 Other invested assets......................... 1,572 1,246 1,027 Short-term investments........................ 3,013 6,532 638 -------- -------- -------- Total investments........................... 170,637 207,921 202,295 -------- -------- -------- Cash........................................... 4,507 2,410 3,794 Insurance receivables: Reinsurance receivables....................... 15,027 13,773 12,708 Premiums receivable........................... 18,749 21,791 22,948 Deferred acquisition costs..................... 8,671 10,527 10,551 Accrued investment income...................... 4,047 4,260 4,017 Federal income taxes recoverable............... 899 448 220 Deferred income tax asset, net................. 6,601 -- 1,430 Prepaid reinsurance premiums................... 1,806 1,864 1,993 Receivable from affiliates, net................ 10,567 13,860 14,940 Other assets................................... 1,596 1,434 1,823 -------- -------- -------- Total assets................................ $243,107 $278,288 $276,719 ======== ======== ======== LIABILITIES AND POLICYHOLDERS' EQUITY Liabilities: Reserves for losses and loss adjustment expenses....................................... 127,954 137,978 140,319 Unearned premium reserve...................... 48,843 52,799 53,999 Reinsurance premiums payable.................. 4,029 2,635 1,076 Accrued expenses and other liabilities........ 6,555 7,788 7,532 Debt.......................................... 2,749 2,707 2,698 Deferred income tax liability, net............ -- 217 -- -------- -------- -------- Total liabilities........................... 190,130 204,124 205,624 -------- -------- -------- Commitments and contingencies Policyholders' equity: Retained earnings............................. 55,678 65,284 65,586 Net unrealized investment gains (losses)...... (2,701) 8,998 5,627 Minimum pension liability adjustment.......... -- (118) (118) -------- -------- -------- Total policyholders' equity................. 52,977 74,164 71,095 -------- -------- -------- Total liabilities and policyholders' equity. $243,107 $278,288 $276,719 ======== ======== ========
See accompanying notes to Consolidated Financial Statements. F-3 FARM FAMILY MUTUAL INSURANCE COMPANY CONSOLIDATED STATEMENTS OF INCOME ($ IN THOUSANDS)
FOR THE YEAR ENDED FOR THE THREE MONTHS DECEMBER 31, ENDED MARCH 31, --------------------------- --------------------- 1993 1994 1995 1995 1996 -------- -------- -------- ---------- ---------- (UNAUDITED) Revenues: Premiums.................... $ 96,672 $101,466 $116,936 $ 27,852 $ 31,676 Net investment income....... 13,861 13,190 14,326 3,504 3,858 Realized investment gains (losses), net................ (174) 1,340 912 61 63 Other income................ 676 696 840 168 213 -------- -------- -------- ---------- ---------- Total revenues............ 111,035 116,692 133,014 31,585 35,810 -------- -------- -------- ---------- ---------- Losses and expenses: Losses and loss adjustment expenses..................... 73,213 82,680 83,184 19,157 25,722 Underwriting expenses....... 26,811 28,768 34,902 8,212 8,787 Interest expense............ 223 220 216 54 54 Dividends to policyholders.. 122 51 122 47 27 -------- -------- -------- ---------- ---------- Total losses and expenses. 100,369 111,719 118,424 27,470 34,590 -------- -------- -------- ---------- ---------- Income before federal income tax expense and extraordinary item.......... 10,666 4,973 14,590 4,115 1,220 Federal income tax expense... 3,082 1,447 4,984 1,193 397 -------- -------- -------- ---------- ---------- Income before extraordinary item......................... 7,584 3,526 9,606 2,922 823 Extraordinary item-- demutualization expenses..... -- -- -- -- 521 -------- -------- -------- ---------- ---------- Net income................ $ 7,584 $ 3,526 $ 9,606 $ 2,922 $ 302 ======== ======== ======== ========== ==========
See accompanying notes to Consolidated Financial Statements. F-4 FARM FAMILY MUTUAL INSURANCE COMPANY CONSOLIDATED STATEMENTS OF POLICYHOLDERS' EQUITY ($ IN THOUSANDS)
DECEMBER 31, MARCH 31, -------------------------- ----------- 1993 1994 1995 1996 ------- -------- ------- ----------- (UNAUDITED) RETAINED EARNINGS Balance, beginning of period......... $44,568 $ 52,152 $55,678 $65,284 Net income........................... 7,584 3,526 9,606 302 ------- -------- ------- ------- Balance, end of period............... 52,152 55,678 65,284 65,586 ------- -------- ------- ------- NET UNREALIZED APPRECIATION (DEPRECIATION) OF INVESTMENTS Balance, beginning of period......... 1,883 8,360 (2,701) 8,998 Change in unrealized appreciation (depreciation), net................... (293) (11,061) 11,699 (3,371) Cumulative effect of accounting change for investments................ 6,770 -- -- -- ------- -------- ------- ------- Balance, end of period............... 8,360 (2,701) 8,998 5,627 ------- -------- ------- ------- MINIMUM PENSION LIABILITY ADJUSTMENT Balance, beginning of period......... -- -- -- (118) Minimum pension liability adjustment. -- -- (118) -- ------- -------- ------- ------- Balance, end of period............... -- -- (118) (118) ------- -------- ------- ------- TOTAL POLICYHOLDERS' EQUITY......... $60,512 $ 52,977 $74,164 $71,095 ======= ======== ======= =======
See accompanying notes to Consolidated Financial Statements. F-5 FARM FAMILY MUTUAL INSURANCE COMPANY STATEMENTS OF CONSOLIDATED CASH FLOWS ($ IN THOUSANDS)
FOR THE YEAR ENDED FOR THE THREE MONTHS DECEMBER 31, ENDED MARCH 31, ---------------------------- ---------------------- 1993 1994 1995 1995 1996 -------- -------- -------- ---------- ---------- (UNAUDITED) CASH FLOWS FROM OPERATING ACTIVITIES: Net income............... $ 7,584 $ 3,526 $ 9,606 $ 2,922 $ 302 -------- -------- -------- ---------- ---------- Adjustments to reconcile net income to net cash provided by operating activities: Realized investment (gains) losses........... 174 (1,340) (912) (61) (63) Amortization of bond discount................. 4 77 62 17 32 Depreciation............ 322 -- -- -- -- Deferred income taxes... (1,048) 596 581 (11) 169 Changes in: Reinsurance receivables.............. (3,968) 1,910 1,254 (193) 1,065 Premiums receivable.... (2,936) (2,732) (3,042) (2,404) (1,157) Deferred acquisition costs.................... (1,684) (39) (1,856) (883) (24) Accrued investment income................... (692) (426) (213) 504 243 Federal income taxes recoverable.............. -- (899) 451 899 228 Prepaid reinsurance premiums................. 211 (367) (58) (229) (129) Receivable from affiliates............... (1,344) 1,699 (3,293) (1,142) (1,080) Other assets........... 397 96 271 818 (389) Reserves for losses and loss adjustment expenses. 5,980 4,477 10,024 1,555 2,341 Unearned premium reserve.................. 1,595 4,541 3,956 2,098 1,200 Reinsurance premiums payable.................. (1,418) 4 (1,394) (968) (1,559) Accrued expenses and other liabilities........ 3,269 (2,028) 1,001 1,543 (256) Income taxes payable... (813) (459) -- 307 -- -------- -------- -------- ---------- ---------- Total adjustments.... (1,951) 5,110 6,832 1,850 621 -------- -------- -------- ---------- ---------- Net cash provided by operating activities..... 5,633 8,636 16,438 4,772 923 -------- -------- -------- ---------- ---------- CASH FLOWS FROM INVESTING ACTIVITIES Proceeds from sales: Fixed maturities available for sale....... 21,921 26,100 28,466 3,167 3,918 Equity securities....... -- 732 -- -- 151 Investment collections: Fixed maturities available for sale....... 26,628 16,025 15,435 2,297 4,274 Fixed maturities held to maturity................. 305 418 514 214 172 Mortgage loans.......... 185 58 68 16 19 Investment purchases: Fixed maturities available for sale....... (52,798) (54,010) (58,339) (11,109) (14,023) Fixed maturities held to maturity................. (7,240) (1,040) (1,598) Change in short-term investments, net......... 3,457 90 (3,519) (10) 5,894 Change in other invested assets................... 328 3,186 480 157 65 Proceeds from sale of property and equipment... -- 711 -- -- -- -------- -------- -------- ---------- ---------- Net cash provided by (used in) investing activities............... (7,214) (7,730) (18,493) (5,268) 470 -------- -------- -------- ---------- ---------- CASH FLOWS FROM FINANCING ACTIVITIES Principal payments on debt..................... (36) (34) (42) (15) (9) -------- -------- -------- ---------- ---------- Net cash used in financing activities..... (36) (34) (42) (15) (9) -------- -------- -------- ---------- ---------- Net increase (decrease) in cash....... (1,617) 872 (2,097) (511) 1,384 Cash, beginning of period................... 5,252 3,635 4,507 4,507 2,410 -------- -------- -------- ---------- ---------- Cash, end of period...... $ 3,635 $ 4,507 $ 2,410 $ 3,996 $ 3,794 ======== ======== ======== ========== ==========
See accompanying notes to Consolidated Financial Statements. F-6 FARM FAMILY MUTUAL INSURANCE COMPANY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES Basis of Presentation: The accompanying consolidated financial statements have been prepared in conformity with generally accepted accounting principles and include the accounts of Farm Family Mutual Insurance Company ("Farm Family Mutual") and its wholly owned subsidiary, Rural Agency and Brokerage, Inc. ("Rural Agency"), (collectively referred to as the "Mutual Company"). All significant intercompany balances and transactions have been eliminated. The preparation of financial statements in accordance with generally accepted accounting principles requires management to make estimates and assumptions that affect 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 Mutual 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 Mutual Company and its affiliates. The operations of the Mutual Company are closely related with those of its affiliates, Farm Family Life Insurance Company (the "Life Company") and the Life Company's wholly owned subsidiary, United Farm Family Insurance Company ("United"). (See Note 10.) The accompanying unaudited consolidated financial statements, reflect, in the opinion of management, all adjustments, consisting of only normal and recurring adjustments, necessary for a fair presentation of the consolidated financial position at March 31, 1996, and the consolidated results of operations for the three month periods ended March 31, 1995 and 1996. The results of operations for the three month period ended March 31, 1996 are not necessarily indicative of the results to be expected for the full year. The unaudited consolidated financial statements as of and for the three month period ended March 31, 1996 include the accounts of Farm Family Holdings, Inc. (the "Holding Company") since its incorporation on February 12, 1996. The Holding Company was incorporated under Delaware Law for the purpose of becoming the parent holding company of the Mutual Company under a plan of reorganization and conversion, as amended (the "Plan"), whereby the Mutual Company will convert from a New York mutual property and casualty insurance company to a New York stock property and casualty insurance company. (See Note 2.) Investments: Effective December 31, 1993, the Company adopted Statement of Financial Accounting Standards ("SFAS") No. 115, "Accounting for Certain Investments in Debt and Equity Securities." SFAS No. 115 requires that investments classified as available for sale be carried at fair value. Previously, fixed income securities classified as available for sale were carried at the lower of amortized cost or fair value, determined in the aggregate. Unrealized holding gains and losses are reflected as a separate component of policyholders' equity, net of deferred income taxes. The cumulative effect of adoption of this statement increased policyholders' equity at December 31, 1993 by $6,770,000. Fixed maturities include bonds, redeemable preferred stocks and mortgage- backed securities. Investments in fixed maturities which the Mutual Company has both the ability and positive intent to hold to maturity are classified as held to maturity and carried at amortized cost. Fixed maturities which may be sold prior to their F-7 FARM FAMILY MUTUAL INSURANCE COMPANY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) contractual maturity are classified as available for sale and are carried at fair value. The difference between amortized cost and fair value of fixed maturities classified as available for sale, net of deferred income taxes, is reflected as a component of policyholders' equity. The carrying values of all investments in fixed maturities are reviewed on an ongoing basis. If this review indicates a decline in fair value below cost is other than temporary, the Mutual Company's carrying value in the investment is reduced to its estimated realizable value and a specific writedown is taken. Such writedowns are included in realized investment gains and losses. 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 policyholders' equity. Mortgage loans are carried at outstanding principal balance. Other invested assets, which consist primarily of investments in limited partnerships, are carried at cost. Cash and short-term investments consist of demand deposits, repurchase agreements and money market investments whose maturities are three months or less from the date of purchase. Short-term investments are carried at cost which approximates fair value. Investment income consists primarily of interest and dividends. Interest is recognized on an accrual basis and dividends are recorded on the date of declaration. Interest income on mortgage-backed securities is determined on the effective yield method based on estimated principal repayments. Realized investment gains and losses are determined on a specific identification basis. Income Taxes: The income tax provision is calculated under the liability method. Deferred income tax assets and liabilities are recorded based on the difference between the financial statement and tax bases of assets and liabilities and the enacted tax rates. The principal assets and liabilities giving rise to such differences are reserves for losses and loss adjustment expenses, unearned premiums, and deferred policy 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 such as agents' compensation, premium taxes, and certain other underwriting expenses that vary with and are primarily related to the production of business have been deferred. Such deferred policy acquisition costs are amortized as premium revenue is recognized. Deferred policy 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 Mutual 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 F-8 FARM FAMILY MUTUAL INSURANCE COMPANY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) 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.) Participating Policyholders: All of the Mutual Company's insurance policies are written on a participating basis. Dividends to policyholders are approved by the Board of Directors based on overall underwriting experience by state for eligible policies. 2. PLAN OF DEMUTUALIZATION AND OPTION TO ACQUIRE LIFE COMPANY On November 1, 1995, the Mutual Company submitted an application to the New York Superintendent of Insurance (the "Superintendent") for permission to convert from a mutual property/casualty insurance company to a stockholder owned company. As part of the demutualization, the Holding Company was formed and the Mutual Company's policyholders will receive common stock in the Holding Company and/or cash in exchange for their membership interest in the Mutual Company. The submission of the application to the Superintendent represents the first step in the demutualization process which will require the approval of the Superintendent as well as the Mutual Company's policyholders prior to demutualization. The Holding Company has entered into the Option Purchase Agreement, dated February 14, 1996 (the "Option Purchase Agreement"), with the shareholders of the Life Company pursuant to which the Holding Company has, for a two-year period commencing on the effective date of the Plan, the option to acquire the Life Company subject to certain conditions, which include the approval of the Holding Company's shareholders and applicable regulatory authorities. Financial statements for the Life Company are not being furnished because the Holding Company has determined that the acquisition of the Life Company is not "probable" within the meaning of Rule 3.05 of Regulation S-X at this time. Although the Holding Company believes that the acquisition of the Life Company would be desirable under appropriate circumstances, the Holding Company is not in a position at this time to predict with any certainty whether the option to acquire the Life Company will in fact be exercised. The Holding Company's decision to exercise the option will depend, among other things, on the exercise price for the shares of the Life Company, an evaluation of the financial statements prepared in accordance with generally accepted accounting principles and prospects of the Life Company, the outcome of a vote by the Holding Company's shareholders and the receipt of applicable regulatory approvals. The Life Company's financial statements are prepared on the basis of statutory accounting practices prescribed or permitted by insurance regulatory authorities. Financial statements for the Life Company prepared in accordance with generally accepted accounting principles do not currently exist. 3. INVESTMENTS The following is a schedule of the amortized cost, fair value and gross unrealized gains and losses of investments in fixed maturities at December 31, 1994 and 1995. F-9 FARM FAMILY MUTUAL INSURANCE COMPANY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
AMORTIZED GROSS UNREALIZED FAIR 1994 COST GAINS (LOSSES) VALUE - ---- --------- ------- --------- -------- ($ IN THOUSANDS) AVAILABLE FOR SALE U.S. Government & Agencies................ $ 20,184 $ 606 $ (608) $ 20,182 States, Municipalities & Political Subdivisions.............................. 19,630 304 (1,029) 18,905 Corporate................................. 108,410 1,077 (7,756) 101,731 Mortgage-backed Securities................ 1,923 44 -- 1,967 Redeemable Preferred Stock................ 6,444 105 (445) 6,104 -------- ------- -------- -------- Total................................... $156,591 $ 2,136 $ (9,838) $148,889 ======== ======= ======== ======== HELD TO MATURITY States, Municipalities & Political Subdivisions.............................. $ 4,722 $ 21 $ (16) $ 4,727 Corporate................................. 6,607 -- (386) 6,221 -------- ------- -------- -------- Total................................... $ 11,329 $ 21 $ (402) $ 10,948 ======== ======= ======== ========
AMORTIZED GROSS UNREALIZED FAIR 1995 COST GAINS (LOSSES) VALUE - ---- --------- ------- -------- -------- ($ IN THOUSANDS) AVAILABLE FOR SALE U.S. Government & Agencies................. $ 22,700 $ 1,543 $ -- $ 24,243 States, Municipalities & Political Subdivisions............................... 21,871 1,675 (66) 23,480 Corporate.................................. 119,319 7,040 (987) 125,372 Mortgage-backed Securities................. 1,082 48 -- 1,130 Redeemable Preferred Stock................. 6,722 322 (80) 6,964 -------- ------- ------- -------- Total.................................... $171,694 $10,628 $(1,133) $181,189 ======== ======= ======= ======== HELD TO MATURITY States, Municipalities & Political Subdivisions............................... $ 5,925 $ 373 $ -- $ 6,298 Corporate.................................. 6,461 354 (13) 6,802 -------- ------- ------- -------- Total.................................... $ 12,386 $ 727 $ (13) $ 13,100 ======== ======= ======= ========
The table below presents the amortized cost and fair value of fixed maturities at December 31, 1995, by contractual maturity. Actual maturities may differ from contractual maturities as a result of prepayments.
AVAILABLE FOR SALE HELD TO MATURITY ------------------ ----------------- AMORTIZED FAIR AMORTIZED FAIR COST VALUE COST VALUE --------- -------- --------- ------- ($ IN THOUSANDS) Due in one year or less.................... $ 349 $ 303 $ 79 $ 79 Due after one year through five years...... 25,420 25,839 1,477 1,539 Due after five years through ten years..... 69,862 72,994 5,057 5,161 Due after ten years........................ 66,528 71,769 5,773 6,321 -------- -------- ------- ------- 162,159 170,905 12,386 13,100 Mortgage-backed securities................. 9,535 10,284 -- -- -------- -------- ------- ------- $171,694 $181,189 $12,386 $13,100 ======== ======== ======= =======
F-10 FARM FAMILY MUTUAL INSURANCE COMPANY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) Unrealized investment gains and losses on fixed maturities classified as available for sale and equity securities included in policyholders' equity at December 31, 1995 are as follows:
COST/ NET AMORTIZED FAIR GROSS UNREALIZED UNREALIZED COST VALUE GAINS (LOSSES) GAINS --------- -------- ------- -------- ---------- ($ IN THOUSANDS) Fixed maturities available for sale............................ $171,694 $181,189 $10,628 $(1,133) $9,495 Equity securities............... 334 4,746 4,440 (28) 4,412 -------- -------- ------- ------- ------ Total......................... $172,028 $185,935 $15,068 $(1,161) 13,907 ======== ======== ======= ======= Deferred income taxes........... 4,909 ------ Total......................... $8,998 ======
The change in unrealized appreciation (depreciation) of investments included in policyholders' equity for the years ended December 31, 1993, 1994 and 1995 was as follows:
1993 1994 1995 ------ -------- ------- ($ IN THOUSANDS) Fixed maturities available for sale.................. $9,532 $(17,236) $17,197 Equity securities.................................... 282 477 802 Other invested assets................................ -- -- (63) ------ -------- ------- $9,814 $(16,759) $17,936 Deferred income taxes................................ (3,337) 5,698 (6,237) ------ -------- ------- $6,477 $(11,061) $11,699 ====== ======== =======
The components of net investment income are as follows:
1993 1994 1995 ------- ------- ------- ($ IN THOUSANDS) Interest on fixed maturities......................... $13,719 $13,546 $14,561 Dividends from equity securities..................... 102 23 19 Interest on mortgage loans........................... 211 182 180 Interest on short-term investments................... 81 145 315 Other, net........................................... 31 (381) (406) ------- ------- ------- Total investment income............................ 14,144 13,515 14,669 Investment expense................................... (283) (325) (343) ------- ------- ------- Net investment income.............................. $13,861 $13,190 $14,326 ======= ======= =======
A summary of realized investment gains (losses), net as follows:
1993 1994 1995 ------- ------- ------- ($ IN THOUSANDS) Fixed maturities..................................... $ (174) $ 1,241 $ 912 Equity securities.................................... -- 99 -- ------- ------- ------- $ (174) $ 1,340 $ 912 ======= ======= =======
F-11 FARM FAMILY MUTUAL INSURANCE COMPANY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) 4. FAIR VALUE OF FINANCIAL INSTRUMENTS The estimated fair value of financial instruments has been determined using available market information and appropriate value methodologies. The estimated fair value of financial instruments are not necessarily indicative of the amounts the Mutual 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 Mutual Company's significant assets (including deferred policy 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 Mutual Company as a whole. The following table presents the carrying value and fair value of the Mutual Company's financial instruments at December 31, 1994 and 1995.
DECEMBER 31, 1994 DECEMBER 31, 1995 ----------------- ----------------- CARRYING FAIR CARRYING FAIR VALUE VALUE VALUE VALUE -------- -------- -------- -------- ($ IN THOUSANDS) ASSETS Fixed maturities: Available for sale........................ $148,889 $148,889 $181,189 $181,189 Held to maturity.......................... 11,329 10,948 12,386 13,100 Equity securities........................... 3,944 3,944 4,746 4,746 Mortgage loans.............................. 1,890 1,890 1,822 1,822 Other invested assets....................... 1,572 1,572 1,246 1,246 Short-term investments...................... 3,013 3,013 6,532 6,532 Cash........................................ 4,507 4,507 2,410 2,410 Premiums receivable, net.................... 18,749 18,749 21,791 21,791 Accrued investment income................... 4,047 4,047 4,260 4,260 Receivable from affiliates.................. 10,567 10,567 13,860 13,860 Other assets................................ 1,596 1,596 1,434 1,434 LIABILITIES Accrued expenses and other liabilities...... 6,555 6,555 7,788 7,788 Debt........................................ 2,749 2,749 2,707 2,707
The following methods and assumptions were used in estimating the fair value disclosures for the financial instruments: . Fixed Maturities (available for sale and held to maturity), Equity Securities and Other Invested Assets--The fair value is based upon quoted market prices where available or from independent pricing services. . Mortgage Loans--The fair value is based on discounted cash flows using discount rates at which similar loans would be made to borrowers with similar characteristics. . Short-term Investments--Due to their short-term, highly liquid nature, their carrying value approximates fair value. . Premiums Receivable, Accrued Investment Income, Receivable from Affiliates, Other Assets and Accrued Expenses and Other Liabilities--Due to their short-term nature, their carrying value approximates fair value. . Debt--The fair value is based on discounted cash flows using current borrowing rates for similar debt arrangements. F-12 FARM FAMILY MUTUAL INSURANCE COMPANY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) 5. REINSURANCE The Mutual Company assumes and cedes insurance to participate in the reinsurance market, limit maximum losses and minimize exposure on large risks. Reinsurance contracts do not relieve the Mutual Company from its obligations to policyholders as the primary insurer. The Mutual 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 Mutual Company and an allowance for uncollectible reinsurance is provided when collection is in doubt. At December 31, 1994 and 1995, the Mutual Company determined it was not necessary to provide an allowance for uncollectible reinsurance. The Mutual Company's reinsurance program also includes reinsurance agreements with United. (See Note 10.) The effects of reinsurance on premiums written and earned, and losses and loss adjustment expenses, for the years indicated was as follows:
YEAR ENDED DECEMBER 31, ---------------------------- 1993 1994 1995 -------- -------- -------- ($ IN THOUSANDS) PREMIUMS WRITTEN Direct.......................................... $111,158 $122,039 $135,963 Assumed......................................... 9,045 7,577 6,261 Ceded to United................................. (9,010) (9,776) (9,237) Ceded to non-affiliates......................... (12,715) (14,226) (12,153) -------- -------- -------- Premiums written, net of reinsurance............ $ 98,478 $105,614 $120,834 ======== ======== ======== PREMIUMS EARNED Direct.......................................... $108,892 $117,384 $131,717 Assumed......................................... 9,716 7,690 6,552 Ceded to United................................. (9,009) (9,750) (9,238) Ceded to non-affiliates......................... (12,927) (13,858) (12,095) -------- -------- -------- Premiums earned, net of reinsurance............. $ 96,672 $101,466 $116,936 ======== ======== ======== LOSSES AND LOSS ADJUSTMENT EXPENSES Direct.......................................... $ 80,859 $ 91,467 $ 91,176 Assumed......................................... 7,165 4,513 4,658 Ceded to United................................. (6,613) (7,378) (6,604) Ceded to non-affiliates......................... (8,198) (5,922) (6,046) -------- -------- -------- Losses and loss adjustment expenses, net of reinsurance...................................... $ 73,213 $ 82,680 $ 83,184 ======== ======== ========
F-13 FARM FAMILY MUTUAL INSURANCE COMPANY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) 6.INCOME TAXES The components of the deferred income tax assets and liabilities at December 31, 1994 and 1995 are as follows:
YEAR ENDED DECEMBER 31, ----------------------- 1994 1995 ----------- ----------- ($ IN THOUSANDS) DEFERRED INCOME TAX ASSETS Reserves for losses and loss adjustment expenses....... $ 4,287 $ 4,444 Unearned premium reserve............................... 3,192 3,559 Unrealized investment losses, net...................... 1,391 -- Accrued expenses and other liabilities................. 324 474 Investments............................................ 575 68 ----------- ----------- Total deferred income tax assets....................... 9,769 8,545 ----------- ----------- DEFERRED INCOME TAX LIABILITIES Deferred acquisition costs............................. $ 2,948 $ 3,685 Unrealized investment gains, net....................... -- 4,846 Other assets........................................... 220 231 ----------- ----------- Total deferred income tax liabilities.................. 3,168 8,762 ----------- ----------- Net deferred income tax asset (liability).............. $ 6,601 $ (217) =========== ===========
There was no valuation allowance for deferred income tax assets as of December 31, 1994 or 1995. In assessing the realization of deferred tax assets, management considers whether it is more likely than not that the deferred tax assets will be realized. Management primarily considered the existence of taxable income in the carryback period in making this assessment and believes the benefits of the deductible differences recognized as of December 31, 1994 and 1995 will ultimately be realized. The components of income tax expense (benefit) are as follows:
YEAR ENDED DECEMBER 31, ------------------------- 1993 1994 1995 -------- ------- ------- ($ IN THOUSANDS) Current.............................................. $ 4,130 $ 851 $ 4,403 Deferred............................................. (1,048) 596 581 -------- ------- ------- Total income tax expense............................. $ 3,082 $ 1,447 $ 4,984 ======== ======= =======
The Mutual Company paid income taxes of $4,943,000, $2,209,000 and $3,952,000 in 1993, 1994 and 1995, respectively. F-14 FARM FAMILY MUTUAL INSURANCE COMPANY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) A reconciliation of the differences between the Mutual Company's effective rates of tax and the United States federal income tax rates follows:
YEAR ENDED DECEMBER 31, ---------------------------------------------- % OF % OF % OF PRETAX PRETAX PRETAX 1993 INCOME 1994 INCOME 1995 INCOME ------ ------ ------ ------ ------ ------ ($ IN THOUSANDS) Income tax provision at prevailing rates............................. $3,633 34.06% $1,691 34.00% $5,006 34.31% Tax effect of: Tax exempt interest income....... (104) (.98) (67) (1.35) (11) (.08) Dividends received deduction..... (200) (1.87) (140) (2.81) (148) (1.01) Other, net....................... (247) (2.31) (37) (.74) 137 (.94) ------ ----- ------ ----- ------ ----- Federal income tax expense....... $3,082 28.90% $1,447 29.10% $4,984 34.16% ====== ===== ====== ===== ====== =====
7.RESERVES FOR LOSSES AND LOSS ADJUSTMENT EXPENSES As described in Note 1, the Mutual Company establishes reserves for losses and loss adjustment expenses on reported and incurred but not reported claims of insured losses. The establishment of appropriate reserves for losses and loss adjustment expenses is an inherently uncertain process and the ultimate cost may vary materially from the recorded amounts. Reserve estimates are regularly reviewed and updated, using the most current information. Any resulting adjustments, which may be material, are reflected in current operations. The following table provides a reconciliation of beginning and ending liability balances for reserves for losses and loss adjustment expenses, net of reinsurance for the years ended December 31, 1993, 1994 and 1995.
YEAR ENDED DECEMBER 31, --------------------------- 1993 1994 1995 -------- -------- -------- ($ IN THOUSANDS) Reserves for losses and loss adjustment expenses at beginning of year.............................. $117,497 $123,477 $127,954 Less reinsurance recoverables and receivables..... 24,463 28,761 28,230 -------- -------- -------- Net reserves for losses and loss adjustment expenses at beginning of year..................... 93,034 94,716 99,724 -------- -------- -------- Incurred losses and loss adjustment expenses: Provision for insured events of current year..... 73,114 86,370 88,366 Increase (decrease) in provisions for insured events of prior years............................. 99 (3,690) (5,182) -------- -------- -------- Total incurred losses and loss adjustment expenses.......................................... 73,213 82,680 83,184 -------- -------- -------- Payments: Losses and loss adjustment expenses attributable to insured events of current year.............. 34,839 43,232 40,519 Losses and loss adjustment expenses attributable to insured events of prior years............... 36,692 34,440 33,066 -------- -------- -------- Total Payments:............................... 71,531 77,672 73,585 -------- -------- -------- Net reserves for losses and loss adjustment expenses at end of year........................... 94,716 99,724 109,323 Plus reinsurance recoverables and receivables..... 28,761 28,230 28,655 -------- -------- -------- Reserves for losses and loss adjustment expenses at end of year.................................... $123,477 $127,954 $137,978 ======== ======== ========
F-15 FARM FAMILY MUTUAL INSURANCE COMPANY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) The Mutual 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 $4,876,000 (net of a discount of $1,217,000) and $4,754,000 (net of a discount of $1,192,000) at December 31, 1994 and 1995, respectively. 8.DEBT At December 31, 1995, debt consists of $1,249,500 of debentures and $1,457,000 of subordinated surplus certificates. The debentures and subordinated surplus certificates 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 Superintendent. No single holder, other than the Life Company (see Note 10) holds more than 5% of the outstanding debentures or subordinated surplus certificates. The Mutual Company paid interest of $223,000, $220,000 and $217,000 for the years ended December 31, 1993, 1994 and 1995, respectively. At December 31, 1995, the Mutual Company had an available line of credit with a bank for $2,000,000. 9.BENEFITS PLANS Pension Plans: The Mutual Company and the Life Company sponsor a qualified multi-employer noncontributory defined benefit pension plan covering substantially all of the Mutual Company's and the Life Company's full-time employees who meet the eligibility requirements. Benefits under the defined benefit pension plan are primarily based upon the employee's length of service and the employee's average compensation for certain periods during the last years of employment. The Mutual Company's funding policy for its defined benefit pension plan is to make annual contributions in accordance with accepted actuarial cost methods subject to regulatory funding limitations. Plan assets at December 31, 1995 consisted primarily of long-term corporate, United States, and municipal obligations and a group deposit annuity contract with the Life Company. A summary of the components of net periodic pension expense for the plan follows:
YEAR ENDED DECEMBER 31, --------------------------- 1993 1994 1995 -------- ------- -------- ($ IN THOUSANDS) Service cost....................................... $ 694 $ 777 $ 708 Interest cost on projected benefit obligation...... 1,173 1,225 1,384 Actual return on plan assets....................... (1,212) (401) (1,844) Net amortization (deferral)........................ 86 (756) 632 -------- ------- -------- Total pension expense.............................. $ 741 $ 845 $ 880 ======== ======= ========
The Mutual Company's portion of net periodic pension expense for the years ended December 31, 1993, 1994 and 1995 was $415,000, $516,000 and $537,000, respectively. In accordance with Statement of Financial Accounting Standards No. 87, "Employers' Accounting for Pensions", the Mutual Company recorded a minimum pension liability of $232,000 in 1995. The transaction, which had no effect on net income, was offset by recording an asset of $114,000 and reducing policyholders' equity by $118,000. F-16 FARM FAMILY MUTUAL INSURANCE COMPANY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) Assumptions used in the determination of pension obligations and assets were:
YEAR ENDED DECEMBER 31, ------------------------- 1993 1994 1995 ------- ------- ------- Weighted-average discount rate....................... 7.00% 7.90% 6.40% Rate of increase in compensation levels.............. 4.00% 4.90% 3.40% Expected long-term rate of return on plan assets..... 8.00% 8.00% 8.00%
The following table summarizes the funded status of the defined benefit pension plan:
YEAR ENDED DECEMBER 31, ------------------------ 1994 1995 ----------- ----------- ($ IN THOUSANDS) Actuarial present value of benefit obligations: Vested.............................................. $ 13,919 $ 17,901 Nonvested........................................... 354 338 ----------- ----------- Accumulated benefit obligation....................... 14,273 18,239 Effect of projected future salary increases on past service.............................................. 3,129 3,204 ----------- ----------- Projected benefit obligation......................... 17,402 21,443 Plan assets at fair value............................ 15,477 17,112 ----------- ----------- Projected benefit obligation in excess of plan assets............................................... $ (1,925) $ (4,331) =========== ===========
The accrued pension liability of the defined benefit plan was as follows:
YEAR ENDED DECEMBER 31, ------------------------ 1994 1995 ----------- ----------- ($ IN THOUSANDS) Projected benefit obligation in excess of plan assets............................................... $ (1,925) $ (4,331) Unrecognized prior service asset..................... 142 114 Unrecognized net gain from past experience different from that assumed.................................... 1,824 3,880 Unrecognized net asset at transition................. (613) (558) Minimum liability adjustment......................... -- (232) ----------- ----------- Accrued pension liability............................ $ (572) $ (1,127) =========== ===========
Incentive Savings Plan: The Mutual Company and the Life Company sponsor an employee incentive savings plan which is qualified under Section 401(k) of the Internal Revenue Code. Under the provisions of this plan, employees may contribute 1% to 16% of their eligible compensation, with up to 6% being eligible for matching contributions from the Mutual Company. In addition, the Mutual Company contributes 1% of eligible compensation up to $240 of the plan for all eligible employees. The Mutual Company's expense associated with the plan was $119,000, $155,000 and $138,000 in 1993, 1994 and 1995, respectively. Postretirement Benefits Other Than Pensions: The Mutual Company and the Life Company provide life insurance benefits for retired employees meeting certain age and length of service requirements. The postretirement benefit plan is currently unfunded and noncontributory. Benefits under the postretirement benefit plan are provided by a group term life insurance policy. F-17 FARM FAMILY MUTUAL INSURANCE COMPANY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) Effective January 1, 1995, the Mutual Company adopted SFAS No. 106, "Employers' Accounting for Postretirement Benefits Other than Pensions", which changed the accounting for the Mutual Company's postretirement benefit plan from a cash basis by requiring accrual of the expected cost of providing benefits under the plan during the years that the employee renders the necessary service to the Mutual Company. Net periodic postretirement benefit expense for the year ended December 31, 1995 included the following:
1995 ---------------- ($ IN THOUSANDS) Service cost................................................... $ 37 Interest cost.................................................. 73 Return on assets............................................... -- Amortization of transition obligation.......................... 47 ---- Total:....................................................... $157 ====
The Mutual Company incurred postretirement benefit expenses on a cash basis of $5,000 and $6,000 during the years ended December 31, 1993 and 1994, respectively. The Mutual Company's portion of net periodic postretirement benefit expense for the year ended December 31, 1995, was $66,000. The following table presents the plan's postretirement benefit obligations as of December 31, 1995 reconciled with the plan's funded status and the amount recognized in the Mutual Company's consolidated balance sheets:
1995 ---------------- ($ IN THOUSANDS) Accumulated postretirement benefit obligation Retirees..................................................... $ (534) Other fully eligible plan participants....................... (260) Other active plan participants............................... (452) ------ Obligation at year-end..................................... (1,246) Plan assets.................................................... -- ------ Funded status.................................................. (1,246) Unrecognized transition obligation............................. 893 Unrecognized net loss.......................................... 238 ------ Accrued postretirement benefit liability at year-end......... $ (115) ======
A 6.4% discount rate was used to determine the accumulated postretirement benefit obligation at December 31, 1995. F-18 FARM FAMILY MUTUAL INSURANCE COMPANY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) 10. RELATED PARTY TRANSACTIONS The operations of the Mutual Company are closely related with those of the Life Company and the Life Company's wholly owned subsidiary, United. These three companies operate under an identical Board of Directors and have similar senior management. These 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 each company's share of such expenses is summarized below:
COMPANY'S SHARE ------------------ GROSS SHARED YEAR ENDED DECEMBER 31, EXPENSES AMOUNT PERCENTAGE - ----------------------- ------------ ------- ---------- ($ IN THOUSANDS) 1993......................................... $23,829 $13,431 56% 1994......................................... $23,833 $14,402 60% 1995......................................... $26,650 $16,182 61%
The Life Company holds $813,000 of debentures issued by the Mutual Company. The Mutual Company recognized interest expense of $65,000 in 1993, 1994 and 1995 on the debentures held by the Life Company. During 1994, the Mutual Company sold its data processing equipment to the Life Company at net book value. The Mutual Company's reinsurance program includes reinsurance agreements with United. In accordance with the provisions of these reinsurance agreements, the Mutual Company recognized commission income (expenses) of approximately $1,713,000, ($39,000), and $2,000 during the years ended December 31, 1993, 1994 and 1995, respectively. A summary of the effect of the reinsurance agreements with United on premiums written and earned is described in Note 4. Receivable from affiliates represents amounts due from United pursuant to a reinsurance agreement and amounts due from the Life Company and United for shared expenses. Currently, the Life Company and its wholly owned subsidiary, United, prepare their financial statements in accordance with statutory accounting practices. Such practices vary significantly from generally accepted accounting practices. The following financial information was derived from the statutory basis financial statements for the Life Company and United as of and for the year ended December 31, 1995:
TOTAL STATUTORY NET ASSETS SURPLUS INCOME -------- --------- ------- ($ IN THOUSANDS) Life Company......................................... $687,721 $61,801 $12,029 United............................................... $ 32,069 $15,827 $ 2,244
11. STATUTORY ACCOUNTING PRACTICES The following table reconciles consolidated net income and policyholders' equity as reported herein in conformity with generally accepted accounting principles ("GAAP") with consolidated statutory net income and statutory capital and surplus, determined in accordance with statutory accounting practices ("SAP") prescribed or permitted by the New York Insurance Department. Prescribed statutory accounting practices include a variety of publications of the National Association of Insurance Commissioners (the "NAIC"), as well as state laws, regulations, and general administrative rules. Permitted statutory accounting practices encompass all accounting practices not so prescribed. SAP differs from GAAP primarily due to the following: (a) the costs associated with acquiring new business are expensed as incurred for SAP, whereas for GAAP, such acquisition costs are deferred and amortized over the term of the underlying policies, (b) timing differences between financial statement earnings and earnings F-19 FARM FAMILY MUTUAL INSURANCE COMPANY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) reported for tax purposes are recognized as deferred income taxes for GAAP and are not recognized for SAP, (c) debentures and subordinated surplus certificates are recognized as surplus under SAP and recorded as a liability (debt) under GAAP, (d) SAP prohibits recognition of certain assets that cannot be readily converted to cash through a charge to surplus, whereas for GAAP, such "nonadmitted assets" are recognized at their estimated net realizable value, (e) SAP does not provide for the effect of SFAS No. 115, whereby in accordance with GAAP, fixed income securities classified as available for sale are carried at fair value and the related unrealized holding gains and losses are reflected as a separate component of policyholders' equity, net of deferred income taxes, and (f) SAP requires certain income and expense items to be charged directly to surplus, whereas for GAAP, such items are recorded in the statement of income.
NET INCOME -------------------------------------- FOR THE THREE MONTHS FOR THE YEAR ENDED ENDED POLICYHOLDERS' EQUITY ------------------------ ------------ ------------------------------- DECEMBER 31, MARCH 31, AT DECEMBER 31, AT MARCH 31, ------------------------ ------------ ----------------- ------------ 1993 1994 1995 1996 1994 1995 1996 ($ IN THOUSANDS) ------- ------ ------- ------------ ------- -------- ------------ (UNAUDITED) (UNAUDITED) Balance per generally accepted accounting principles............. $ 7,584 $3,526 $ 9,606 $ 302 $52,977 $ 74,164 $ 71,095 Investments............. 1,908 -- (1,908) -- 6,469 (9,459) (3,888) Debt.................... -- -- -- -- 2,749 2,707 2,698 Deferred acquisition costs................... (1,684) (39) (1,856) (24) (8,672) (10,527) (10,551) Income taxes............ (1,048) (34) 582 168 (6,601) -- (1,430) Salvage and subrogation. 211 (449) -- -- (3,936) -- -- Non-admitted assets..... -- -- -- -- (571) (886) (782) Other, net.............. 162 (25) 91 696 455 (83) 537 ------- ------ ------- ------ ------- -------- -------- Balance per statutory accounting practices... $ 7,133 $2,979 $ 6,515 $1,142 $42,870 $ 55,916 $ 57,679 ======= ====== ======= ====== ======= ======== ========
12. COMMITMENTS, CONTINGENCIES AND UNCERTAINTIES The Mutual Company is party to various legal actions. Although the outcome cannot be determined, management and the Mutual Company's legal counsel are of the opinion that such actions, either singly or in the aggregate, will not have a material adverse effect on the Mutual Company's consolidated financial position or results of operations. The Mutual Company is obligated under certain non-cancelable leases for branch office facilities. Rental expense under all operating leases totaled $77,000 in 1993 and $76,000 in 1994 and 1995. The minimum future rental payments under non-cancelable leases at December 31, 1995, were as follows: 1996--$76,000; 1997--$58,000; and 1998--$37,000. Catastrophes are an inherent risk of the property/casualty insurance industry and could produce significant adverse fluctuations in the Mutual Company's results of operations and financial condition. Since the Mutual Company operates primarily within the northeastern U.S., it is subject to a concentration of risk within this geographic region. For the years ended December 31, 1993, 1994 and 1995, approximately 58%, 58% and 60%, respectively, of the Company's direct written premiums were derived from policies written in the states of New York and New Jersey. While the Mutual Company maintains reinsurance coverage to mitigate the effect of losses from catastrophes, there can be no assurance that such losses will not materially affect its operating results and financial condition. However, the Mutual Company is required by law to participate in a number of involuntary reinsurance pools and such pools may from time to time experience deficits which could result in losses to the Mutual Company. F-20 FARM FAMILY MUTUAL INSURANCE COMPANY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) Pursuant to an agreement between the Mutual 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 Mutual 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 Mutual Company in accordance with the Mutual 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 Mutual 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, 1995 was $2,284,000. 13. UNAUDITED INTERIM FINANCIAL INFORMATION
QUARTER ENDED MARCH 31 JUNE 30 SEPTEMBER 30 DECEMBER 31 - ------------- -------- ------- ------------ ----------- ($ IN THOUSANDS) 1994 Revenues.............................. $28,295 $28,594 $30,278 $29,525 ======= ======= ======= ======= Net income (loss)..................... $ (255) $ 1,593 $ 1,584 $ 604 ======= ======= ======= ======= 1995 Revenues.............................. $31,585 $32,770 $34,145 $34,514 ======= ======= ======= ======= Net income............................ $ 2,922 $ 2,106 $ 3,173 $ 1,405 ======= ======= ======= =======
F-21 [LETTERHEAD OF COOPERS & LYBRAND L.L.P. APPEARS HERE] REPORT OF INDEPENDENT ACCOUNTANTS To the Board of Directors Farm Family Holdings, Inc. We have audited the accompanying balance sheet of Farm Family Holdings, Inc. as of February 29, 1996. This financial statement is the responsibility of the Company's management. Our responsibility is to express an opinion on this financial statement based on our audit. We conducted our audit 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 statement is free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statement. 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 audit provides a reasonable basis for our opinion. In our opinion, the financial statement referred to above presents fairly, in all material respects, the financial position of Farm Family Holdings, Inc. as of February 29, 1996, in conformity with generally accepted accounting principles. COOPERS & LYBRAND L.L.P. Albany, New York April 19, 1996, except for Note 2 which is dated June 17, 1996 Coopers & Lybrand L.L.P. is a member of Coopers & Lybrand International, a limited liability association incorporated in Switzerland. F-22 FARM FAMILY HOLDINGS, INC. BALANCE SHEET
AT FEBRUARY 29, 1996 --------------- ASSETS Cash......................................................... $1,000 ------ Total Assets............................................... $1,000 ====== EQUITY Preferred stock, $.01 par value, 1,000,000 shares authorized and no shares issued and outstanding............................................. $ -- Common stock, $.01 par value, 10,000,000 shares authorized and 1,000 shares issued and outstanding............................................. 10 Additional paid-in capital................................... 990 ------ Total Equity............................................... $1,000 ======
See accompanying notes to Balance Sheet. F-23 FARM FAMILY HOLDINGS, INC. NOTES TO BALANCE SHEET 1.BUSINESS Farm Family Holdings, Inc. (the "Holding Company") was incorporated under Delaware Law on February 12, 1996 as a wholly owned subsidiary of Farm Family Mutual Insurance Company ("Farm Family Mutual") for the purpose of becoming the parent holding company of Farm Family Mutual under a plan of reorganization and conversion, as amended (the "Plan"), whereby Farm Family Mutual will convert from a New York mutual property and casualty insurance company to a New York stock property and casualty insurance company. The Holding Company has had no operations and the only cash transaction has been the receipt of $1,000 for the issuance of 1,000 shares of common stock to Farm Family Mutual. 2.PLAN OF REORGANIZATION AND CONVERSION Pursuant to the Plan, eligible policyholders of Farm Family Mutual will receive shares of common stock of the Holding Company or cash in exchange for their interest in Farm Family Mutual. Farm Family Mutual will thereby become a wholly owned subsidiary of the Holding Company. The Plan was approved by the New York Superintendent of Insurance on May 1, 1996 after a public hearing was held and by Farm Family Mutual's voting policyholders on June 17, 1996. The Plan will become effective on a date determined by Farm Family Mutual's Board of Directors. In connection with the Plan, the Holding Company anticipates a public offering of 2,470,000 shares of common stock to be sold at a range of $20 to $22 per share. 3.OPTION TO ACQUIRE LIFE COMPANY The Holding Company has entered into the Option Purchase Agreement, dated February 14, 1996 (the "Option Purchase Agreement"), with the shareholders of the Life Company pursuant to which the Holding Company has, for a two-year period commencing on the effective date of the Plan, the option to acquire the Life Company subject to certain conditions, which include the approval of the Holding Company's shareholders and applicable regulatory authorities. Financial statements for the Life Company are not being furnished because the Holding Company has determined that the acquisition of the Life Company is not "probable" within the meaning of Rule 3.05 of Regulation S-X at this time. Although the Holding Company believes that the acquisition of the Life Company would be desirable under appropriate circumstances, the Holding Company is not in a position at this time to predict with any certainty whether the option to acquire the Life Company will in fact be exercised. The Holding Company's decision to exercise the option will depend, among other things, on the exercise price for the shares of the Life Company, an evaluation of the financial statements prepared in accordance with generally accepted accounting principles and prospects of the Life Company, the outcome of a vote by the Holding Company's shareholders and the receipt of applicable regulatory approvals. The Life Company's financial statements are prepared on the basis of statutory accounting practices prescribed or permitted by insurance regulatory authorities. Financial statements for the Life Company prepared in accordance with generally accepted accounting principles do not currently exist. F-24 NO DEALER, SALESPERSON OR ANY OTHER PERSON HAS BEEN AUTHORIZED TO GIVE ANY IN- FORMATION OR TO MAKE ANY REPRESENTATIONS, OTHER THAN THOSE CONTAINED IN THIS PROSPECTUS, IN CONNECTION WITH THE OFFER MADE IN THIS PROSPECTUS, AND, IF GIVEN OR MADE, SUCH INFORMATION OR REPRESENTATIONS MUST NOT BE RELIED UPON AS HAVING BEEN AUTHORIZED BY THE HOLDING COMPANY. NEITHER THE DELIVERY OF THIS PROSPECTUS NOR ANY SALE MADE HEREUNDER SHALL UNDER ANY CIRCUMSTANCES CREATE ANY IMPLICATION THAT THERE HAS BEEN NO CHANGE IN THE AFFAIRS OF THE HOLDING COMPANY SINCE THE DATE HEREOF. THIS PROSPECTUS DOES NOT CONSTITUTE AN OFFER OR SOLICITATION BY ANYONE IN ANY JURISDICTION IN WHICH SUCH OFFER OR SOLICITATION IS NOT AUTHORIZED OR IN WHICH THE PERSON MAKING SUCH OFFER OR SOLICITATION IS NOT QUALIFIED TO DO SO OR TO ANYONE TO WHOM IT IS UNLAWFUL TO MAKE SUCH OFFER OR SOLICITATION. ---------------- TABLE OF CONTENTS
PAGE ---- Available Information..................................................... 2 Prospectus Summary........................................................ 3 Risk Factors.............................................................. 10 The Company............................................................... 16 The Reorganization........................................................ 17 Option to Acquire Life Company............................................ 22 Use of Proceeds........................................................... 26 Dividend Policy........................................................... 26 Capitalization............................................................ 27 Selected Consolidated Financial Data...................................... 28 Management's Discussion and Analysis of Financial Condition and Results of Operations............................................................... 30 Business.................................................................. 36 Management................................................................ 56 Certain Relationships and Related Transactions............................ 63 Stock Ownership of Management............................................. 69 Description of Capital Stock.............................................. 71 Shares Eligible for Future Sale........................................... 74 Underwriting.............................................................. 75 Legal Matters............................................................. 76 Experts................................................................... 76 Glossary of Selected Insurance Terms...................................... 77 Index to Financial Statements............................................. F-1
---------------- UNTIL , 1996 ALL DEALERS EFFECTING TRANSACTIONS IN THE COMMON STOCK, WHETHER OR NOT PARTICIPATING IN THIS DISTRIBUTION, MAY BE REQUIRED TO DELIVER A PROSPECTUS. THIS DELIVERY REQUIREMENT IS IN ADDITION TO THE OBLIGATION OF DEALERS TO DELIVER A PROSPECTUS WHEN ACTING AS UNDERWRITERS AND WITH RESPECT TO THEIR UNSOLD ALLOTMENTS OR SUBSCRIPTIONS. 2,470,000 SHARES FARM FAMILY HOLDINGS, INC. COMMON STOCK ($.01 PAR VALUE) [COMPANY LOGO APPEARS HERE] - ------------------------------------- SALOMON BROTHERS INC - ---------------------------------------- PROSPECTUS DATED , 1996 PART II INFORMATION NOT REQUIRED IN PROSPECTUS ITEM 13. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION The estimated expenses of the issuance and distribution, all of which are payable by the Registrant, are as follows: SEC Registration Fee....................................... $ 21,725 NASD Fee................................................... 6,800 Stock Exchange Listing..................................... 92,764 Printing and Engraving..................................... 360,000 Accounting Fees and Expenses............................... 100,000 Legal Fees and Expenses.................................... 650,000 Blue Sky Fees and Expenses................................. 25,000 Transfer Agent and Escrow Agent's Fees and Expenses........ 135,000 Miscellaneous Expenses..................................... 25,000 ---------- Total.................................................... $1,416,289(/1/)
- -------- (1) Includes $1,234,395 which will be paid to cover expenses of the Subscription Offering. ITEM 14. INDEMNIFICATION OF DIRECTORS AND OFFICERS Article Fourteenth of the Registrant's Certificate of Incorporation (the "Certificate") requires indemnification to the fullest extent permitted by Section 145 of the Delaware General Corporation Law (the "DGCL"). Section 145 of the DGCL provides that a corporation may indemnify directors and officers as well as other employees and individuals against expenses (including attorneys' fees), judgments, fines and amounts paid in settlement actually and reasonably incurred in connection with specified actions, suits or proceedings, whether civil, criminal, administrative, or investigative (other than action by or in the right of the corporation--a "derivative action"), if they acted in good faith and in a manner they reasonably believed to be in or not opposed to the best interests of the corporation and, with respect to any criminal action or proceeding, had no reasonable cause to believe their conduct was unlawful. A similar standard is applicable in the case of derivative actions, except that indemnification only extends to expenses (including attorneys' fees) incurred in connection with the defense or settlement of such actions, and the statute requires court approval before there can be any indemnification where the person seeking indemnification has been found liable to the corporation. Indemnification provided by or granted pursuant to Section 145 is not exclusive of other indemnification that may be granted by a corporation's bylaws, any agreement, any vote of stockholders or disinterested directors or otherwise. Article VIII of the Registrant's bylaws provides for indemnification consistent with the requirements of Section 145 of the DGCL. Reference is made to Exhibits 3.1 and 3.2 to this Registration Statement for the complete text of, respectively, Article Fourteenth of the Registrant's Certificate and Article VIII of the Registrant's bylaws. Section 145 of the DGCL also permits a corporation to purchase and maintain insurance on behalf of directors and officers. Article VIII of the Registrant's bylaws permits it to purchase such insurance on behalf of its directors and officers. The Registrant intends to obtain, prior to the consummation of the public offering of its common stock pursuant to this Registration Statement, directors' and officers' liability insurance providing aggregate coverage in the amount of $20 million. Article Thirteenth of the Registrant's Certificate provides for, to the fullest extent permitted by the DGCL, elimination or limitation of liability of directors to Farm Family Holdings, Inc. or its stockholders for breach of fiduciary duty as a director. Section 102(b)(7) of the DGCL permits a corporation to provide in its certificate of incorporation that a director of the corporation shall not be personally liable to the corporation or its stockholders II-1 for monetary damages for breach of fiduciary duties as a director, except for liability (i) for any breach of a director's duty of loyalty to the corporation or its stockholders, (ii) for acts or omissions not in good faith or which involve intentional misconduct or a knowing violation of law, (iii) for improper payment of dividends or redemptions of shares, or (iv) for any transaction from which the director derives an improper personal benefit. Reference is made to Exhibit 3.1 to this Registration Statement for the complete text of Article Thirteenth of the Registrant's Certificate. Reference is made to the form of Underwriting Agreement filed as Exhibit 1.1 to this Registration Statement which provides for the indemnification of the directors and officers of the Registrant signing this Registration Statement and certain controlling persons of the Registrant against certain liabilities, including those arising under the Securities Act of 1933, as amended (The "Securities Act"), in certain instances by the Underwriters. ITEM 15. RECENT SALES OF UNREGISTERED SECURITIES On February 14, 1996, the Registrant issued 1,000 shares of Common Stock to Farm Family Mutual Insurance Company for $1,000 in cash. This sale is exempt from registration under Section 4(2) of the Securities Act. It is contemplated that such shares will be cancelled pursuant to the plan of reorganization and conversion described in this Registration Statement and which is included as Exhibit 2.1 to this Registration Statement. ITEM 16. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES (a) Exhibits **1.1 -- Form of Underwriting Agreement *2.1 -- Plan of Reorganization and Conversion, dated February 14, 1996, as amended by Amendment No. 1, dated April 23, 1996 (Exhibits A, B and C to Exhibit 2.1 are included as Exhibits 10.1, 3.1 and 3.2, respectively, to this Registration Statement) *3.1 -- Certificate of Incorporation of Farm Family Holdings, Inc. *3.2 -- Bylaws of Farm Family Holdings, Inc. *4.1 -- Form of Certificate for shares of Common Stock *5.1 -- Opinion of LeBoeuf, Lamb, Greene & MacRae, L.L.P. **5.2 -- Opinion of LeBoeuf, Lamb, Greene & MacRae, L.L.P. for the Public Offering *8.1 -- Tax Opinion of LeBoeuf, Lamb, Greene & MacRae, L.L.P. *10.1 -- Option Purchase Agreement, dated February 14, 1996, among Farm Family Holdings, Inc. and The Shareholders of Farm Family Life Insurance Company Listed Therein *10.2 -- Expense Sharing Agreement, made effective as of January 1, 1996, by and between Farm Family Mutual Insurance Company and Farm Family Life Insurance Company *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 Subscribing Reinsurer(s) Executing the Interests and Liabilities Agreement(s) Attached Thereto, as amended by Addendum No. 1, effective January 1, 1996 *10.5 -- Umbrella Quota Share Reinsurance Contract, effective January 1, 1995, issued to Farm Family Mutual Insurance Company and United Farm Family Insurance Company, as amended by Addendum No. 1, effective January 1, 1995 *10.6 -- Excess Catastrophe Reinsurance Contract effective January 1, 1996, issued to Farm Family Mutual Insurance Company
II-2 *10.7 -- Assumption Agreement, commencing January 1, 1995, between Farm Family Mutual Insurance Company and United Farm Family Insurance Company *10.8 -- Service Agreement, made effective as of July 25, 1988, by and between Farm Family Mutual Insurance Company and United Farm Family Insurance Company *10.9 -- Form of Membership List Purchase Agreement between Farm Family Mutual Insurance Company and each of the Farm Bureaus *10.10 -- Farm Family Mutual Insurance Company 8% Subordinated Surplus Certificate, as amended by Certificate of Amendment No. 1 and Trust Indenture, dated as of December 29, 1976 relating to the 8% Subordinated Surplus Certificates *10.11 -- Farm Family Mutual Insurance Company 5% Debenture, as amended by Certificate of Amendment, effective January 1, 1969, Certificate of Amendment No. 2, effective January 1, 1979, Certificate of Amendment No. 3 and Supplemental Trust Indenture, dated as of August 25, 1955, Amending Trust Indenture Dated 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 Mutual Insurance Company Officer Severance Pay Plan, adopted effective August 1, 1994 *10.13 -- Farm Family Mutual Insurance Company Supplemental Employee Retirement Plan, adopted as of January 1, 1994 *10.14 -- Escrow Agreement between Farm Family Holdings, Inc. and The Bank of New York, dated as of April 26, 1996 *21.1 -- List of Subsidiaries 23.1 -- Consent of Coopers & Lybrand L.L.P. *23.2 -- Consent of LeBoeuf, Lamb, Greene & MacRae, L.L.P. (contained in their Opinion filed as Exhibit 5.1) **23.3 -- Consent of LeBoeuf, Lamb, Greene & MacRae, L.L.P. (contained in their Opinion filed as Exhibit 5.2) *24.1 -- Power of Attorney (included with the signatures in Part II of this Registration Statement) *28.1 -- Information from reports furnished to State insurance regulatory authorities *99.1 -- Form of Subscription Order Form for Subscription Policyholders *99.2 -- Form of Subscription Order Form for Participating Surplus Note Holders
- -------- * Previously filed. **To be filed by amendment. (b) Financial Statement Schedules *Schedule VI--Reinsurance *Schedule X--Supplemental Information Concerning Property/Casualty Insurance Operations - -------- * Previously filed. ITEM 17. UNDERTAKINGS (a) Insofar as indemnification for liabilities arising under the Securities Act of 1933 may be permitted to directors, officers and controlling persons of the Registrant pursuant to the foregoing provisions, or otherwise, the Registrant has been advised that in the opinion of the Securities and Exchange Commission such indemnification is against public policy as expressed in the Act and is, therefore, unenforceable. In the event that a claim for indemnification against such liabilities (other than the payment by the Registrant of expenses incurred or paid by a director, officer or controlling person of the Registrant in the successful defense of any action, suit or proceeding) is asserted by such director, officer or controlling person in connection with the securities being registered, the Registrant will, unless in the opinion of its counsel the matter has been settled by controlling II-3 precedent, submit to a court of appropriate jurisdiction on the question whether such indemnification by it is against public policy as expressed in the Act and will be governed by the final adjudication of such issue. (b) The undersigned Registrant hereby undertakes that: (1) For purposes of determining any liability under the Securities Act of 1933, the information omitted from the form of prospectus filed as a part of this Registration Statement in reliance upon Rule 430A and contained in a form of prospectus filed by the Registrant pursuant to Rules 424(b)(1) or (4) or 497(h) under the Securities Act shall be deemed to be part of this Registration Statement as of the time it was declared effective. (2) For the purpose of determining any liability under the Securities Act of 1933, each post-effective amendment that contains a form of prospectus shall be deemed to be a new registration statement relating to the securities offered therein, and the offering of such securities at that time shall be deemed to be the initial bona fide offering thereof. (c) The undersigned Registrant hereby undertakes: (1) To file, during any period in which offers or sales are being made, a post-effective amendment to this registration statement. (i) To include any prospectus required by Section 10(a)(3) of the Securities Act of 1933; (ii) To reflect in the prospectus any facts or events arising after the effective date of the registration statement (or the most recent post- effective amendment thereof) which, individually or in the aggregate, represent a fundamental change in the information set forth in the registration statement. Notwithstanding the foregoing, any increase or decrease in volume of securities offered (if the total dollar value of securities offered would not exceed that which was registered) and any deviation from the low or high and of the estimated maximum offering range may be reflected in the form of prospectus filed with the Commission pursuant to Rule 424(b) if, in the aggregate, the changes in volume and price represent no more than 20 percent change in the maximum aggregate offering price set forth in the "Calculation of Registration Fee" table in the effective registration statement. (iii) To include any material information with respect to the plan of distribution not previously disclosed in the registration statement or any material change to such information in the registration statement. (2) That, for the purpose of determining any liability under the Securities Act of 1933, each such post-effective amendment shall be deemed to be a new registration statement relating to the securities offered therein, and the offering of such securities at that time shall be deemed to be the initial bona fide offering thereof. (3) To remove from registration by means of a post-effective amendment any of the securities being registered which remain unsold at the termination of the offering. (d) The undersigned Registrant hereby undertakes to provide to the underwriter at the closing specified in the underwriting agreements, certificates in such denominations and registered in such names as required by the underwriter to permit prompt delivery to each purchaser. II-4 SIGNATURES Pursuant to the requirements of the Securities Act of 1933, as amended, the Registrant has duly caused this Post-Effective Amendment No. 2 to the Registration Statement to be signed on its behalf by the Undersigned, thereunto duly authorized, in the Town of Bethlehem, State of New York on June 17, 1996. FARM FAMILY HOLDINGS, INC. By: /s/ Philip P. Weber ---------------------------------- Philip P. Weber President and Chief Executive Officer Pursuant to the requirements of the Securities Act of 1933, as amended, this Post-Effective Amendment No. 2 to the Registration Statement has been signed below on June 17, 1996 by the following persons in the capacities indicated.
SIGNATURE TITLE --------- ----- * _____________________________________ Chairman of the Board of Directors WILLIAM M. STAMP, JR. * _____________________________________ Vice Chairman of the Board of JOHN W. LINCOLN Directors /s/ Philip P. Weber _____________________________________ President and Chief Executive PHILIP P. WEBER Officer (Principal Executive Officer) * _____________________________________ Executive Vice President and CHARLES E. SIMON Treasurer (Principal Financial and Accounting Officer) * _____________________________________ Director ROBERT L. BAKER * _____________________________________ Director FRED G. BUTLER, SR. * _____________________________________ Director RANDOLPH C. BLACKMER, JR. * _____________________________________ Director JOSEPH E. CALHOUN * _____________________________________ Director JAMES V. CRANE * _____________________________________ Director STEPHEN J. GEORGE * _____________________________________ Director GORDON H. GOWEN
II-5
SIGNATURE TITLE --------- ----- ___________________________________* Director JON R. GREENWOOD ____________________________________* Director CLARK W. HINSDALE III ____________________________________* Director RICHARD A. JEROME ____________________________________* Director ARTHUR D. KEOWN, JR. ____________________________________* Director DANIEL R. LAPOINTE ____________________________________* Director WAYNE A. MANN ____________________________________* Director JOHN P. MOSKOS ____________________________________* Director NORMA R. O'LEARY ____________________________________* Director JOHN I. RIGOLIZZO, JR. ____________________________________* Director HARVEY T. SMITH ____________________________________* Director HOWARD T. SPROW ____________________________________* Director RICHARD D. TRYON ____________________________________* Director CHARLES A. WILFONG ____________________________________* Director TYLER P. YOUNG
/s/ Philip P. Weber *By: ---------------------------- Philip P. Weber as attorney-in-fact for each of the persons indicated II-6 INDEX TO EXHIBITS
SEQUENTIAL PAGE EXHIBITS NUMBER -------- --------------- **1.1 -- Form of Underwriting Agreement *2.1 -- Plan of Reorganization and Conversion, dated February 14, 1996, as amended by Amendment No. 1, dated April 23, 1996 (Exhibits A, B, and C to Exhibit 2.1 are included as Exhibits 10.1, 3.1 and 3.2, respectively, to this Registration Statement) *3.1 -- Certificate of Incorporation of Farm Family Holdings, Inc. *3.2 -- Bylaws of Farm Family Holdings, Inc. *4.1 -- Form of Certificate for shares of Common Stock *5.1 -- Opinion of LeBoeuf, Lamb, Greene & MacRae, L.L.P. **5.2 -- Opinion of LeBoeuf, Lamb, Greene & MacRae, L.L.P. for the Public Offering *8.1 -- Tax Opinion of LeBoeuf, Lamb, Greene & MacRae, L.L.P. *10.1 -- Option Purchase Agreement, dated February 14, 1996, among Farm Family Holdings, Inc. and The Shareholders of Farm Family Life Insurance Company Listed Therein *10.2 -- Expense Sharing Agreement, made effective as of January 1, 1996, by and between Farm Family Mutual Insurance Company and Farm Family Life Insurance Company *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 Subscribing Reinsurer(s) Executing the Interests and Liabilities Agreement(s) Attached Thereto, as amended by Addendum No. 1, effective January 1, 1996 *10.5 -- Umbrella Quota Share Reinsurance Contract, effective January 1, 1995, issued to Farm Family Mutual Insurance Company and United Farm Family Insurance Company, as amended by Addendum No. 1, effective January 1, 1995 *10.6 -- Excess Catastrophe Reinsurance Contract effective January 1, 1996, issued to Farm Family Mutual Insurance Company *10.7 -- Assumption Agreement, commencing January 1, 1995, between Farm Family Mutual Insurance Company and United Farm Family Insurance Company *10.8 -- Service Agreement, made effective as of July 25, 1988, by and between Farm Family Mutual Insurance Company and United Farm Family Insurance Company *10.9 -- Form of Membership List Purchase Agreement between Farm Family Mutual Insurance Company and each of the Farm Bureaus *10.10 -- Farm Family Mutual Insurance Company 8% Subordinated Surplus Certificate, as amended by Certificate of Amendment No. 1 and Trust Indenture, dated as of December 29, 1976 relating to the 8% Subordinated Surplus Certificates
SEQUENTIAL PAGE EXHIBITS NUMBER -------- --------------- *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, dated 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 Mutual Insurance Company Officer Severance Pay Plan, adopted effective August 1, 1994 *10.13 -- Farm Family Mutual Insurance Company Supplemental Employee Retirement Plan, adopted as of January 1, 1994 *10.14 -- Escrow Agreement between Farm Family Holdings, Inc. and The Bank of New York, dated as of April 26, 1996 *21.1 -- List of Subsidiaries 23.1 -- Consent of Coopers & Lybrand L.L.P. *23.2 -- Consent of LeBoeuf, Lamb, Greene & MacRae, L.L.P. (contained in their Opinion filed as Exhibit 5.1) **23.3 -- Consent of LeBoeuf, Lamb, Greene & MacRae, L.L.P. (contained in their Opinion filed as Exhibit 5.2) *24.1 -- Power of Attorney (included with the signatures in Part II of this Registration Statement) *28.1 -- Information from reports furnished to State insurance regulatory authorities *99.1 -- Form of Subscription Order Form for Subscription Policyholders *99.2 -- Form of Subscription Order Form for Participating Surplus Note Holders
- -------- * Previously Filed ** To be Filed by Amendment EX-23.1 2 CONSENT OF INDEPENDENT ACCOUNTANTS EXHIBIT 23.1 COOPERS COOPERS & LYBRAND L.L.P. &LYBRAND a professional services firm CONSENT OF INDEPENDENT ACCOUNTANTS We consent to the inclusion in this registration statement on Form S-1 (File No. 333-4446) of our reports dated February 13, 1996, on our audits of the financial statements of Farm Family Mutual Insurance Company and Subsidiary and our report dated April 19, 1996 on our audit of the balance sheet of Farm Family Holdings, Inc.. We also consent to the reference to our firm under the caption "Experts" and in the tables "Summary Consolidated Financial Data" and "Selected Consolidated Financial Data." COOPERS & LYBRAND L.L.P. Albany, New York June 17, 1996 -----END PRIVACY-ENHANCED MESSAGE-----